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Payments Industry Trends - Educational Snapshots
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TABLE
OF
CONTENTS
Questions?
Report Overview
3
Alternative Payment Methods
4
Cross Border Payments Environment
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Issuer and Acquirer Blending
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B2B Payments
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P2P Payments
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Payments and ISVs
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Private Equity Involvement in Payments
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About TSG
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Report Overview
TSG has developed a high-level, educational overview of select key topics within the payments
ecosystem. This report summarizes these topics with each section providing an overview of the
topic, why the topic is important as the industry continues to evolve, and a list of select key players
within the related market segment.
This report condenses each of the following seven topics into a one-page snapshot, offering a brief
and informative summary on each corresponding topic.
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Alternative Payment Methods
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Cross Border Payments Environment
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Issuer and Acquirer Blending
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B2B Payments
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P2P Payments
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Payments and ISVs
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Private Equity Involvement in Payments
For more in-depth research on the payments industry and/or to learn more about TSG’s services,
please contact: tsgmetrics@thestrawgroup.com.
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Alternative Payment Methods
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Alternative Payment Methods
What is it?
Alternative payment methods (APMs) represent payment preferences and methods outside of a traditional card payment (e.g. Visa/Mastercard) and/or use of traditional
network rails (e.g. card networks). These payment alternatives offer their own digital application and settlement process, currency support, and are often subject to local
rules and regulations. It’s important to note that interpretations may vary within the industry; however, here are the key areas to keep in mind.
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Alternative Rails: alternative infrastructure that bypasses the use of traditional card rails (Visa, Mastercard, AmEx, Discover). This category primarily consists of bank
transfers, wire transfers, and digital applications that sync to directly to users’ bank accounts. Alternative rails are also used by local card schemes, such as the
National Payment Gateway in Indonesia.
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Alternative Payment Methods: payment methods that are used as an alternative to credit card payments or traditional payment rails.
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Local Payment Methods: payment methods that are specific to a local region or country. This may include cash on delivery purchases (common in Southeast Asia),
local wallets, national payment systems such as SEPA, and local card schemes. Payments using both traditional and alternative rails are included in this category.
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Digital Wallets: a digital hub for payments using traditional card and alternative rails. Digital wallets such as Apple Pay and Google Pay enable users to send money
via online or through a contactless-enabled card terminal using their connected credit or debit card associated with their account. PayPal uses both traditional and
alternative rails, as users have the option to connect directly to their bank account or link an associated credit or debit card.
Why is it important?
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In the U.S., payment preferences are changing as the use of digital wallets like Apple Pay and alternative payment methods like Affirm are growing in popularity.
These entities are playing a growing role in the payments ecosystem as they are continuously increasing year-after-year through large user and merchant adoption.
For U.S. players looking to operate globally, being able to offer local payment preferences abroad is critical. As demand increases, acquirers and issuers are at the
forefront of integrating with APMs/local payment methods and incorporating them into their product and service offering.
The market for APMs has exploded in recent years with a variety of new providers trying to grasp their share of the market. Currently there are hundreds of APMs
worldwide and obtaining a larger market share through expanding geographically is becoming more evident with examples like Alipay and WeChat Pay having
established themselves as leading alternative payment providers making a bigger push into the North American market.
Key Players
Alternative Rails
Alternative Payment Methods
Digital Wallets
Local Payment Methods
Germany
Australia
Japan
Singapore
Sources: TSG analysis
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Cross Border Payments Environment
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Cross Border Payments Environment
What is it?
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The merchant acquiring market is consistently evolving and expanding beyond borders. As merchants continue
to seek growth, they will require products and services that enable them to market their business and accept
payments on an international front. Some of the largest merchant acquirers and payment processors have
developed an infrastructure that empowers merchants to sell across borders and accept payment transactions
from numerous countries. A large, globally-focused acquirer for example can authorize in more than one
hundred currencies and accept payments from geographies covering over 99% of the global GDP.
Large international players have established a suite of products and services either through a network of
partnerships or in-house developments. One primary component for international payment processing resides
in currency conversion capabilities. Dynamic Currency Conversion (DCC) has emerged as a leading tool for
currency conversion and enables merchants to accept foreign currencies directly at the point of sale.
