payments Insight. Opinion.
vol 15
CONTENT Opinion paper: PSD2 and the impact of Access to Account
1 Opinion Paper: PSD2 and the impact What is the strategic impact for banks, of Access to Account payment institutions and merchants? We take a look at the strategic impact of PSD2/XS2A for banks, payment institutions and merchants.
4 Qu o vadis girocard Kalle Dunkel the PSD2, such as those extending its scope and Jan Lettow and Jakob Schniewind take a look on the current Senior Associate those relating to consumer protection, liabilities, challenges of Germany's leading cashless payment method security and payment instrument charges, we expect and it's future viability. Jan Lettow XS2A to have the biggest impact when it comes to Manager new business opportunities. 5 M&A Activity XS2A requires banks to provide third party providers Which transactions made headlines in the 3rd quarter of Christian Löw with API access to customer accounts if the account 2016? What are the current M&A and IPO drivers? Robert Senior Associate holder consents. XS2A allows third party providers to Kayser, Apostolos Psaras and Maximilian Kind answer offer two new distinct types of services: these questions. Jakob Schniewind 1. Payment initiation services, i.e., the execution of Associate online payments without holding user funds 7 Venture Capital Actvity 2. Account information services, i.e., access to pay- Edoardo Cenci and Stefan Thomalla review the latest pay- Access to account as part of the PSD2 ment account data to provide a comprehensive ment start-up fundings of Q3 2016 and elaborate the stra- The objective of the revised Payment Service Direc- view of a user’s financial situation tegic thinking. tive (PSD2) is to further improve the foundation of an One of the reasons for creating these new service pro- EU-wide unified market viders under PSD2 is to 10 M&A Deal Activity for payments by foster- include currently unregu- Transaction overview ing competition, innova- Payment initiators lated business models in tion and transparency. A will disintermediate the regulation: examples 12 VENTURE CAPITAL ACTIVITY major game changer traditional payment of payment initiation ser- Transaction overview introduced by PSD2 is schemes and are best suited vice providers are “Access to Account” SOFORT, Trustly and (XS2A). While there are for PSPs, banks and other iDEAL. Examples of further provisions within regulated payment institutions account information ser- vice providers are fymio, mint and Money Dashboard. One provider may cover multiple service offerings and this will even come to Payment initiation service Merchant be expected due to positive synergies. 2 payment initiation services Business opportunities based on 3rd party XS2A payment 1 Account Based on the two initiation 3 aggregation services possible XS2A ser- vices, EY Innovalue XS2A has identified five possible business opportunities arising for incumbents and ... 4 Scoring new players:
Data
5 analytics and marketing Account information Fig. 1: Business service opportunities based on XS2A payments Insight. Opinion. 2
1. 3rd party payment initiation services the price of cannibalizing their current higher-mar- implement an account information service and gain Payment initiation service providers can use APIs gin (card) business. further customer insights above and beyond the provided by the consumer’s bank to trigger transac- extended payment experience. tions for merchants. In this way, merchant acquirers 2. Merchant payment initiation services and card schemes are disintermediated. While Merchants have the option of becoming a payment 3. Account aggregation PSD2’s provisions calls for stronger authentication, initiation service provider themselves and initiate The new account information service APIs can be recurring payments can be exempted if merchants payments directly from consumer bank accounts. leveraged to gain a true “360°” financial overview are white-listed by customers. The payment initia- The primary motivation for merchants to become a for private and commercial multi-bank clients. By tion service providers’ business model is based on payment initiation service is to support the core aggregating the information in a financial manage- the expectation that revenue from transaction fees business by lowering costs, augmenting the cus- ment cockpit, the bank or aggregation layer pro- will be lower than current costs and cover a provider tomer experience and gaining further customer vides additional value for the client. However, the margin as well as potential transaction or API fees insights, while revenue potential is secondary. Plat- stand-alone presentation of financial information charged by the consumer bank. Costs arise from the form providers and super merchants (e.g., Alibaba, will soon become a market standard and will lose its need to obtain a payment institution license, set up Amazon and eBay) or “walled gardens” (e.g., Face- differentiator attribute. Lasting value for the cus- infrastructure, operations, marketing (less if white book and Twitter) could generate additional reve- tomer will be achieved by smart use of data, i.e., label) and potentially transaction or API fees nue from sub-merchants. On the other hand, costs advisory services with regard to better product charged by the consumer bank. Incumbents will see will be driven by the need for a payment institution offerings and relevant cross-selling. Revenue an increase in competition, ultimately leading to a license, infrastructure, operations and potentially streams are unlikely to spring up from the aggrega- commoditization of this service with lower fees. the transaction or API fees charged by the con- tion itself. Incumbents, such as Centralway, Moven Potential new players, such as banks, PSPs and sumer bank. Due to administrative and regulatory and Mint, will face fiercer competition from banks other regulated payment institutions, have the burdens, only large multinational merchants will and might have difficulties defending their current opportunity of extending their offering to an existing invest in becoming a regulated entity. As an already USP. loyal customer base. However, this might come at regulated player, the merchant could also
1 1 3 2 1 3 Account access Confirmation Account access Payment Merchant 2 Merchant as Payment service user service user Initiation payment initiator Aggregation layer
2 3 via API Initiation Confirmation P ayment via API Initiator 4 4 Consumer`s Merchant`s Consumer`s Merchant`s Interbank funds Interbank funds Bank bank Bank bank transfer transfer Private/ commercial Card Merchant Card Merchant client scheme acquirer scheme acquirer
Fig. 2: 3rd party payment initiation services Fig. 3: Merchant payment initiation services Fig. 4: Account aggregation
4. Scoring provide approval for access to their accounts in e.g., telematics) or incentives (loyalty points, e.g., “Classic” (e.g., credit reports) and “new” (e.g., social order to positively influence their own credit scoring PAYBACK or Nectar). To comply with data protec- media data) scoring data sources can be supple- and thereby gain access to benefits such as lower tion regulations, the customer has to explicitly opt- mented with data retrieved via the new account interest rates. The resulting enhanced credit scores in. The data obtained can either be used internally by information service APIs. With the client’s consent, can be used as a stand-alone business model (credit the financial institution itself or sold to commercial the credit scoring provider can tap into the account scoring as a service) or for internal use as part of a partners for customized offerings with higher hit and transaction histories of all the banks of the cli- credit approval process by banks or merchants. His- rates and increased added value for clients. Com- ent and thereby enhance the scoring process with torically, FinTechs like bonify, Score Kompass and mercial partners include financial as well as non- valuable insights. Clients will be encouraged to Kreditech already made use of data-based scoring financial players. systems. Now, traditional banks are expected to 4 enter the field, striving to gain additional revenue 5 sources. With direct access to customer informa- tion, banks should obtain more reliable credit Credit Social Access scores, threating more indirect big data approaches reports media to bank accounts accounts currently relied on by many FinTechs.
