Having continued its rapid evolution over the past year, the payments space is now feeling the impact of global macroeconomic headwinds and geopolitical instability. Against this backdrop, however, the emergence of new payment models and Open Banking has defined the market. In addition to this, the convergence of software and payment systems continues to deepen, as players in both sectors target each other for potential tie-ups to enhance their capabilities through M&A rather than organic growth.
Payment companies, particularly digital players, performed strongly through the pandemic. The rise of online spending, a shift to cards and the heightened popularity of digital products like crypto and e-wallets all made their impact felt.
So, what’s changed?
Following a period of hypergrowth, we are seeing an expected slowdown amongst digital payment players. Publicly listed digital platforms have been acutely affected by the recent downturn in global equity markets, driven by projected interest rate rises, concern about consumer spending alongside Russia’s invasion of Ukraine, with its knock-on impact on supply chains, commodity prices, and inflation. The MSCI All-Country Index, calculating the performance of major large and mid-cap stocks across 23 developed and 24 emerging markets, is down 12% as of March 2022. In the payments market, where volumes are heavily exposed to this difficult economic environment, major digital players have fared worse still. PayPal’s share price plunged in February 2022 with others like Square also suffering, prompting investors to price in significant financial risk despite a period of strong performance, before this fluctuation.
Inevitably, there’s somewhat less volatility amongst the more traditional players as well as in private market valuations. Several high-profile growth capital raises did take place early in the year. GoCardless, a leading fintech in direct payment solutions, secured USD 312 million in Series G funding in early February, at a valuation of USD 2.1 billion. As well, Checkout reached a USD 40 billion valuation after raising USD 1 billion in its Series D funding round in January. However, we can expect that volatility and market uncertainty is likely to put additional pressure on the size of rounds and valuations in the private markets.
This downward pressure on payment company valuations, both public and private, could present discounted opportunities for opportunistic acquirers – particularly financial sponsors. Aiding this is a highly fragmented payment sector with ample runway for further consolidation as we move further into this year. Despite the above context, uncertainty will persist with a risk-off market environment impacting the M&As appetite, particularly impacting companies’ ability to part-fund major transactions with equity.
However, running in parallel with this global uncertainty are radical market changes that are creating powerful incentives for payments companies to undertake strategic transactions. As consumers and businesses look for a seamless online experience and service, we are seeing a convergence between payment players and software providers. Ecommerce payment platforms are increasingly seeking to provide an all-encompassing service to merchants, and therefore a better end-market experience for the consumer, through acquisitions of software-centric businesses (and vice-versa). The elevated risk of volatility in volumes only increases the incentive for payments companies to expand into new areas, with software services offering more stable, recurring revenues and greater customer stickiness. Whilst this trend is in its early stages, deal activity is increasingly taking shape. Global Payments acquired MineralTree, a leading provider of Accounts Payable (AP) automation and business-to-business (B2B) payment solutions, to enhance its service for customers and integrate payment options across key vertical markets. Similarly, Intuit’s acquisition of Credit Karma for USD 7.1 billion has enabled it to create a personalised financial assistance service that helps customers find the right financial products. This integration harkens the emergence of specialist payment champions within specific verticals that have deep domain expertise, reduced company cost pressures, and will likely become acquisition targets themselves.
Secondly, the rise in Buy Now, Pay Later (BNPL) services, driven by a generational shift towards subscription payments and accelerated by the pandemic, is proving to be a growing source of deal activity. Square’s acquisition of Afterpay for approximately USD 29 billion was a marquee deal in this space. It underscored the huge appetite for BNPL providers and other major players have since moved in, with Apple acquiring Credit Kudos in March to accelerate its move into the space.
Traditional players in the banking sector have also opted into the booming market, with NatWest recently becoming the first UK high street bank to announce a BNPL product. Other payments and consumer credit incumbents may instead move into the market via acquisitions. Meanwhile, the first movers in the BNPL space are becoming consolidators themselves, with Klarna recently acquiring mobile wallet provider Stocard.
Thirdly, we are also beginning to see Open Banking gaining real traction. VISA’s acquisition of Tink, a European Open Banking platform enabling financial institutions, fintechs, and merchants to build tailored financial management tools, is a direct response to how regulation has opened up a range of different payment options.
Fourthly, the rise of fraud will increasingly become a key driver of M&As as companies look to enhance mitigation capabilities. With online consumer payments rising, particularly during the Covid pandemic, consumers utilising digital financial tools are increasingly vulnerable. In response to this, regulators have acted with the UK’s Financial Conduct Authority (FCA) rolling out ‘Strong Customer Authentication’, changing how consumers confirm their identity when making online purchases by adding additional security and identity verification steps. These measures will likely heighten scrutiny of payment providers, in turn prompting them to identify acquisition targets which specialise in providing cyber protection to consumers.
So, how will the above trends impact the future direction of travel for payment providers?
The macroeconomic volatility that we observe today will likely continue in the coming months. Investors, particularly in the public markets, will be navigating an uncertain terrain, which will put price pressure on established players.
At the same time, whilst markets previously were solely focused on growth, investors now want to see both growth and profitability. The companies that can perform well amidst this uncertainty and attract premium valuations, versus those that cannot, will prompt a bifurcation in the market with elevated M&A activity levels likely to persist. Growing consumer demand will drive further convergence between software and payments. Providers will also look to move into the fastest-growing sectors of the market, such as BNPL. While payment volumes will decline for the short and medium-term in a recessionary environment, we should still expect to see the most ambitious companies investing in acquisitions that enable them to capitalise on fundamental changes in the industry
This article was first published in Who’s Who in Payments Report 2022, the most recent market overview and analysis of key payment providers in the B2B and B2C commerce payment ecosystem.
About John Meehan
John is a founding member of Arma Partners with c.25 years of corporate finance experience in the technology sector. At Arma, John focuses on the Financial Technology sector and has advised on over 50 transactions across capital markets, asset management/wealth management, insurance and payments.
About Arma Partners
Arma Partners provides independent corporate finance advice to companies and investors active in the global Digital Economy. Arma acts as a trusted advisor to Digital Economy leaders throughout their entire corporate lifecycle, from raising private capital for fast-growing disrupters and founder-led businesses to orchestrating complex cross-border M&A deals for private equity investors and global large-cap public companies. Founded in 2003, Arma has completed 257 deals worth USD 91.8 billion in aggregate deal value since its inception and employs a growing team of 31 senior bankers.
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