The Rise of Integrated Payments Spurs Vertical FinTech Consolidation

The Financial Technology (FinTech) & Payments sector experienced a banner year in 2021, both in terms of merger and acquisition (M&A) activity and venture capital financing. While the first half of 2022 has yet to produce the same deal volume or funding levels as the prior year, sector tailwinds of global digitization and accelerated adoption of online channels have continued to drive investment capital into FinTech and payment companies across both Private and Public markets.

Payment solutions are becoming a more integral part of a pure software company’s strategy and roadmap to not only capture additional revenue opportunities but to also offer a complete solution regardless of the industry they participate in.

David Francione Head of Financial Technology & Services, Capstone Partners

FinTech & Payments M&A Market Exhibits Strong Long-Term Growth Potential

FinTech & Payments sector M&A transaction volume reached 432 announced or completed deals year-to-date (YTD), trailing 2021 levels during the same period (571 deals). However, deal volume has outpaced YTD 2020 and 2019 volumes by 19% and 8%, respectively, indicating strong long-term growth potential in the FinTech & Payments M&A market. Strategic buyers have continued to lead the sector, accounting for 68.8% of M&A transactions to-date. Private strategics have comprised the lion’s share of engagements (41.9% of deals YTD) as leading players consolidated competitors to gain segment-specific capabilities and expand into other areas. Private equity’s presence in the space has remained constant relative to the total deal count in previous years, with add-on engagements comprising 20.8% of transactions YTD. At the segment level, sponsors’ interest has continued to gravitate towards Bank Technology (BankTech) (23.2% of segment volume) as the large financial institutions that make up the client base for BankTech providers tend to be high retention customers, adding a level of stability to the investment.

M&A valuations in the sector have also normalized in recent months, as the average revenue purchase multiple dropped to 5.0x EV/Revenue YTD compared to 6.4x EV/Revenue in 2021. This pricing adjustment can largely be attributed to the rising concerns of a recession; decreased levels of deployed venture capital funding; and recently implemented regulations diluting the value of mergers with special purpose acquisition companies (SPACs).

Top Payment Providers Diversify Offerings Through M&A

The Payments segment has increasingly been the focus of consolidation for strategic and private equity-backed buyers looking to gain new competencies and reduce the costs associated with sourcing, retaining, and servicing customers. Through June 2022, the Payments segment has comprised nearly half (44.7%) of sector acquisition targets, an increase of 7.7% year-over-year (YOY). Large public players in the segment, such as Fidelity National Information Services (NYSE:FIS) and REPAY (Nasdaq:RPAY), have continued to diversify offerings with a number of tuck-in deals.

Recent, notable deal activity in the space has included the Capstone-advised sale of Payix to REPAY in January 2022 for an enterprise value of $115 million, a slight premium over the average YTD middle market Payments segment deal size of $112 million, according to Capstone Partners. Based on historical growth trends, Payix is expected to generate top-line and gross-profit growth in excess of 40% through 2023. Payix's loan repayment platform will further enhance REPAY's position in the Automotive vertical and accelerate its expansion into the attractive Buy Now, Pay Later (BNPL) space. The transaction also demonstrates buyers' appetite for vertically-focused payment solutions, enabling participants to penetrate high-growth end markets through M&A.

Integrated Payments' Chasm Expands Beyond Financial Services

Integrated payment providers, delivering embedded software solutions in specific verticals, have historically focused on the Financial Services space including banks, nonbank lenders, and asset management firms. However, the rapid expansion of the digital economy in recent years has prompted the adoption of integrated payments in a myriad of verticals. Notably, 74% of global digital payments are expected to be conducted by nonfinancial institution-owned platforms by 2030, according to Forbes.¹ While Financial Services businesses continue to benefit from merchant relationships, the verticals outlined below have enjoyed the heightened interoperability and efficiency associated with integrated payment partners. The shifting ecosystem has resulted in significant acquisition and revenue opportunities for integrated payment providers serving these key verticals.

• Government - M&A activity in the Government Information Technology (IT) Services sector reached record highs in 2021 (111 deals), outpacing the previous record by 40%, according to Capstone's Government IT Services Sector Update. Government services providers, namely tax management firms, have also become active buyers in the Integrated Payments subsegment, acquiring software businesses to complement service offerings. Of note, AnaCap Financial Partners-backed Gestión Tributaria Territorial (GTT) acquired Meana Group's Electronic Administrations business in May 2022 for an undisclosed sum. The acquisition bolsters GTT's tax management and information services with proprietary tax administration and payment transfer software, automating processes for clients in the Public sector. In addition to taxes, Meana's administrative software can be utilized to facilitate and transfer payments on project bids from the Spanish government, a unique value-add for GTT going forward. The transaction demonstrates sponsors' interest in bolt-on payment software deals for service providers. AnaCap has implemented this strategy in the European Financial Services and Government Services verticals, with $2.1 billion in backing deployed across 21 platform companies, according to the firm's website.²

