DeutscheBank FITTThePandemic'sLastingTrendsintheNewFinTechWorld Apr 21 2022

Deutsche Bank
Research
North America Industry Date

United States 20 April 2022
FITT
TMT FITT Research
Payments, Processors, & IT
Services
The Pandemic's Lasting Trends in the

New FinTech World
Bryan Keane
Research Analyst
+1-415-617-4246
Nate Svensson, CFA

Research Associate
+1-801-787-2204
Hersh Shintre
Research Associate
+1-212-250-9042
Johannes Schaller
Research Analyst
+49-69-910-31731
Nooshin Nejati
Research Analyst
+49-69-910-61797
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Distributed on: 20/04/2022 23:01:14 GMT
F.I.T.T. for investors
Deutsche Bank Securities Inc.

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware
that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report
as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED
IN APPENDIX 1. MCI (P) 051/04/2022.
For the exclusive use of Aman Agarwal (aman.agarwal@dcadvisory.in) at Daiwa Corporate Advisory LLC
7T2se3r0Ot6kwoPa
20 April 2022
Payments, Processors, & IT Services
FITT
Deutsche Bank Securities Inc. Page 1
Deutsche Bank
Research
North America Industry Date

United States 20 April 2022
FITT
TMT FITT Research
Payments, Processors, & IT
Services
The Pandemic's Lasting Trends in the

New FinTech World
Bryan Keane
Research Analyst
F.I.T.T. for investors +1-415-617-4246
Embedded finance platform taking form Nate Svensson, CFA

Embedded finance is becoming the post-pandemic operating model as FinTechs Research Associate
look to embed payments as well as financial products (e.g., loans/BNPL, insurance, +1-801-787-2204
etc.) into the commerce experience, pushing more toward contextual commerce Hersh Shintre
and finance. Beyond the significant BNPL opportunity from embedded finance, the Research Associate
process of payments becoming more seamless should further accelerate the shift +1-212-250-9042
to omni-channel commerce. In addition, data-driven services, such as those in open Johannes Schaller
banking (e.g., Plaid, Finicity, Aiia) and hybrid debit/credit solutions (e.g., AFRM Research Analyst
Debit+), should further expand potential use cases and product offerings. +49-69-910-31731
Furthermore, as we push into a post-pandemic era, we believe that FinTechs will
Nooshin Nejati
shift their focus toward driving higher inflows, engagement, and platform cross-
Research Analyst
selling in order to raise RPU. We also expect B2B payments through AR/AP +49-69-910-61797
automation and ePayments to continue recording strong demand. FinTechs that
can prove they are sustainably better off post the pandemic, that can achieve rising Top Picks
RPU/engagement and opportunity for higher take rates and monetization, and that
Affirm (AFRM.OQ),USD37.03 Hold
have a strong path toward future profitability with limited credit risks (appearing
PayPal (PYPL.OQ),USD103.66 Buy
more like a FinTech vs. a financial institution) should continue to be favored, in our
Global Payments Inc.
view. In addition, we believe that payment companies that were deemed as Buy
(GPN.N),USD144.60
"legacy" last year could see renewed interest, due to their strong earnings and FCF
AvidXchange (AVDX.OQ),USD8.88 Buy
capabilities. As a result, we believe that SQ, BILL, GPN, and V/MA are best
Western Union (WU.N),USD19.24 Hold
positioned, and we reiterate our Buy ratings on those stocks.
Source: Deutsche Bank
Bringing the sale to the merchant and owning the network

As FinTechs continue to build out their complementary platforms, they are
increasingly focusing on owning the consumer relationship and bringing the sale
to the merchant, which increases their relevance in the ecosystem and creates the
potential for higher take rates. BNPL providers (like AFRM and Afterpay) have built
strong connections to consumers and merchants by offering them embedded
finance solutions (e.g., "pay in 4", 0% loans, and interest-bearing loans). As a result,
they have been able to build direct merchant relationships, leveraging both white-
label BNPL offerings as well as branded solutions, due to the significant value
proposition namely higher conversions and ticket sizes. In addition, they have built
their own networks, starting by owning the commerce shopping experience (e.g.,
AFRM Marketplace), where we see other FinTechs (such as SQ and PYPL)
Deutsche Bank Securities Inc.

