From helping retailers take on Amazon to battling fraud, 4 VCs explain which payments startups will soar as the coronavirus transforms how we buy

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Some are betting on B2B players that enable small businesses to compete with the likes of Amazon, while others think that companies with strong point-of-sale tech will see a wave of new customers as merchants shift digital.

Samantha Lee/Business Insider


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  • The coronavirus pandemic has shifted the way consumers shop and pay, both online and in-store.
  • Payments companies make money through fees from each transaction processed at a merchant, so with retail sales down by record amounts, payments revenues will also take a hit.
  • Business Insider asked investors at Activant Capital, Andreessen Horowitz, Bain Capital Ventures, and Citi Ventures what it will take for payments companies to stand out. 
  • From being able to work with governments to investing in not-so-glamorous tech like fraud monitoring, here’s a look at what it’ll take for payments startups to thrive.
  • Click here for more BI Prime stories.

The coronavirus pandemic has changed the way we shop and pay. 

With widespread shelter-in-place orders keeping consumers home, spending has shifted toward digital. And in-store at essential businesses like grocery stores and pharmacies, consumers are rethinking whether they should be using cash.

Even before the coronavirus pandemic, payments fintechs like PayPal, Square, and Stripe benefited from these trends toward digital. They’ve been enabling retailers online and in-store to get paid with plug-and-play tech. But the impact of the pandemic has brought some challenges.

Retail sales, which includes apparel, bars and restaurants, furniture, and motor vehicles, plummeted a record 8.7% in March. And since payments companies make money through fees on each transaction, their revenues will be impacted, too.

But as economies start to recover, some payments players are well positioned to thrive.

We asked investors to share who they think is best positioned to come out strong, and who’s not. Some are betting on B2B players that enable small businesses to compete with the likes of Amazon, while others think that companies with strong point-of-sale tech will see a wave of new customers as merchants shift digital.

Here’s a look at what it will take for payment players to survive, both during and after the coronavirus pandemic.

Steve Sarracino, founder and partner at Activant Capital

Steve Sarracino



Activant Capital


Notable Investments: Better, Bolt, Finix

As small non-essential businesses are shutting down amid the coronavirus pandemic, big-box retailers like Amazon and Walmart are seeing a surge in demand. 

But Steve Sarracino, founder and partner at Activant Capital, thinks that startups enabling small businesses to compete with the likes of Amazon are well-positioned to grow as the economy recovers.

“The biggest beneficiaries of what’s happening right now, not only with the way the market’s shifting because of the shutdown, but a lot of these government programs end up benefiting big companies. If you look at the biggest beneficiaries, it’s going to be Amazon, Walmart, et cetera,” said Sarracino.

He added that as these big corporations gain power, they also tend to hollow out American small businesses which are the primary engine growth for jobs.

“At least they’re hiring, but when it gets back to normal, it’s going to be up to the small businesses. And we need to empower them with the same tools that the big guys have,” Sarracino said.

Activant is a growth equity firm, meaning it invests in mature companies looking to scale. And most of its portfolio companies are commerce infrastructure players, including one-click checkout startup Bolt and payments-as-a-service fintech Finix

Sarracino thinks that these B2B players that enable small businesses to compete with big-box retailers both in-store and online will be in demand as the economy recovers.

“The assets we’ve invested in empower the small brands to be able to compete with Amazon,’ said Sarracino, meaning they recreate the Amazon experience for small businesses, facilitating one-click checkouts, managing accounts, and payments in a seamless way.

“It’s empowering the average person that starts a shoe brand to be able to compete head-to-head with Amazon. I think that’s going to be super important…

“I think that the world will shine more of a spotlight on the tools that these smaller businesses need to succeed,” Sarracino said.

Anish Acharya, general partner at Andreessen Horowitz

Anish Acharya headshot

Anish Acharya, general partner at Andreessen Horowitz

Andreessen Horowitz


Notable Investments: Affirm, Instacart, Stripe

Anish Acharya, general partner at Andreessen Horowitz, thinks the ongoing trend toward digital payments will benefit players like Stripe and Finix, which enable a business to process payments online.

“COVID-19 has accelerated the shifts in technology adoption and consumer behavior that we predicted would hit 10 years from now, to today. There’s no going back to the ‘old way.’ And as the world shifts to ‘internet by default’ from ‘real world by default,'” Acharya said in emailed comments.

And as consumers and businesses embrace a digital-first new normal, payments players that enable businesses to sell online be well-positioned.

“Stripe, Braintree, Ayden, and Finix are some of the most obvious payment players that may benefit in my view. They have a stronghold on internet native spend so I expect the companies will continue to benefit from growth in gaming, grocery delivery, live video, and more,” Acharya said.

Looking toward recovery, Acharya sees players like Square and Toast coming out strong. Both these fintechs provide online and in-store points-of-sale for businesses to process payments.

