Access to account as part of the PSD2

The objective of the revised Payment Service Direc-

tive (PSD2) is to further improve the foundation of an

EU-wide unified market

for payments by foster-

ing competition, innova-

tion and transparency. A

major game changer

introduced by PSD2 is

“Access to Account”

(XS2A). While there are

further provisions within

the PSD2, such as those extending its scope and

those relating to consumer protection, liabilities,

security and payment instrument charges, we expect

XS2A to have the biggest impact when it comes to

new business opportunities.

XS2A requires banks to provide third party providers

with API access to customer accounts if the account

holder consents. XS2A allows third party providers to

offer two new distinct types of services:

1. Payment initiation services, i.e., the execution of

online payments without holding user funds

2. Account information services, i.e., access to pay-

ment account data to provide a comprehensive

view of a user’s financial situation

One of the reasons for creating these new service pro-

viders under PSD2 is to

include currently unregu-

lated business models in

the regulation: examples

of payment initiation ser-

vice providers are

SOFORT, Trustly and

iDEAL. Examples of

account information ser-

vice providers are fymio,

mint and Money Dashboard. One provider may cover

multiple service offerings and this will even come to

be expected due to positive synergies.

Business opportunities based on

XS2A

Based on the two

possible XS2A ser-

vices, EY Innovalue

has identified five

possible business

opportunities arising

for incumbents and

new players:

OpiniOn paper: pSD2 anD the impact Of acceSS tO accOunt What is the strategic impact for banks, payment institutions and merchants?

Kalle DunKel

senior associate

Jan lettOw

manager

paymentsInsight. Opinion.

vOl 15

COntent

1 OpiniOn paper: pSD2 anD the impact

Of acceSS tO accOunt

We take a look at the strategic impact of PSD2/XS2A for

banks, payment institutions and merchants.

4 QuO vaDiS girOcarD

Jan Lettow and Jakob Schniewind take a look on the current

challenges of Germany's leading cashless payment method

and it's future viability.

5 m&a activity

Which transactions made headlines in the 3rd quarter of

2016? What are the current M&A and IPO drivers? Robert

Kayser, Apostolos Psaras and Maximilian Kind answer

these questions.

7 venture capital actvity

Edoardo Cenci and Stefan Thomalla review the latest pay-

ment start-up fundings of Q3 2016 and elaborate the stra-

tegic thinking.

10 m&a Deal activity

Transaction overview

12 venture capital activity

Transaction overview

payment initiators will disintermediate traditional payment

schemes and are best suited for psps, banks and other regulated payment institutions

account aggregation

Scoring

Data analytics and

marketing

3rd party payment initiation services

...

account information service

payment initiation service merchant

payment initiation services

2

13

4

5

XS2a

fig. 1: Business opportunities based on Xs2a

chriStian löw

senior associate

JaKOb SchniewinD

associate

payments Insight. Opinion.

1. 3rd party payment initiation services

Payment initiation service providers can use APIs

provided by the consumer’s bank to trigger transac-

tions for merchants. In this way, merchant acquirers

and card schemes are disintermediated. While

PSD2’s provisions calls for stronger authentication,

recurring payments can be exempted if merchants

are white-listed by customers. The payment initia-

tion service providers’ business model is based on

the expectation that revenue from transaction fees

will be lower than current costs and cover a provider

margin as well as potential transaction or API fees

charged by the consumer bank. Costs arise from the

need to obtain a payment institution license, set up

infrastructure, operations, marketing (less if white

label) and potentially transaction or API fees

charged by the consumer bank. Incumbents will see

an increase in competition, ultimately leading to a

commoditization of this service with lower fees.

Potential new players, such as banks, PSPs and

other regulated payment institutions, have the

opportunity of extending their offering to an existing

loyal customer base. However, this might come at

4. Scoring

“Classic” (e.g., credit reports) and “new” (e.g., social

media data) scoring data sources can be supple-

mented with data retrieved via the new account

information service APIs. With the client’s consent,

the credit scoring provider can tap into the account

and transaction histories of all the banks of the cli-

ent and thereby enhance the scoring process with

valuable insights. Clients will be encouraged to

provide approval for access to their accounts in

order to positively influence their own credit scoring

and thereby gain access to benefits such as lower

interest rates. The resulting enhanced credit scores

can be used as a stand-alone business model (credit

scoring as a service) or for internal use as part of a

credit approval process by banks or merchants. His-

torically, FinTechs like bonify, Score Kompass and

Kreditech already made use of data-based scoring

systems. Now, traditional banks are expected to

enter the field, striving to gain additional revenue

sources. With direct access to customer informa-

tion, banks should obtain more reliable credit

scores, threating more indirect big data approaches

currently relied on by many FinTechs.

5. Data analytics and marketing

The new account information service APIs will allow

customers to give financial institutions access to

their accounts in exchange for benefits, such as

increased convenience (free account aggregator,

e.g., N26), discounts (insurance rebate,

e.g., telematics) or incentives (loyalty points, e.g.,

PAYBACK or Nectar). To comply with data protec-

tion regulations, the customer has to explicitly opt-

in. The data obtained can either be used internally by

the financial institution itself or sold to commercial

partners for customized offerings with higher hit

rates and increased added value for clients. Com-

mercial partners include financial as well as non-

financial players.

the price of cannibalizing their current higher-mar-

gin (card) business.