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware
that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report
as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED
IN APPENDIX 1. MCI (P) 051/04/2022.
20 April 2022
FITT
expanding through Afterpay and Honey, driving product discovery and helping gain
a higher checkout share. Owning the consumer relationship is particularly
important in the younger demographic (where Cash App, Venmo, and AFRM/
Afterpay operate), as this demographic offers the best potential LTV for each
customer.
Higher inflows drive cross-selling opportunity

FinTechs leverage direct deposits, tax filing, and P2P transfers in order to drive
inflows, and they leverage embedded finance (including BNPL) as well as
cryptocurrency, banking/investing services, and bill pay in order to accelerate
engagement. Capturing inflows and moving beyond core capabilities in order to
cross-sell them into multiple products drives compounding platform benefits.
Inflows from direct deposits and tax filings (e.g., Cash App Taxes and PYPL's
partnership with TurboTax) create usable balances in the ecosystem, and
complementary spending, sending, and investments (e.g., cards, P2P, and crypto
trading) keep the funds revolving around the platform. Therefore, diversification
beyond core checkout into complementary products and services is critical for
maintaining and gaining share in the long term. Product innovation and
diversification through cross-selling synergy benefits can be organic and/or
acquired. For example, SQ's acquisition of Afterpay has provided significant cross-
selling opportunity and network effects across the company's ecosystems.
Similarly, BILL acquired Divvy and Invoice2Go in order to complement its existing
core software automation business in spend management and in order to expand
internationally. We also believe that PYPL has strong cross-selling assets in its
super app and that it could benefit from a strategic acquisition.
Optimizing product pricing to accelerate ROI and RPU

Building a cohesive ecosystem not only involves providing a full suite of omni-
channel payment and financial services, it also entails creating synergies and
network effects between the offerings, as well as balancing customer acquisition
costs (CAC) with pricing and monetization in order to deliver the best customer
experience while minimizing churn and maximizing the revenue opportunity.
Across the ecosystem, product pricing must promote further engagement while
monetizing volumes and striking a balance between customer acquisition costs
(CAC), return on investment (ROI), and revenue per user (RPU). FinTechs must
monetize engagement on products that are offered for free (or at a low cost) by
driving usage of complementary products and services at a higher cost and take
rate to the merchant and consumer. Having multiple solutions with various price
points (based on the speed or convenience of the service) can drive ecosystem
pricing optimization. SQ offers sellers and consumers the ability to use their funds
and balances through card spending (namely Cash Card) instantly and for free, but
it charges for Instant Deposits, which promotes inflow cross-selling opportunities,
as the funds are retained in the ecosystem. However, FinTechs must balance the
benefits of higher pricing with potential offsets (like friction and churn) in order to
drive optimized platform monetization as well as optimized customer experience
and retention. We note that selling higher-value services drives higher take rates.
B2B players (like BILL) have significant opportunities for take-rate expansion
through higher-monetization offerings – like virtual cards, instant deposits, and
cross-border FX.
20 April 2022
FITT
Table Of Contents
Top 20 FinTech Trends Outlasting the Pandemic................7
Moving Beyond Payments into Embedded Finance ......... 14

Merchants rapidly adopting embedded finance..............................................14
Building the Super App of apps.......................................................................14
AAPL Working to Bring Embedded Financial Services In-House.....................19
Maximizing inflows..........................................................................................19
Cross-selling products.....................................................................................21
Pivoting To Commerce Enablement.................................................................22
Expanding into affiliate marketing...................................................................26
RTP Use Cases Expanding Rapidly...................................27

Understanding the rapidly evolving RTP landscape.........................................31
RTP taking off in the US market.......................................................................34
China a mature RTP market.............................................................................38
Faster payments in Brazil: an opportunity for FinTechs ................................... 39
Global interoperability ..................................................................................... 41
Real-time payments adoption is accelerating..................................................42
Massive B2B opportunity.................................................................................47
Building infrastructure for RTP use cases........................................................47
FinTechs leveraging real-time payments..........................................................50
FIs driving new revenue opportunities in RTP use cases ................................. 52
Payment processors could benefit from real-time payments...........................53
Open banking initiatives creating opportunity.................................................54
Monitoring disintermediation risks..................................................................56
Opportunities and Threats in Open Banking.....................57

