Two Distinct Business Models Emerge in the Financial Technology & Payments Sector
Capstone Partners released its March 2022 Financial Technology & Payments Market Update, reporting that the convergence of technology offerings and services in the Financial Technology (FinTech) & Payments sector has materialized in two distinct business models: financial services-led Software-as-a-Service (SaaS) and aggregator platforms. In either model, the strategies consistently reflect organic and inorganic expansion into various segments of the FinTech & Payments sector, maintaining ownership of the customer relationship, and capturing a larger portion of the total addressable market. Heightened competition for market share has resulted in substantial levels of global sector revenue, with healthy growth projections through 2030.
Unprecedented levels of consolidation and cross-segment expansion have fueled active merger and acquisition (M&A) markets and robust pricing. Public company valuations and M&A purchase multiples are often heavily dependent on participants’ core offerings and whether those offerings have historically been rooted in services- or software-based business models. Various channels have provided strong streams of liquidity for FinTech & Payments M&A including majority control investments from strategic buyers, private equity firms, and special purpose acquisition companies (SPACs). Although SPAC funders often experience lucrative payouts, they also possess the ability to redeem shares prior to the acquisition target’s public listing which has the potential to damage the entity’s initial market performance. Further consolidation is expected as venture capital funding has accelerated startups’ growth trajectory, resulting in heightened competition. As organic growth tends to decelerate for later-stage businesses, M&A has become a key strategic option for mature FinTech and payment providers seeking to expand market presence and diversify offerings in other segments of the FinTech & Payments sector. Notable deal activity in the Payments segment includes the Capstone-advised sale of Payix to Repay Holdings (Nasdaq:RPAY) for an implied enterprise value of $115 million in January 2022.
“We have strong conviction that the global appetite for both investment and M&A will continue to remain strong this year and in the coming years. For banks and insurance companies, it’s a race to stay ahead of the competition by adopting digital technologies to reduce friction in the customer interaction process and reducing customer acquisition cost, respectively,” said Capstone’s Head of FinTech & Payments David Francione, the lead contributor in the newly released report.
Also included in this report:
- Capstone’s FinTech Front Runners, a series of FinTech and payment startups that have exhibited exceptional leadership and revenue growth.
- How the rise of neobanks have accelerated modernization in the Banking sector, creating significant demand for bank technology providers.
- Why wealth management firms and registered brokers have focused on strengthening digital tools and engagement and how this has impacted valuations in the Capital Markets Technology segment.
- Drivers behind the favorable M&A outlook in the Insurance Technology segment, and why buyers have paid premium valuations to gain an early foothold in the space.
- Why the Payments segment has continued to lead the sector in M&A activity and venture capital funding.
- A breakdown of elevated venture capital funding by segment and how this has led to record levels of public listings via SPACs and initial public offerings (IPOs).
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