Changes in the Financial Industry: Adyen and Fintech CASE STUDY Ithough 2020 was a very difficult year for D many companies, it was a very successful and requires several companies to work together to one for Adyen, a Dutch company that mostly ensure that the payment is successful. To start with, there is, of course, the merchant, but there are also focuses on processing Internet payments. As the companies providing a gateway for the payments, as- COVID-19 pandemic boosted the volume of online sessing the risk, and so on. Because of this crowded payments, business soared. Ayden announced in field of facilitators, many things can go wrong. For November 2020 that it was expanding in the Middle instance, software may be outdated, or programs used East, opening a new office in Dubai. Earlier that by one provider may be incompatible with those of year, Internet retailer Zalando chose Adyen to pro- another. cess its credit card payments in all European mar- According to Forrester, a market research firm kets. Raffles Hotel Singapore selected Adyen as its that focuses on information technology, around 10 preferred payment provider to offer a seamless and percent of all payments fail for "technical" reasons. more customer-centric digital payment experience Adyen is reducing this performance gap by integrat- across all of the hotel's touchpoints. The company ing several components of the payment chain (such also signed a new agreement with Microsoft, expand- as the gateway, risk assessment, and processing) into ing and deepening their cooperation on payments one platform. It has thus been successful in ensuring processing. These are just the latest in a long series a higher success rate in its payments chain than other of successes for Ayden. In 2018, American Internet facilitators. giant eBay announced that Adyen would become Ayden's second advantage is that its payments eBay's primary payments provider. This was signifi- platform is connected to most payment systems cant for two reasons. First, eBay is, of course, a huge being used in the world. Payment systems can differ company: in 2019, the value of goods sold on the greatly from country to country. In the Netherlands, platform amounted to a staggering $90.2 billion. For for instance, most online payments are done through Adyen, this meant a huge increase of its business. the iDEAL system, which links payments to check- Second, and perhaps more importantly, eBay gave ing accounts. In other countries, most payments are preference to Adyen over PayPal, which is very often done through credit cards or debit cards like Visa the first choice of online companies. For a startup or Mastercard. When it comes to processing pay- like Adyen to beat a market leader like PayPal was ments, this variety of methods complicates things remarkable. enormously, as the payment processors need to have As a result of all these successes, Adyen has been several platforms. Adyen, however, has one integrated the star of the Amsterdam stock exchange for several platform that can link with most payment methods years. In 2018, Adyen had a very successful initial being used all over the world. This is, of course, an public offering (IPO) and its shares, which were attractive option for merchants or online companies priced at 6240, nearly doubled in price during the that sell their goods worldwide. When eBay decided to first trading day. Since then Adyen's share price has work with Adyen, it gave two reasons for its decision: continued to increase, reaching over 6740 by the end Adyen processes payments more cheaply and gives more control to merchants that use the platform. of 2019. Then the coronavirus crisis broke and more Adyen is a good example of a company that and more people started to shop online and make works in the field of fintech (financial technology). payments through Adyen. The company's share price Companies that use technology to facilitate financial more than doubled over the following months and by transactions have been highly successful over the last December 11, 2020, it had risen to E1834.50. decade. Founded in 2006, Adyen is relatively old for What explains Adyen's success? The answer to a fintech company, but it has grown enormously- that rests primarily in the technology it uses. To put in 2019 it had E240 billion in processed volume. it simply, Adyen makes payment transactions easier. Remarkable as Adyen's case is, it is definitely not Making payments on the Internet is a much more unique; other firms have used technology to find a complicated business than many people think it is, .new niche in the international payments universe. incorporated many stages of the payment chain, and The company TransferWise (which was founded in traditional companies that used to provide, for in- Estonia but now mostly operates from the United stance, risk assessment now have to either make their Kingdom) is another example: it facilitates money business model more efficient or face the very real transfers from Country A to Country B while avoiding possibility of going out of business. The German firm currency conversion. N26 is also a good example of how fintech is changing Initially, traditional banks found it hard to compete the banking industry. This company provides pay- with companies like Adyen. It is in the DNA of fin- ment services just like a normal bank does, but it does tech companies to develop and focus on state-of-the- not have physical locations where customer agents art information systems. Traditional banks are very give advice to the customers; everything is online. In different; they tend to value direct, physical contact 2020, N26 had over 5 million customers in 25 markets. with the customer and often have branches in various One of its founders, Maximilian Tayenthal, remarked countries that function more or less independently. that traditional banks had not taken N26 seriously Their IT staff often has a supporting role and not, as when the company was launched. See the Chapter 3 in the case of Adyen, a guiding one. Traditional banks opening case for more information on N26. use IT systems to facilitate business operations, not Fintech companies that make online banking much to compete with other financial providers. Their IT easier have already had a huge impact on the physical systems are usually at the national level and may dif- presence of banks in many countries. The number of fer from country to country. The heart of Adyen is bank branches in Europe has declined dramatically, its technical platform, and the IT staff works continu- from 240,000 a decade ago to around 165,000 in 2020. ously to make it cheaper and more user-friendly. The In the Netherlands, the digital banking experience data received on this platform are analyzed and used progressed so rapidly that the Dutch government felt to upgrade and