Top open banking highlights............................................................................58
Evolution of Open Banking..............................................................................60
Regulatory Impetus A Key Driver.....................................................................61
Moving Beyond To Open Finance .................................................................... 61
European Open Banking Readiness.................................................................62
Latest Developments in Open Banking............................................................64
FinTechs taking advantage of permissioned account access .......................... 69
Networks supporting multi-rail strategy..........................................................73
Role Of Acquirers In Open Banking ................................................................. 74
Banks attempting to thwart competition.........................................................76
Latest Developments in BNPL..........................................79

DB global BNPL projections.............................................................................84
Pricing pressure for low- and high-AOV transactions......................................85
BNPL payment flows.......................................................................................86
Debit+ hybrid card and Adaptive Checkout.....................................................88
MA Installments brings multirail to BNPL........................................................92
Visa exploring BNPL projects...........................................................................93
Networks battling disintermediation ............................................................... 94
AFRM partnership with AMZN ........................................................................ 94
Page 4 Deutsche Bank Securities Inc.
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Table Of Contents
Curve Flex, a new BNPL solution.....................................................................95
Klarna rapidly expanding footprint and services..............................................95
Upgrade â€“ a growing new FinTech providing responsible credit..................96
AAPL dipping a toe into BNPL.........................................................................96
Merchant Acquiring in the Spotlight ................................ 98

Integrated payments and software ownership ................................................ 98
Payment Facilitator model gaining prominence ............................................ 100
Disintermediation risks overstated ................................................................ 102
Risks and opportunities in open banking.......................................................102
Limited threat of disintermediation from BNPL.............................................102
FISV merchant growth expected to accelerate..............................................103
Leveraging Crypto Interest to Drive Engagement...........106

Crypto keeps growing in popularity...............................................................106
Crypto investments and trading.....................................................................107
Crypto purchases still in early stages.............................................................108
Emerging uses in decentralized finance ........................................................ 109
PYPL leveraging crypto for inflows and engagement....................................111
FinTechs getting into stablecoins .................................................................. 113
Central Bank Digital Currencies (CBDCs).......................................................113
Regulatory Issues In Crypto...........................................................................114
Survey Shows Increased Focus on Engagement............116

Key survey takeaways....................................................................................117
Survey demographics....................................................................................120
Understanding mobile payment app usage...................................................120
Survey shows strong interest in Cash App and Venmo ................................. 125
BNPL app insights ......................................................................................... 133
Crypto interest in the spotlight ...................................................................... 136
B2B Payments Accelerating Post Pandemic...................139

B2B payments are one of the hottest trends in FinTech.................................140
Monitoring key trends in B2B payments........................................................141
Breaking down the B2B revenue opportunity................................................144
Analyzing higher-monetization offerings.......................................................145
Understanding the AP automation opportunity.............................................148
AR/AP automation is displacing manual processes.......................................149
Driving adoption of higher-monetization offerings........................................153
Cross-Border B2B Payments are Accelerating...............................................155
RTP opportunities in B2B payments .............................................................. 158
B2B Go-to-Market Strategies.........................................................................165
Competition in the B2B Market ..................................................................... 167
AR/AP Automation Companies......................................................................167
Payment Software Companies with Material B2B Exposure ......................... 173
Incumbent Payment Companies....................................................................178
Evolving Regulatory Landscape ..................................... 181
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Table Of Contents
Increasing FinTech scrutiny ........................................................................... 181
Growing regulatory scrutiny of BNPL ............................................................ 181
Debit interchange..........................................................................................182
Open banking a potential beneficiary of increased regulation.......................183
Monitoring Cross-Border Travel......................................184

Travel volumes beginning to inflect ............................................................... 184
Surveys show pent-up demand for travel ...................................................... 186
Tracking Trends in Retail Sales and eComm...................187

Tracking the recovery in small business ........................................................ 188
E-commerce spending strong ....................................................................... 191
Deutsche Bank global e-commerce projections............................................193
Monitoring Consumer Credit..........................................196

US credit card delinquency data....................................................................196
BNPL securitization delinquencies ................................................................ 197
Keeping an Eye on Private FinTech Growth .................... 198