Cross-border payments are becoming a higher priority for many merchants worldwide. As the eCommerce
market continues to ramp up throughout the world, online marketplaces have made it possible for merchants to
sell items internationally. The need for cross-border online solutions such as Multi Currency Processing (MCP) is
evidently on the rise as more merchants shift their products towards eCommerce marketplaces.
Total Estimated Annual Global Payments Industry
Transactions in 2021
211
Billion
876 Billion Total
665
Billion
Rest of the World
North America
Why is it important?
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As merchants continue to expand their business internationally, payment providers will need to accommodate and tailor their services to match the necessities of
international payment acceptance. Merchant acquirers are continuously seeking to expand their market presence into new geographical areas in their efforts to
bring in higher payment and transaction volumes on their platform.
The payments ecosystem has become borderless and all the major payments players are operating globally. In their efforts to remain competitive, payment
providers are seeking geographical expansion through in-house developments, third-party partnerships, or acquisitions of leading local players in certain regions. An
example of this is Worldline’s recent acquisition of Ingenico which will enable them to gain traction in new global markets, such as North America.
Nearly a quarter of all payment transactions are originated from North America, however, emerging markets such as in Southeast Asia and Africa demonstrate a
large opportunity for payment processors as countries within these regions begin to lay down the infrastructure for banking establishments.
Key Players
Sources: TSG analysis, Statista, McKinsey
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Issuer and Acquirer Blending
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Issuer and Acquirer Blending
What is it?
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In recent years, the payments market has witnessed the blending of acquirers and
technology companies providing solutions for issuers/financial institutions through
substantial acquisitions. These acquisitions are driven by increasing market presence
across geographies, adding additional sales channel opportunities in adjacent markets,
and becoming more of a one-stop shop for financial technology across the financial
institution and merchant landscape.
As payment companies continue to grow, maintaining a competitive advantage in the
market generally entails acquisitions of leaders in ancillary or adjacent markets. Rather
than developing solutions in-house or organically, acquisitions can often be an easier
option when entering new or adjacent markets.
The combination of acquirers and issuing technology entities enables companies to
serve both sides of the payment environment. For example, Fiserv primarily develops
technology for issuers and financial institutions, however, with their acquisition of First
Data they are able to cross-sell their products and services to include First Data’s
merchant service offering. This ultimately enables Fiserv to provide additional services
to their existing client base using First Data’s already known merchant acquiring
products and establish synergies among an adjacent payments market. This can be seen
through the rapid growth in First Data’s Clover POS terminal, which saw a 40% increase
in payment volume after the acquisition was completed. In addition, First Data
accounted for 61% of Fiserv’s total internal revenue in their 2019 fourth quarter.
Key 2019 Acquisitions
Acquired Worldpay for $35 billion
Transaction Details
FIS acquired Worldpay in a 90% stock and 10% cash deal. The implied equity value for Worldpay
was approximately $35.5 billion, a ~14% premium compared to the company’s closing share
price. The combined company will evidently merge financial solutions, eCommerce, and
integrated payments for their thousands of client relationships.
Acquired First Data for $22 billion
Transaction Details
Fiserv acquired First Data in mid-2019, valuing the company at a ~29% premium amounting to
$22.74 billion. Fiserv holds a majority ownership (57.5%) in the combined company, which will
go under the Fiserv brand name. This acquisition ultimately enables Fiserv to cross-sell First
Data’s merchant service products and solutions their current clients of banking institutions.
Why is it important?
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The market will evidently continue to evolve in the coming years as payment providers
strive to stay competitive. Consolidation between issuing technology providers and
acquirers within the U.S. may continue to unfold as companies seek additional sales
opportunities in adjacent markets.
The blending between the two market segments will continue to play out in the coming
years and understanding both sides of the payments environment is vital as the two
become more interconnected in their product offerings.
Acquired TSYS for $21.5 billion
Transaction Details
Global Payments acquired TSYS in an all-stock deal valued at $21.5 billion, a ~20% premium on
TSYS’s closing share price. Global Payments holds a majority share (52%) of the combined
company, which will maintain dual headquarters in Atlanta and Columbus, Georgia. The
combination of these companies has created one of the largest software companies in the U.S.
with an emphasis on payments.
Sources: TSG analysis
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B2B Payments
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B2B Payments
What is it?