2. Merchant payment initiation services

Merchants have the option of becoming a payment

initiation service provider themselves and initiate

payments directly from consumer bank accounts.

The primary motivation for merchants to become a

payment initiation service is to support the core

business by lowering costs, augmenting the cus-

tomer experience and gaining further customer

insights, while revenue potential is secondary. Plat-

form providers and super merchants (e.g., Alibaba,

Amazon and eBay) or “walled gardens” (e.g., Face-

book and Twitter) could generate additional reve-

nue from sub-merchants. On the other hand, costs

will be driven by the need for a payment institution

license, infrastructure, operations and potentially

the transaction or API fees charged by the con-

sumer bank. Due to administrative and regulatory

burdens, only large multinational merchants will

invest in becoming a regulated entity. As an already

regulated player, the merchant could also

implement an account information service and gain

further customer insights above and beyond the

extended payment experience.

3. Account aggregation

The new account information service APIs can be

leveraged to gain a true “360°” financial overview

for private and commercial multi-bank clients. By

aggregating the information in a financial manage-

ment cockpit, the bank or aggregation layer pro-

vides additional value for the client. However, the

stand-alone presentation of financial information

will soon become a market standard and will lose its

differentiator attribute. Lasting value for the cus-

tomer will be achieved by smart use of data, i.e.,

advisory services with regard to better product

offerings and relevant cross-selling. Revenue

streams are unlikely to spring up from the aggrega-

tion itself. Incumbents, such as Centralway, Moven

and Mint, will face fiercer competition from banks

and might have difficulties defending their current

USP.

fig. 2: 3rd party payment initiation services

fig. 5: scoring

fig. 3: merchant payment initiation services fig. 4: account aggregation

account access Confirmation

merchantpaymentservice user

Consumer`s Bank

card scheme

merchantacquirer

merchant`s bank

paymentInitiator

Initiation via apI

aggregation layer

private/ commercial client

Interbank funds transfer

account access

Confirmation

merchant as payment initiator

paymentservice user

Consumer`s Bank

card scheme

merchantacquirer

merchant`s bank

Initiation via apI

Interbank funds transfer

creditreports

social media

accounts

access to bank

accounts

aggregation and scoring

enhanced credit score sale to 3rd partyinternal use

1 2 3

4

Keep data Sell data

fig. 6: Data analytics and marketing

5

gainingcustomerinsights

1 3

4

2

1

2

3

4

2

page 1

payments Insight. Opinion.

Open Banking: beyond the PSD2

The PSD2 and its provisions for XS2A are only the

first steps on the path to digitalization that will force

banks to open up their “data-vaults”. Outside the

banking industry, digital companies such as Google

or Facebook have already grasped for a long time

that opening up towards other market participants

can increase value for its customers and ecosys-

tems. Based on this trend and the increasing rele-

vance of open APIs in banking, the term Open

Banking was coined. Open Banking stands for the

technology-driven evolution of banking, in which

banks create a symbiosis between financial institu-

tions, technology players (e.g., FinTechs), mer-

chants and customers to address financial as well as

non-financial customer needs. Open Banking and

APIs have the potential to remodel the financial ser-

vices industry and banks will be forced to make stra-

tegic decisions as to which role they want to play in

creating value for their customers.

One option open to banks is to focus on providing

backend banking services. They could grant trusted

partners extensive API access to data and pro-

cesses, while they focus on providing liquidity and

infrastructure services as a backend financial ser-

vices provider. This arrangement reduces customer

interaction and harbors the risk of disintermedia-

tion, although the bank’s expertise and scale will

always ensure a share of the profits.

A different path open to banks is to focus on main-

taining the customer relationship and providing top

notch front-end banking services. They can leverage

customer insights from consolidated services and

data to become the customer’s central hub for

financial services and create a platform for financial

institutions, merchants and customers to work

together. In doing so, banks will be able to provide

enhanced offerings with products and services that

address both financial and non-financial needs.

The question that remains is how the banks will

actually position themselves. Will they attempt to

bar the gates? Will they take the guidelines pre-

pared by the EBA and implement the APIs to cover

only the most basic functionalities, hampering the

processes and charging the highest fees they can

get away with? Or will they embrace the change, go

beyond the mandatory requirements and provide

the market with genuine open banking?

