The paradox of growth: funding challenges for payments startups

The payments industry finds itself at a crossroads. A striking paradox has emerged: while publicly traded payments companies largely posted revenue growth last year, venture capital (VC) funding for startups in the sector plummeted by 47% compared to previous years.

This disconnect underscores a broader recalibration in investor sentiment, driven by macroeconomic uncertainty, shifting priorities, and the evolving demands of a digital-first economy. 

As startups grapple with tighter funding conditions, the industry’s resilience hinges on innovation, consolidation, and strategic alignment with emerging trends.

The paradox: rising revenues meet shrinking funding

Last year, 77% of publicly traded payments firms reported year-over-year revenue growth, according to a recent S&P Global Market Intelligence report. 

The answer lies in a combination of macroeconomic pressures and sector-specific challenges. Rising interest rates, geopolitical instability, and fears of a U.S. recession have made investors increasingly risk-averse. 

At the same time, the payments sector’s maturity means VCs are no longer chasing “growth at all costs” but instead prioritizing startups with proven business models, sustainable unit economics, and defensible technologies.

This shift mirrors trends observed across fintech. For example, while digital wallets and neobanks secured $2.7 billion in funding last year—the largest share among private payments startups—investors largely ignored undifferentiated players. Instead, they focused on innovators addressing specific pain points, such as cross-border transaction inefficiencies or real-time payment fraud.

Investors pivot to quality over quantity

The days of “spray and pray” VC strategies are over. In 2024, the number of funding deals for payments startups fell by 23%, reflecting a laser focus on quality. Investors now demand:

1. Clear paths to profitability: Startups must demonstrate efficient customer acquisition and retention strategies.
2. Product differentiation: Solutions that solve niche problems, such as automated chargeback management or tokenized payment security, stand out.
3. Regulatory foresight: Compliance with evolving frameworks, such as the EU’s instant payment mandates, is critical.

This selectivity has created a bifurcated market. Established players like Stripe and Klarna continue to attract capital—Stripe raised over $8 billion in three rounds since 2021.

For instance, B2B-focused fintechs leveraging AI to streamline invoice reconciliation or supply chain payments have fared better than consumer-facing apps with unclear monetization strategies.

Public markets: revenue growth masks underlying challenges

Publicly traded payments companies present their own contradictions. Despite 77% reporting revenue growth in 2024, more than half saw negative stock returns. Legacy players, in particular, struggled to keep pace with younger competitors.

Why the disconnect? 

1. Legacy tech debt: Older firms are burdened by outdated systems. A recent analysis found that global banks will spend $75 billion on legacy payments infrastructure in 2024 alone.
2. Consumer sentiment shifts: Rising inflation has dampened discretionary spending, impacting sectors like buy now, pay later (BNPL). Klarna’s planned IPO, for example, comes amid growing skepticism about BNPL’s long-term viability.
3. Market saturation: Traditional payment processors face pressure from agile newcomers offering embedded finance solutions or FedNow-powered instant payments.

Younger companies founded after 2000 outperformed their older peers, thanks to cloud-native architectures and AI-driven tools. For example, startups using machine learning to optimize payment approval rates or detect microtransaction fraud have captured investor attention despite the broader funding slump.

M&A surge: consolidation becomes a survival tactic

With IPOs stalled and VC funding scarce, mergers and acquisitions (M&A) have become a lifeline. This consolidation is driven by:

• Vertical integration: Acquirers seek end-to-end capabilities, such as combining merchant acquiring with fraud prevention.
• Geographic expansion: Firms like Adyen and Block are acquiring regional players to tap emerging markets.
• Technology acquisition: Legacy banks are snapping up startups specializing in real-time payment APIs or decentralized finance (DeFi) protocols.

Private equity firms have also entered the fray, targeting undervalued startups with strong cash flows. For example, Thoma Bravo’s acquisition of a majority stake in Instant, a payroll provider, underscores the demand for solutions addressing earned wage access and gig economy payments.

B2B payments: the industry’s bright spot

While consumer-facing fintechs falter, B2B payments have emerged as a beacon of innovation. Startups addressing pain points like cross-border settlements, invoice automation, and supply chain financing secured 35% of all private funding in 2024. Key drivers include:

1. Globalization complexity: Businesses demand solutions for multi-currency reconciliation and compliance with trade sanctions.
2. AP/AR automation: AI-powered platforms reducing manual workflows are gaining traction, particularly those integrating with ERP systems.
3. Embedded finance: Non-financial companies, from SaaS providers to logistics firms, are embedding payment tools into their platforms.

Regulatory tailwinds are also boosting B2B innovation. The European Central Bank’s push for instant payments and the U.S. FedNow’s expansion have created fertile ground for real-time B2B solutions.

Fraud prevention: a non-negotiable investment

As digital payments grow, so do fraud risks. Payment fraud losses are projected to exceed $40 billion globally in 2024, forcing startups and enterprises alike to prioritize security. Investors are funneling capital into:

• AI-driven fraud detection: Platforms using generative AI to analyze transaction patterns in real time.
• Behavioral biometrics: Tools that authenticate users based on typing speed or device interaction.
• Blockchain traceability: Solutions leveraging distributed ledgers to track cross-border transactions.

Regulatory pressures are amplifying this focus. The SEC’s new cybersecurity disclosure rules and the EU’s Digital Operational Resilience Act (DORA) mandate stricter fraud controls, creating opportunities for compliance-focused startups.

Regulatory hurdles: navigating a patchwork landscape

The payments sector’s global nature exposes startups to a labyrinth of regulations. In 2024, key challenges include:

• Data localization laws: Countries like India and Russia require payment data to be stored domestically.
• Anti-money laundering (AML) compliance: Stricter enforcement of Bank Secrecy Act requirements in the U.S.
• Interchange fee caps: The EU’s revised Payment Services Directive (PSD3) could squeeze merchant acquirer margins

Startups that proactively address these issues—such as those offering modular compliance APIs or partnering with regulatory tech firms—are better positioned to attract funding.

The road ahead: adaptation and collaboration

The payments industry’s 2024 funding crunch is not a death knell but a call to evolve. Key strategies for survival include:

1. Niche specialization: Startups must focus on underserved verticals, such as nonprofit donations or military payroll services.
2. Partnerships: Collaborating with banks, telcos, and Big Tech firms can provide scale and distribution.
3. Decentralized finance (DeFi): Integrating blockchain for transparent settlements could disrupt traditional rails.

While VC funding may remain subdued, alternative capital sources—such as revenue-based financing or corporate venture arms—are filling the gap. Additionally, startups that align with megatrends like CBDCs or green payments (e.g., carbon-neutral transactions) could unlock new opportunities.

Resilience through reinvention

The payments sector’s 2024 story is one of contrasts: growth versus caution, innovation versus consolidation, risk versus reward. While the VC pullback has created headwinds, it has also spurred creativity, forcing startups to prioritize sustainability and scalability.

For investors, the message is clear: The payments industry remains a $172 billion opportunity, but success requires patience and precision. For startups, the path forward lies in solving real problems—whether through AI-powered fraud tools, tokenized security, or B2B payment automation.

As the sector navigates this inflection point, one truth endures: Payments are the lifeblood of the global economy. Those who adapt to today’s challenges will shape tomorrow’s financial infrastructure.