An analysis released by Accenture last week indicates that 2017 was a record year for global investment in financial technology, which rose 18 percent to a total of US$27.4 billion.
In the U.S., the firm said, most of the investment went to lending and payments startups – collectively accounting for 60 percent of the country’s total.
Against this backdrop of widespread interest in innovative solutions that are changing the financial services landscape, the payment facilitator model is presenting an increasingly compelling value proposition to investors.
Ned May, a partner at fintech growth equity investor Napier Park Financial Partners, describes the PF space as one where interest is rising as more people begin to understand both the value proposition PFs offer to the marketplace and the long-term value creation possible through those models.
The theme of integrated payments and the attractiveness of the ISV model are widely known, but the marketplace is more recently coming to appreciate the evolution from ISV to PF. Momentum has built as PFs like Stripe have experienced significant growth, and as milestone agreements highlighting the model have made the news, May told PaymentFacilitator.com.
Last year, when J.P. Morgan Chase acquired WePay, the financial giant acknowledged the value in owning a company that would help it to offer integrated payments and instant onboarding to its clients. Announcements like that, along with the sheer number of private equity financings and strategic acquisitions involving vertically focused software vendors, have raised mainstream awareness of the role of payment facilitators, he said.
For May, the PF model made sense after he worked with high growth software companies who identified a common pain point. The process of onboarding customers to accept payments through traditional acquirers was inefficient and interrupted the highly customized flow they had worked hard to develop for a given niche.
“We recognized the opportunity to bring more of the underwriting/risk and payments boarding expertise in-house to make that customer experience more seamless and then, over time, to gain a greater share of the payments value chain. All of that clicked,” he said.
As investor interest in the PF space grows, May said, it has been driven by the understanding that faster onboarding can dramatically improve the client experience as well as reduce the time it takes to begin earning revenue from new clients.
“If I’m a software vendor and I can onboard somebody in a matter of minutes as opposed to 24-48 hours, I benefit from improving the client experience, generating revenue quicker, and eliminating speed bumps where a client might not ultimately sign on and go live,” May said.
Over the past few years, May’s firm has worked with a number of software vendors, including leading TouchBistro’s 2017 Series C financing. Some of them have chosen to go on to become payment facilitators while others have remained in the more traditional ISV role, he said.
“The consensus around integrated payments is that the actual processing of payments is increasingly commoditized, and those software vendors who own the end client relationship have an opportunity to monetize more of the payments value chain over time. We are early innings in the growth of the PF market,” May said.
No solution works for every company, and part of the role played by May’s firm is to help its clients strategize about the route that they should take. An ecosystem that didn’t exist five years ago has made integrating payments easier for software companies who choose to do so.
Today, entrants such as WePay, NMI, Infinicept and Payrix offer a range of PF services and technology, while incumbent processors and acquirers such as Vantiv are increasingly addressing the PF model within their own strategies, May said.
In fact, this support system growing around the nascent PF space – which includes advice from investment firms – is evidence that the model has legs, he said.
The payment facilitator universe itself is certainly expanding. A report published by financial services firm Cowen last fall estimated the processing volume for payment facilitators in the U.S. to be just under $350 billion during 2016, with an annual growth rate of 30%.
If that estimate holds true, there will be plenty of PF investment opportunity to go around.