#payments insights. opinions. volume 18...open apis in banking #payments 5 volume 18 central banks...

Open APIs in banking: an Asia-Pacific (APAC) perspective

Open application programming interfaces (APIs) facilitate data sharing for financial institutions through the use of external-facing interfaces that allow unaffiliated parties to access data, such as transaction history, product catalogs and service-related functionalities. Legislation in the EU has resulted in the design and implementation of mandated open API standards for the banking industry. The UK has taken the lead on being the first to implement and will be delivering beyond the requirements set out by the EU’s Payment Services Directive 2 (PSD2). Will these standards form the basis of eventual global standards, or should we expect a more commercially driven evolution of open APIs for the banking industry across APAC?Continued on page 3

#paymentsinsights. opinions.

Volume 18

» As regulators in APAC begin to define

industry guidance on open API banking, we anticipate more banks developing individual and shared open API propositions to leverage collaborative solutions to respond quicker to competitive pressures and rising customer expectations.

Open APIs in banking: an Asia-Pacific (APAC) perspective As global standards for an open API framework emerge, how will the APAC financial ecosystem develop its own open architecture propositions?

Editorial

Dear readers,

I am often asked to clarify what defines the current “FinTech moment.“ After all, technology change has long been a driver in financial services — so, what’s new? Four factors stand out — a dramatic decrease in the cost of computing power, a wider access to more capital, a change in customer expectations, and an evolving regulatory and policy environment.

What connects the world of payments with these FinTech drivers? In simple terms, payments is the area of financial services with which consumers and businesses have the greatest interaction. Moreover, it’s clear that many nontraditional financial services firms view payments as the anchor functionality (or platform) upon which to build ecosystems of services, both financial and nonfinancial. This is perhaps most evident in APAC as major e-commerce, messaging and on-demand service providers move laterally into financial services — with payments at the core.

This edition of our #payments quarterly provides insights from around the world about key payment-related initiatives. We at EY welcome the global dialogue these articles will generate.

Best,

James Lloyd Asia-Pacific FinTech Leader

3

7Payments as a driver for industry convergence Payments play a key role in the convergence of previously divergent market sectors. This provides new opportunities for banks and payment service providers.

Venture Capital roundup Q3 2017 was characterized by an increasing number of initial coin offerings, and a strong focus on alternative payment systems and security solutions.

Transaction overview M&A and Venture Capital

10

12

14

M&A roundup Deal volume in the payment industry reached a new peak in the second quarter of 2017, exceeding US$25.9 billion.

Banks need to incentivize customers to continually share

personal data.

Open Banking API

Privacy and security are concerns. Banks will need to screen companies

accessing its API to ensure data protection.

Open Banking API

1

3 4

2Third-party providers connect their applications (apps) to a bank’s open API. Some regulators are promoting standardization to ensure that the process is simple for FinTechs and developers to connect.

No special agreement is required for these providers to test data in a sandbox or have basic access to open APIs.

A customer uses a third-party app to request a service from its bank (e.g., customer data, a transfers or payment from its account). The request is sent via the API.

Bank systems automatically send data and payment confirmation to the app via API, once the request has been received.

Open

Banki

ng A

PI

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Open APIs in banking: an Asia- Pacific (APAC) perspectiveContinued from page 1

Propelling digital transformation in APACDevelopments fostering open API development across APAC include: • Competition from new players: APAC is

emerging as a global force in e-commerce, led by China which is already the world’s largest retail e-commerce market, with around 47%1 of the global digital retail sales. The emergence of firms such as Alibaba and JD.com, as well as their respective financial subsidiaries, along with the proliferation of FinTech start- ups and entry of challenger banks are increasingly encroaching onto the space of traditional banks. Digital banks such as WeBank and MyBank are offering customized services, streamlined lending processes and innovative credit-rating assessments, and are capturing customers from incumbents. Such firms are succeeding, in part, by leveraging best- in-class API architecture.

• Regulatory directives: Another factor lowering entry barriers for non-traditional

1 Source: www.emarketer.com/Article/China-Eclipses-US-Become-Worlds-Largest-Retail-Market/1014364

Source: Adapted from: “BBVA Puts its APIs into the Wild,” *Business Insider (common API elements), May 2017 – www.businessinsider.com/bbva-puts-its-open-apis-into-the-wild-2017-5

Figure 1: Common elements in API banking

players is the facilitative regulatory environment. While regulatory mandates and objectives differ across markets, in general, financial markets are increasingly accessible to FinTechs as regulators seek to drive efficiency and promote competition. We also note more instances of increased global knowledge sharing and collaborations, which result in progressive APAC regulators emulating global best practices and similarly instituting their own legislations and time lines for open API development. We anticipate active development of open API policy frameworks across key APAC markets.

• More exacting customer requirements: As typical banking customers in APAC become increasingly sophisticated and digitally connected, they expect to seamlessly embed financial services into their daily lives. Ideally, consumers want their banks to not only provide readily accessible financial information and offerings, but to do so unobtrusively and

without friction across multiple distribution channels, applications and interfaces. This process, which often requires numerous collaborations, is greatly facilitated by an open API architecture.

While traditional banks may be starting from a position of strength, given their established branding, expertise and customer portfolios, they are increasingly facing competitive pressure, regulatory mandates and escalating customer expectations. One way they can respond is by migrating to more agile architectures. This involves opening up their APIs to external developers to cocreate solutions that can drive customer-centric designs and omni-channel experiences, thereby enhancing customer’s user experience.

Regional developmentsGlobal adoption has been somewhat disparate to date — largely, a consequence of regulatory divergence:

• Developments are most structured in the EU, as retail banks actively implement API initiatives ahead of the EU Commission’s PSD2. This regulation comes into effect from January 2018, requiring banks to permit third-party providers to access their data and systems through an API framework.

• The UK’s Open Banking Standard applies specifically to many of the principles set forth in PSD2. The country’s nine largest retail banks have been tasked with standardizing current account and product data to permit access by registered third parties in line with the PSD2 time frame.

• Conversely in the US, the lack of a centralized approach to data governance has resulted in ad hoc partnerships, as large banks experiment with commercial Open Banking platforms and open up systems to share data with individual partners.

