Voice of the Industry

Acquisitions and investments in the payments industry: where money goes in 2021 (part I)

Friday 24 September 2021 10:39 CET | Editor: Anda Kania | Voice of the industry

The first part of the M&As and investments overview regards the Buy Now, Pay Later sector, the A2A payments, and the way unicorns are strengthening their position in the payments value chain 

Mergers and acquisitions are at an all-time high due to the rapidly changing global payments landscape. The increased M&A activity is being driven by a variety of trends, including an increase in ecommerce, the global shift away from cash, and the rise of payment options such as Buy Now, Pay Later, bank-based payments, e-wallets and more. As a result, both established players and startups are making acquisitions or investments to stay ahead of the game. 

According to KPMG’s ‘Pulse of Fintech H1 2021 – Global’,  in the latter half of 2020, global fintech investment increased to USD 98 billion from USD 97 billion in H1 of 2021, which is a remarkable rebound. A regional analysis finds that in H1 2021, fintech investment from the Americas was 51.4 billion USD, while the US received 42.1 billion. The EMEA also experienced strong investment at USD 39.1 billion. The Asia-Pacific region saw fintech investment rise from USD 4.5 billion to USD 7.5 billion between H2 of 2020 and H1 of 2021, though this is still at a low level compared to previous record highs. 

By analysing the major deals in the payment industry we provide a better understanding of how the industry dynamics work, how the businesses environment capitalizes on technologies, new capabilities, and market opportunities, and essentially, what are the regions and domains with the greatest potential in 2021.  

In our review, we have identified seven trends that seem to contribute to the organic growth of the industry:

  • Buy Now, Pay Later never goes out of style;
  • Account-to-Account (A2A) payments are powered by open banking;
  • Unicorns strengthening positions in the payments value chain;
  • Ecommerce is a big play;
  • Gen Z and Millenials are the main targets;
  • India is fit for fintech;
  • LATAM remains a good place to invest and expand.

Buy Now, Pay Later is a moneymaking machine

An overview of the latest investments for this year has been depicted here, and since then, the overview can be extensively updated. Another round of funding brought Klarna USD 639 million on top of its USD 1 billion raised earlier this year, and it plans to expand more at a global level. The POS instalment loan product of Affirm has undergone a USD 500 million securitization. Asset-backed securities (ABS) are pools of loans that are packaged and sold to investors as securities. This latest transaction is Affirm’s third securitization of 2021, and the sixth since it launched its program in July 2020. Colombia-based ADDI has been involved in three rounds this year: USD 30 million in debt funding, USD 35 million in an equity round and USD 75 million extension to its Series B. Italy-based Scalapay has raised USD 155 million aiming to expand across multiple countries and to launch new products especially for the luxury and travel sectors, two domains that will most likely boom after the pandemic. POS finance provider DivideBuy raised GBP 300 million, which means by conversion approximately USD 416 million, and it will use the funding to strengthen its partnerships with retailers. 

As regards M&As, in April this year, Affirm acquired Returnly, a provider of digital return experiences for direct-to-consumer (D2C) brands. There are two positive aspects to this event. First, returns have always been a hassle for consumers when buying via pay later options, a fact that also impacts the merchant or the brand’s image and their revenue. Second, going D2C is a good strategy to win consumer’s trust and loyalty. So with Returnly, Affirm might address these two factors of customer conversion and thus expanding its merchants’ network. 

Australia-based Zip is looking to expand into three regions this year: Europe by acquiring Twisto, into Middle East (which seems to be a strategic market lately) by acquiring Spotii, and Africa by acquiring Payflex. Through these latest moves, Zip follows first and foremost the market share. Twisto can offer access to all European countries,  in the Middle East, online spend increased at a rate of 25% annually, making it one of the fastest-growing regions for ecommerce, and South Africa has a few players in this field, and it’s also a market with untapped growth opportunities. Moreover, another key aspect is the risk factor – both Spotii and Twisto have in-house credit and fraud scoring engines that allow access to growth markets with limited access to traditional credit data. 

With the US becoming an attractive market, Zilch, a UK-based D2C BNPL company, has bought NepFin, a US-based commercial lending fintech that provides debt funding to SMEs. Earlier this year, Zilch has raised USD 80 million, bringing its total value to USD 500 million. The way their business model works is slightly different from the other players, as customers can pay at any online retailer that accepts Mastercard, not just those that use the platform. Although the expansion is quoted as the main rationale for this acquisition, they have eyed an SME lender, which suggests the company is looking to broaden its target and reach, and enter the B2B space as well. 

Probably the most discussed announcement in this domain is Square’s plans of acquiring Australian-based Afterpay in a USD 29 billion deal. Square is looking to capitalize on its CashApp ecosystem – customers will be able to manage their repayments and discover new merchants once Cash App integrates Afterpay. A mobile payment service formerly referred to as Square Cash, Cash App enables users to transfer money to one another using a mobile app. Moreover, Afterpay will also be integrated into Seller, Square’s online and in-store checkout solution. Square already offers an instalment option to pay to businesses using Seller, so this new partnership serves as a new opportunity to enhance capabilities. One can expect a similar move from its competitors like Stripe or Shopify that for now they only partnered with BNPL providers. 