Stripe: Growing the internet economy...........................................................198
Challenger banks and alternative/POS lenders..............................................207
B2B................................................................................................................210
Crypto............................................................................................................215
Payments infrastructure ................................................................................ 216
20 April 2022
FITT
Top 20 FinTech Trends

Outlasting the Pandemic
Although the pandemic high helped to propel some digital trends (e.g., the adoption
of e-commerce and unprecedented small business/consumer stimulus packages,
which are starting to fade), continued systemic changes should result in sustained
increases in adoption and engagement. For example, a recent survey by Plaid
showed that 59% of Americans use more apps to manage money now than before
the pandemic, and >76% of consumers say that they expect to maintain increased
engagement with digital services. As a result, the focus has shifted toward finding
growth companies that are, in fact, sustainably better off post the pandemic and
toward value plays that have been beaten down by what we believe to be (in many
cases) unwarranted concerns over disintermediation . FinTechs that can continue
to simultaneously accelerate net adds, engagement, and monetization after the
pandemic while minimizing credit exposure (appearing less like a financial
company and more like a tech company), and those that can also show a path
toward future profitability are best positioned, in our opinion. We also believe value
plays that can prove they are not losing share to upstarts and that have strong
recurring business models with high earnings and FCF generation should continue
to be more favored over "growth for the sake of growth" in the new post-pandemic
era. Below, we highlight what we believe to be the top 20 key trends in FinTech.
1) Embedded finance enabling consumer experiences

Embedded finance is about meeting the customer where the financial service is
needed. For example, AFRM partners with merchants to bring its embedded
finance solutions (namely Split Pay, 0% APR, and interest-bearing loans) to
consumers when they checkout online. Similarly, SQ acquired Afterpay in order to
go after the embedded finance opportunity through BNPL, and PYPL has expanded
beyond PYPL Credit into "Pay in 4", further addressing the embedded finance
opportunity. We note that embedded finance drives new customer acquisition as
well as increased engagement, delivering opportunities for both FinTechs and
merchants. In addition, higher engagement and adoption of financial products can
drive significantly higher revenue per user (ARPU), accelerating growth rates for
FinTechs. Embedded finance not only makes the consumer experience more
seamless, it also increases conversions and ticket sizes for merchants – particularly
for large, discretionary purchases. We estimate that embedded finance could drive
>$250bn in net new revenue for FinTechs by 2025.
2) Focused on bringing the consumer to the merchant

Not only do FinTechs aim to become the consumer/merchant's trusted partner and
financial advisor, they also strive to be the conduit for everyday shopping needs and
experiences. FinTechs are moving beyond payments and up the value chain into
commerce enablement in order to create better economics by bringing their
captured consumer base to the merchants themselves (creating a better value
proposition for merchants), moving more toward an affiliate model with higher take
rates and potential profitability. In the process, they are creating their own
networks, addressing both the consumer side and the merchant side and becoming
part of the full value chain from start to the finish along the shopping journey. For
example, AFRM has its own commerce platform, and FinTechs like PYPL are
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FITT
leveraging their assets and acquisitions (e.g., Honey) in order to drive commerce
enablement in browsers and apps. As another example, SQ acquired Afterpay, and
it could leverage the combined company to expand into its own network and
commerce enabler.
3) Expanding ARPU by monetizing new products and inflows

Being able to expand beyond core competencies into new innovative products and
services that drive higher average revenue per user (ARPU) through better
engagement and/or monetization of new revenue streams is key for driving share
gains. SQ has proven itself as a product innovator, now pivoting to Block, which
includes Square, Cash App, Tidal, and TBD. In particular, Cash App had four
products with >$200m of annual gross profit in FY21, including Instant Deposits,
Cash Card, Cash for Business, and Bitcoin (up from >$100m across each product
in FY20). We also note that despite continued strength in Cash App's monthly active
users (MAUs) (up by ~20m over the past two years), its ARPU has expanded by ~$23
over the same period to ~$47, and new products should further expand ARPU in the
future (e.g., Cash App Taxes and Square Photo Studio). Meanwhile, PYPL plans to
focus on driving higher engagement and ARPU in order to drive sustainable top-line
strength going forward, and it showed strong engagement growth (excluding eBay)
of ~18% in 4Q21. BILL also continues to drive accelerated ARPU expansion via
increased engagement and higher-monetization offerings.
4) Supplementing growth with M&A cross-selling opportunities