Open APIs in banking

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Banks should consider open APIs to respond quicker to competitive and regulatory pressures, and rising customer expectations.

An Asia-Pacific (APAC) perspective

Figure 2: Regulatory trends for Open Banking APIs

Countries most actively moving toward Open Banking API legislation or partnerships

Countries actively moving toward Open Banking API legislation or partnerships

Countries steadily moving toward Open Banking API legislation or partnerships Source: EY, 2017

EU• EU Member States have until January 2018 to

transpose the Regulatory Technical Standards into national law

• EU PSD2 to include payment initiation and account information services by 2018–19

• EU General Data Protection Regulation (GDPR) to enhance consumer rights to access data by 2018 UK

• UK Competition and Markets Authority (CMA) requires major UK banks to fund, adopt and enable APIs beginning Q2 2017.

• Banks have spent around £1 million each to create open APIs, according to Britain’s Open Data Institute.

US• US FinTechs established the Consumer Financial

Data Rights (CFDR) lobby group calling banks to provide customer data access via APIs.

• Leading US banks, such as Bank of America, Wells Fargo and Citigroup, are implementing some form of API strategy while deciding how to align their global footprint in anticipation of PSD2 regulations.

India• The Indian Government has mandated an open

API policy as part of its Digital India initiative.• This gives third party providers (TPP) access

to the propriety software for five key programs: Aadhaar for digital identity, e-Know Your Customer (e-KYC), e-signing, privacy-protected data sharing and Unified Payments Interface.

China (mainland)• Open Banking in China is not driven by

regulation, but by the aggressive plans of tech giants (e.g., Ant Financial) and insurers (e.g., Ping An) interested in entering the financial industry. For instance, Ant Financial not only provides connectivity to its Alipay system, but leverages proprietary data for third parties, such as Sesame credit scoring and Sesame facial recognition.

• Some major banks have stared exploring Open Banking mainly to improve user experience.

Hong Kong• The Hong Kong Monetary Authority (HKMA)

aims to finalize its policy on open APIs for the banking sector by the end of 2017.

Japan• In March 2017, Japan’s Cabinet proposed

revisions to the banking law for banks to open up their APIs.

• It will also introduce a banking API user registration system by 2018.

Australia• The Australian Treasury will develop a

framework that binds banks to an API-based data-sharing regime, defining data security, privacy controls guidelines and penalties for noncompliance.

Singapore• The Monetary Authority of Singapore (MAS)

has been a key advocate of an “API economy” and enabler of FinTech start-ups.

• The Association of Banks in Singapore (ABS) and the MAS released their Finance-as-a-Service: API Playbook in 2016 to provide high-level guidelines for API standardization.

Malaysia• Bank Negara Malaysia (BNM) is exploring an

open API for technology developers to tap into shared data.

Countries will likely emulate the European Banking Authority (EBA) Regulatory Technical Standards to achieve open API milestones. These include:• Establishing an alpha/beta program with internal/external partners on the basis of a banking assets and services review • Initiating a sandbox program to deploy APIs in a live secure environment and offer banking products for a fee in the future• Providing onboarding to enhance customer engagement, track usage rates and employ quality surveys to measure impact on customer experience


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Central banks in select APAC countries have begun instituting regulations or at least pro-vide guidance on open API banking. An Asia-Pacific (APAC)

perspective

In APAC, most jurisdictions are largely taking a cautious approach to open API banking with institutions awaiting clearer regulatory guidance. Nonetheless, some jurisdictions like Australia, Singapore, Hong Kong and India are driving forward:

• The Australian Government has announced that it will introduce an Open Banking regime, and has commissioned an independent review to recommend the best approach to implement it. The review is to file its report by the end of 2017. A recent issues paper draws a distinction between Open Banking and open data. Open Banking enables the customer to direct that they, or elected third parties, be provided with pre-determined parts of their banking data in a secure environment and in a prescribed way, so that it can be used to offer them new or better services.

• The MAS, working with the ABS, released a financial industry API playbook in November 2016 identifying common and useful APIs for the industry and cross-sectoral stakeholders. The playbook also provided guidance on information security standards and governance models for financial institutions and FinTech players. We anticipate additional announcements in line with the city-state’s drive to become a “smart city.”

• The HKMA is currently consulting industry practitioners to formulate a framework for facilitating the development of open APIs. The regulator believes that the wide adoption of an open API framework would promote collaboration between banks and tech firms — a crucial element for stimulating innovations and improved services for customers in Hong Kong. A policy framework is expected by the end of 2017.

• The Indian Government has taken a high-impact approach by mandating an open API policy as part of its Digital India initiative, stepping in to provide central infrastructure for the issuance of biometric digital identities (Aadhaar). This next-generation government service accelerates open API banking by giving developers access to government proprietary software for authentication, secure e-storage of banking documents in a centralized database, e-signature features, a unified payment interface for mobile financial transactions, and

privacy-protected data sharing. Open architecture benefits Customer value creation and revenue generation: Data sharing via APIs enables banks to collaborate and innovate at scale with a wide community of developers, extend offerings beyond their traditional reach and generate additional sources of income. Specifically, utilizing the developer community to build on existing applications and cocreate greater value propositions for customers not only increases convenience and retention, but delivers deeper insights to identify cross- and up-sell prospects.

Examples from APACEarly adopters of open API banking in APAC include Citibank regionally, Oversea- Chinese Banking Corporation (OCBC) in Singapore, National Australia Bank (NAB) in Australia, and both DBS Bank and YES Bank in India:

• OCBC launched its developer portal for an array of APIs, ranging from account balances to product details, transaction status and calculators, to enable developers to integrate OCBC banking products and services in their solutions.

• Similarly, in early 2017, NAB in Australia started its developer portal with an API each for branch and ATM locations, and one for foreign exchange rates, allowing approved developers to plug into the bank’s data for testing and possible integration in their own systems.

• Citibank, meanwhile, introduced the Citi API Developer Portal in selected Asian markets to connect directly with the developer community on features such as account management, person-to-person (P2P) payments, money transfer and investment purchases, and to keep pace with the increasingly agile banking needs of customers.