Gaining customer 5. Data analytics and marketing insights Aggregation and scoring The new account information service APIs will allow customers to give financial institutions access to their accounts in exchange for benefits, such as Enhanced Keep data Sell data internal use credit score Sale to 3rd party increased convenience (free account aggregator, Fig. 5: Scoring e.g., N26), discounts (insurance rebate, Fig. 6: Data analytics and marketing
Page 1 payments Insight. Opinion. 3
3rd party Incumbents • Standardization and openness lead to lower costs PISP • Increase in competition Commoditization of service and decrease in fees impact on • 1 New players • Additional new business and revenues • Increase existing customer’s loyalty via new services Cannibalization of higher margin business (e.g. cards) Banks PSPs •
Merchant Incumbents PISP No incumbents yet impact on 2 New players • Optimized shopping experience • Lower payment costs Regulatory burden Large merchants Platforms Walled gardens •
Account Incumbents • Regulatory approved business model aggregation • Loss of USP/ increasing competition impact on • Regulatory burden
3 New players • Increased customer convenience Potential for cross-selling Banks •
Scoring using Incumbents • Regulatory approved business model AISP data • Loss of USP/ increasing competition impact on • Regulatory burden
New players • More reliable credit scores 4 Revenue potential from credit scores Banks •
Data analytics & Incumbents • More data and information Marketing (AISP) • Increase in competition impact on • Higher regulation results in additional fixed costs
New players • Additional new business and revenues Customized core offering based on collected data 5 Banks •
Fig. 7: Overview of impact on incumbents and new players
APIs and Open technology-driven evolution of banking, in which A different path open to banks is to focus on main- banks create a symbiosis between financial institu- taining the customer relationship and providing top Banking have the tions, technology players (e.g., FinTechs), mer- notch front-end banking services. They can leverage potential to remodel chants and customers to address financial as well as customer insights from consolidated services and the financial service industry – non-financial customer needs. Open Banking and data to become the customer’s central hub for XS2A and PSD2 are only one APIs have the potential to remodel the financial ser- financial services and create a platform for financial vices industry and banks will be forced to make stra- institutions, merchants and customers to work step on the path of change tegic decisions as to which role they want to play in together. In doing so, banks will be able to provide Open Banking: beyond the PSD2 creating value for their customers. enhanced offerings with products and services that The PSD2 and its provisions for XS2A are only the address both financial and non-financial needs. first steps on the path to digitalization that will force One option open to banks is to focus on providing The question that remains is how the banks will banks to open up their “data-vaults”. Outside the backend banking services. They could grant trusted actually position themselves. Will they attempt to banking industry, digital companies such as Google partners extensive API access to data and pro- bar the gates? Will they take the guidelines pre- or Facebook have already grasped for a long time cesses, while they focus on providing liquidity and pared by the EBA and implement the APIs to cover that opening up towards other market participants infrastructure services as a backend financial ser- only the most basic functionalities, hampering the can increase value for its customers and ecosys- vices provider. This arrangement reduces customer processes and charging the highest fees they can tems. Based on this trend and the increasing rele- interaction and harbors the risk of disintermedia- get away with? Or will they embrace the change, go vance of open APIs in banking, the term Open tion, although the bank’s expertise and scale will beyond the mandatory requirements and provide Banking was coined. Open Banking stands for the always ensure a share of the profits. the market with genuine open banking?