•• ••• •Banks PSPs

••• Large merchants Walled gardens Platforms

••

• ••

Banks

••

• ••

Banks

•• •

••Banks

1

2

3

4

5

fig. 7: Overview of impact on incumbents and new players

apIs and Open Banking have the potential to remodel

the financial service industry – Xs2a and psD2 are only one step on the path of change

Standardization and openness lead to lower costsIncrease in competition Commoditization of service and decrease in fees

3rd party piSpimpact on

incumbents

new players

incumbents

new players

incumbents

new players

incumbents

new players

incumbents

new players

merchant piSpimpact on

no incumbents yet

account aggregation impact on

Scoring using aiSp dataimpact on

Data analytics & marketing (aiSp) impact on

Additional new business and revenuesIncrease existing customer’s loyalty via new services Cannibalization of higher margin business (e.g. cards)

Optimized shopping experienceLower payment costsRegulatory burden

Regulatory approved business modelLoss of USP/ increasing competitionRegulatory burden

Regulatory approved business modelLoss of USP/ increasing competitionRegulatory burden

More data and informationIncrease in competition Higher regulation results in additional fixed costs

Increased customer conveniencePotential for cross-selling

More reliable credit scoresRevenue potential from credit scores

Additional new business and revenuesCustomized core offering based on collected data

3

page 1

payments Insight. Opinion.

The historic importance of girocard

“Convenient. Everywhere. Accepted.” – For its 25th

anniversary, today's girocard – a success story of the

German banking industry – received a new claim,

including an updated web presence. The promise has

so far been kept: consumers, merchants and banks

all enjoyed the benefits of the girocard in the past.

More than 100 million cards, nearly 800 thousand

terminals and nearly uninterrupted revenue growth

are the highlights of this success story.

However, girocard’s new branding cannot mask the

numerous challenges it is facing. Being “convenient,

everywhere and accepted” exposes girocard to ever

more rapidly changing market demands, which

include in particular:

Regulations (e.g., merchant fee negotiations and

IF-Regulation)

Changing consumer behavior (e.g., international-

ization and E-Commerce)

New technologies (e.g., contactless and mobile

payment)

These trends are calling the German private and sav-

ings banks as well as the Deutsche Kreditwirtschaft

(German banking association) to respond. In the fol-

lowing girocard’s greatest challenges will be outlined

and potential next steps discussed.

Regulation

Traditionally, one of girocard’s strongest USPs has

been the comparatively low cost of acceptance for

merchants. However, this competitive advantage has

been weakened by recent market developments.

Firstly, merchants are able to reduce fees through

individual negotiations. Secondly, the recent inter-

change fee regulation has put a cap on interchange

fees. Despite some questionable pricing strategies,

the costs of acceptance have decreased by almost

30 % overall.

Intuitively, one would expect girocard’s transaction

volume to increase further. However, recent transac-

tion volumes and amounts paint a different picture.

This can be explained by a concurrent reduction in

the acceptance costs of major competing payment

substitutes. The acceptance costs of regulated credit

cards has decreased by over 50 % and the accep-

tance cost of international debit cards has decreased

by more than 20 %.

This new competitive pricing landscape has signifi-

cantly raised the acceptance of VISA and

QuO vaDiS girOcarD

Jan lettOw

manager

JaKOb SchniewinD

associate

no significant changes in the status quo will inevitably

lead to girocard’s decline in the market.

MasterCard and even

large grocery stores have

started to accept these

schemes. In addition,

some merchants have

started questioning the

acceptance of girocard

entirely due to potential cost savings. By excluding

girocard as a payment option, the purchase price of a

terminal can be reduced by up to 50 %, since no cer-

tification by the Deutsche Kreditwirtschaft is

required anymore. This allows merchants to pursue

an international purchasing strategy for their termi-

nals. Furthermore, acquirers’ tender offers can be

centralized and reconciliation processes can be

unified.

The combination of these factors has diminished

one of girocard’s most prominent USPs. The accep-

tance costs for alternative products are no longer

prohibitively expensive and in some cases mer-

chants are even better off by completely neglecting

girocard as a payment option.

Changing consumer behavior

Consumers are increasingly questioning girocard’s

suitability for everyday use. One reason is the fact

that it is still not possible to pay by girocard in all

locations abroad. The European initiatives EAPS

(European Alliance of Payment Schemes) as well as

EUFISERV/Trionis did not achieve their initial goals

and German banks are still forced to add competing

international acceptance brands such as Maestro or

V PAY on their issued debit cards.

In addition, girocard’s lack of online acceptance is

becoming increasingly problematic. According to

the Handelsverband Deutschland (German trade

association), the German online retail market, with

sales of more than EUR 45 billion, represents a share

of almost 10 % of all retail sales and is expected to

grow to over 15 % by 2020. Although the “girocard

online” initiative was set up to participate in the shift

towards online payment, it has had no market impact

so far. The brand’s decreasing market relevance is

exacerbated by the accelerating growth of online

commerce.

New technologies

From a technological perspective, girocard has not

changed much since its launch and still only allows

“classic card payments” at the point of sale. Techno-

logical innovations, such as contactless, mobile pay-

ments and cross-channel functionalities, have

largely been neglected. Although the Deutsche

Kreditwirtschaft is trying to close this gap through

several initiatives, nothing concrete has been

brought to market yet.

Many of these initiatives

end up as regional pilots

or as solutions that are

separate from the actual

girocard, such as girogo.