• DBS in Singapore regularly organizes API hackathons to engage with start-ups and integrate their solutions in its systems via open APIs. This has enabled DBS’ Digibank, India’s first mobile-only bank, to leverage emerging technologies from FinTechs, such as conversational commerce start-up Kasisto, customer analytics start-up Moneythor and digital solution provider V-Key.

• In India, YES Bank has been driving API collaborations, including one with e-commerce platform SnapDeal. For instance, YES Bank’s API corporate payment gateway enables auto reconciliation to reduce the turnaround for customers’ refunds for purchases on SnapDeal from three days to one hour.


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Open APIs for payments are most common, but can be applied to cross-sell, perform con-sumer analysis and manage risk. An Asia-Pacific (APAC)

perspective

Li-May Chew

James Lloyd

Marc Entwistle

Jan Bellens

From these use cases, cocreating higher customer value through open architectures for fund transfer and digital payments appears particularly valuable. In addition to delivering on seamless, faster and cheaper money transfers across banks and applications, data sharing also allows banks to experiment with transformative technologies, such as blockchain, artificial intelligence (AI), identity systems and the internet of things (IoT), within their payment systems.

Beyond traditional financial offerings, banks are increasingly collaborating with partners from adjacent industries to cross-sell non-traditional solutions. Banking APIs are being used to integrate with APIs from disparate providers (such as payment APIs integrated with travel, retail or wearable fitness APIs) to create innovative apps for travel insurance and lifestyle services that help drive a more holistic customer experience. Banks are also utilizing social APIs for consumer sentiment analysis to identify potential sales opportunities or quickly address customer satisfaction issues.

Standardization and risk management: Besides the aforementioned benefits from extended customer reach and revenues, open API banking also allows banks to:• Incorporate standardized APIs to

facilitate easier integration between

internal and partner systems. Such standardization not only enables them to comply with emerging regulatory norms and more easily collaborate on various projects in tandem with multiple third parties. It also helps to reduce integration and maintenance costs for new apps.

• Enhance risk mitigation by outsourcing processes, such as the creation of a merchant interface for redeeming loyalty program points, or a client-servicing API to request customer service feedback. These are data-heavy and error-prone activities potentially best managed by third-party providers.

• Improve services by consolidating customer accounts into one visual analytical dashboard for a holistic snapshot of their bank engagement to identify additional sales opportunities. Analyzing a full set of customer data also makes it possible to detect anomalies in their financial service usage patterns to help identify and mitigate fraud and money laundering.

The opportunities for traditional (and non-traditional) financial service providers to benefit from an open API framework are immense, at both a national and cross-border level. Banks and FinTechs in the UK and Europe are already responding to

these opportunities with new services and innovative solutions. Ever-rising customer expectations combined with evolving regulatory mandates are set to transform the banking landscape. As national, regional, and potentially global standards begin to emerge, we will see banks and regulators across Asia-Pacific develop individual and shared open API propositions. These help to truly leverage collaborative solutions designed for today’s digital ecosystem. One thing is certain: open APIs will drive the future of banking.

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Payments as a driver for industry convergence

Today’s industries are dramatically changing — increasing digitization and new business models have transformed industries and will continue to do so. At the same time, boundaries between previously disconnected industry sectors are disappearing, spurred by the rapid advancement of new technology alongside changes in consumer preferences and behavior. These trends have opened up doors for incumbents and new players from different industries to collaborate and cocreate new value and growth opportunities in the respective markets.

New convergent services and ecosystems are evolving by merging distinct technologies and integrating services from disparate industries to create a unified new service. In terms of payments, convergence refers to a drawing together of worlds in which payments are used, e.g., banking, transportation, ticketing and commerce.

Payment services foster industry convergencePayment services have fueled the convergence of various industries. Proliferation of convergence is increasing where large, established customer bases can be leveraged, using payments as a connector or facilitator, or existing frictions are removed by the new service.

Payment services that are part of a unified cross-industry offering are typically initiated by entrants from other market sectors, and are developed, operated and commercialized jointly with financial institutions.

However, as convergence continues apace, the new entrants are gradually expanding their financial service capabilities and resources to capture more value. For instance, the Norwegian telecom company Telenor, after initially establishing a mobile payment system in Serbia, has taken the next step toward offering comprehensive banking services by acquiring KBC Banka

in 2013 together with Société Générale. AliPay, the payment service of AliBaba, the Chinese e-commerce giant, has more than 450 million users and has obtained a share of 54%2 of the mobile payments market in China.

AliBaba has consolidated AliPay and all its financial service activities into a full-scale bank under the brand Ant Financial. This demonstrates the potential for large retailers to make the transition into banking. This is massively challenging the existing financial service players and shapes the payments and retail financial services market.

Regulatory initiatives around the world like Open Banking and instant payments are tearing down existing market barriers in the payments industry. At the same time, new global payment systems are evolving outside of the traditional financial providers’ and banks’ ecosystems. Players of any kind, such as merchants, telecoms, insurance companies, utilities, car manufacturers or social media platforms, increasingly have the opportunity to facilitate their own payment processes. This will fuel cross-sector convergence but, at the same time, lead to more players encroaching on the territory of traditional banks and payment providers.

Figure 3: Examples of converging industries accelerated by payment services

Source: EY Innovalue research

Telecom and bankingTelecoms leveraging their large customer basis and the mobile device market penetration to provide mobile banking services for the non- and underbanked customers

Social Media and retailSocial media platforms increasingly moving from an advertised-centric to a commerce business model with a fully integrated payments functions (also used for social payments and commerce) an leveraging again transaction data for personalized offers

E-commerce and consumer finance”Pay later” option to pay in installments to be selected by the customer with “one click” at the online shopping checkout process to increase appeal especially among younger generations

Transport and travelA variety of options, such as single payment for multi-modal journeys, pay-as-you go transportation or electronic tolling providing convenience and removing frictions within the transportation and travel sector

Automotive and telematicsCar manufacturers offering in-car purchase (e.g., for parking, telematics solutions and car functionalities)

Travel and insuranceSituation — and location-based on-demand insurance with an instant payment solution

2 Source: Mary Meeker s 2017 Internet Trends Report (p. 219; p. 223)

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Convergence: new opportunities for payment providersConvergence can be a substantial lever for growth for banks and other payments players. New convergent ecosystems built upon payments and payment-related capabilities are appealing for new market shapers and leaders. By mixing their capabilities with players from other industrial ecosystems as well as challenging established market assumptions, offers front-running payment providers the opportunity that the new whole (ecosystem) is greater than the sum of its parts. For successful ecosystem builders there is substantial value available — high network and platform value, customer and ecosystem party lock-in along with reduced/shared risks and resources to create these new markets.