Page 1 payments Insight. Opinion. 4
Quo vadis girocard
Jan Lettow MasterCard and even No significant brought to market yet. large grocery stores have Many of these initiatives Manager changes in the status started to accept these end up as regional pilots Jakob Schniewind schemes. In addition, quo will inevitably or as solutions that are Associate some merchants have lead to girocard’s decline separate from the actual started questioning the in the market. girocard, such as girogo. The historic importance of girocard acceptance of girocard To boost the success rate “Convenient. Everywhere. Accepted.” – For its 25th entirely due to potential cost savings. By excluding for future developments, the innovation center "giro- anniversary, today's girocard – a success story of the girocard as a payment option, the purchase price of a card city Kassel" was launched. Currently, another German banking industry – received a new claim, terminal can be reduced by up to 50 %, since no cer- contactless girocard is being tested there. It remains including an updated web presence. The promise has tification by the Deutsche Kreditwirtschaft is to be seen whether this additional contactless initia- so far been kept: consumers, merchants and banks required anymore. This allows merchants to pursue tive can be successfully merged with the existing all enjoyed the benefits of the girocard in the past. an international purchasing strategy for their termi- non-girocard-based contactless solutions. More than 100 million cards, nearly 800 thousand nals. Furthermore, acquirers’ tender offers can be Looking at mobile payments, girocard is far behind terminals and nearly uninterrupted revenue growth centralized and reconciliation processes can be its competitors. So far, the German co-operative are the highlights of this success story. unified. banks have merely announced a partnership with the However, girocard’s new branding cannot mask the The combination of these factors has diminished three large mobile operators in Germany earlier this numerous challenges it is facing. Being “convenient, one of girocard’s most prominent USPs. The accep- year. Whether girocard mobile, in its proposed form, everywhere and accepted” exposes girocard to ever tance costs for alternative products are no longer will ever reach market and successfully compete more rapidly changing market demands, which prohibitively expensive and in some cases mer- against established solutions is highly questionable, include in particular: chants are even better off by completely neglecting particularly since some members of the German Regulations (e.g., merchant fee negotiations and girocard as a payment option. banking industry publicly favored a solution involv- IF-Regulation) ing Apple Pay. Changing consumer behavior (e.g., international- Changing consumer behavior ization and E-Commerce) Consumers are increasingly questioning girocard’s Outlook for girocard New technologies (e.g., contactless and mobile suitability for everyday use. One reason is the fact The measures taken in the not too distant future will payment) that it is still not possible to pay by girocard in all decide upon girocard’s future. The key question is These trends are calling the German private and sav- locations abroad. The European initiatives EAPS whether girocard wants to rest on its laurels as the ings banks as well as the Deutsche Kreditwirtschaft (European Alliance of Payment Schemes) as well as leading in-store cashless payment method in Ger- (German banking association) to respond. In the fol- EUFISERV/Trionis did not achieve their initial goals many or whether it is willing to compete at the same lowing girocard’s greatest challenges will be outlined and German banks are still forced to add competing level as international card schemes and technology and potential next steps discussed. international acceptance brands such as Maestro or companies for future market shares in the cashless V PAY on their issued debit cards. payment market. Regulation In addition, girocard’s lack of online acceptance is No significant changes in the status quo will inevita- Traditionally, one of girocard’s strongest USPs has becoming increasingly problematic. According to bly lead to girocard’s decline in the market. For the been the comparatively low cost of acceptance for the Handelsverband Deutschland (German trade medium term, i.e., the next 5 to 7 years, girocard will merchants. However, this competitive advantage has association), the German online retail market, with probably be able to capture the majority of cashless been weakened by recent market developments. sales of more than EUR 45 billion, represents a share in-store sales and thereby benefiting the banks with Firstly, merchants are able to reduce fees through of almost 10 % of all retail sales and is expected to corresponding fees for some time to come. In the individual negotiations. Secondly, the recent inter- grow to over 15 % by 2020. Although the “girocard long-term future, however, competition on prices change fee regulation has put a cap on interchange online” initiative was set up to participate in the shift will further intensify in the relatively sluggish retail fees. Despite some questionable pricing strategies, towards online payment, it has had no market impact market, resulting in a loss of market share and the costs of acceptance have decreased by almost so far. The brand’s decreasing market relevance is declining fee revenues. Investments in the future of 30 % overall. exacerbated by the accelerating growth of online girocard must be made for it to remain the leading Intuitively, one would expect girocard’s transaction commerce. cashless payment method in Germany. It can only volume to increase further. However, recent transac- maintain its market leadership by embracing innova- tion volumes and amounts paint a different picture. New technologies tion and enabling cross-channel functionalities. Pro- This can be explained by a concurrent reduction in From a technological perspective, girocard has not viders such as Apple Pay and PayPal are setting the the acceptance costs of major competing payment changed much since its launch and still only allows pace and working on corresponding solutions at full substitutes. The acceptance costs of regulated credit “classic card payments” at the point of sale. Techno- speed. In order to not fall behind, all parties involved cards has decreased by over 50 % and the accep- logical innovations, such as contactless, mobile pay- are well-advised to join forces and to align their gov- tance cost of international debit cards has decreased ments and cross-channel functionalities, have ernance in order to work together on marketable and by more than 20 %. largely been neglected. Although the Deutsche competitive girocard solutions. Piloting long-term This new competitive pricing landscape has signifi- Kreditwirtschaft is trying to close this gap through regional projects with existing technology features cantly raised the acceptance of VISA and several initiatives, nothing concrete has been does not encourage much optimism.
Page 1 payments Insight. Opinion. 5
M&A Activity