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Business-to-business (B2B) payments refers to payment transactions between two separate business
establishments referred to as a buyer and a supplier. This market is largely still dominated by paper checks,
however, electronic payment processing within this space has been increasing in recent years. Deloitte estimates
that the U.S. B2B market is growing at a 5.8% compound annual rate and will reach $23.1 trillion in 2020.
Although the use of checks has been declining, there have been several technological advancements that have
helped ease the writing and check processing acceptance, some of which includes Remote Data Capture,
Remittance scanning, and other lockbox services.
Businesses are migrating towards digital B2B payment methods including credit and debit payments (including
using virtual cards), wire transfers, and ACH. Data from NACHA and the Credit Research Foundation estimate
that ACH payments will encapsulate 45% of the B2B payments market by the end of 2020.
The B2B payment migration has led to a large market for B2B payment ISVs that provide solutions for buyers and
suppliers to simplify their supply chain management and payment needs. This, in turn, has led to opportunities
for payments companies. B2B ISVs have partnered with specialized B2B AP automation payments companies to
provide these specialty payments services.
A B2B payments company needs to solve issues for many buyers as well as suppliers as each has its own
priorities depending on the type, size, financial status, and back office sophistication.
Estimated 2020 U.S. B2B Market Size
$4.52
Large Businesses (> $1 B)
$23.1 Trillion
$4.54
Medium Businesses ($50 M - $1 B)
In 2020
Small Businesses (< $50 M)
$14.04
Why is it important?
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According to The Association for Financial Professionals, 81% of B2B organizations used checks in 2004, however, as of 2016, this figure was down to 51%. The rate
of check usage is forecasted to continue declining as digital payment services become more accessible to the wider business market. In addition, as of 2018 all
invoicing for business-to-government payments must be electronic payments, eliminating the use of paper checks in this market segment.
The B2B environment will continue to attract additional payment players as the market is extremely large and underpenetrated. It is imperative that merchant
acquirers have their pulse on this high-growth, complex space.
Key Players
Sources: TSG analysis, Deloitte, NACHA, Credit Research Foundation
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P2P Payments
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P2P Payments
What is it?
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Peer-to-peer (P2P) payments involve the transfer of funds made between separate
individuals using their banking accounts or credit cards through an online or digital
medium such as PayPal or Venmo. In order to facilitate the payment transaction, both
parties must have an account created on the same platform. Users cannot successfully
transfer funds through separate digital platforms (e.g. PayPal users cannot send
payments to Zelle users).
Individuals connect their banking account and/or credit or debit card to their P2P
account in order to facilitate payment transactions to other individuals. The leading
P2P players have established a wide network of partnerships with issuing banks to
ease the process of connecting user’s banking accounts. For example, Zelle, has
developed partnerships with more than 220 financial institutions on their platform.
Once users have connected their banking account and/or credit or debit card, payment
transactions can be facilitated between users within 24 hours or a matter of days
depending on the option chosen by the user. P2P players primarily generate revenue
through an instant payout option which charges the recipient user an additional fee.
2018 P2P Transaction Volume
($ in billions; estimated)
$139
PayPal
$119
Zelle
$62
Venmo
Subsidiary of PayPal
Square Cash App
$30
Why is it important?
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The P2P payments market has been booming in recent years with substantial growth from the leading payment providers. Venmo, a subsidiary of PayPal which
primarily focuses on the P2P market, reported an increase of 65% in 2019 payment volume. On the other hand, Zelle, a bank-backed P2P platform owned by Early
Warning Services, reported an increase of 57% in total 2019 payment volume. Additionally, Square’s Cash App generated more than $1.1 billion in 2019 revenue, up
157% year-over-year.
As P2P payment providers continue to see growth on their platforms, the shift in developing additional methods of monetization with continue to unfold into the
market. One example of this shift is the transformation into eCommerce and in-store acceptance through establishing partnerships with leading retailers and the
creation of debit cards linked to user’s accounts.
Key Players
Sources: TSG analysis
Subsidiary of
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Payments and ISVs
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Payments and ISVs
What is it?
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An ISV is commonly referred to as an Independent Software Vendor, but in payments, ISV most notably stands for Integrated Software Vendor. Both abbreviations are
widely accepted, and generally both carry the same definition. The North American market is mature and contains numerous ISVs that address a wide range of
business needs to help centralize and manage various business functions and operations.
