Cashless Payments Industry: Sector Analysis

According to Rostyslav Dyuk, chair of the Ukrainian Association of Fintech and Innovation Companies, “Ukraine’s cashless payment industry has seen impressive twenty-fold growth in just a few short years.” In 2016, the cumulative valuation of the entire sector was estimated at a negligible US$30 million. Three years later, that number was closer to US$650 million. This might be still small compared with the more advanced economies, but it demonstrates how fast the industry can move.

In terms of the popularity of contactless payments, Ukraine is now fourth globally, with almost 80% of all point-of-sale terminals supporting this option. “In 2019, non-cash transactions overtook their cash counterparts by a slight margin, accounting for 50.3% of the total value of all card exchanges,” says Dyuk. This was the continuation of an upward trend that had been seen for the preceding five years.

It is true that the Ukrainian cashless payments industry still has some way to go. As Dyuk notes, in contrast to the more advanced economies, there is a distinct absence of venture capital and private equity in the industry. As he succinctly puts it: “Much of the funding still comes from the three ‘Fs’ — friends, family, and fools.” As such, a thin public stock market also means that practically the entire industry remains in private hands.

While this can be considered a drawback, there are surprising positives as well. Dyuk has observed that about 80% of local fintech companies had reached at least breakeven profitability. It seems when your investors are your friends and family, and without venture capitalists pushing the “growth-at-all-costs” narrative, founder behaviour can differ significantly.

Nonetheless, the expansion of the Ukrainian cashless payments and fintech space has been remarkable. With that in mind, what can we learn from this fascinating case study?

Serhii Karpenko, head of the Strategy and Reforming Department at NBU, believes that industry growth can be driven as much from the top down as from the bottom up. This is why, in the latest five-year plan for the Ukrainian financial sector to 2025, supporting the fintech and cashless payments industry has been identified as a key strategic goal — on par with financial stability, macroeconomic development, financial inclusion, and deeper financial markets.

The government and NBU’s 2025 vision is one in which a sustainable Ukrainian fintech ecosystem exists alongside a developed cashless economy and a population with high digital and financial literacy. “This vision will be supported by four key pillars — regulations and policies, capital, demand, and talent,” says Karpenko.

Some select key performance indicators (KPIs) for this vision include the following:

• Lift the percentage of citizens holding some form of bank account to 80% (from about 63% currently)
• Increase the percentage of small and midsize enterprises that accept cashless payments to 70% (from about 38%)
• Have at least 20 companies in each fintech vertical, such as regtech and insurtech (from about five presently)
• Increase the Ukrainian populace’s financial literacy index growth score from 11.6 to 12.5 (based on Organisation for Economic Co-operation and Development scoring)
• Launch a full-fledged regulatory sandbox and increase the number of products and services tested in the sandbox environment to about 16 to 20 a year
• Obtain membership of the Global Financial Innovation Network

To create incentives that will help fulfil these KPIs, the government is launching the aforementioned regulatory sandbox to rapidly test innovative products and services and a “mini MBA” programme. The objective is to provide the industry with an academic base on which to build various fintech verticals, such as Big Data and cybertech, focusing on open banking.

A notable takeaway from the Ukrainian case study is that for a cashless payments ecosystem to flourish, progress must be driven from the top down and the bottom up. “With a high number of mathematics and IT specialists in the country, Ukraine has already demonstrated its capacity for bottom-up growth,” says Karpenko. To take it to the next level, top-down guidance and incentives are needed, too.

In the second part of the webinar, Eunice Chu, FCCA, head of policy at ACCA Hong Kong, presented an overview of the joint sectoral analysis report between the CFA and ACCA. “Development of the global cashless payment sector displays a distinct non-uniform trend — creating pockets of opportunities,” notes Chu. The report detailed the four key components investors should look at when assessing investment opportunities in this sector.

• Market structure: The structural demographics of a particular market, including population age, spending patterns, ease of internet access, smartphone penetration, and level of cashless activity
• Competitive landscape: Market concentration between customers and merchants, barriers to entry, regulatory and operational restrictions, legacy systems compatibility, and any advantages that accrue to incumbents
• Demand drivers: Factors that influence demand, such as the types of payment methods offered, revenue mix, e-commerce market share, value-added services to end users, and size of the online payment ecosystem
• Individual operations: Company-specific aspects, including growth in transaction value and volumes, financial metrics, investment infrastructure, fee structures, and the level of monetisation in a company’s user base

In the subsequent Q&A, the panel members also shared interesting insights with prospective investors and industry practitioners. According to Danny Leong, CEO of GHL Berhad, Malaysia’s leading payment services provider, “the number one company metric investors should look at is TPV — total payments value. This is the full value of all payment transactions that flow through said company.”

Leong offers a simple breakdown of the two major factors that influence TPV: the number of payment schemes (e.g., AliPay and Visa) available and the size of the merchant base, which is also influenced by the geographies in which a company operates.

He also addressed a panellist question on the high valuations inherent to the industry. From his perspective — that of an acquirer — he notes that when his company buys a smaller payments business, it automatically capture all its transactions and merchant base, which tend to keep expanding. It is very much a growth-driven industry, which contributes to high valuations.

The panellists unanimously agreed that the pandemic is a tailwind for the cashless payments sector. Not only has it forced banks to digitalise but also customers are now more accepting of contactless payments, for obvious reasons. However, as Dyuk shares, “There are downsides, and payment volumes from hard-hit industries like tourism and hotels are experiencing steep falls.”

On the regulatory front, Alan Lok, CFA, director of Ethics Education and Professional Standards at CFA Institute, observes that he has “seen a trend where industry participants strive to follow the standards set by whatever is seen as the strictest regulatory body — currently the European Union (EU).”

Dyuk concurs, noting that the Ukrainian fintech industry has been experiencing some stress when complying with EU regulations, especially those pertaining to open banking, data privacy, and anti-money laundering. This is despite Ukrainian laws being laxer by comparison.

As for where the current market opportunities lie, Dyuk confidently points to Ukraine, referencing the relatively young age of the industry. For Leong, the answer is ASEAN, which he calls a “cashless payment melting pot,” observing the high percentage of unbanked citizens but with a significant smartphone penetration rate.