Robert Kayser footprint internationally, supporting ACH-related 70 32 70 Senior Associate payment infrastructures in Sweden, Singapore, Thai- 62 60 Number of transactions land and the United States. VocaLink processed 12 49 46 50 Apostolos Psaras about USD 7.3 trillion in payments in the UK last 10 36 Associate year and generated revenue of USD 220 million. So 8 40 14.1 31.9 far, VocaLink’s owners were a group of 18 banks and 6 30 20 Maximilian Kind building societies including Lloyds Banking Group, 4 6.1 10 Associate 2 4.7 3.9
Barclays, HSBC, Royal Bank of Scotland and [USD billion] Disclosed value Santander. The decision to sell their stake in VocaL- 0 0 2015 2015 2016 2016 2016 ink comes shortly after UK’s payment system regu- Q3 Q4 Q1 Q2 Q3 The third quarter of 2016 saw reverse in the lator stated that banks should sell their share in the Number of transactions Disclosed value [USD billion] number of M&A transactions within the payment company to foster innovation and increase competi- industry. A total of 36 deals were reported with a tion. MasterCard engaged in this acquisition to Figure 1: M&A market development total disclosed value of USD 3.9 billion. One deal wrestle control of the payments infrastructure away stands out: the USD 1.15 billion VocaLink acquisi- from big British banks and to strengthen its position tion by MasterCard. Other transactions dis- in the UK payments market. With the acquisition of 16x 14.5 14.7 cussed in this issue are the acquisition of VocaLink, MasterCard has the technology to pro- 14x 13.1 Unicredit’s payments processing services by SIA cess real-time (non-card) payment transactions. In 12x 10.6 and NET’s IPO. light of the PSD2 requirements governing the imple- 9.5 10x mentation of access 8x M&A activity and deal to account provisions A total of 36 deals 6x characteristics for financial institu- 3.7 2.3 have been reported 4x 2.8 3.5 A total of 36 M&A transac- tions and initiatives 2x tions were announced in with a total disclosed aimed at the creation 2012 2013 2014 2015 2016 the third quarter of 2016. value of USD 3.9 billion of a pan-European Q3
This represents a 22 % real-time payments Revenue Multiple Ebitda multiple decrease over the 46 deals reported in the same infrastructure, it becomes evident that the VocaLink period in 2015. The financial terms of 9 transactions, acquisition would ideally position MasterCard to Figure 2: Median enterprise value multiples with a total volume of USD 3.9 billion, were dis- benefit from the proliferation of real-time “push” closed, a 72 % decrease compared to the same payments. Currently, MasterCard has only about period in 2015. It appears that for the first time in 5 % of the UK’s debit card market and is greatly out- 2016Q3 many years, and in contrast to venture capital performed by its strongest competitor, Visa. The 6% investments (see page 7), there is a summer gap deal is expected to close in early 2017. 0% (“silly season”). The overall decrease is primarily the The median EBITDA-multiple decreased from 13.1x 0% 2015 0% result of a drop in the number of deals in North in 2015 to 10.6x in 2016. The median revenue multi- America from 28 in Q3/2015 to 19 this quarter. ple decreased from 3.5x in 2015 to 2.3x in 2016. Sputtering economic growth, the prospect of further MasterCard’s acquisition of VocaLink for USD 1.15 42% 53% U.S. Fed interest rate hikes and uncertainty over the billion represents a revenue multiple of 4.8x or an outcome of the U.S presidential election were the EBITDA-multiple of 11.3x. Apollo Capital Manage- main causes for the decline in North America and ment’s acquisition of Outerwall for USD 1.6 billion continue to be so. represents a revenue multiple of 0.7x or an EBITDA- The total disclosed deal value for Q3/2016 was par- multiple of 3.3x. SIA’s acquisition of Unicredit Busi- ticularly shaped by MasterCard’s acquisition of ness Integrated Solutions for USD 559 million VocaLink for USD 1.15 billion (29 % of disclosed vol- represents an EBITDA-multiple of 12.0x. Tito’s North America Middle East, Africa (MEA) ume). The London-based payment processing and acquisition of Emric for USD 35 million results in a Europe Australia technology company is the operator of BACS, the revenue multiple of 1.6x. Blackhawk’s acquisition of Asia South America UK Automated Clearing House, LINK, the UK ATM Grass Roots for USD 118 million amounts to an Figure 3: Targets by region network and Faster Payments, the UK real-time EBITDA-multiple of 8.2x. In line with previous quar- account-to-account payments network. Addition- ters, investors seem to resent the potentially disrup- ally, VocaLink’s portfolio includes a number of inno- tive nature of target companies in the payments vative services such as ZAPP, a service that allows sector and consequently reduce the transaction membership referendum (“Brexit”). However, the money to move instantly from a customer account multiples of their offers. Furthermore, investors offer deal landscape still shows a diverse range of valua- to a merchant account through near real-time pay- more conservative valuations due to the uncertainty tions. ments. VocaLink has also recently expanded its surrounding the United Kingdom’s European Union
Page 1 payments Insight. Opinion. 6
In light of PSD2 requirements […] it becomes evident that the VocaLink acquisition would ideally position MasterCard to benefit from the proliferation of real-time “push” payments
Geographically, 53 % of the targets were based in North America (2015: 49 %), followed by 42 % in Europe (2015: 33 %) and 6 % in Asia/Pacific (2015: 8 %). Contrary to expectations, the Brexit does not seem to have hindered market players’ appetite for M&A activity in the European market. From a cross- border perspective, three deals stand out. Fleetcor, the US-based commercial fuel card provider, acquired the Dutch fuel card issuer Travelcard Nederland, formerly a part of Leaseplan, in order to gain a strong foothold in the Netherlands as part of its wider growth strategy in key European markets. Furthermore, Asian eCommerce giant Alibaba is The initial public offering (IPO) of NETS, the preliminary insolvency as it engaged in M&A talks rapidly expanding into the payments market and Danish payments processing company owned by a with potential buyers. The financial terms of the strengthened its distribution channels by acquiring consortium of investors including private equity transaction have not been disclosed. Secondly, the Wandoujia for USD 200 million. iZettle, Sweden’s funds Bain and Advent international and the merger of Polish online payment service providers leading mPOS solution provider, bought Intelligent Danish pension fund ATP, also underscores the Dotpay and eCard is another sign of consolidation Point of Sale, a cloud-based point-of-sale applica- higher rate of activity in the processing sector. The in the European digital acceptance landscape. The tion for iPad providers, in an effort to expand its company began trading on the Copenhagen Stock two companies aim to create an integrated plat- business and European market presence, for an Exchange on 23 September at a value of USD 4.5 form, able to service eCommerce merchants’ undisclosed amount. billion, with the floatation being oversubscribed by needs across segments and capitalize on the 4.7 %. Bain and Advent international acquired growth in Polish and CEE eCommerce. Thirdly, the Key drivers of and rationale behind M&A activity NETS 2.5 years ago for USD 2.6 billion and, as with acquisition of Indian online payments provider Cit- The trend observed in the previous quarters the Worldpay IPO, managed a successful exit. rus Pay by PayU, a