Convergence provides new opportunities for payment players.

However, to reap the potential benefits of becoming a leader in a new ecosystem or entirely new market, a new and innovative way of thinking is required. It will no longer be sufficient to view payments as a utility proposition — commoditized, undifferentiated and scale-driven. In fact, payments have already begun to be more than just a transaction settlement or a transfer of funds.

Converged payments offerings are strategic, value-adding solutions that incorporate the broader commercial and transactional context within which a payment takes place, for instance, electronic tolling, in-car purchases of telematics services or single ticketing for multi-modal travel journeys. Also payment-proximate services such as

Payments fueling industry convergence

consumer financing (pay later) or currency exchange are increasingly becoming part of the basis upon which payment providers develop enlarged value propositions.

The payment options available to consumers will quickly increase and bring new opportunities for converged services and digital platforms: virtual and crypto currencies are expected to gradually replace physical money. Customers have started to recognize the value of their personal data and are seeking compensation for sharing them. Consequently, payments are likely to evolve over time into a concept of “value transfer” whereby, non-monetary values, such as loyalty, time, or customer consent

to use transaction or behavioral data, will

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become increasingly accepted as “payment” in

exchange for goods and services. Payment

data are a key part of a customer profile and a

behavior indicator. Shared payment data

are a significant asset enabling new service

opportunities from financial advisory to health

guidance.

It should be noted that we are evolving into

an era of ubiquitous payments — where

consumers can pay in various ways through

any internet-connected device located

anywhere. These appliances are programmable

to automate specific transactions and help

create an ecosystem of value-added services.

Call for action

Observing the pace of convergence

development, banks and payment

providers need to adapt to the disruptive

movement of industry convergence, and

create new sources of revenue, as fees from

facilitating pure payment transactions are

likely to be significantly eroded.

To stay relevant and be successful in the

future, banks and payments providers need to:

• Take a strategic, holistic perspective on payments — also considering “payment-proximate” activities

• Identify markets, business areas and services where payments are a crucial aspect

• Evaluate and prioritize viable options as to where and how to play

• Define the required business enablers

• Allocate resources and investments to craft and deliver value-added solutions and products related to payment flow, with consistent and well-designed customer experience as the main guideline

• Explore new partnership models, including strategic cross-industry alliances with players that have not been considered before to get access to new customer bases and partnerships with financial technology companies (FinTechs)

Successful payment providers of the future will put themselves into the driver seat, move fast and take action today. Those that hesitate risk being left behind.

Payment players need to take a leading role in creating new converged services and markets.

Kai-Christian Claus

Andreas Kornowski

Torben Ottens

Payments fueling industry convergence

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M&A roundup

M&A activity and deal characteristicsA total of 38 M&A transactions were announced in the third quarter (Q3) of 2017. This level of activity is in line with the 36 deals in Q3 2016. After a slight increase in the number of deals in the second quarter (Q2) 2017,6 Q3 saw a moderate decline. The financial terms of 15 transactions were disclosed in Q3 2017, amounting to a total volume of US$26.0 billion. This represents a 570% increase over the Q3 2016 deal volume.7, 8

The deal volume in Q3 2017 was driven primarily by four large transactions within the acquiring and acceptance segments of the payments market. These deals were split equally among trade buyers and private equity investors. In the largest deal of the quarter, which amounted to 44% of the total volume, the leading US merchant acquirer Vantiv acquired Worldpay, the leading European merchant acquirer and online payment services provider. This acquisition values Worldpay at implied enterprise value of US$11.5 billion — a revenue multiple of 7.5x and an earnings

On the basis of transaction value, deal activity within the payments industry increased in the third quarter of 2017, following a decrease in the second quarter of the year. In Q3 2017, a total of 38 deals were reported globally, with a total disclosed value of US$26.0 billion. The acquisition of UK-headquartered WorldPay, Europe’s largest merchant acquirer,3 by Vantiv, the largest US-based merchant acquirer, stands out since it involves two of the largest global players in the payments industry and features the second-largest enterprise value transacted since the fourth quarter of 2014.4, 5

before interest, taxes, depreciation and amortization (EBITDA) multiple of 19.6x. This transaction is expected to increase Vantiv’s global scale, solidify its position as the largest global merchant acquirer ahead of First Data, and allow it to expand into Europe and gain access to Worldpay’s processing platform and global e-commerce payment processing capabilities.

The second-largest deal involving a corporate acquirer was the acquisition of Bambora by Ingenico at an implied enterprise value of US$1.75 billion and a 8.2x revenue multiple. Bambora was launched in 2015 as a result of the combination of payment businesses Euroline, KeyCorp, Samport, MPS, DK Online and ePay, all acquired by Nordic Capital.9 Bambora has more than 700 employees and serves 110,000 merchants across the Nordics, Australia, New Zealand, Canada and the US. The business provides acquiring and acceptance services for offline and e-commerce payments.10 For Ingenico, the transaction is another strategic step toward an increased focus

3 Source: The Nilson Report. According to the report, Vantiv processed 21.2 billion purchase transactions worldwide in 2016.

4 The largest enterprise value recorded in the EY M&A Payments tracker was the sale of Visa Europe for approximately US$23.1 billion.

5 Sources: EY M&A Payments tracker6 In the last edition of the newsletter, the M&A article

tracked the deals until 13 March 2017. Q2 2017 numbers quoted in this edition include the full Q2 2017.

