Key Payments Trends from Q1 2023 Earning's Season - By Kepler Cannon

It's an exciting time for the Payments and FinTech firms, and analyzing Q1 results reveals impressive top-line growth and financial performance. But not content to rest on their laurels, firms are doubling down on innovation and growth amidst a macro-environment beginning to face some headwinds.

Key takeaways from Q1 Earning Calls:

1 - Cross-border transactions soar as travel makes a comeback

Q1 saw a rebound in travel demand, driven by Asia, especially China, where travel in and out of the region already reached pre-pandemic levels, along with a strong interest in Europe.

• AmEx saw Travel and Entertainment (T&E) spending grow by 59% YoY internationally, while its consumer travel bookings reached record high since pre-pandemic
• Visa Direct's cross-border P2P transactions grew nearly 50%, excluding Russia
• Mastercard reported a 35% increase in global cross-border volume, Cross-border travel in Q1 reached 148% of 2019 levels with all regions above 2019 levels

2 - Rise of contactless payments: Tap-to-Pay leads the way

Popularity of this trend is fuelled by desire for faster and more convenient transactions, as well as the need for safer and more hygienic payment options in a post-pandemic world.

• Mastercard reported that contactless penetration reached 50% in over 100 markets globally, 2x from three years ago
• Visa reported Tap-to-Pay as a powerful driver of engagement, dominating 34% of all US face-to-face transactions, up 7x from three years ago. Its penetration surpassed 40% for QSRs in key metro areas in the US, and processed ~750 million Tap-to-Ride transactions in the last 6 months! 
• Fiserv launched support for Apple Tap to Pay on iPhone for SMBs (on Clover) and US enterprise clients
• Square expanded Tap to Pay for Android last month for sellers across US, UK, Ireland, France and Spain, expanding offer

3 - Innovation pilots in AI, Open Banking, Digital Identity, and beyond

There's been a surge of innovation in the Payments ecosystem with firms embracing newer technologies and partnership models to stay ahead of the curve.

• Mastercard is piloting open banking product across broad set of banks for account openings and top ups (Denmark based Saxo bank is a great in-market use case), and has partnered with Southwest Airlines to embed it's intelligent identity solutions in digital interactions
• Fiserv's Issuer Solution has deployed multiple highly innovative products for its clients, including Advance Defense (AI-based fraud prevention), Ondot (card controls and alerts), and POS credit solutions to complete with BNPL offerings
• Square continues to invest in open protocols like Nostr, Bluesky, Web5, etc. to build new capabilities with better economics
• Coinbase continues to invest in blockchain and Wallet-as-a-Service offerings, enabling crypto custody into it's client's workflows

4 - Unlocking the power of Value-added-Services (VAS)

Q1 witnessed increased focus and investments from Payment firms to provide their clients with features beyond core payment processing to increase stickiness and LTV.

• Visa's VAS revenue increased over 20% to hit around $1.7 billion, with ~80% growth in clients for it's risk-related products; Further investment into managed services, advanced authorization and acceptance indicates this trend will continue
• In lockstep, Mastercard's VAS net revenue also surged by ~20%, driven by impressive growth in its cyber and intelligence solutions, as well as high demand for fraud solutions; Mastercard continues to acquire new capabilities (Baffin Bay's AI-powered threat protection, Dynamic Yield's personalization platforms, etc.) to enhance it's VAS portfolio
• Fiserv's Clover operating system continues its impressive growth (~22% YoY), with a VAS penetration of 17% led by integration into Fiserv's broader suite of products including Bill Pay and Fraud Management
• Square announced its plans to invest $160 million in compliance this year, five times its investment in 2020. The growth in compliance investment outpaced Opex growth 2x during this period

5 - Global expansion and strong growth in international markets

US-based firms demonstrated impressive growth rates in their international business segments, followed by continued efforts to expand globally through acquisitions and partnerships.

• American Express reported positive results from the reorganization of its international business, with its International Card Services billings growing by ~30%
• Visa's had strong growth rate in payments volume across major markets, with the CEMEA region (excluding Russia) growing at 29% and Europe growing at 13% (31% excluding the U.K.). 
• Fiserv’s international issuing business continued to grow above segment average, and it's merchant business grew ~40% organically led by LatAm
• Square’s gross profit in its international markets outpaced overall gross profit up (up 29% YoY), and has launched multiple global partnerships including on with Yellowcard in Africa enabling fiat on and off ramps in 16 African countries
• Mastercard is exploring doing cross-border business in China and has applied for a license to participate in the domestic market

6 - Gearing up for launch of FedNow

There are multiple global case studies of state-backed real-time payments network (UPI in India, Pix in Brazil, etc.) that have completely disrupted money movement in these markets.With FedNow's upcoming launch in July 2023, it will be an intriguing Payment ecosystem battle to see who emerges on top.

• FIS stated it's tight partnership with the Fed in enabling it's client base to tap into FedNow once it's rolled out
• Fiserv is investing in connecting FIs to FedNow through its Fiserv NOW Network, with 6 banks in the pilot phase and 20+ banks set to go live in July
• Visa and Mastercard have a head start with their money movement products, and will continue to invest to compete and partner with FedNow