ISVs, in addition to general business management, may also provide industry specific functionality such as table management in the restaurant industry. These ISVs
are referred to as vertically focused ISVs. Other ISVs that cater to more general business functions like CRM and marketing are typically referred to as horizontally
focused ISVs, as their solutions can be utilized in a wide variety of industries.
Why is it important?
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Payments and ISVs are becoming more integrated and as such acquirers are leveraging these software related relationships as sales channels to reach a wider range
of merchants, which provides more value and lower attrition through a stickier relationship. ISVs are valuable partners and potential acquisition targets as they
provide industry specific functionality and additional sales channels for merchant acquirers.
ISVs represent a-one-to-many relationship for payments companies, as partnering with a large ISV could equate to the acquisition of thousands of new merchant
clients. Merchants rely on ISVs to manage crucial business functions like inventory, marketing, invoicing, payment acceptance, and more. Since ISVs provide
integrated tools that manage multiple key areas of a merchant’s operation, merchants sold via the ISV channel tend to stay longer and perform better than
merchants sold via traditional sales channels.
Merchant acquirers are seeing a larger opportunity in the ISV market as payment integration and monetization help drive revenue through additional channels. Many
leading ISVs have established payment monetization on their platform which has led to key payment processing partnerships through revenue sharing models to
create additional sources of income and profitability.
Key Players
Horizontally Focused
Vertically Focused
Government ISV
Nonprofit ISV
Marketing
Accounting
CRM
Healthcare ISV
Education ISV
Childcare ISV
Loyalty
Appointments
Sources: TSG analysis
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Private Equity Involvement in Payments
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Private Equity Involvement in Payments
What is it?
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The electronic payments industry has continued to attract the attention of PE firms
and investors as the secular shifts from paper transactions (check and cash) to
electronic payment methods continues to gain traction and adoption. Investments in
electronic payment firms provides these investors with consistent growth and
profitability.
TSG’s Payments Index tracks leading payment companies and compares their market
performance to the S&P 500. Payment companies have been thriving in recent years
which has led them to become more valuable and profitable for both the company
and its investors. Company performance and future growth expectations are primary
characteristics in attracting investors and additional shareholders which evidently
drives up market capitalization and company valuation.
PE firms and investors see a large opportunity in further developing and reshaping
payments companies to increase their overall valuation. Integrated payments
solutions including software monetization impact the profitability of these
companies and generally lead to a higher return on investment for the investor. In
addition, PE firms may also participate in a round of funding to obtain a large share
in a growing fintech provider.
$649
VS.
+23% CAGR
$600
$500
TSGPX
S&P 500
$400
$244
•
$300
$200
+11% CAGR
$100
$-
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2011
2012
2013
2014
2015
2016
2017
2018
2019
Key Payments-Focused PE Firms
Why is it important?
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$700
PE firms and investors play a significant role in the growth and progression of
payment companies by providing capital that is used for the development of fintech
products and services. With an increased amount of investment, payment
companies can broaden their services and expand into new markets.
The rise in PE firms playing a larger role in the development of payments companies
to increase their overall valuation will evidently continue. An example of this
includes Parthenon Capital’s involvement of Payroc’s mergers with Payscape, NXGEN,
and BluePay Canada in late 2019. The consolidation of these merchant acquirers has
added additional capabilities and market presence which has ultimately increased
their valuation and ROI for Parthenon Capital and its investors.
Sources: TSG analysis
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ANALYTICS + CONSULTING
The Strawhecker Group (TSG) is a fast-growing analytics and consulting
firm. The company serves the entire payments ecosystem, from fintech
startups to Fortune 500 companies. The firm provides its clients with
advisory services, research and analytics to help them plan and execute
their strategic initiatives. Based in Omaha, a recognized payments industry
hub, TSG is an established leader in this high-growth, ever-evolving space.
40+
250+
Of the top 50 merchant acquirers
served, including 9 of the top 10
Completed payments company
valuations; as well as ~30
buy/sell/investment advisements
23+ Years
1,000+
Clients advised,
including many in
the Fortune 500
Average
Associate
experience in the
payments industry
3.7+ Million
Card-accepting merchants in TSG’s
AIM analytics platform, driving
millions of dollars in ROI for its users
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