To boost the success rate

for future developments, the innovation center "giro-

card city Kassel" was launched. Currently, another

contactless girocard is being tested there. It remains

to be seen whether this additional contactless initia-

tive can be successfully merged with the existing

non-girocard-based contactless solutions.

Looking at mobile payments, girocard is far behind

its competitors. So far, the German co-operative

banks have merely announced a partnership with the

three large mobile operators in Germany earlier this

year. Whether girocard mobile, in its proposed form,

will ever reach market and successfully compete

against established solutions is highly questionable,

particularly since some members of the German

banking industry publicly favored a solution involv-

ing Apple Pay.

Outlook for girocard

The measures taken in the not too distant future will

decide upon girocard’s future. The key question is

whether girocard wants to rest on its laurels as the

leading in-store cashless payment method in Ger-

many or whether it is willing to compete at the same

level as international card schemes and technology

companies for future market shares in the cashless

payment market.

No significant changes in the status quo will inevita-

bly lead to girocard’s decline in the market. For the

medium term, i.e., the next 5 to 7 years, girocard will

probably be able to capture the majority of cashless

in-store sales and thereby benefiting the banks with

corresponding fees for some time to come. In the

long-term future, however, competition on prices

will further intensify in the relatively sluggish retail

market, resulting in a loss of market share and

declining fee revenues. Investments in the future of

girocard must be made for it to remain the leading

cashless payment method in Germany. It can only

maintain its market leadership by embracing innova-

tion and enabling cross-channel functionalities. Pro-

viders such as Apple Pay and PayPal are setting the

pace and working on corresponding solutions at full

speed. In order to not fall behind, all parties involved

are well-advised to join forces and to align their gov-

ernance in order to work together on marketable and

competitive girocard solutions. Piloting long-term

regional projects with existing technology features

does not encourage much optimism.

4

page 1

payments Insight. Opinion.

16x

14x

2x

12x

10x

8x

6x

4x

The third quarter of 2016 saw reverse in the

number of M&A transactions within the payment

industry. A total of 36 deals were reported with a

total disclosed value of USD 3.9 billion. One deal

stands out: the USD 1.15 billion VocaLink acquisi-

tion by MasterCard. Other transactions dis-

cussed in this issue are the acquisition of

Unicredit’s payments processing services by SIA

and NET’s IPO.

M&A activity and deal

characteristics

A total of 36 M&A transac-

tions were announced in

the third quarter of 2016.

This represents a 22 %

decrease over the 46 deals reported in the same

period in 2015. The financial terms of 9 transactions,

with a total volume of USD 3.9 billion, were dis-

closed, a 72 % decrease compared to the same

period in 2015. It appears that for the first time in

many years, and in contrast to venture capital

investments (see page 7), there is a summer gap

(“silly season”). The overall decrease is primarily the

result of a drop in the number of deals in North

America from 28 in Q3/2015 to 19 this quarter.

Sputtering economic growth, the prospect of further

U.S. Fed interest rate hikes and uncertainty over the

outcome of the U.S presidential election were the

main causes for the decline in North America and

continue to be so.

The total disclosed deal value for Q3/2016 was par-

ticularly shaped by MasterCard’s acquisition of

VocaLink for USD 1.15 billion (29 % of disclosed vol-

ume). The London-based payment processing and

technology company is the operator of BACS, the

UK Automated Clearing House, LINK, the UK ATM

network and Faster Payments, the UK real-time

account-to-account payments network. Addition-

ally, VocaLink’s portfolio includes a number of inno-

vative services such as ZAPP, a service that allows

money to move instantly from a customer account

to a merchant account through near real-time pay-

ments. VocaLink has also recently expanded its

rObert KaySer

Senior Associate

apOStOlOS pSaraS

Associate

maXimilian KinD

Associate

m&a activity

North America Europe Asia

Middle East, Africa (MEA) Australia South America

figure 3: targets by region

figure 1: m&a market development

Disclosed value [USD billion]Number of transactions

footprint internationally, supporting ACH-related

payment infrastructures in Sweden, Singapore, Thai-

land and the United States. VocaLink processed

about USD 7.3 trillion in payments in the UK last

year and generated revenue of USD 220 million. So

far, VocaLink’s owners were a group of 18 banks and

building societies including Lloyds Banking Group,

Barclays, HSBC, Royal Bank of Scotland and

Santander. The decision to sell their stake in VocaL-

ink comes shortly after UK’s payment system regu-

lator stated that banks should sell their share in the

company to foster innovation and increase competi-

tion. MasterCard engaged in this acquisition to

wrestle control of the payments infrastructure away

from big British banks and to strengthen its position

in the UK payments market. With the acquisition of

VocaLink, MasterCard has the technology to pro-

cess real-time (non-card) payment transactions. In

light of the PSD2 requirements governing the imple-

mentation of access

to account provisions

for financial institu-

tions and initiatives

aimed at the creation

of a pan-European

real-time payments

infrastructure, it becomes evident that the VocaLink

acquisition would ideally position MasterCard to

benefit from the proliferation of real-time “push”

payments. Currently, MasterCard has only about

5 % of the UK’s debit card market and is greatly out-

performed by its strongest competitor, Visa. The

deal is expected to close in early 2017.