• Insurance - At the end of 2021, the Global Insurance sector held an estimated $990 billion in capital across commercial and personal product lines, demonstrating the deep strength of the space, according to Reuters Group.³ In addition, insurers have increased their average products per customer from one in 2019 to three in 2022, according to Ernst & Young.⁴ The sharp increase in globally administered policies has led to heightened demand for insurance claim platforms offering integrated software solutions to efficiently deliver payments to policyholders. Australia-based insurance claim payment software provider LanternPay has capitalized on this trend, processing nearly $20 billion per year in claims from Australia's National Disability Insurance Scheme (NDIS), according to Financial Review.⁵ In January 2022, HICAPS (Health Industry Claims and Payments Service), a subsidiary of National Australia Bank (ASX:NAB), seized an opportunity to gain exposure to the segment's growth with the acquisition of LanternPay. Terms of the transaction were not disclosed. HICAPS plans to use LanternPay as a platform to create smartphone applications that allow claims to be processed through mobile phones for medical practices that do not possess physical terminals, further expanding their presence in the space.

• Healthcare - The rapidly growing era of digitalization in the Healthcare industry has driven demand for advanced revenue cycle management (RCM) solutions, as the Global RCM market size was valued at $243.1 billion in 2021, according to Grand View Research.⁶ The RCM market is projected to continue expanding at a compound annual growth rate (CAGR) of 11.6% from 2022 to 2030 as the rising number of data siloes and unorganized workflows pave the way for integrated software providers. While private equity firms have historically been attracted to the Healthcare industry, sponsors have recently increased their exposure in the RCM subsegment through add-on acquisitions. In a recent example, The Carlyle Group (Nasdaq:CG)-backed CorroHealth acquired RCM provider Aergo Solutions in May 2022. Terms of the transaction were not disclosed. Aergo delivers electronic accounts receivable solutions through its Escort product line, processing recurring payments and fully liquidating static receivables from a billing system conversion or hospital acquisition. "The solutions and success Aergo brings to CorroHealth help address an often overlooked segment of the Healthcare space. Their solutions scale to meet the needs of regional healthcare organizations. This scale makes revenue cycle improvements typically seen in larger health systems obtainable for any organization," said Pat Leonard, CEO of CorroHealth, in a press release.⁷

• Retail - The rapid expansion of e-commerce platforms since the onset of the pandemic has broadened the addressable market for integrated payment providers serving the Retail vertical, especially for those focused on Amazon Marketplace and other top-tier online retailers. Amazon Marketplace has led the space, possessing approximately 25% of the total U.S. E-Commerce market share (see Capstone's E-Commerce Sector Update). Top business-to-business (B2B) payments provider FIS has developed a global e-commerce payment processing business over the last three years, which launched with its acquisition of Worldpay in March 2019 for an enterprise value of $43.4 billion, equivalent to 11.0x EV/Revenue and 28.0x EV/EBITDA. FIS has recently bolstered this division with the acquisition of Payrix in February 2022 to fill in a gap in their settlements technology. Terms of the transaction were not disclosed. Payrix provides integrated payment offerings to small- and medium-sized e-commerce businesses, namely those associated with Amazon Marketplace and eBay (Nasdaq:EBAY). FIS plans to leverage and combine its portfolio of banking and payment processing assets with Payrix's integrated payment solutions to create differentiated experiences for e-commerce clients depending on their size.

• Entertainment - The proliferation of online media services has invoked a flurry of integrated payment providers to the Entertainment space, specifically the E-Sports subsegment as the total number of gamers worldwide reached three billion in 2021, an increase of 5.3% YOY (see Capstone's Sports Technology Sector Update). The growing number of gamers has contributed to a more competitive and lucrative Professional Gaming space, with prize pools for E-Sports competitions trending upwards of $30 million in some cases, according to payment technology company Nuvei (TSX:NVEI).⁸ Demand for integrated payment solutions in the E-Sports space has been primarily driven by operators seeking secure methods of transferring winnings and processing ticket and merchandise sales. Major operators, such as NeoGames (Nasdaq:NGMS), have acquired integrated payment providers with gaming experience to maintain low margins and provide efficient, compliant payout suites. In a recent example, NeoGames acquired Aspire Global in January 2022 for an enterprise value of $462.3 million, or 2.0x EV/Revenue and 13.8x EV/EBITDA. Aspire has a strategic license agreement with Esports Technologies to integrate E-Sports odds modeling and trading feeds into its payment processing platform. The licensing agreement and payment capabilities enable NeoGames to remain compliant while further expanding its E-Sports segment and diversifying from its core iLottery offerings.