With many FinTechs facing difficult comps and/or slowing growth rates due to
stimulus and e-commerce pull-forward, strategic acquisitions with significant
cross-selling opportunities could help to supplement growth, scale, and ubiquity.
BILL acquired Divvy in spend management and Inoice2Go (I2G) in order to expand
mobile-first capabilities in AR automation – both of which offer significant cross-
selling opportunities, expansion into new adjacencies, and geographic expansion
over time (I2G is ~60% international). In addition, SQ acquired APT to expand into
BNPL, which we believe will create significant cross-selling opportunity. Although
PYPL has had more limited success with recent acquisitions and expanding into
new revenue streams beyond core checkout, we believe that an acquisition that
could provide strong cross-selling opportunities could help to drive more
accelerated future share gains and growth rates.
5) Brand recognition drives pricing power

FinTechs with strong brand recognition and a two-sided consumer and merchant
value proposition have the ability to leverage pricing in multiple ways to drive
enhanced future revenues. For example, products and services offered for free can
be useful customer acquisition tools to get funds into the ecosystem and drive
engagement with monetizable products and offerings. In particular, offering
multiple levels of service, with faster products being monetized and slower
products being free, strikes the right balance between customer acquisition and
product monetization – where we believe SQ has been an innovator. In addition,
FinTechs with multiple products have the ability to leverage higher pricing on one
product in order to drive higher usage of another product. For example, we believe
that SQ could raise pricing on Instant Deposits, driving incremental revenue but
lowering demand for products and pushing more adoption of Cash Card to allow
faster access to funds, potentially driving better payment velocity around the
ecosystem. PYPL recently raised pricing for small merchants on its platform, and it
increased pricing for small crypto transactions, pricing its suite of products to its
value proposition.
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6) Focused on lowering CAC

Customer acquisition cost (CAC) is an important metric for identifying a successful
FinTech, as CAC increases over time as companies scale. Early-stage FinTechs tend
to have low CACs due to their digital-first models, and social platforms which allow
them to grow organically, as well as their ability to create value and improve
consumer lifestyles. The level at which FinTechs are successful in scaling while
keeping CAC low determines their LTV opportunity. Variable margins, driven by
expanding ARPU, must ultimately outweigh true CAC, and companies that fit this
profile are well positioned. Social/P2P payments remain one of the best ways to
drive efficient user growth and lower CAC. However, emerging capabilities
surrounding crypto trading/purchases have gained significant interest, with the
potential to become meaningful future ARPU and engagement drivers.
7) Networks positioned in RTP to drive growth

Real-time payments (RTP) have driven significant use case expansion as well as
revenue opportunities for FinTechs and networks. With FinTechs, challenger banks,
tech firms, FIs, and payments processors all competing for share, we view V/MA as
being best positioned to benefit as the rails behind RTP. V/MA are taking share of
FinTech, FI, and payment processor volumes by investing in infrastructure in order
to support RTP expansion. They benefit from FinTechs' disruption of traditional
banking through digital wallets and RTP expansion into new monetizable use cases.
They should also benefit from increased competition, with FIs quickly expanding
into RTP, leveraging payment processors (like FIS and FISV for Same-Day ACH and
Zelle/Popmoney for P2P payments). We estimate that new flows and value-added
services from RTP could contribute 7-8ppts to revenue growth for V and MA over
the next few years, with the potential to accelerate top-line growth by ~2-3ppts.
8) Data services opening opportunities in open banking

With an estimated market for open banking consumer payments of ~$903m in
revenue through 2025, we believe that the larger opportunity in open banking is in
emerging FinTech use cases, such as improved underwriting and account
aggregation, which we estimate could represent ~$21.2bn over the same period.
Open banking players (like Plaid, Finicity, Aiia, Tink, Railsbank, Credit Kudos and
Truelayer) are driving use case adoption by FinTechs such as Venmo, AFRM (e.g.,
Debit+), and Stripe for data services. We emphasize our belief that open banking –
including data calls and account-to-account payments (A2A) – is more likely to drive
positive tailwinds for V and MA rather than create a threat. Alternative rails for open
banking are relatively non-existent, and we believe that V and MA have the best
solutions available, having successfully competed with closed-loop domestic
payments and ACH schemes historically. In addition, their acquisitions of Finicity,
Aiia, and Tink position them well in the market to take share in open banking.
9) BNPL adoption increasing rapidly