7 Sources: EY analysis, Bloomberg, CapitalIQ, company websites, Mergermarket

8 Deal volume is based on the implied enterprise value as recorded by CapitalIQ or other publicly available sources.

9 Sources: www.nordiccapital.com/portfolio/ case-studies/bambora/

10 Sources: www.ingenico.com/press-and-publications/press-releases/finance/2017/07/ingenico-ramps-up-its-transformation-acquisition-of-bambora.html

Figure 4: Targets by segment (in percentage)

Payment acceptance devices plus software

Processing Issuing Alternative payment systems

Money transfer Acquiring Data analytics Couponing/loyality Other includes security, ATM and commerce

2017Q3

8

5

11

29 2017Q2

13

8

21

33

Sources: EY Innovalue, Capital IQ, Mergerstat M&A Database, company websites.

Figure 5: M&A market development

Number of transactions Disclosed value (in US$ billion)

30

25

20

15

10

5

0

50

40

30

20

10

02016Q3 2016Q4 2017Q1 2017Q2 2017Q3

3.9

36

3.4

19

5.5

45

4.0 26.0

4638

Figure 6: Median enterprise value multiples

EBITDA multiple Revenue multiple

16x

14x

12x

10x

8x

6x

4x

2x

0 2013 2014 2015 2016 2017

3.7

14.5

2.8

14.7

3.5

13.1

2.3

10.6

3.3

14.9

Figure 7: Targets by region (in percentage)

North America Europe Asia

Middle East and Africa (MEA) Oceania South America

2017Q333

8

55

21

2017Q2

5

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on merchants’ needs, and diversifying from hardware toward software, payments processing and acceptance services. According to Ingenico, Bambora will enhance the group’s technology assets, expand its distribution channels via a direct-to-SME channel, and increase the group’s scale and omni-channel payment capabilities in Europe.

In the largest private equity payments deal of the quarter, US-based fund Hellman & Friedman, along with a group of co-investors, launched a takeover of Nets, the leading payment processor and merchant acquirer in the Nordics. Nearly one year ago (September 2016), Nets’ private equity owners, Advent, Bain Capital and Danish pension fund ATP, publicly listed the company at a value of US$4.5 billion.11 The proposed deal values Nets at an implied enterprise value of US$6.4 billion, an EBITDA multiple of 19.8x and a revenue multiple of 5.5x, and is the largest European leveraged buyout (LBO) transaction since March 2013.12 Nets’ new owners are aiming to benefit from the growth of digital payments across the Nordics and are expected to perform additional bolt-on acquisitions.

In another private equity takeover, CVC Capital Partners and Blackstone launched a bid to acquire the UK-based online merchant acquirer and payments processor Paysafe. The proposed acquisition would represent a 3.8x revenue and 15.1x EBITDA multiple on the basis of an implied enterprise value of US$4.0 billion.

Strategically, it is also worth noting the move by Global Payments to up the ante in integrated payments with its US$1.2 billion purchase of Active Network. This follows a string of independent software vendor (ISV)-related acquisitions by Global’s peers and private equity buyers, and represents a bold move to go deeper into the business management software value chain.

The median EBITDA multiple for all deals year-to-date increased from 10.6x in 2016 13 to 14.9x in 2017. The median revenue multiple for the same period increased from 2.3x to 3.3x.14 Investors are constantly assessing the potential disruptive nature of target companies in the payments sector as well as the growth prospects of the electronic payments industry and the proliferation of online payments. This

The deal volume in Q3 was driven by four large transactions within the acquiring and acceptance segments of the market.

results in the revision of their valuations which is leading to a diverse range of multiples across deals in the market.15

In Q3 2017, 55% of the targets were based in Europe, followed by 21% in North America and 8% in Asia. The four largest deals of the quarter involved European targets. We expect this trend to continue over the next quarters, should the current wave of consolidation in the highly fragmented European payments landscape retain its pace.

Andreas Habersetzer

Markus Massem

M&A roundup

Apostolos Psaras

11 Sources: www.bloomberg.com/news/articles/2016-10-04/nets-losses-since-ipo-prompt-deutsche-to-take-stabilizing-steps12 Sources: www.ft.com/content/53c55e28-a11c-11e7-9e4f-7f5e6a7c98a213 This includes all deals in 2016.14 Transaction multiples are based on implied enterprise value, EBITDA and revenue data sourced primarily from Capital IQ.15 Sources: EY analysis, Bloomberg, CapitalIQ, company websites, Mergermarket

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Funding activityIn the third quarter of 2017, 44 companies raised US$1.0 billion in funding, of which US$36.4 million was debt financing (4% of the total). The number of announced deals remained flat compared with the previous quarter, but the total investment value decreased by 48%. However, Q2 2017 volume was inflated by the US$1.4 billion financing round received by Paytm in Q2 2017.16

While Q2 was characterized by a propensity toward investment in early-stage companies, Q3 has seen a slight shift toward more mature businesses and a rise in initial coin offering activities (discussed below).17

Geographically, in line with the previous quarter, 50% of total investment activities in Q3 2017 (based on the number of transactions) took place in North and Central America followed by Europe and Asia.18

Investment trendsAs forecasted, investor interest in alternative payment systems and security FinTechs continued to grow throughout Q3 2017. Additionally, there has been increasing interest in payment processing companies.19

In line with the attention garnered by alternative payment systems, the largest deal of the quarter was landed by Klarna with a US$250.0 million private equity investment. Frequently mentioned in our newsletters, Klarna provides alternative payment methods and check-out solutions to merchants and consumers. In June 2017 they received a full banking license from the Swedish Financial Supervisory Authority, becoming the largest European FinTech company to receive such authorization.20 Klarna currently serves 60 million customers, 70,000 merchants and handles 650,000 payment transactions per day across Europe.21

Venture Capital roundup

16 Source: EY analysis, Crunchbase, companies’ newsletters17 Source: EY analysis, Crunchbase18 Source: EY analysis, Crunchbase19 Source: EY analysis, Crunchbase20 On the basis of total funding amount.21 Source: EY analysis, Crunchbase, Permira’s newsletter, TechCrunch, FT

Figure 9: Investment by region (in percentage)

North and Central America Asia Europe

Middle East and Africa (MEA)