subsidiary of the South African has become entrenched in established payment During the holding time, the consortium was media and internet conglomerate, Naspers, show- sectors such as acceptance, money transfer and successful in value creation through measures cases the growing importance of non-cash pay- processing accounting for the majority of the such as backing the purchase of Nordea Merchant ments in emerging markets. The deal will allow targets in Q3. According to the relevant deal Acquiring for USD 256 million in July last year. PayU to improve its competitive rank in the Indian announcements, key drivers for inorganic growth in digital commerce sector relative to other domestic Q3 were ambitions to expand into new geogra- In the online acceptance segment, a number of players such as PayTM, which had so far raised phies and enhance technological (platform), deals that particularly stand out. Firstly, there is the more than USD 760 million. product and distribution capabilities. acquisition of German online payment service For the last quarter of 2016, we expect a challeng- The sale of Unicredit Business Integrated Solutions provider Paymill by the Swiss company CYBERser- ing market environment, shaped among other to SIA Payments is another example of a banking vices, which operates the things by the U.S. pre- institution divesting itself of its payments process- Klik&Pay online pay- For the last quarter sidential elections and ing operations. Through this transaction, valued at ments gateway. The deal further details on the USD 560 million, Unicredit will shed a non-core will enable Klik&Pay to of 2016 we expect a Brexit. Total M&A deal business activity in Germany, Austria and Italy, and expand their footprint on challenging market volumes are likely to enter into a ten year outsourcing agreement for the European market and environment conditioned be lower this year card payments processing. For SIA, the rationale target the SME segment. compared to 2015 behind the deal is that it can raise its profile in two Paymill had received among others by the U.S. even though total key strategic markets (Austria and Germany) and USD 18 million in venture presidential election and number of deals is achieve greater economies of scales by adding the capital financing from further details on the Brexit similar. processing of Unicredit transaction volumes in its Rocket Internet and platform. declared a strategic
Page 1 payments Insight. Opinion. 7
Venture Capital
5,000 53 60 Number of transactions Stefan Thomalla of venture and seed capital nearly doubled from 48 50 50
4,000 42 Associate USD 47 million in Q2 to USD 90 million in Q3. 39
40 In addition to early stage funding, some large 3,000 Edoardo Cenci financing rounds were also secured in this quarter. 4,977 30 2,000 Associate In Q3, 75 % of the total funding volume - USD 427 20 million - can be traced back to Top 10 funding. Very 1,000 10 Disclosed value [USD million] Disclosed value Funding activity large and more mature deals were closed primarily 463 427 0 345 382 0 In the third quarter of 2016, 42 companies raised in Asia. 3 out of the top 4 investment arrangements 2015 2015 2016 2016 2016 Q3 Q1 Q2 USD 427 million, of which USD 426 million was in in terms of funding volume were signed in Asia, Q4 Q3 the form of equity and USD 1 million in the form of which shows that the Asian payment FinTechs are Number of transactions Disclosed value [USD million] debt financing. This represents a 21 % decrease continuing to chart a growth course. from the 53 deals reported the previous quarter. A This quarter’s largest equity funding deal was Figure 1: Market development – comparison with 2015, with 39 deals, shows that raised by One97 Communications. The Indian pay- Including both equity and debt investors were slightly more active in terms of ven- ment and ecommerce service provider operates a funding deals ture capital spending, digital goods market- even though a summer In the 3rd quarter of place and mobile mar- gap (“silly season”) is keting platform in India, Q3 once again identifiable. 2016, 42 companies through which Indian 2016 0% 0% raised USD 427 million, users can shop or pay 5%
From a regional per- of which USD 426 million in utility bills. One97 21% 2015 spective, North Ameri- Communications has equity and USD 1 million in debt ca held the lead, gained a market profile 31% reporting 18 deals (Q3 financing. In comparison to the in India through its
2015: 23) with a dis- same period of 2015, investors mobile payment sub- closed value of USD sidiary “Paytm” (Pay 195 million (Q3 2015: have been slightly more active Through Mobile). USD 297 million). in venture capital Paytm was founded Looking to Asia, 13 and incubated by 43% funding arrangements were secured in Q3, match- One97 in 2010 as a prepaid mobile recharge ing the combined number of deals for Q1 and Q2 (6 website. In 2014, the start-up launched Paytm Europe Middle East, Africa (MEA) and 7 deals, respectively). In fact, this is the highest Wallet, one of India largest mobile payment service North America Australia number of identified investments in core payments platforms, and in March 2015, Alibaba Group took Asia South America in a quarter in Asia in the last few years. Although a 25 % stake in One97. Figure 2: Investment by region Europe was the region with the liveliest funding activities in Q2 (22 deals), there was a marked shift One97 raised USD 60 million in its recent financing in attention by investors away from this region in round, which valued the company at USD 5 billion. Q3. Only 9 deals with combined a value of USD 24 The funding is part of a bigger plan to raise USD 17% 17% million were closed in Europe, prominently demon- 300 million in order to expand its payment and 26% 20% 24% 2% 6% 2% 4% 0% strating the summer gap. The decrease in Europe’s ecommerce business and ultimately build its digital 6% 9% 8% 15% 10% 5% venture capital market is closely linked to the bank, for which it has already obtained a license. 13% 10% 15% United Kingdom’s European Union membership One97 Communications is backed by a couple of 16% 10% 5% 21% 13% referendum (“Brexit”). See our treatment of this very popular investors such as SAIF Partners, SAP 15% 6% 12% 26% 23% topic further down. Ventures, Intel Capital and Silicon Valley Bank and 5% has offices in India, the Middle East and Africa. The 33% 34% 26% 21% 26% Investment trends leading investor in the most recent financing round The observation made in our last few newsletter was MediaTek, a Taiwanese chip designer and 2015 2015 2016 2016 2016 Q3 Q4 Q1 Q2 Q3 issues, in which we noted investors’ continual quest manufacturer with a sharp focus on the Indian mar- for new and alternative investment opportunities ket. MediaTek is also a shareholder in Paytm's com- Other C A Seed due to the low returns from capital markets, is still petitor MobiKwik, which raised this quarter’s fourth D B Venture valid. Regarding the financing rounds, venture and largest funding amount of USD 40 million from seed capital are still dominant, accounting globally Net1 UEPS Technologies. Earlier this year, MediaTek Figure 3: Financing rounds for more than 50 % of the total deals. Moreover, the was already among the investors that drove a ongoing confidence in early stage funding is largely USD 50 million Series C funding investment in substantiated by the fact that the total closed value MobiKwik.