Venture Capital Firms Invest in Integrated Payments' Longevity

Venture capital financing in the FinTech & Payments sector has slowed YTD, with $78.8 billion in funding deployed across 3,469 deals. Compared to the same period in 2021, funding has declined by 13.7% YOY and deal volume fell 12.7% YOY. The decline in sector venture capital activity has largely been driven by the volatility in macroeconomic conditions and the public market, which has the potential to hamper investors' returns on exits via public listing. As a result, Capstone expects an uptick in sector M&A activity in the second half of 2022 as sell-side transactions become a more attractive exit position than initial public offerings (IPOs).

Despite investor pull-back across the sector, nearly 50 payment companies completed financing rounds greater than $100 million in the first half of 2022, demonstrating venture capital firms' continued confidence in the segment. As outlined below, integrated payment providers have been among the top businesses to receive funding of this caliber.

• Walnut Financial Raises $110 Million in Series A Funding (May 2022) - In May 2022, Walnut secured $110 million in Series A financing led by Gradient Ventures. Existing investors including Newark Ventures, Afore Capital, and 2048 Ventures also participated in the round. Walnut operates a BNPL platform specific to the Healthcare vertical, enabling patients to break up their medical bills and pay them in smaller portions. "For healthcare, it’s non-cyclical, and people always need it and I think being able to help patients with something that they really need versus what they want is really helpful in a market downturn," said Roshan Patel, Founder and CEO of Walnut, in a press release.⁹ Walnut continues to demonstrate defensibility as its revenue has grown 50% every month for the last six months, according to the press release.

• Checkout.com Raises $1 Billion in Series D Funding (January 2022) - Checkout.com, a full-stack payments company for e-commerce businesses, secured $1 billion in Series D funding for a post-money valuation of $40 billion (January 2022). This represents a stark increase compared to last year's valuation, with Checkout.com garnering a post-money valuation of $15 million in its $450 million Series C round in January 2021. Checkout.com will use the funds to enhance its payment acquirer and processor capabilities to support Apple Pay, Google Pay, PayPal (Nasdaq:PYPL), and bank transfers. London-based Checkout.com plans to focus on the U.S. market next, partnering with enterprise merchants to bring its suite of integrated payment solutions worldwide.

To discuss the trends above, provide an update on your business, or learn about Capstone's wide range of advisory services and Financial Technology & Payments sector knowledge, please contact Head of Financial Technology & Services David Francione.

Endnotes

1. Forbes, "The Future Of Embedded Payments: What The Consumer-Centric Approach Means For Banks And Businesses," https://www.forbes.com/sites/forbesbusinesscouncil/2022/04/27/the-future-of-embedded-payments-what-the-consumer-centric-approach-means-for-banks-and-businesses/?sh=3fd018355f94, accessed June 20, 2022.

2. AnaCap Financial Partners, "Private Equity Portfolio," https://www.anacapfp.com/private-equity, accessed June 20, 2022.

3. Reuters, "Natural Disasters Cost Insurers $120 Billion in 2021," https://www.reuters.com/markets/commodities/natural-disasters-cost-insurers-120-billion-2021-munich-re-says-2022-01-10/, accessed June 21, 2022.

4. Ernst & Young, "2022 Global Insurance Outlook," https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/insurance/ey-2022-global-insurance-outlook-report.pdf, accessed June 21, 2022.

5. Financial Review, "NAB Buys LanternPay to Maintain HICAPS Dominance," https://www.afr.com/companies/financial-services/nab-buys-lanternpay-to-maintain-hicaps-dominance-20220112-p59nmy, accessed June 23, 2022.

6. Grand View Research, "Revenue Cycle Management Market Size," https://www.grandviewresearch.com/industry-analysis/revenue-cycle-management-rcm-market, accessed June 24, 2022.

7. CISION, "Aergo Solutions Joins CorroHealth," https://www.prnewswire.com/news-releases/aergo-solutions-joins-corrohealth-301552787.html, accessed June 24, 2022.

8. Nuvei, "ESports is Taking Over the Online Entertainment World, but Not Without a Digital Payment Partner," https://nuvei.com/insights/articles/esports-is-taking-over-the-online-entertainment-world-but-not-without-a-digital-payment-partner/, accessed June 24, 2022.

9. TechCrunch, "The BNPL Crackdown hasn't Crushed Walnut and its Latest $110M Series A," https://techcrunch.com/2022/05/05/walnut-buy-now-pay-later-health-series-a/, accessed June 24, 2022.