The BNPL business model was also embraced by bigtechs, such as PayPal, which has introduced in March 2021 short-term, interest-free payments services to its financing options with PayPal Checkout Pay in 4 and PayPal credit. So far, PayPal has offered these services in the US and a few counties from Europe, so one could consider that the focus was mainly in these regions, but the company recently acquired Japan-based Paidy for USD 2.7 billion. PayPal was already well integrated into the Japanese market with its cross-border solutions, and strongly connected with Paidy previous to this announcement. PayPal was the first digital wallet to integrate with Paidy Link, a feature allowing users to instantly link digital wallets with Paidy accounts. According to follow-up news, after the announcement, PayPal shares has risen by 1% in pre-market trading, while Affirm and Square have dropped by 4% at market close. 

A2A payments are driven by open banking, technology and competition 

PSD2, open banking, and instant payments schemes are accelerating the development around A2A payments in Europe, but the mass adoption of real-time payment systems around the globe covers essentially all the regions. The M&As and investments are mainly driven by two factors as explained below. 

One of them is innovation in technology, including improved authentication and verification methods, and one illustrative example is the open banking platform TrueLayer that has raised USD 70 million to scale its open banking network, work on embedded finance solutions, and continue to expand footprints. 

Another factor is the competitive environment, especially for card networks that need to diversify their business model and move into banking payment rails. Visa has announced the acquisition of the European open banking platform Tink for USD 2.2 billion. The company plans to combine its payment infrastructure and fraud prevention capabilities with Tink’s APIs and technology in a bid to accelerate the adoption of open banking in Europe. 

A2A is relevant for all ecommerce verticals, including gaming, which is already a big use case for real-time payments. Payment service provider Nuvei eyed Mazooma, an A2A payments provider in online gaming and sports betting whose Instant Bank Transfer payment solution features same-day Automated Clearing House (ACH) for pay-ins and payouts – these functionalities will also be assimilated by Nuvei. Mazooma partnered with Plaid in 2020 to facilitate this instant payment for its consumers. 

Incumbent PSPs continue to scale up, but time is ripe for unicorns as well

Every PSP wants to grab the greatest portion of the ecosystem, and most of them achieve this by investing in their capabilities or buying a company that can complement their services and remove competition. Most of the events this year revolved around maximizing payment processing solutions, with companies such as PPRO, Mollie, Rapyd, and many more, being attracted by the growing number of initiatives for promoting digital payments. 

In the first quarter of 2021, local payments provider PPRO reached a billion-dollar valuation when it closed USD 180 million in funding, which was followed by a second round of USD 90 million backed by JP Morgan Chase. The company hopes to further expand in LATAM and APAC, but what’s important to notice is the involvement of one of the largest US-based banks. As part of its comprehensive strategy, JP Morgan would like to develop more payment services based on its existing relationships and grow its payments business globally, by working more closely with PPRO.  

The fintech provider Fiserv has purchased the payment processing startup Pineapple Payments to enhance omnichannel technologies. The two companies have already had a close relationship, as Pineapple Payments has operated as a key distribution partner for Fiserv. Although it’s a relatively young player, Pineapple Payments acquired since 2017 six payment service providers – Payline Data Services, Transax, AthleteTrax, CardChamp, Paystri, and 1st Payment Systems.

Rapyd, a Fintech-as-a-Service company, has entered into a definitive agreement with Arion Bank to acquire Valitor, an Iceland-based PSP, in a USD 100 million deal size. Valitor offers in-store and online payments acceptance solutions as well as card issuing to SMBs in Iceland, the UK, Ireland, and across Europe. The company's solution would work as an add-on to Rapyd's existing capabilities, including the issuing services. Shortly after this move, Rapyd raised USD 300 million in Series E funding that will be directed towards other acquisitions and investments, the company also being interested in embedded finance developments. 

Cross-border payments company Thunes has announced the acquisition of payment methods platform Limonetik, to complement its existing payments solutions, but more importantly, to develop one key capability: collecting payments from emerging markets. According to Thunes, there are a few players in the market that can enable collecting money even in the hardest to reach countries, and Limonetik was one of them, hence the decision of buying it. This year, Thunes has also raised USD 60 million with Checkout.com among shareholders, after raising the same amount of money in 2020. 

Stripe has raised USD 600 million, reaching a valuation of USD 95 billion. The company wants to invest in its European operations, particularly in Ireland, and expand its global payments solutions, and Treasury Network, which is a banking-as-a-service API that enables businesses to embed financial services in their marketplace or platform. Although there was communicated a focus on Europe, Stripe has recently closed deals in China with UnionPay, and invested in the US-based corporate card startup Ramp. From a financial perspective, we expect to see if the decision to go public will be pursued. 

Fintech company SumUp has landed USD 893 million in debt financing – a relevant detail to mention, because this means the company has to give the money back. SumUP plans to continue its series of acquisitions and to expand into Chile, Colombia, and Romania. This year, before the funding, SumUp bought the European provider of POS software solutions for restaurants and merchants Tiller. The company announced the acquisition just after it revealed it acquired mobile banking solutions provider Paysolut. So far, it seems like the plan is to augment their value proposition with mobile payments services. 

The first three trends examined in this part have been concluded, the second part covers the ecommerce space, the fast-growing sectors, and an extensive recap. 

About Anda Kania

Anda is doctor in Political Sciences, currently exploring her research skills to discover the latest trends in the payment and commerce industry. At the Paypers she is in the wonderful position to analyse the hottest topics, and to discuss them with thought leaders in order to get the pulse of the payments environment. 

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Keywords: merger, acquisition, BNPL, account-to-account payment, startup, investment
Categories: Payments & Commerce | Online Payments
Countries: World
This article is part of category

Payments & Commerce