There continues to be strong demand for Buy Now, Pay Later (BNPL) services, and
our recent survey showed that only 11% of consumers have tried BNPL services
over the past year, pointing to significant room for further penetration and growth,
in our view. PYPL has emerged as a strong player in BNPL, and SQ should
significantly benefit from the Afterpay acquisition, helping the company to expand
into embedded finance and to drive synergies across its ecosystem. AFRM also
continues to be a leader, differentiated through its high AOV capabilities – which
has attracted large retailers and marketplaces (e.g., AMZN, SHOP, WMT, TGT) to
adopt the solutions through white-label partnerships. Other strong competitors in
BNPL include Klarna, as well as Zip and Sezzle. MA has also launched MA
Installments, which will be integrated into click-to-pay and participating digital
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wallets, leveraging attractive pricing, which we estimate at a ~3.5-4% gross take

rate (an avg. core interchange fee, plus an installment fee of ~2.5% shared with the
issuers). Moreover, in Europe, Nexi is offering BNPL through Ratepay while
Worldline has partnered up with APEXX’s BNPL connect platform (connecting to
12 BNPL providers) to offer the service in over 40 markets globally. We plan to
monitor Apple Pay Later, which could drive further adoption of Apple Pay online,
in-app, and in-store over time.
10) Hybrid solutions provide flexibility in payments

FinTechs like AFRM and PAGS have launched hybrid debit/credit installment
products which give the consumer the ability to better manage their purchases and
monthly bills. Although the AFRM Debit+ card rides V's rails for initial transactions,
repayments are entirely funded through ACH, leveraging Stripe and Plaid. BNPL
players with hybrid products not only benefit from the unregulated interchange on
debit transactions, but also from higher MDR for the "pay in four" credit installment
offering. In addition, AFRM could expand beyond Split Pay into 0% and interest-
bearing loans over time on the Debit+ card. Access to consumers' bank accounts
through Plaid provides significant data that can be used with adaptive checkout.
We believe that multiple FinTechs will announce similar structures to Debit+ over
time (e.g., Klarna and Curve have already launched similar products).
11) Differentiating between a FinTech and a financial

The difference between whether a company is viewed as a technology company or
as a financial company has significant implications for valuation. For example,
although low-Average-Order-Value (low-AOV), shorter-duration BNPL loans (like
PYPL's Pay in 4, AFRM's Split Pay offering, and SQ/APT's core product) are facing
increased competition due to their lower level of complexity, they generate revenue
mainly via the Merchant Discount Rate (MDR), which entails low gross take rates
of ~3-5% and net take rates of ~1-2%, but relatively low credit risk. High-AOV,
longer-duration loans – mainly offered by AFRM, which is the company's
differentiator, particularly among larger merchants (e.g., AMZN, SHOP, WMT, and
TGT) – more closely resemble traditional financial models, as they mainly rely on
consumer interest (~10-30%) and gains on sale to generate revenue. However,
high-AOV, longer-duration loans also entail higher gross take rates of ~10-15% and
net take rates of ~6-10%, but with additional credit risk. We believe that in order to
be viewed as a technology company rather than a financial company, credit
exposure needs to be limited to roughly ~10-15% of revenue. We recall that PYPL
sold its US consumer book to Synchrony in order to lower its credit exposure, and
SQ sells the majority of its credit loans to third parties. UPST has been growing by
triple digits and is delivering profitability. Yet, despite not being a lender itself (due
to limited balance sheet exposure), the company still has significant exposure to the
seasonality of lending business, earning its fees from banks and credit unions and
lacking liquidity.
12) Monitoring credit risks and the impact of higher rates

