Investors Lured by Hockey Stick Growth of Payment Facilitators

Bailey Reutzel

While most people outside the industry don’t know what a payment facilitator is by name, the process of simplifying merchant onboarding to allow merchants to quickly start accepting payments is a business model seeing increased interest from the venture capital community.

According to panelists at Payment Facilitator Day during the ETA’s TRANSACT 17 conference, the payment facilitator industry is still in the very early days, but there’s substantial interest both by software companies looking to follow the PF model and investors looking to funnel money into the model.

“There are a lot of software companies with an interest, looking through the payment volumes going through their business and wanting to make money on it,” said Marcus Dagenais, president of BluePay Canada, an integrated payment processor. “Most are still on the boxed software fee that’s a monthly or annual software fee. Their eyes light up when we tell them about the payfac model.”

The PF model lets these companies offer their software for free while reaping revenue from transaction volume.

“The [revenue] growth goes from linear to an exponential growth curve when they start monetizing payments,” Dagenais said.

Ned May, the fintech growth equity investor at Napier Park Financial Partners, agreed about the impact of monetizing payments, saying, “Companies are starting to recognize payments is no longer a means to an end but that there’s embedded value there.”

According to Todd Ablowitz, president of Double Diamond Group and co-publisher of PaymentFacilitator.com, the industry has projected that half a trillion dollars of the independent software vendor market’s $1.6 trillion in spend would get routed through PFs by 2021.

And this growth, obviously, is enticing to the investor community.

According to the panelists, the convergence of software and payments is a main focus of venture capitalists today. “But,” said Roy Burns, managing director of TA Associates, “I don’t think the venture community knows ‘payfac’ yet.”

And while the saying goes, “software is eating the world,” Burns said, not all payments will be sold by software vendors because there are huge differences between the payments and software industry and the experts in those subsequent fields.

“The partnership model will drive penetration forward; it won’t all live under software,” he said. “It isn’t the easiest thing in the world to manage all that [payments] complexity under one roof.”

But for Burns, seeing a vertical-specific software company that’s not monetizing payments is very exciting because his company can help them take on the opportunity. And it’s not an opportunity that will vanish anytime soon, he thinks.

“Valuations are as high as any I’ve seen in the last 20 years. In many cases, it’s not a cycle you’re going to see roll over; there’s lasting lifetime value for clients,” he said.

For PFs looking to secure venture capital money, Napier Park’s May said his team looks closely at how durable a company’s differentiation is, which is steered by a great team with experts in the payments market that knows the regulatory challenges.

And, Burns said, he’s interested in a company’s total addressable market.

“A tiny niche can be a great business but I might not be that interested in it,” he said. “A company needs to have the ability to have a large enough addressable market and have adjacencies that can be seen.”

Burns also looks at the characteristics of how a business is generating revenue. For instance, he said: Is it fair? Does the company have the business logic that revenue is tied to a customer’s benefit? And most importantly, does the company deserve to win?

While the industry is still relatively quiet here in the U.S., the panelists acknowledged possible competition coming from international providers soon.

“Something like hundreds of thousands of merchants are being onboarded in India…largely thought the payfac channel. There’s just staggering growth,” said Ablowitz.

Dagenais agrees, although the environment in India is vastly different than in the U.S. and most other western markets. Paytm, an India payment and commerce company, has become the largest payment method in the country somewhat because of the Indian government’s demonetization about six months ago.

Paytm, which is sometimes seeing 100% day-over-day transaction volume growth, is looking at Canada as its first international market, Dagenais noted.

“You’ll see a lot of international companies come into the U.S. market with a lot of investor interest,” Dagenais said.

But, according to Burns, U.S. payment facilitators can jump on opportunities internationally too. For instance, countries like Nigeria where electronic payment penetration is low are good markets for U.S. companies to investigate.

“In markets that don’t have dozens of competitors and a scarcity of talent,” Burns said, “the opportunity is monstrous.”

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