Page 1 payments Insight. Opinion. 8
Moving on to another topic, although the “block- global network now includes 15 of the top 50 global technology that allows customers to pay using their chain” was simply the echo of the word “Bitcoin” banks, with ten banks in commercial deal phases fingerprints. Touché has developed a POS terminal three years ago, today this technology has become and over thirty bank pilots completed. and POS solution specifically for this purpose. a concrete tool used by financial institutions around The blockchain however is not simply about cross- Along the same line, MasterCard is rolling out a bio- the world. Confirming this trend, Ripple, a peer-to- border payments. A good example is UBS: at the end metric payment solution that allows customers to peer protocol and of September, this pay via facial recognition or fingerprint. blockchain solution Swiss bank has According to MasterCard, biometric payments provider, closed its The decrease in announced its plan to eliminate the need for cardholders to recall pass- highest ever financing Europe’s venture implement a trade words, speeding up the digital checkout experience round of USD 55 capital market is finance system that while improving security. With the mobile identity million. The total equity uses distributed led- check, the cardholder verifies their identity by using financing volume to particularly linked to the United gers to streamline the fingerprint scanner on their smartphone or via date is USD 93 million, Kingdom European Union import-export transac- facial recognition technology by taking a “selfie” making Ripple one of membership referendum tions globally. photo. the best capitalized Looking at payment This technology is already available in 12 European start-ups in the block- (“Brexit”) trends from a customer markets and will be rolled out in the rest of the chain industry. Compa- perspective, the likeli- world in the next couple of years. nies such as Accenture, Santander and Standard hood is great that one day, no one will be carrying In addition, Ingenico, one of the market leaders in Chartered Bank appear in the list of investors, around payment cards, but rather simply pay by terms of POS terminal production, responded to demonstrating the consistency of Ripple’s offering using a fingerprint, face, eye or even voice; but how the need for biometric authentication by launching and the potential of the blockchain. far is that day? a POS terminal with a fingerprint scanner, and Ripple was envisioned by its CEO and co-founder Touché, a Singapore based biometric hardware and recently expanded to developing countries, such as Chris Larsen as the enabler of cross-border software solution provider for the payment industry, Ghana, to serve the under- and unbanked popula- payments for both banks and consumers, in order is one of the companies that, in our opinion, brings tion. to create an Internet of Value where the world the future to us. The Asian start-up received USD 2 moves money as easily as information. Ripple’s million in equity funding. The company provides a
Page 1 payments Insight. Opinion. 9
Following in Ingenico’s footsteps, the TagPay plat- Apart from the human capital factor, some major Furthermore, from the investees’ perspective, the form, which recently received USD 1 million in seed financial institutions such as JP Morgan are consi- Brexit could have unintended repercussions. Valen- capital, makes the creation of a solid network of dering a relocation of their investment banking tin Stalf, founder and CEO of Number26, a FinTech agents in developing countries possible that offers department to other financial metropoles in Europe, company that raised USD 40 million in a B round in mobile financial services to the unbanked. The such as Dublin, Frankfurt or Paris. As a result, we Q2 2016, said that the uncertainty caused by indis- technology provided by TagPay allows agents to may see a long-term structural change in this tinct regulation will have a deep impact on the mar- leverage facial recognition and sound-based tech- formerly thriving investment behaviour. Other ket. The Berlin-based company announced that it nology to facilitate KYC procedures and mobile European capitals, like Berlin, could conceivably will scale back its plans to focus on the UK market. payment activities. become the new start-up hubs. For the rest of 2016 and start of 2017, uncertainty Going back to take a closer look at the summer gap: and political changes will continue to shape the the “Brexit” can be considered as one of its major venture capital market. causes, since, in the past, the UK held a pivotal role Very large and more North America will be strongly influenced by the in the European venture capital environment as a mature deals were presidential elections in November and the results hub for both investors and FinTechs. especially closed in could drastically affect the volume of funding The free movement of labour between the UK and rounds in the last quarter of the year. the EU and the concentration of resources and Asia. 3 out of the top 4 However, at the end of the day, “the show must go incubators attracted the best and most talented investments in terms of funding on” despite drastic changes and grave uncertain- human capital in Europe to London. They came volume were signed in Asia, ties. Consequently, North America and Europe, and bearing advanced software skills, creativeness and especially the UK, will go through a stabilizing expertise, which are central requirements for top which shows that the Asian period in which both investors and investees will tech start-ups. The plans to withdraw from the EU payment FinTechs continue need to reassess the new reality. Asia, in the other may cause a brain drain that could significantly the growth path hand will continue to “pump up” its giants, after lower innovation in London. which is likely to see a consolidation period.