The median EBITDA-multiple decreased from 13.1x

in 2015 to 10.6x in 2016. The median revenue multi-

ple decreased from 3.5x in 2015 to 2.3x in 2016.

MasterCard’s acquisition of VocaLink for USD 1.15

billion represents a revenue multiple of 4.8x or an

EBITDA-multiple of 11.3x. Apollo Capital Manage-

ment’s acquisition of Outerwall for USD 1.6 billion

represents a revenue multiple of 0.7x or an EBITDA-

multiple of 3.3x. SIA’s acquisition of Unicredit Busi-

ness Integrated Solutions for USD 559 million

represents an EBITDA-multiple of 12.0x. Tito’s

acquisition of Emric for USD 35 million results in a

revenue multiple of 1.6x. Blackhawk’s acquisition of

Grass Roots for USD 118 million amounts to an

EBITDA-multiple of 8.2x. In line with previous quar-

ters, investors seem to resent the potentially disrup-

tive nature of target companies in the payments

sector and consequently reduce the transaction

multiples of their offers. Furthermore, investors offer

more conservative valuations due to the uncertainty

surrounding the United Kingdom’s European Union

Revenue Multiple EbitDA multiple

figure 2: median enterprise value multiples

9.5

14.5 14.713.1

10.6

3.72.8 3.5

2012 2013 2016Q3

2015

2.3

2014

Num

ber of transactions

10

0

20

30

40

50

60

70

4

6

8

0

10

12

32

2

a total of 36 deals have been reported with a total disclosed

value of UsD 3.9 billion

0% 0%

6%0%

42% 53%

2015

2016Q3

membership referendum (“Brexit”). However, the

deal landscape still shows a diverse range of valua-

tions.

70

49

3.9

36

6.1

4.7

62

31.9

14.1

Dis

clos

ed v

alue

[U

SD b

illio

n]

2015Q3

2015Q4

2016Q1

2016Q2

2016Q3

46

5

page 1

payments Insight. Opinion.

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

rapidly expanding into the payments market and

strengthened its distribution channels by acquiring

Wandoujia for USD 200 million. iZettle, Sweden’s

leading mPOS solution provider, bought Intelligent

Point of Sale, a cloud-based point-of-sale applica-

tion for iPad providers, in an effort to expand its

business and European market presence, for an

undisclosed amount.

Key drivers of and rationale behind M&A activity

The trend observed in the previous quarters

has become entrenched in established payment

sectors such as acceptance, money transfer and

processing accounting for the majority of the

targets in Q3. According to the relevant deal

announcements, key drivers for inorganic growth in

Q3 were ambitions to expand into new geogra-

phies and enhance technological (platform),

product and distribution capabilities.

The sale of Unicredit Business Integrated Solutions

to SIA Payments is another example of a banking

institution divesting itself of its payments process-

ing operations. Through this transaction, valued at

USD 560 million, Unicredit will shed a non-core

business activity in Germany, Austria and Italy, and

enter into a ten year outsourcing agreement for

card payments processing. For SIA, the rationale

behind the deal is that it can raise its profile in two

key strategic markets (Austria and Germany) and

achieve greater economies of scales by adding the

processing of Unicredit transaction volumes in its

platform.

The initial public offering (IPO) of NETS, the

Danish payments processing company owned by a

consortium of investors including private equity

funds Bain and Advent international and the

Danish pension fund ATP, also underscores the

higher rate of activity in the processing sector. The

company began trading on the Copenhagen Stock

Exchange on 23 September at a value of USD 4.5

billion, with the floatation being oversubscribed by

4.7 %. Bain and Advent international acquired

NETS 2.5 years ago for USD 2.6 billion and, as with

the Worldpay IPO, managed a successful exit.

During the holding time, the consortium was

successful in value creation through measures

such as backing the purchase of Nordea Merchant

Acquiring for USD 256 million in July last year.

In the online acceptance segment, a number of

deals that particularly stand out. Firstly, there is the

acquisition of German online payment service

provider Paymill by the Swiss company CYBERser-

vices, which operates the

Klik&Pay online pay-

ments gateway. The deal

will enable Klik&Pay to

expand their footprint on

the European market and

target the SME segment.

Paymill had received

USD 18 million in venture

capital financing from

Rocket Internet and

declared a strategic

preliminary insolvency as it engaged in M&A talks

with potential buyers. The financial terms of the

transaction have not been disclosed. Secondly, the

merger of Polish online payment service providers

Dotpay and eCard is another sign of consolidation

in the European digital acceptance landscape. The

two companies aim to create an integrated plat-

form, able to service eCommerce merchants’

needs across segments and capitalize on the

growth in Polish and CEE eCommerce. Thirdly, the

acquisition of Indian online payments provider Cit-

rus Pay by PayU, a subsidiary of the South African

media and internet conglomerate, Naspers, show-

cases the growing importance of non-cash pay-

ments in emerging markets. The deal will allow

PayU to improve its competitive rank in the Indian

digital commerce sector relative to other domestic

players such as PayTM, which had so far raised

more than USD 760 million.