“Post-Covid, I believe companies that have reinvented the cash register will be in a strong position to succeed as well, such as Square and Toast. A whole generation of small businesses will, unfortunately, need to be rebuilt or replaced by new incumbents; new players will be using new technologies like Square and Toast,” said Acharya.

Acharya also has his eyes on consumer-facing fintechs like Square’s Cash App and challenger bank Chime. And as banking shifts online during the coronavirus pandemic, Acharya expects that consumers will seek digital banking options.

“Finally, it’s worth considering the future of household financial brands. This is the nail in the coffin of bank branches, as consumers who haven’t yet adopted digital banking are now forced to do so. 

More importantly, as incumbent banks pull back on lending when consumers need it most, I expect we’ll see an acceleration in the adoption of products like Cash App, Credit Karma, Digit, and Chime who are still largely open for business and finding ways to be a part of the recovery story (i.e. Cash App distributing PPP funds),” Acharya said.

Merritt Hummer, partner at Bain Capital Ventures

Merritt Hummer Bain

Merritt Hummer, Partner at Bain Capital Ventures

Bain


Notable Investments: Finix, Ribbon, SmartRent

For payments players, some early beneficiaries include payments automation startups and companies that support e-commerce, said Merritt Hummer, partner at Bain Capital Ventures.

“So far, we are seeing COVID-19 beneficiaries emerge in areas including online brokerage, accounts payable and accounts receivable automation, and platforms supporting e-commerce payments,” said Hummer in emailed comments.

But payments platforms’ success could largely depend on the industries they support.

“Payments companies that are likely to face headwinds in this environment include pay day advance apps, POS systems (Square, Toast), and vertical software companies that monetize through payments in highly exposed verticals like hospitality and retail,” Hummer said.

Square, a popular point-of-sale option among small businesses, and Toast, which provides payments and other business services to restaurants, could take a hit while the non-essential businesses they support remain closed.

Alternative lenders, meaning non-bank players like LendingClub or Affirm, may also face challenges, Hummer said.

“While vertical will still play a role in alternative lending, this is a category we believe will suffer dramatically coming out of the pandemic. Several players will go out of business, and others will be pressured to enter various forms of consolidation,” said Hummer.

LendingClub, a marketplace alternative lender, just laid off about a third of its workforce, including its president Steve Allocca, according to a regulatory filing.

Given the impact of the coronavirus pandemic, Bain Capital Ventures is keeping a close eye on its portfolio and the startup ecosystem, looking at both the direct impacts of the pandemic on a startup’s business, but also the longer-term implications of the current market environment.

“In light of COVID-19, our team has primarily been looking at companies along two dimensions. The first dimension is the direct impact of COVID-19 on the company itself,” said Hummer.

“The second dimension is the vulnerability of the company more broadly, accounting for factors like burn rate, balance sheet strength, and predictability of revenue,” Hummer said.

Hummer is advising startups to stress test their runways, and plan to operate with existing cash on hand for a minimum of 18 months.

Ramneek Gupta, managing director & co-head of venture investing at Citi Ventures

Ramneek Gupta Citi Ventures

Ramneek Gupta, Managing Director & Co-Head of Venture Investing at Citi Ventures

Citi Ventures


Notable Investments: FastPay, Jet.com, Square

Startups that have more than one revenue stream are best positioned to succeed, said Ramneek Gupta, managing director and co-head of venture investing at Citi Ventures.

“It’s the multiplicity of revenue streams and the diversity of verticals. People who have either by accident or by design ended up in that format are performing better,” said Gupta.

Offering multiple products within one platform, like payments and lending, for example, can help businesses stay afloat when there’s pressure on one revenue stream.

“By definition, people who can manage multi-line solutions and products and revenue streams are closer to being platform companies. Those companies tend to perform better in both downturns and in good times,” Gupta said.

Gupta also expects that the winners in payments will be the ones who can demonstrate their ability to handle things like anti-money laundering and fraud, which is on the rise amid the coronavirus pandemic.

“The other thing that is happening dramatically at this point is the professionals are getting rapidly separated from the amateurs. Fraud and fraudsters that are out in force right now…

“Unfortunately, they tend to take advantage of this situation and people who do not have the right infrastructure, the right investment in their middle office and back office in preventing and protecting against these sort of things, you’ll start to see them lose their shirt at a rapid clip,” Gupta said.

In addition to investment in not-so-glamorous tech like fraud monitoring, winners will also be those who can work with governments effectively during recovery efforts.

Historically, startups and the venture community tend to shy away from anything involving government, Gupta said. When governments are involved, things tend to take longer and don’t always seem worth it, he added.

“However, given the scale and size of the programs that the government is running in terms of the stimulus, etcetera, all of those will work through financial services, both incumbents and the fintech ecosystem. So the ability to work with the government is going to be quite a differentiator and a value creator in the next several quarters or years,” said Gupta.

PayPal and Square, for example are some of the non-bank fintechs that are working with the Small Business Administration to issue paycheck protection loans.


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