Oceania

2017Q35

25

20

50

2017Q2

Figure 10: Deals by funding stage (in percentage)

3

52

2016Q4 2017Q1 2017Q2 2017Q3

37

13

33

13

89

23

11

7

9

30

14

27

10

23

1625

23 36 23

Funding stages: Other C A D/E B Venture seed

Figure 8: Venture Capital deal

Number of investments Disclosed value (US$billion)

2,000

1,750

1,500

1,250

1,000

750

500

250

0

50

45

40

35

30

25

20

15

10

5

02016Q4 2017Q1 2017Q2 2017Q3

30

505 753 1,938 1,006

40

44 44

#payments 13

Volume 18

The funds were injected by Permira, a private equity firm with total committed capital of approximately €32 billion. Permira acquired a 10% stake in the Swedish company, bringing its value to US$2.5 billion. As a consequence of the investment, two existing stakeholders, General Atlantic and DST, sold their shares in Klarna.22

Beyond such deals, there is an emerging trend that aims to disrupt the way funds are raised. This new fundraising activity is known as an initial coin offering (ICO).

An ICO is an unregulated practice aimed at raising funds for a new cryptocurrency venture, and is used by start-ups to bypass the more rigid and complex fundraising processes led by venture capitalists. In an ICO, a newly issued cryptocurrency is sold to financiers in exchange for legal tender or other cryptocurrencies. This practice also solves the basic problem of how to initially distribute the new cryptocurrency.

The ICO process starts with the issuance of a whitepaper by the cryptocurrency start-up. The whitepaper contains key information on the company’s plan, how much money the start-up is looking to raise, what share of the cryptocurrency (also called virtual tokens) the company’s founders will retain, what kind of money is accepted (most often both fiat currency and Bitcoin) and how long the ICO campaign will last.

Initial financers are incentivized to purchase the cryptocurrencies, driven by the expectation that the start-up will be successful and the value of the cryptocurrency will increase over time.

Despite some successful initiatives, such as the Ethereum project (whose cryptocurrency, Ether, was worth US$0.4 in 2014 and increased to approximately US$290 at end of September 2017), ICOs are considered risky activities and can be fraudulent. In September 2017, first China and then South Korea banned ICOs because of concerns over potential financial scams.

Overall, in 2017, we have noticed a shift from pure consumer front-end solutions, such as payment acceptance devices and money transfer solutions, to more complex front- and back-end solutions, such as alternative payment and security systems.

Over the next 12 months, increased clarity around PSD2 is expected to help define the competitive landscape in the industry. This might lead incumbent players to proactively seek investments in providers of innovative product, data analytics and data security solutions. Existing FinTechs should be looking to scale up and seek additional financing rounds to exploit this industry opportunity.

Interest in alternative payment systems and security solutions has continued through Q3 2017.

22 Sources: EY analysis, Crunchbase, Permira’s newsletter, TechCrunch, FT

Venture Capital roundup

Andreas Habersetzer

Markus Massem

Edoardo Cenci

Figure 11: Investment sectors

2016Q4 2017Q1 2017Q2 2017Q3

17

30

10

20

1327

36

25

8

1136

8

7

11

7

15 14

17 35 30 18

Money transfer Security

Alternative payment systems Payment acceptance

Other Processing Issuing

5

3

4

5

25

5

#payments 14

Volume 18

M&A Transaction overview

Q3 2017

Date announced

Target company Country Target company industry Buyer(s) Country Transaction value (US$m)

1 19 June 2017 Fortune Payment Solutions

India Provides electronic payment platform solutions and services to acquiring banks and merchants in India

Ezetap Mobile Solutions

India

2 20 June 2017 Europass France Provides WeChat payment solutions Global Blue Switzerland

3 21 June 2017 MOL Global Malaysia Operates a payments platform that facilitates online and mobile commerce in Malaysia and internationally

ZV-Midas Singapore

4 22 June 2017 Vindi Brazil Provides a cloud-based subscription billing and loyalty marketing platform in Brazil

Smartbill Brazil

5 27 June 2017 PayThru South Africa

South Africa Operates a cloud-based payment gateway which integrates mobile devices

DPO South Africa South Africa

6 29 June 2017 Safepak US Manufactures electronically monitored deposit retrieval systems and ATM security products

BranchServ Sys-tems Integration

US

7 29 June 2017 Green Net Administradora de Cartão

Brazil Develops a payment system for electronic payment shipping of freight

Amaggi Exportação e Importação and Louis Dreyfus Company Agrícola

Brazil

8 30 June 2017 EURO 6000 Spain Operates a bankcard network in Spain ServiRed, Sociedad Española de Medios de Pago

Spain

9 30 June 2017 Magellan France Develops software for secure electronic payment transactions

Keyware Technologies

Belgium 11.4

10 4 July 2017 Arjo systems France Provides electronic ID (e-ID) solutions ASSA ABLOY Sweden

11 5 July 2017 Worldpay UK Provides payments processing technology and solutions for merchant customers

Vantiv US 11,527.3

12 5 July 2017 Docdata Payments

Netherlands Provides online payments for web shops, retailers, brands, and start-ups in Europe

CM Telecom Netherlands

13 5 July 2017 Chip and PIN Solutions

UK Offers card processing services Valitor Iceland

14 6 July 2017 Paysbuy Thailand Provides payment gateway services, sales and software solutions

Omise Thailand

15 6 July 2017 Buckaroo Netherlands Provides online billing and payment services to e-commerce clients

Blackfin Capital Partners

France

16 10 July 2017 Grupo Synthesys Argentina Provides software for point-of-sale (POS) and electronic payment solutions

Linx Sistemas E Consultoria

Brazil 25.8

17 11 July 2017 Transact Payment Gibraltar Issues MasterCard, and Visa physical and virtual prepaid cards

Neptune International

UK

18 17 July 2017 Brighterion US Develops software solutions for real-time fraud prevention, predictive intelligence, risk management, anti-money laundring (AML) and know your customer (KYC) compliance, and homeland security intelligence

Mastercard US

19 18 July 2017 Digital River World Payments

Sweden Provides online payment processing solutions Worldline France

20 18 July 2017 Secure Bill Pay US Develops healthcare payment software Ability Network US

21 20 July 2017 Bambora Sweden Provides card acquiring, payment processing, infrastructure, and additional services to merchants

Ingenico France 1,746.8

22 21 July 2017 Delta Card Services

US Provides merchant payment processing services Paysafe UK 470.0

#payments 15

Volume 18

Date announced


23 21 July 2017 Paysafe UK Provides online processing of direct debit, credit card, and alternative payment services to businesses and individuals

CVC Capital Partners Limited; The Blackstone Group L.P.