For the last quarter of 2016, we expect a challeng-

ing market environment, shaped among other

things by the U.S. pre-

sidential elections and

further details on the

Brexit. Total M&A deal

volumes are likely to

be lower this year

compared to 2015

even though total

number of deals is

similar.

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

For the last quarter of 2016 we expect a challenging market

environment conditioned among others by the U.s. presidential election and further details on the Brexit

6

page 1

payments Insight. Opinion.

Stefan thOmalla

associate

Funding activity

In the third quarter of 2016, 42 companies raised

USD 427 million, of which USD 426 million was in

the form of equity and USD 1 million in the form of

debt financing. This represents a 21 % decrease

from the 53 deals reported the previous quarter. A

comparison with 2015, with 39 deals, shows that

investors were slightly more active in terms of ven-

ture capital spending,

even though a summer

gap (“silly season”) is

once again identifiable.

From a regional per-

spective, North Ameri-

ca held the lead,

reporting 18 deals (Q3

2015: 23) with a dis-

closed value of USD

195 million (Q3 2015:

USD 297 million).

Looking to Asia, 13

funding arrangements were secured in Q3, match-

ing the combined number of deals for Q1 and Q2 (6

and 7 deals, respectively). In fact, this is the highest

number of identified investments in core payments

in a quarter in Asia in the last few years. Although

Europe was the region with the liveliest funding

activities in Q2 (22 deals), there was a marked shift

in attention by investors away from this region in

Q3. Only 9 deals with combined a value of USD 24

million were closed in Europe, prominently demon-

strating the summer gap. The decrease in Europe’s

venture capital market is closely linked to the

United Kingdom’s European Union membership

referendum (“Brexit”). See our treatment of this

topic further down.

Investment trends

The observation made in our last few newsletter

issues, in which we noted investors’ continual quest

for new and alternative investment opportunities

due to the low returns from capital markets, is still

valid. Regarding the financing rounds, venture and

seed capital are still dominant, accounting globally

for more than 50 % of the total deals. Moreover, the

ongoing confidence in early stage funding is largely

substantiated by the fact that the total closed value

of venture and seed capital nearly doubled from

USD 47 million in Q2 to USD 90 million in Q3.

In addition to early stage funding, some large

financing rounds were also secured in this quarter.

In Q3, 75 % of the total funding volume - USD 427

million - can be traced back to Top 10 funding. Very

large and more mature deals were closed primarily

in Asia. 3 out of the top 4 investment arrangements

in terms of funding volume were signed in Asia,

which shows that the Asian payment FinTechs are

continuing to chart a growth course.

This quarter’s largest equity funding deal was

raised by One97 Communications. The Indian pay-

ment and ecommerce service provider operates a

digital goods market-

place and mobile mar-

keting platform in India,

through which Indian

users can shop or pay

utility bills. One97

Communications has

gained a market profile

in India through its

mobile payment sub-

sidiary “Paytm” (Pay

Through Mobile).

Paytm was founded

and incubated by

One97 in 2010 as a prepaid mobile recharge

website. In 2014, the start-up launched Paytm

Wallet, one of India largest mobile payment service

platforms, and in March 2015, Alibaba Group took

a 25 % stake in One97.

One97 raised USD 60 million in its recent financing

round, which valued the company at USD 5 billion.

The funding is part of a bigger plan to raise USD

300 million in order to expand its payment and

ecommerce business and ultimately build its digital

bank, for which it has already obtained a license.

One97 Communications is backed by a couple of

very popular investors such as SAIF Partners, SAP

Ventures, Intel Capital and Silicon Valley Bank and

has offices in India, the Middle East and Africa. The

leading investor in the most recent financing round

was MediaTek, a Taiwanese chip designer and

manufacturer with a sharp focus on the Indian mar-

ket. MediaTek is also a shareholder in Paytm's com-

petitor MobiKwik, which raised this quarter’s fourth

largest funding amount of USD 40 million from

Net1 UEPS Technologies. Earlier this year, MediaTek

was already among the investors that drove a

USD 50 million Series C funding investment in

MobiKwik.

venture capital

eDOarDO cenci

associate

figure 1: market development – Including both equity and debt funding deals

Disclosed value [USD million]Number of transactions

Europe North America Asia

Middle East, Africa (MEA) Australia South America

figure 2: Investment by region

In the 3rd quarter of 2016, 42 companies raised UsD 427 million,

of which UsD 426 million in equity and UsD 1 million in debt financing. In comparison to the same period of 2015, investors have been slightly more active in venture capital

2015

2016Q3

Other D

C b

A Venture

Seed

2015Q3

2015Q4

2016Q1

2016Q2

figure 3: Financing rounds

2016Q3

463 427382

5048

39

0

10

20

30

40

50

605,000

4,000

3,000

2,000

1,000

0

42

4,977

53

345

Dis

clos

ed v

alue

[U

SD m

illio

n]

Num

ber of transactions

26% 33% 34%21% 26%

12%23%

26%15%

21% 16% 13%10%

15% 10% 13% 10%15%

9%8%

26% 17% 20% 17% 24%

5%4%2%2% 0%

6%

6%

6%

5%

5%

0%

5%

31%

43%

21%

0%

2015Q3

2015Q4

2016Q1

2016Q2

2016Q3

7

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payments Insight. Opinion.

