Over the past three quarters, the number of venture-backed payments companies has declined, tumbling from 59 startups in the third quarter of 2013 to just 41 companies in the second quarter of 2014, according to CrunchBase data.
Some winners have already emerged from the scrum of payments technologies that have raised money over the past five years. Companies like Stripe, the online payments provider for small and medium-sized businesses, which raised $80 million in January from investors including Khosla Ventures; Square , the mobile payment company for small and medium-sized businesses, which closed a $100 million debt financing in April; and Klarna, the Swedish payments company that notched its own $115 million in private equity funding earlier in the year as well.
Klarna, the European juggernaut in online payments, is beginning to make moves in the U.K. and is eyeing an expansion into the U.S.
So much firepower may be keeping new platforms for jumping in, but there are also problems inherent in the payments market that have made it a difficult sector for startups to navigate, according to Khosla Ventures’ Benjamin Ling.
“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.”
Those challenges are what make the successes of companies like Klarna, Stripe, Square, iZettle or any of the large venture-funded startups more impressive.
Meanwhile, investors like Bain Capital Ventures‘ Matthew Harris think the slowdown in funding for payments companies is a natural evolution of what had been a relatively young market.
“It basically came from nowhere if you look at the earlier quarters, and it was almost literally zero in the prior years,” wrote Harris in an email. “Payments have gone from being irrelevant in the venture landscape to being a meaningful sub-sector, but trees don’t grow to the sky… I also think there has been a shift in focus to alternative and ‘peer to peer’ lending as the hottest sector, which I think is drawing away from capital.”