The biggest equity financing rounds in Q3 2016 have been closed particularly by alternative payment systems
USD m Alternative payment 60 525 585 PE systems
55 39 94 Other Series B
Payment acceptance 45 16 61 Series B devices + Software Alternative payment 40 87 127 Series C systems
39 62 100 Money transfer N/D
Alternative payment 21 0 21 systems Venture
19 21 40 Security Series B
Payment acceptance 18 3 20 devices + Software Series B Payment acceptance 15 0 15 Venture devices + Software
15 37 52 Security Series C
Most recent financing volume Totel financing volume
Figure 4: Top 10 Investments in Q3 2016 by disclosed value
Page 1 payments Insight. Opinion. 10
M&A DEAL Activity Q3 2016
Date Target Company Country TC Industry Buyer(s) (Country) Country Transaction Announced value (USDm) 1 01/07/16 Paymill Germany Provides online payment services CYBERservices Switzerland N/D
2 05/07/16 ACCENT InterMedia USA Provides gift cards and rewards program Next Group Holdings USA N/D management services
3 06/07/16 GuestLogix Canada Provides onboard merchandising, payment and USA N/D business intelligence technology delivered to the passenger travel industry 4 08/07/16 Wandoujia China Provides a Chinese store for Android app Alibaba China 200
5 11/07/16 AvidXchange USA Provides automating invoice and payment Relyco USA N/D processes for companies
6 11/07/16 Starmount USA Provides modern store systems provider serving Infor USA N/D large and mid-market retailer
7 13/07/16 MeaWallet Norway Develops mobile payment solutions Seamless Distribution Norway 3.1
8 14/07/16 The Children's Place (credit card USA Provides clothing and items for children Alliance Data Systems USA N/D portfolio)
9 14/07/16 Dotpay Poland Provides online payments solutions eCard Poland N/D
10 18/07/16 DemoTeller Systems USA Provides instant issuance solutions for HID Global Sweden N/D the financial market
11 21/07/16 PayStar USA Provides FIs with merchant, remittance and Net Element USA N/D payroll services suite
12 21/07/16 Nexcharge USA Operates a proprietary payment processing, Net Element USA N/D fraud management and merchant management platform
13 21/07/16 VocaLink United Provides electronic financial payment services MasterCard USA 1,148.6 Kingdom
14 25/07/16 Outerwall USA Provides movie and video game rental kiosks Apollo Capital Management USA 1,600 as well as coin-cashing machines
15 25/07/16 Vendsys USA Delivers vending management systems Nayax USA N/D
16 27/07/16 Greenaddressit Malta Provides Bitcoin wallet Blockstream Canada N/D
17 02/08/16 Happy USA Provides mobile payment application services PaidEasy USA N/D
18 04/08/16 Unicredit Business Integrated Solutions Italy Provides e-money processing solutions SIA Italy 558.7
19 04/08/16 Travelcard Nederland Netherlands Engages in issuing fuel cards to pay for mobility-related FleetCor Technologies USA N/D services
20 08/08/16 Citrus Payment Solutions India Provides online bank payment and card payment solutions PayU Netherlands 179.9
21 09/08/16 Next Step USA Issues payment cards to people in recovery True Link Financial USA N/D from alcohol or drug addiction
22 10/08/16 Transfercredit France Provides account and international mobile Ding Ireland N/D top-up credit transfer services
23 12/08/16 FC Exchange United Provides international money transfer and Global Reach Partners United N/D Kingdom payment solutions Kingdom
24 18/08/16 Bitnet Technologies United Provides Bitcoin services Rakuten Japan N/D Kingdom
25 30/08/16 Pay2Global United Provides digital international money transfer services TerraPay United N/D Kingdom Kingdom
26 01/09/16 Income Access Group Canada Provides digital marketing software and solutions Paysafe United 30.6 for the iGaming industries Kingdom
27 01/09/16 Emric Sweden Provides software solutions for the credit processes Tito Finland 35.0 of finance companies
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Date Target Company Country TC Industry Buyer(s) (Country) Country Transaction Announced value (USDm) 28 02/09/16 Grass Roots United Provides employee- and customer-engagement solutions Blackhawk Network USA 117.9 Kingdom
29 06/09/16 Intelligent Point of Sale Sweden Provides cloud based point of sale applications for iPad iZettle Sweden N/D
30 07/09/16 LaunchKey USA Develops mobile identity and access management platform iovation USA N/D
31 12/09/16 BlueSquare Resolutions USA Offers turn-key payment solutions for merchants Applied Merchant Systems USA N/D of all types
32 13/09/16 EyeVerify USA Provides software that allows authentication Ant Financial China N/D via cameras on mobile devices
33 14/09/16 Tonic USA Provides sandboxed JavaScript environment Stripe USA N/D
34 16/09/16 iCheque United Develops disruptive and secure online payment systems CashFlows United N/D Kingdom Kingdom
35 19/09/16 Burroughs SmartSource USA Provides scanners and document imaging products Digital Check USA N/D
36 20/09/16 Maas Global Solutions USA Provides electronic payment solutions Intrix Technology USA N/D
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Venture Capital Activity Q3 2016
Target (Country) Round Volume Investor(s) Funding Description (USDm) (USDm) 1 One97 Communications 60.00 MediaTek Inc. 585.00 One97 runs an online platform through which users can shop or pay utility bills. (India) 2 Ripple Labs (United States) B 55.00 Accenture, CME Ventures, Santander InnoVentures, 93.60 The peer-to-peer and virtual currency protocol Ripple can be used SBI Investment, SCB Digital Ventures, Seagate globally to make transactions in any available currency. Technology LLC, Standard Chartered Bank, Venture51 3 Yunnex (China) B 45.07 GSR Ventures 60.87 Yunnex is a smart point-of-sales (POS) solutions provider, that offers an Internet-based POS device that incorporate two-dimensional bar codes, coupons, messaging, e-commerce platforms and sales management software, in addition to the traditional payment function. 4 MobiKwik (India) 40.00 Net1 126.85 MobiKwik is a popular mobile wallet app in India, that millions of Indians use for shopping, P2P money transfer, and bill payments. 5 Remitly (United States) C 38.50 International Finance Corporation, Silicon Valley Bank 100.00 Remitly is a provider of a money transfer service in the United States.