Moving on to another topic, although the “block-

chain” was simply the echo of the word “Bitcoin”

three years ago, today this technology has become

a concrete tool used by financial institutions around

the world. Confirming this trend, Ripple, a peer-to-

peer protocol and

blockchain solution

provider, closed its

highest ever financing

round of USD 55

million. The total equity

financing volume to

date is USD 93 million,

making Ripple one of

the best capitalized

start-ups in the block-

chain industry. Compa-

nies such as Accenture, Santander and Standard

Chartered Bank appear in the list of investors,

demonstrating the consistency of Ripple’s offering

and the potential of the blockchain.

Ripple was envisioned by its CEO and co-founder

Chris Larsen as the enabler of cross-border

payments for both banks and consumers, in order

to create an Internet of Value where the world

moves money as easily as information. Ripple’s

global network now includes 15 of the top 50 global

banks, with ten banks in commercial deal phases

and over thirty bank pilots completed.

The blockchain however is not simply about cross-

border payments. A good example is UBS: at the end

of September, this

Swiss bank has

announced its plan to

implement a trade

finance system that

uses distributed led-

gers to streamline

import-export transac-

tions globally.

Looking at payment

trends from a customer

perspective, the likeli-

hood is great that one day, no one will be carrying

around payment cards, but rather simply pay by

using a fingerprint, face, eye or even voice; but how

far is that day?

Touché, a Singapore based biometric hardware and

software solution provider for the payment industry,

is one of the companies that, in our opinion, brings

the future to us. The Asian start-up received USD 2

million in equity funding. The company provides a

technology that allows customers to pay using their

fingerprints. Touché has developed a POS terminal

and POS solution specifically for this purpose.

Along the same line, MasterCard is rolling out a bio-

metric payment solution that allows customers to

pay via facial recognition or fingerprint.

According to MasterCard, biometric payments

eliminate the need for cardholders to recall pass-

words, speeding up the digital checkout experience

while improving security. With the mobile identity

check, the cardholder verifies their identity by using

the fingerprint scanner on their smartphone or via

facial recognition technology by taking a “selfie”

photo.

This technology is already available in 12 European

markets and will be rolled out in the rest of the

world in the next couple of years.

In addition, Ingenico, one of the market leaders in

terms of POS terminal production, responded to

the need for biometric authentication by launching

a POS terminal with a fingerprint scanner, and

recently expanded to developing countries, such as

Ghana, to serve the under- and unbanked popula-

tion.

the decrease in europe’s venture capital market is

particularly linked to the United Kingdom european Union membership referendum (“Brexit”)

8

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payments Insight. Opinion.

Following in Ingenico’s footsteps, the TagPay plat-

form, which recently received USD 1 million in seed

capital, makes the creation of a solid network of

agents in developing countries possible that offers

mobile financial services to the unbanked. The

technology provided by TagPay allows agents to

leverage facial recognition and sound-based tech-

nology to facilitate KYC procedures and mobile

payment activities.

Going back to take a closer look at the summer gap:

the “Brexit” can be considered as one of its major

causes, since, in the past, the UK held a pivotal role

in the European venture capital environment as a

hub for both investors and FinTechs.

The free movement of labour between the UK and

the EU and the concentration of resources and

incubators attracted the best and most talented

human capital in Europe to London. They came

bearing advanced software skills, creativeness and

expertise, which are central requirements for top

tech start-ups. The plans to withdraw from the EU

may cause a brain drain that could significantly

lower innovation in London.

Apart from the human capital factor, some major

financial institutions such as JP Morgan are consi-

dering a relocation of their investment banking

department to other financial metropoles in Europe,

such as Dublin, Frankfurt or Paris. As a result, we

may see a long-term structural change in this

formerly thriving investment behaviour. Other

European capitals, like Berlin, could conceivably

become the new start-up hubs.

Furthermore, from the investees’ perspective, the

Brexit could have unintended repercussions. Valen-

tin Stalf, founder and CEO of Number26, a FinTech

company that raised USD 40 million in a B round in

Q2 2016, said that the uncertainty caused by indis-

tinct regulation will have a deep impact on the mar-

ket. The Berlin-based company announced that it

will scale back its plans to focus on the UK market.

For the rest of 2016 and start of 2017, uncertainty

and political changes will continue to shape the

venture capital market.

North America will be strongly influenced by the

presidential elections in November and the results

could drastically affect the volume of funding

rounds in the last quarter of the year.

However, at the end of the day, “the show must go

on” despite drastic changes and grave uncertain-

ties. Consequently, North America and Europe, and

especially the UK, will go through a stabilizing

period in which both investors and investees will

need to reassess the new reality. Asia, in the other

hand will continue to “pump up” its giants, after

which is likely to see a consolidation period.