UK & US 4,013.7

24 25 July 2017 First Data Baltics Lithuania Provides outsourcing services, such as interbank clearing and switching, issuing processing, and value-added service (VAS)

Worldline France 85.1

25 25 July 2017 Pagfacil LTDA Brazil Operates as a payments network for the unbanked and underbanked

The Brink's Company

US

26 26 July 2017 Giocard network business from VOB-ZVD

Germany Provides debit card payment processing services SIX Payment Services

Switzerland

27 27 July 2017 Accelyst Solutions and Freecharge Payment Technologies

India Owns and operates a website that provides online recharge and bill payment services

Axis Bank India 60.0

28 1 Aug. 2017 Santander Elavon Merchant Services Entidad de Pago

Spain Provides payment processing services for merchants Banco Santander Spain

29 3 Aug. 2017 Active Network US Provides cloud-based software, including payment technology solutions, to event organizers in the communities, and health and fitness segments

Global Payments US 1,206.6

30 3 Aug. 2017 Contovista Switzerland Offers an analytics engine providing structured data in the areas of personal finance management, business analytics and marketing

Aduno Switzerland

31 4 Aug. 2017 Pocket Card Japan Provides credit card services in Japan FamilyMart Co and GIT Corporation

Japan 170.2

32 8 Aug. 2017 Spectrum Financial Group

UK Provides in-house cash management services through the issuance of cards

FAIRFX Group UK 20.1

33 9 Aug. 2017 KaChingpay.com Canada Develops a smartphone-based payment and money transfer system where consumers purchase tokens for their digital wallets

Bitcoin Crypto Curreny Exchange Corporation

US

34 10 Aug. 2017 Aduno Switzerland Provides credit and debit card payment terminals SIX Payment Services

Switzerland

35 10 Aug. 2017 First Data Resources South Africa

South Africa Provides online payment processing services Bidvest Bank South Africa

36 10 Aug. 2017 Tarjetas Regionales

Argentina Issues payment cards and processes consumer loan operations, and credit card transactions

Grupo Financiero Galicia

Argentina

37 14 Aug. 2017 TransferMate Ireland Provides an online payment platform for international money transfers

Unknown buyer

38 18 Aug. 2017 Virtual Card Services

South Africa Engages in developing and implementing credit, debit and smart card processing systems for major card issuers

Direct Pay Online Kenya

39 21 Aug. 2017 Dovetail Group Ireland Provides a payment services hub for the processing of batch and individual payments on a single platform

Fiserv US

40 21 Aug. 2017 SIA Transferta Latvia Offers money transfer services Money Express Latvia

41 23 Aug. 2017 Cardtech Card & POS Service

Germany Operates an electronic cash network Concardis Germany


Q3 2017

#payments 16

Volume 18

Date announced


42 28 Aug. 2017 Meontrust Finland Provides security solutions to online services and their users for two-factor authentication, transaction authorization and other use cases

Inside Secure France 6.0

43 30 Aug. 2017 Cashstar US Provides digital gift cards Blackhawk Network US 175.0

44 31 Aug. 2017 SmartPay Holdings

New Zealand Designs, develops and implements payments solutions, and electronic fund transfer at point of sale (EFTPOS) solutions in New Zealand and Australia

Pemba Capital Partners

Australia 46.1

45 14 Sep. 2017 Posera Fingerprint POS

Canada Provides POS for restaurants SICOM Systems US 10.0

46 25 Sep. 2017 Nets Denmark Provides digital payment services and related technology solutions

Advent International, Bain Capital Private Equity, Fisher Lynch Capital, GIC Special Investments, Hellman & Friedman, Sampo, StepStone Group

US, UK, Finland and Singapore

6,430.6

47 27 Sep. 2017 Rezzcard US Owns and operates a rent-payment platform Mobility Capital Finance

US


Q3 2017

#payments 17

Volume 18

Venture Capital

Date an nounced

Target Country Round Financial volume(US$m)

Total funding(US$m)

Lead investor

Market segment

Description

1 4 July 2017 Instarem Singapore B 13.00 18.00 GSR Ventures Money transfer

Provides money transfer services for individuals and businesses

2 4 July 2017 Previse UK Seed 2.60 2.60 Hambro Perks

Data analytics

Develops and offers a proprietary AI solution that supports instant payments between corporate and SMEs

3 6 July 2017 Payfit France B 15.90 21.50 Accel Partners

Other Provides a platform for small and medium enterprises to easily and quickly pay their employees

4 7 July 2017 Orb Japan N/D 1.30 3.59 Mitsui Sumitomo Insurance Venture Capital

Alternative payment systems

Develops and manages CoinPass Kessei, a bitcoin payment service for electronic commerce

5 10 July 2017 PayStand US Venture Undisclo-sed

2.36 LEAP Global Partners


Operates an electronic payments portal

6 11 July 2017 Revolut UK B 66.00 81.06 Index Ventures


Develops a mobile application that allows users to exchange currencies at interbank rates, send money through social networks and spend with a multi-currency card

7 11 July 2017 Curve UK A 10.00 12.00 Santander Innoventures


Offers an all-in-one card that enables customers to consolidate all existing cards and accounts in one card with just one PIN

8 12 July 2017 Innoviti India B 18.00 24.60 SBI-FMO Fund Payment acceptance devices plus software

Develops payments processing, credit distribution and payments management software solutions

9 13 July 2017 SelfLender US Venture 3.42 5.48 Alternative payment systems

Enables customers to join the self-lender community, select their monthly payment and term-length options, and make auto payments

10 17 July 2017 Pillar Project Switzerland N/D 21.00 21.00 Alternative payment systems

