The cross-border payments industry has been on a tear over the last 12-months, with payment flows nearing $200 trillion, and projections expected to skyrocket past $290 trillion by 2030.
Yet, despite this immense promise, venture capital investment in this sector remains surprisingly tepid. In the first half of 2024, cross-border payment companies attracted a mere $318.4 million in venture capital, a paltry 2.3% of the total fintech deal value, according to a new report from PitchBook titled, “Currency Crossroads: A Cross Border Payments Deep Dive.”
The question that looms large is: why this disconnect?
The obvious answer is that VCs aren’t deploying capital. Investment in fintech has declined dramatically over recent years. Once the top sector for startup funding globally, VC inflows into fintech totaled a mere $43 billion, its lowest level in six years, according to Crunchbase data. That’s down more than half year over year from the $89.5 billion invested in fintech in 2022.
However, the less obvious answer is that cross-border payment solution providers – and, really, fintechs in general – just aren’t doing enough to capture the attention of discerning investors.
There has never been a greater need for fintechs – cross-border payments companies, in particular – to develop a better, stronger core narrative that clearly presents both the problem and the solution they’ve brought to market to solve it. With the right narrative, these solution providers will be better equipped to pull out specific messages that position them relative to each investor and unique investment thesis, to make a stronger case for investment.
Framing the narrative around a market ripe for disruption
The cross-border payments landscape is fraught with inefficiencies. Traditional methods, reliant on a convoluted correspondent banking system, are slow, expensive, and opaque.
Per data from Pitchbook, 40% of wholesale payments face delays, primarily due to compliance hurdles, batch processing limitations, and discrepancies in market operating hours. The average cost of sending $200 globally stands at 6.39%, with some corridors experiencing costs exceeding 15%. The lack of transparency further exacerbates the problem, leaving senders in the dark about settlement times and total costs.
This scenario presents a compelling narrative for investors. The pain points are palpable, the market is vast, and the need for disruption is undeniable. However, the challenge lies in effectively communicating this narrative and showcasing the unique value proposition of each solution provider.
Quantifying the potential cost savings and efficiency gains modern solutions can offer
In just over a decade, the global average cost to send $200 has decreased from a peak of 9.34% in Q3 2011 to 6.39% in Q4 2023. Similarly, the cost of sending $500 has dropped from 5.54% to 4.45% in the same timeframe. These figures represent significant savings, but there's still ample room for improvement.
Innovative solutions leveraging technologies like artificial intelligence, blockchain and real-time payment rails have the potential to further reduce costs and streamline processes. Moreover, the adoption of ISO 20022, a modern messaging standard, is opening a new avenue for optimization.
By quantifying these potential savings and demonstrating the efficiency gains these solutions can bring, providers can paint a compelling picture for investors.
Reaching the right investors with the right messages at the right time
Beyond telling a compelling story, cross-border payment solution providers need to adopt a targeted communications strategy to meaningfully connect with prospective investors.
Part of this strategy should include tailoring their pitch to align to a target investor's specific investment thesis. For example, if an investor is focused on financial inclusion, highlighting how the solution will empower underserved populations in emerging markets would be crucial. If the investor is interested in technological innovation, emphasizing the cutting-edge technology behind the solution and its potential to disrupt the industry would be more impactful.
In Q2 2024, the majority of VC deal value was captured by US and European companies, with Asia seeing a 13% decrease in funding last quarter, per data from CB Insights. Solution providers should use these figures on the current geographic distribution of investments to deepen their understanding of the existing regional preferences of investors. This can help cross-border payment providers tailor their messaging and target their outreach efforts more effectively.
The Time is Now
The bottom-line? Cross-border payment solution providers need to step up their communications game if they want to raise capital in the foreseeable future. This means building a stronger, more compelling narrative that conveys both the problem and proposed solution. Further, it means reaching the right investors at the right time with the right messages.
The time is ripe for innovation, and the investors are waiting. The question is: are you ready to seize the opportunity?
Rosie Gillam, Executive Vice President, Edelman Smithfield