The FinTech innovation cycle is reaching its peak. These are the five FinTech sectors we’re most excited about, starting with Merchant Processing.

Ron Suber, the “Godfather of FinTech” as he is often described, penned an article for LLR’s GrowthBits in which he summed up the current state of FinTech as “a once-in-a-lifetime opportunity.” “We Are Living in the Golden Age of FinTech” mapped out a 50-year innovation cycle for the FinTech sector that began in 1998 with the launch of PayPal and is now reaching its peak.

Suber’s insightful take on the complex and dynamic FinTech market reflects LLR’s views as an early and active investor in the market. For two decades, we have navigated the sector’s growth and evolved our investment theses to partner with companies that demonstrate the ability to succeed amid a rapidly evolving market. Those trends include:

  • Increasing adoption of technology
  • Development of partnerships between FinTech companies and incumbent financial services providers
  • Growing availability of financial services to the masses
  • An active financing and M&A environment.

So, what comes next? At LLR, we continue to believe in taking a thematic approach to investing. We focus on the sub-sectors of FinTech where our experience guides us to recognize talented entrepreneurs with strong business models and differentiated product offerings that serve large market opportunities.

 

We’re focused on Payments, Wealth Management and Lending Technology. The following kicks off a series of five GrowthBits in which we will outline in more detail the primary trends driving growth opportunities and investment in these sectors.

 

 

Large Market Opportunity for Merchant Processors with an Integrated, Scalable Platform

As private equity investment and industry consolidation abound, new payments technologies are consistently being introduced to the market, enabling broader payment acceptance across the ecosystem and presenting a multitude of new opportunities.

Large, Growing and Fragmented Market Opportunity

Payment cards continue to be the fastest growing payment option, with a growth rate of approximately 10% per year. Despite the magnitude of the payments market, approximately two-thirds of U.S.-based businesses still do not accept payment cards which creates a massive greenfield opportunity for merchant acquirers, processors and payment technology providers. The approximately one-third of businesses that can accept payment cards are being driven by consumer demand to upgrade their payment technology to enable a faster, omni-channel payment experience that enables consumers to pay whenever and wherever they want—online, via mobile, etc.—while enjoying an invisible, seamless experience.

Further, in 2017 alone, approximately $7 trillion of payment card volume flowed across Visa, Mastercard and other card networks. While the largest acquirers have taken a big piece of this volume and realized meaningful scale in doing so (Global Payments, First Data, TSYS, etc.), the market is still highly fragmented, with approximately 2,700 small- and medium-sized merchant acquirers competing for market share. While many of the smaller acquirers are sophisticated payments providers, they lack the financial scale and resources to keep pace technologically and compete with their larger peers. As the market continues to evolve, and customers/consumers demand faster, seamless, omnichannel, and vertically focused solutions, there is an opportunity to invest in and consolidate smaller merchant services providers.

The convergence of payments and software is shifting the traditional value chain. 

Vertically-Focused Applications Enhance Customer Experience

It has become increasingly difficult for merchant services providers to compete without an integrated, vertically-focused solution. Combining business applications with payment processing capabilities creates a frictionless, integrated experience and allows an SMB or merchant to more effectively serve its customer base. For example, a solution might enable a retail merchant to seamlessly transfer payment-card data to its accounting system for reconciliation, or it might enable a business owner to invoice, charge and accept payment from customers within a single business software application.

Regardless of the vertical, providing a comprehensive solution, underpinned by a fundamental understanding of an SMB’s core business requirements, creates a stickier and more valuable customer relationship.

Case in point: One of LLR’s earliest FinTech deals was a growth equity investment in Heartland Payment Systems in 2011. Heartland went public in 2006 and was later acquired by Global Payments for $4.3 billion in 2016. Over the past 17 years, we’ve also been part of the growth stories at Fleet One ($369M sale to NYSE:WEX), Phreesia, CompoSecure, Midigator and the formation of Celero Commerce. LLR partnered with Kevin Jones, former founder and CEO of Anovia Payments, and President of the Electronic Transactions Association (ETA) to build out Celero Commerce as a tech-forward, vertically focused, integrated commerce solutions provider. Through several subsequent acquisitions and organic growth, Celero now has a national presence, combining state-of-the-art technology and offering businesses and their customers a seamless, integrated experience.

More recently, we also invested in DaySmart Software, which provides integrated business management software and payment processing services to the salon, spa, pet care, recreation, and tattoo industries, and ParkHub, which provides a fully integrated software and payment processing solution for parking operations to universities, parks, operators, professional sports organizations and entertainment venues.

Vertically-focused, integrated payments providers are well positioned to gain share of the large, growing and highly fragmented merchant processing market. Meanwhile, the growth of e-commerce,  movement of fraudsters online, and ease with which consumers can make payments and dispute transactions are creating opportunities for companies that specialize in fraud mitigation and management. More on that in our next post on payment security.

 

Learn more about LLR’s fintech team, portfolio companies and investment focus.