Pillar provides cryptocurrency and token wallet services

11 18 July 2017 Form3 UK A 5.00 5.00 Angel CoFund Processing Delivers cloud-based connectivity, payment processing, clearing and settlement services

12 19 July 2017 Karmic Labs US B 17.20 24.90 Arbor Ventures

Other Provides payment and expense management solutions

13 21 July 2017 Klarna Sweden Venture 250.00 636.85 Permira Payment acceptance devices plus software

Provides alternative e-commerce payment solutions for merchants and shoppers

14 21 July 2017 Tianxiapay Technology

China N/D 22.17 22.17 Shanghai Noah Investment Management


Operates a third-party payment processing platform in China

15 24 July 2017 Everex One Singapore N/D 0.50 0.50 Holley Group Alternative payment systems

Develops a blockchain-based online payments suite, which offers cash transfer and micro- lending services, as well as an e-wallet for cryptocurrency

16 24 July 2017 Glance Technologies

Canada N/D 0.24 1.74 Alternative payment systems

Develops and operates mobile payment processing software and smartphone applications

Transaction overview

Q3 2017

#payments 18

Volume 18

Date an nounced


Total funding(US$m)

Lead investor

Market segment

Description

17 25 July 2017 B-Secur Ireland Seed 4.56 8.42 Accelerated Digital Ventures

Security Develops ECG biometric software to secure devices, data and applications that reads an individual’s unique heartbeat pattern through their fingertips to verify a user’s identity

18 27 July 2017 Callsign UK A 35.00 38.50 Accel Partners

Security Intelligent-driven authentication that minimizes the impact of data breaches and allows password - less access to services

19 28 July 2017 Marqeta US D 25.00 71.27 Visa Issuing Provides prepaid, debit and credit cards

20 28 July 2017 Securrency US Debt 0.20 0.20 Payment acceptance devices plus software

Develops financial technology platform for digital currency

21 31 July 2017 Tierion US N/D 25.00 26.00 Security Provides an API and tools to collect data and anchor it in the blockchain

22 1 Aug. 2017 UnifyID US A 20.00 20.00 New Enter-prise Associates

Security Develops identity applications on the basis of implicit authentication

23 3 Aug. 2017 MobiKwik India N/D 35.36 162.21 Bajaj Auto Finance


Operates a mobile payments network that connects users with retailers

24 8 Aug. 2017 Waypay Canada Debt 0.15 0.15 500 Start-ups Processing Operates as a payment platform for businesses

25 17 Aug. 2017 breadwallet LLC

US Venture 7.00 7.00 DAS Capital Ltd.


Designs, develops and operates a bitcoin wallet application

26 23 Aug. 2017 Ezetap India D 16.00 51.00 JSCapital Payment acceptance devices plus software

Provides mobile point-of-sales payment solutions in India

27 30 Aug. 2017 BitPesa Kenya A 4.25 10.00 Greycroft Partners

Money transfer

Operates an online platform that leverages blockchain settlement, and opens corridors for business payments and trade between Africa and the rest of the world

28 30 Aug. 2017 Domuso US Venture 3.10 7.30 David Kim Alternative payment systems

Provides a software platform that enables flexi-ble payments for the rental industry

29 5 Sep. 2017 Forgerock US D 88.00 140.17 Accel Partners

Security Provides digital identity management solutions

30 6 Sep. 2017 Dataiku US B 28.00 45.70 Battery Ventures

Data analytics

Develops Data Science Studio, the tool that lets data scientists and analysts do machine learning on any (dirty) data

31 7 Sep. 2017 Synergy Commerce

US N/D 35.00 35.00 Providence Strategic Growth Capital Partners

Processing Designs, develops and provides payment processing solutions for businesses

32 7 Sep. 2017 Network Merchants

US N/D Francisco Partners


Provides payments enablement technology to independent sales organizations (ISOs), VARs, ISVs and payment facilitators

33 11 Sep. 2017 Red Dot Payment

Singapore B 5.20 10.40 Payment acceptance devices plus software

Develops and provides online payment processing and gateway solutions in Asia

Venture Capital Transaction overview

Q3 2017

#payments 19

Volume 18

Date an nounced


Total funding(US$m)

Lead investor

Market segment

Description

34 12 Sep. 2017 Pineapple Payments

US Venture 35.00 35.00 PSG Equity Processing Designs, develops and provides payment processing solutions for businesses

35 13 Sep. 2017 Yaypay US Venture 5.30 6.20 QED Ventures Other Provides solution that enables to accept payments through Automated Clearing House (ACH), eChecks, credit cards and PayPal

36 13 Sep. 2017 Vapulus Egypt A 0.25 0.25 Arabian Venture Forum


Provides online and mobile payment solutions

37 14 Sep. 2017 Cashshield US A 5.50 5.50 GGV Capital Security Operates an enterprise risk management company that helps companies manage their risks from fraudulent payments and hostile accounts

38 18 Sep. 2017 Incorta US B 15.00 27.62 Kleiner Perkins Caufield & Byers

Data analytics

Aggregates complex business data in real time using Direct Data Mapping architecture

39 19 Sep. 2017 GoCardless UK D 22.50 47.30 Accel Partners

Processing Provides online payment processing services to businesses

40 19 Sep. 2017 Luno Singapore B 9.00 13.80 Balderton Capital


Provides bitcoin wallet and exchange

41 21 Sep. 2017 Raise US C 60.00 60.00 Accel Partners


Operates an online marketplace to buy and sell gift cards

42 21 Sep. 2017 Activehours US B 39.00 65.10 Andreessen Horowitz


Develops a smartphone-based application that enables hourly workers to get paid early when they need it

43 21 Sep. 2017 iZettle Sweden Debt 36.00 271.51 European Investment Bank (EIB)


Operates a mobile payments company providing portable point-of-sale solutions and free sales overview tools

44 27 Sep. 2017 Pivotal Payments

Canada Venture Novacap Payment acceptance devices plus software

Leading provider of technology-driven global payment processing solutions to the point of sale, business to business (B2B) and e-commerce industries

Venture Capital Transaction overview

Q3 2017

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