Venture capital interest in payment industry startups appears to be on the wane as investors wise up to the difficulties of achieving scale in a complex, competitive market.
According to the latest data from CrunchBase, the number of venture-backed payments companies has declined from a high of 59 startups in the third quarter of 2013 to just 41 in the second quarter of 2014.
Reporting on the numbers, TechCrunch
quotes Khosla Ventures' Benjamin Ling on the hurdles startups face in breaking into the payments space.
"Payments are a massive industry with a lot of room for innovation, but it is very hard to break through because not only do you have to get consumers, you also need merchants and often times… third parties like associations behind you to be successful," Ling wrote in an email. "Consumers want trust and ubiquity in payments. Merchants want to know there are large numbers of consumers. For a startup none of these is usually true. The chicken and egg problem in payments is one of the hardest to break through."
Most of the big success stories in the sector come from companies that piggyback off the existing payment rails to offer genuinely noteworthy innovations, such as Square's mPOS dongle, or utilise new techniques in crowdfunding and P2P lending to gain an edge over established players. But even Square, with its starry-eyed multi-billion dollar valuation, has yet to make a profit and is rumoured to be on the verge of selling out as the money drys up.
Further up the value scale, more unfashionable and established fintech stocks are riding the wave of the equity market rally, far surpassing sell-side analyst price targets in mid-July, SNL data show. Companies like Envestnet, VeriFone Systems, Broadridge Financial Solutions and FleetCor Technologies find themselves among the top 10 outperformers across all financial services sectors. Out of the top 20 outperformers, eight were financial technology companies, four were asset managers, six were broker/dealers and two were specialty lenders.