6 BPS Technology (Australia) 21.20 BPS Technology Limited provides technology platforms and management systems using on digital currency for small to medium enterprises as well as a loyalty and mobile payments platform based on QR code. 7 Signifyd (United States) Venture 19.00 American Express Ventures 40.00 Signifyd is a SaaS-based, enterprise-grade fraud technology solution for e-commerce stores. 8 Omise (Thailand) B 17.50 SBI Asset Management 20.40 Omise is a online payment gateway offering a wide range of processing solutions for any businesses. 9 Paidy (Japan) B 15.00 SBI Holdings 14.00 Paidy is offers a online payment solution for consumers to pay at online stores using only their name and email address and is optimized for mobile and instant-checkout. 10 Jumio (United States) Venture 15.00 Millennium technology Value Partners 51.71 Jumio is a provider of ID valudation software, that enables a friction-free mobile checkout process. 11 Tipalti (United States) C 14.00 SG Ventures 27.00 Tipalti is a provider of software, that automates businesses making global mass payments to partners while maintaining tax and regulatory compliance. 12 Boku (United States) Venture 13.75 Robert Markwick 86.75 Boku is a global mobile payments network providing mobile-enhanced payments in e-commerce and at physical point-of-sale. 13 Coinbase (United States) Venture 10.50 Bank of Tokyo - Mitsubishi UFJ 117.21 Coinbase operates a bitcoin exchange and wallet infrastructure for consumers and merchants, through wich merchants can accept Bitcoins as a means of payment. 14 i3 Verticals (United States) 10.00 i3 Verticals offers credit and debit card transaction processing services to education, property management, government and public, healthcare, utilities, and non-profit and fundraising sectors. 15 Lydia (France) Venture 7.80 NewAlpha Asset Management 13.06 Lydia is an app that enables client to do money transfers and mobile payments by scanning a credit card via smartphone. 16 DailyPay (United States) A 5.00 RPM Ventures 6.50 DailyPay is a financial technology company that provides next day payments for employees and contractors. 17 Sourcery (United States) Venture 5.00 Marker 10.50 Sourcery is developing a payments and commerce platform that focuses on the wholesale foodservice industry. 18 Payworks (Germany) A 4.50 HW Capital, Rumford 4.50 Payworks is the provider of Pulse, a next generation Point of Sale payment gateway technology. 19 Coinify ApS (Denmark) A 4.00 SEB Venture Capital 4.00 Coinify ApS operates as a blockchain payment service provider with focus on extending blockchain currency payment processing and trading services to merchants and consumers respectively. 20 Airwallex (Australia) Seed 3.00 Gobi Partners 3.00 Airwallex is a foreign exchange market making cross boarder payment company focused on Asia Pacific markets. 21 Pleo (Denmark) Seed 3.00 3.00 Pleo offers smart payment cards for employees enabling them to buy the things they need for work, all while keeping the companies in control of spending. 22 Digitzs (United States) 2.84 5.39 Digitzs offers white label online payments platform.
23 Curve (United Kingdom) Seed 2.61 Paul Townsend 4.61 Curve offers an all in one card, the enables customers to consolidate all existing cards and accounts in one card with just one PIN. 24 Trim (United States) Seed 2.20 Enaic Ventures 2.20 Trim provides a solution to track and manage all the subscriptions users pay for, and easily cancel those they don't need. 25 Touche (Singapore) Seed 2.00 2.00 Touche offers both hardware and software that allow customers to pay with their fingerprint. 26 CodaPay (Singapore) A 2.00 IMJ Investment Partners Pte. Ltd 5.20 Codapay is an alternative payment gateway that enables merchants to accept payments from cardless customers in Southeast Asia. 27 MOVO (MovoCash) Venture 1.46 IMJ Investment Partners Pte. Ltd 2.16 Californian MOVO provides payment tokens to enable P2P transfers at (United States) POS & NFC payment terminals.
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Target (Country) Round Volume Investor(s) Funding Description (USDm) (USDm) 28 Switch (United States) Debt 1.18 1.18 Switch's solution is a free web-based credit card updater, that enables customers to update seamless payment information on all the sites where they pay online at once. 29 TagPay (France) Seed 1.11 Societe Generale 1.11 TagPay is a provider offers a sound based authentification service for mobile payments. 30 Plutus.it (United Kingdom) 1.00 1.00 Plutus is a payment gateway solution that connects the blockchain technology with pre-existing infrastructure and empowers users to make contactless payments with Bitcoin at brick and mortar stores with a NFC-enabled point-of-sale terminal. 31 Finja (Pakistan) Seed 1.00 Vostok Emerging Finance 1.00 Pakistan based Finja is a provider of mobile payment wallet.
32 Finexio (United States) Seed 1.00 James R Heistand 1.00 Finexio offers a B2B payment network system for buyers and sellers.
33 Drop Loyalty (Canada) Seed 0.77 ff Venture Capital, HIGHLINEvc, 0.77 Toronto based Drop is a mobile-based loyalty platform. Rothenberg Ventures, White Star Capital 34 Remitware Payments (India) Venture 0.59 0.59 Remitware Payments offers on-demand cross-border remittance services.
35 soCash (Singapore) Seed 0.40 0.40 soCash is an app that enables clients to do cash withdrawals at minimarts or shops.
36 Tabster (Netherlands) Debt 0.25 Leapfunder 0.25 Tabster offers mobile payments service for the hospitality industry.
37 Daalder (Netherlands) Debt 0.06 0.50 Holland based Daalder offers a mobile payment platform.
38 RazorPay (India) Venture MasterCard 11.60 Razorpay provides a payment gateway solution that offers a seamless with merchants' website avoiding visitors from ever leaving their website throughout the process. 39 Meeber (Indonesia) Seed Prima Digital Solusindo Meeber is a provider of a mobile POS solution used at culinary businesses.
40 NetCents (Canada) NetCents is a provider of electronic payment platform that enables clients to do payments either in cash or cyber-currency. 41 Red Dot Payment Venture MDI Ventures Red Dot Payment enables merchants and financial institutions to provide (Singapore) complete end-to-end payment solutions for their customers worldwide. 42 Onfido (United States) Venture 9.00 Charlie Songhurst, Hank Vigil, 30.30 Onfido offers identity verification service, that helps to reduce fraud significantly. Salesforce Ventures, Talis Capital
Page 1 payments Insight. Opinion. 14 disclaimer
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