update it. The data that Adyen gets are it necessary to make it clear that it would not allow global (the platform processes payments from all over the loss of cash payments from the Dutch High Streets the world) and highly diverse (from payment trans- as this would severely limit the participation in soci- actions on the Internet as well as transactions per- ety of vulnerable groups such as the elderly. formed in physical shops). This wealth of data ensures According to experts, the next wave of technol- that Adyen has better opportunities to analyze the ogy will be even more disruptive. In 2018, Antony market of payment transactions and its developments Jenkins, who ran Barclays from 2012 to 2015, told the than traditional banks do. BBC that in the coming years around 50 percent of Fintech is a good example of what economists call all jobs in banking (including those of middle manag- "creative destruction." This term, originally coined ers and customer agents) would be replaced by some by the Austrian economist Joseph Schumpeter, de- kind of artificial intelligence. Andy Haldane, the chief scribes the influence of technology on the economy. economist of the Bank of England, warned in the According to his theory, new technologies inevitably same year of a fourth industrial revolution that would result in winners and in losers. One famous example cause severe disruptions in the job market, and at the of a disruption is the Spinning Jenny, a device in- heart of it would be artificial intelligence-a modern vented in Britain during the eighteenth century. The counterpart to the Spinning Jenny. Spinning Jenny made the production of cloth more This does not mean that success is automati- efficient, cheaper, and-critically-reduced the num- cally guaranteed for new companies like Adyen and ber of laborers needed in the textiles industry, Over TransferWise. Research shows that around 90 percent the last 30 years, the Internet has had the same effect: of new fintech companies go bankrupt without ever some jobs have disappeared, and others have come having been profitable. Many require large invest- into existence. A good example is travel agencies. ments of capital before they can generate profits. Forty years ago, there was a travel agency on every Even when they generate profits, these are often, for high street, but today, the vast majority of travel is a time at least, rather small. Fintech companies are booked online. Likewise, traditional hotels now have now also being challenged by the major traditional banks, who are rapidly developing their own versions to compete with sites like Airbnb. Creative destruction comes in waves, and the bank- of online payment systems, from peer-to-peer pay- ments for retail customers, to highly automated online ing industry is now in the frontline of change because payment and billing systems for global businesses. of the emergence of fintech companies. Adyen hasAs consumers and firms have moved towards mobile expectations that it will surpass all of those bench- and online payments, many traditional banks have marks for 2020. Adyen illustrates how fintech startups invested heavily in new technologies in part using are changing the traditional bank and payment sys- the funds saved by closing down tradi ional physical tems using new technologies and business models. bank branches. Where in-house innovation has not worked, the large banks have purchased fintech firms Sources: Bernard Vogelsang, "AEX Lager Het Weekend In Door Brexit-Zorgen," Telegraaf, December 11, 2020; "Adyen and folded them into their existing business and tech- Breidt Samenwerking Met Microsoft Uit," deaandeelhouder. nology platforms. Traditional banks have a decided nl, December 10, 2020; Ayden, "Raffles Hotel Singapore Takes advantage over fintech startups: extraordinary cash Its Legendary Guest Experience to the Next Level with Adyen," www.adyen.com, November 24, 2020; Robert Vink, "How flow and tens of millions of loyal customers and firms. Adyen Is Simultaneously Disrupting Banks and the Payments In this scenario, fintech firms have been early to the Industry," www.seekingalpha.com, November 18, 2020; Adyen, party but typically do not survive to the end of the 'Adyen to Expand in the Middle East, Opens Dubai Office," party, at least not as independent fin s. www.adyen.com, November 10, 2020; Ben Dummet, "A Little- Known Payments Provider Grows into One of Europe's Most Adyen's founders were very experienced entrepre- Valuable Finance Form," Wall Street Journal, November 16, 2020; neurs when they started their company. They had Quarter of Bank Branches Will Close in Coming Three Years," already created another company, Bibit, which they Consultancy.uk, September 14, 2020; Adyen, "Adyen to Process sold to The Royal Bank of Scotland for 6100 million. European Credit Card Payments for Zalando," www.adyen. Indeed, the word adyen means "again ' in a language com, August 13, 2020; Ryan Browne, "Fintech Firm Adyen Posts 34% Surge in First-Quarter Revenue as Coronavirus Bolsters om Surinam, meaning that Adyen is their second en- Online Payments," www.cnbc.com, April 21, 2020; Adyen, "2019 deavor in the field of financial technology. Adyen ap- Annual Report," www.adyen.com, March 24, 2020; eBay, "eBay pears likely to be one of the survivors. The volume of Inc. Reports Fourth Quarter and Full Year 2019 Results," www. ebay.com, January 28, 2020; Tomasz Grynkiewicz, "This Fintech payments it processes has grown from 632 billion in Attracts 10,000 Customers a Day," www.netguru.com, December 2015 to E240 billion in 2019. Adyen's revenues during 4, 2019; Kamal Ahmed, "Bank of England Chief Economist Warns this time period have also grown, from 698.5 billion on Al Jobs Threat," BBC News, www.bbc.com, August 20, 2018; in 2015 to almost 6500 billion by 2019. Unlike many Jan Hammer, "Adyen: A Global Success Born in Amsterdam," Index Ventures, www.indexventures.com, June 13, 2018,; "Bank fintech company, Adyen has also bee 1 able to show Jobs Could Fall by 50% in 10 Years, Says Ex-Barclays Boss," BBC a profit, with net income rising from 131 million in News, www.bbc.com, November 26, 2015. 2018 to 6204 million in 2019, up 56 percent, and with CASE STUDY QUESTIONS do investors pay so much for shares of com- 1-12 According to Adyen, the payments platform panies that hardly make any profits? has two advantages compared to other pay- 1-14 Explain the term "creative destruction." Is the ment platforms. Describe these advantages in German bank N26 destroying jobs or creating your own words. new jobs? 1-13 Many fintech companies are very valuable on 1-15 Explain why such a high percentage of fin- the stock exchange even though they make tech startups go bankrupt before making any little or no profit. Explain this situation. Why profits at all. Case contributed by Bernard Bouwman