Very large and more mature deals were especially closed in

asia. 3 out of the top 4 investments in terms of funding volume were signed in asia, which shows that the asian payment Fintechs continue the growth path

PE

Series B

Series B

Series C

N/D

Venture

Series B

Series B

Venture

Series C

the biggest equity financing rounds in Q3 2016 have been closed particularly by alternative payment systems

Most recent financing volume  totel financing volume

Alternative payment systems

Other

Payment acceptance devices + Software

Alternative payment systems

Money transfer

Security

Security

Payment acceptance devices + Software

Payment acceptance devices + Software

Alternative payment systems

uSD m

figure 4: top 10 Investments in Q3 2016 by disclosed value

60

55

45

40

39

21

19

18

15

15 37

21

62

87

16 61

94

585

127

100

21

40

20

15

52

39

525

3

0

0

9

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payments Insight. Opinion.

Date Announced

Target Company Country TC Industry Buyer(s) (Country) Country Transaction 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 management services

Next Group Holdings USA N/D

3 06/07/16 GuestLogix  Canada Provides onboard merchandising, payment and business intelligence technology delivered to the passenger travel industry

USA N/D

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 processes for companies

Relyco USA N/D

6 11/07/16 Starmount USA Provides modern store systems provider serving large and mid-market retailer

Infor USA N/D

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 portfolio)

USA Provides clothing and items for children Alliance Data Systems USA N/D

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 the financial market

HID Global Sweden N/D

11 21/07/16 PayStar USA Provides FIs with merchant, remittance and payroll services suite

Net Element USA N/D

12 21/07/16 Nexcharge USA Operates a proprietary payment processing, fraud management and merchant management platform

Net Element USA N/D

13 21/07/16 VocaLink United Kingdom

Provides electronic financial payment services MasterCard USA 1,148.6

14 25/07/16 Outerwall USA Provides movie and video game rental kiosks as well as coin-cashing machines

Apollo Capital Management USA 1,600

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 services

FleetCor Technologies USA N/D

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 from alcohol or drug addiction

True Link Financial USA N/D

22 10/08/16 Transfercredit France Provides account and international mobile top-up credit transfer services

Ding Ireland N/D

23 12/08/16 FC Exchange United Kingdom

Provides international money transfer and payment solutions

Global Reach Partners United Kingdom

N/D

24 18/08/16 Bitnet Technologies United Kingdom

Provides Bitcoin services Rakuten Japan N/D

25 30/08/16 Pay2Global United Kingdom

Provides digital international money transfer services TerraPay United Kingdom

N/D

26 01/09/16 Income Access Group Canada Provides digital marketing software and solutions for the iGaming industries

Paysafe United Kingdom

30.6

27 01/09/16 Emric Sweden Provides software solutions for the credit processes of finance companies

Tito Finland 35.0

m&a Deal activity Q3 2016

10

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payments Insight. Opinion.

Date Announced

Target Company Country TC Industry Buyer(s) (Country) Country Transaction value (USDm)

28 02/09/16 Grass Roots United Kingdom

Provides employee- and customer-engagement solutions Blackhawk Network USA 117.9

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 of all types

Applied Merchant Systems USA N/D

32 13/09/16 EyeVerify USA Provides software that allows authentication via cameras on mobile devices

Ant Financial China N/D

33 14/09/16 Tonic USA Provides sandboxed JavaScript environment Stripe USA N/D

34 16/09/16 iCheque United Kingdom

Develops disruptive and secure online payment systems CashFlows United Kingdom

N/D

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

11

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payments Insight. Opinion.

Target (Country) Round Volume (USDm)

Investor(s) Funding (USDm)

Description

1 One97 Communications (India)

60.00 MediaTek Inc. 585.00 One97 runs an online platform through which users can shop or pay utility bills.

2 Ripple Labs (United States) B 55.00 Accenture, CME Ventures, Santander InnoVentures, SBI Investment, SCB Digital Ventures, Seagate Technology LLC, Standard Chartered Bank, Venture51

93.60 The peer-to-peer and virtual currency protocol Ripple can be used globally to make transactions in any available currency.

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)(United States)

Venture 1.46 IMJ Investment Partners Pte. Ltd 2.16 Californian MOVO provides payment tokens to enable P2P transfers at POS & NFC payment terminals.

venture capital activity Q3 2016

12

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payments Insight. Opinion.

Target (Country) Round Volume (USDm)

Investor(s) Funding (USDm)

Description

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, Rothenberg Ventures, White Star Capital

0.77 Toronto based Drop is a mobile-based loyalty platform.

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 (Singapore)

Venture MDI Ventures Red Dot Payment enables merchants and financial institutions to provide complete end-to-end payment solutions for their customers worldwide.

42 Onfido (United States) Venture 9.00 Charlie Songhurst, Hank Vigil, Salesforce Ventures, Talis Capital

30.30 Onfido offers identity verification service, that helps to reduce fraud significantly.

13

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payments Insight. Opinion.

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