Top-line growth in SME merchant payments was a foregone conclusion for most of the last two decades. In today’s more mature and highly competitive marketplace for merchant payments, growth is no longer easy. Growth in the SME segment now requires sound distribution strategy and execution, including performance across distribution channels. As noted in Figure 1, the landscape for distribution in Europe is changing dramatically from being bank-centric to becoming more focused on software partners (ISVs, SaaS, VARs).
As commerce becomes more digital and payments more deeply integrated into commerce and business management software, software partners have become the key battleground for distribution success. The ISV/SaaS channel has been the key channel for growth in the US market for SME payments for years already. The same trend has been highly visible in the UK market in recent years and is now playing out across Europe defining winners and losers within merchant payment services.
Figure 2: Distribution of software + payment models (directional estimates; % of new SME merchants)
The future of merchant payments is ‘embedded payments’, defined as payments that are deeply integrated into software and where the software provider is also the PSP or where the SaaS and payments partners are collaborating via a strategic partnership to drive product innovation and distribution. We now believe that a majority of SME merchants being signed today in the US market are signing up for embedded payments. This penetration is much lower in Europe, but growing rapidly on the back of solutions such as Shopify Payments.
Embedded payments are better for merchant customers as they reduce friction in transactions and business administration (easier reconciliation, etc.). Embedded payments are also lucrative commercially and a winning formula for distribution, given that the SaaS product tends to be the lead purchasing decision before payment services. Embedded payments such as Shopify Payments, Woo Commerce Payments, Lightspeed Payments, Square, Xero, and many others are rapidly winning market share (payments + SaaS revenue growth at these winning companies generally exceed 50%).
The value of embedded payments expends across software verticals and payments use cases: POS payment, ecommerce payment, billing payment, recurring payment, push payment, and many other use cases lend themselves to integration into the corresponding software environments.
There are a number of different actors and product and business models at play in integrated payments, as shown in Figure 3. Traditionally, POS software was driven by ISVs (independent software vendors) who developed Windows software, then distributed in collaboration with VARs (value-added resellers) who deployed the software along with supporting hardware such as printers, screens, and payment terminals. This common ISV+VAR model for software and POS is being rapidly displaced by SaaS models. Software-as-a-Service product models are cloud-based, allowing for much easier deployment and usage. SaaS companies are often built to drive much of their own distribution, although web agencies and integrators of various forms still play an important role in implementing these solutions.
Integrated payments in Europe are primarily enabled via partnerships between payment services providers and software providers. But there is also an active M&A market whereby PSPs and SaaS are actively merging. For example, Sumup and Saltpay acquired restaurant SaaS providers Tiller and Storyous respectively, and Planet acquired retail SaaS Proximis. Xplor, a global provider of SaaS + payments, has acquired numerous software companies around the world including Stadline, a French provider of fitness/club mgmt. SaaS. Based on the US market development, we anticipate many more combinations of payments and SaaS companies in Europe in 2022 and coming years
Figure 5: Examples of European payments + SaaS M&A
Integrated payments and success in the ISV/SaaS channel were the single most important force of disruption and success in US merchant payments throughout the last decade. We expect the same to be true in the 2020s in Europe.
Payments and fintech M&A continued at a brisk pace throughout 2021 and into 2022, as shown in Figure 6 below. Payments M&A (particularly merchant payments) was primarily driven by strategic buyers including frequent buyers Unzer, Saltpay, Nuvei, Shift4, EVO Payments, Worldline, Nexi, and DNA Payments but also by private equity including experienced fintech buyers such as Advent, Blackstone, Apollo, Corsair, and Permira, among others.
We do not expect a slow-down in the coming years. However, we do expect some rationalisation of valuation levels as pressure from public markets trickles into the M&A market.
Source: Global Data, Flagship Advisory Partners analysis
Venture and private equity funding briskly increased in 2021 and Q1 2022, as well (as shown in figure 7). Fintech investments continue to perform well as a sector that still sees vast quantities of capital looking for a home in fintech. We observe private equity investors moving down-market to find assets of value and also being more proactive to front-run competitive auctions with short fuses. Growth equity in particular has been highly active and defined by peak valuations over the past year driven by aggressive investors such as EQT, General Atlantic, Tiger Global, and TCV, among others.
Figure 7: Select equity fundraises in European payments & fintech: 1Q 2021 – 1Q 2022
As shown in Figure 8, the mix of global fintech M&A is evolving over time. Merchant payments remains highly active as a sector globally. BNPL and other aspects of alternative payments have become highly active as have Banking-as-a-Service and Platform-as-a-Service. We see rapid acceleration of M&A activity in B2B payments in Europe, as well as in the risk and identity management segment. We are also seeing an acceleration of the SaaS + fintech theme in Europe, a carry-over from a primary theme in North America over the past five years. Finally, cross-border payments is also highly active in Europe and we expect this to continue.
Figure 8: Global fintech M&A heatmap
This article is part of ‘Who’s Who in 2022’s payments ecosystem? Full rundown of key topics and actors reshaping the industry as we speak’, a thorough analysis of the payments ecosystem by pinpointing the key trends that shaped the market over the last year, but also the most important names needed to be taken into account when it comes to relevant case studies in the field. The article is published in Who’s Who in Payments Report 2022.
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