Why Investors Love Payment Facilitators Right Now

The payments industry has long been characterized by growth – a solid investment led by solid companies that earned a steady stream of recurring revenue by moving money around the world.

But in recent years, investor interest in payments is booming. According to Pitchbook data quoted by CNBC, the market drew $18.5 billion from investors in 2018 – more than five times the previous year’s amount.

Payment facilitators have been at the center of that trend. Companies from Razorpay and Checkout.com to Stripe and Klarna have all made headlines with big funding raises in the last year.

To learn more about why, we talked with Ryan Goldenberg, a vice president at LLR Partners, which is an active investorin the payments market. 

According to Goldenberg, a confluence of factors has led to the active market we’re experiencing today. First, there is the much-discussed consumer shift, where consumers are being conditioned to increasingly expect frictionless payment experiences. This demand has driven change across markets, opening the door for new providers to create better experiences at the point of sale for all merchants, from hair salons to plumbers to yoga studios. 

The second, related factor that has led to the boom in payment facilitators is the huge opportunity that still exists within payments. Only one-third of small and medium-sized businesses in the U.S. currently accept payment cards, Goldenberg said. 

Traditional payments providers have already reached larger businesses, but smaller businesses have been more challenging and costly for those providers to serve. So how do you reach those millions of businesses? 

“You have to have a better mousetrap,” Goldenberg said. “You have to have a good, comprehensive product offering.”

“The farther down market, the smaller the business, the harder it is to get those folks to adopt software or electronic payments acceptance. So, you have to be vertically focused. And that’s where the opportunity lies,” he said 

Smaller business owners have fewer resources to devote to payments. That results in a customer who just wants to run a business effectively without having to deal separately with equipping their business to accept electronic payments. As a result, companies that began to integrate payments with other business management tools into simple, complete solutions have developed a model that was much more compelling for these businesses. 

“It is becoming harder and harder for a one-dimensional merchant services provider to be competitive,” Goldenberg said. “Just providing payments or just providing software is OK, but if you can provide them together, that’s really what unlocks a broader segment of the marketplace.”

“It’s bringing together software and payments with an integrated solution, with a vertical focus, and enabling a one-stop shop for the business to have a holistic solution at the point of delivery or the point of sale.”

A huge market has sprung up in response to this demand. The payment facilitator model was built on this concept of simplifying payments acceptance and integrating payments into software and other business solutions. And the model is attractive to existing payments businesses and entrepreneurs alike, Goldenberg said. 

So now, a public Mastercard registry of payment facilitators lists more than 1,000 businesses globally. 

“It’s difficult for these small companies to get beyond a certain point,” Goldenberg said, “because you need external capital at some point to accelerate growth. You need technology, relationships, and professional management. So, a lot of people can get into the business and build a very nice lifestyle business, but if you look at the landscape of payment processing and merchant services providers, there’s only a handful that are really big.” 

The size and fragmentation of this market presents an opportunity to investors to consolidate smaller companies and build scale, he said. And that’s what firms such as LLR Partners are doing. 

“We look for durable and visible business models, and payment processing and software certainly fit that mold,” he said.

LLR has put this theory to the test most recently with the launch of Celero Commerce. Celero has acquired four companies since it was formed in December.  

“Since the day I got here, we’ve been trying to figure out how we could build an integrated commerce solutions business,” he said. “It took time, it took the right acquisition targets, and most importantly it took the right team. LLR partnered with Kevin Jones, current president of the ETA, to form Celero Commerce.”

Other payments industry investments for LLR include Phreesia, a healthcare payment facilitator that went public just last month. And while the firm has been investing in the industry since a deal with Heartland Payment Systems in 2001, Goldenberg says there is plenty of room left for more, referring back to that enormous greenfield opportunity represented by SMBs.

“When I think about payments, I think about the concept that every single business on the planet needs to exchange money,” he said. “In theory, the market is infinite, and it certainly is large enough.”