Higher rates increase financial costs, and BNPL providers (particularly companies
with longer-duration loans) could experience increased credit risks in times of
market recessions and credit tightening. In particular, AFRM has exposure to
longer-duration loans, but the company has strong credit decisioning models, and
it is able to estimate losses with significant accuracy. However, we plan to continue
to monitor delinquencies, particularly given the recent increases that we have seen
across some firms. We also plan to monitor the liquidity of the securitization market
in light of the AFRM deal that was pulled due to one large investor. PAGS is also
being impacted by higher financial expenses, which are tied to the rapidly
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FITT
increasing interest rates in Brazil to combat inflation. On a positive note, PAGS is

passing through much of the increased costs through higher pricing, and the micro-
merchant market in Brazil has historically been less sensitive to pricing.
13) Merchant acquiring growth remains steady

We believe that the acquirers/issuer processors, namely GPN, FISV, and FIS, after
being out of favor last year due to disintermediation fears and future share loss
concerns, provide a strong value proposition for their future revenue, earnings and
FCF generation capabilities. In addition, we see a limited threat from
disintermediation risks such as open banking, where we believe the economics for
acquirers are similar to traditional card-based transactions. Furthermore, acquirers
are benefitting from BNPL, as the majority of transactions are leveraging debit
cards for the initial transaction and the repayment transactions. Acquiring has
always been competitive but we have not seen a material shift in share away from
the acquirers, with GPN's merchant count, for example, growing 14% compared to
2019 levels. In addition, we believe the networks are well positioned to benefit from
new technology trends such as BNPL (e.g., MA installments), open banking, and
crypto with limited disintermediation threats being the rails powering many of the
latest FinTech innovations.
14) Crypto driving significant engagement benefits

According to our recent FinTech survey of mobile payment users, ~40% say they are
accessing their Crypto wallet at least once a day to check balances, trade, and/or
make purchases with Crypto, with 45% of Cash App users accessing the account
at least daily compared to PayPal at 28% and Venmo at 26%. As a result, we believe
Crypto will continue to be an important driver of increased engagement and cross-
selling inflows to drive higher ARPU. In addition, we see Crypto expanding over time
beyond trading to more consumer purchases as FinTechs continue to build out their
capabilities along with the payment networks. Further, fintechs like SQ have
pushed further into crypto through TBD which is the companies open developer
platform focused on building a decentralized exchange for Bitcoin.
15) Engaging consumers in new omni-channel experiences

Throughout the pandemic, we have seen highly successful customer acquisition
tools leveraged by FinTechs, namely rewards/offers to capture stimulus funds and
incremental active users into their ecosystem. These strategies were particularly
successful due to the increased need for digital payment solutions during that time.
As the economy continues to recover from the pandemic and FinTechs continue to
grow larger over time, thus penetrating more of the market opportunity, it will
become increasingly important to engage these consumers and merchants in new
ways that leverage omni-channel experiences and multiple product offerings that
drive daily value both in the digital and physical environment. We believe SQ has
been one of the leaders in payments innovation and continue to see significant
potential for PYPL's Venmo asset as the company expands and captures the
younger demographic. In addition, we will monitor private players like Stripe, which
has been highly successful online and is moving more in-store through Stripe
Terminal, which grew its payment volumes 6x in 2021.
16) Tap-to-pay driving incremental digital penetration

Tap-to-pay took off during the pandemic as the better way to pay in-store, due to
both health concerns and convenience. We note that tap-to-pay increases digital
payment adoption, thus taking greater share from cash/check and driving an uplift
in volumes for the networks as a result. In addition, tap-to-pay allows for digital
penetration of low-value transactions, which are typically harder to penetrate, due
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to the convenience provided by tap-to-pay (e.g., transit). Furthermore, FinTechs are

leveraging QR codes such as PYPL's Zettle to go after the contactless payments
opportunity. FinTechs such as SQ and PYPL are also offering business accounts,
where small businesses can get paid through QR codes. Apple is planning to
introduce tap-to-pay on iPhones in the US by the end of the year where merchants
can accept contactless payments on their iPhones. Adyen won AAPL in an
extremely crowded and competitive space, marking another impressive success
over peers and showcasing its broad and leading technology capabilities. We
expect increased focus from FinTechs on expanding more into in-person over time,
but believe the networks will continue to be the rails due to the significant consumer
and merchant infrastructure and connectivity globally.
17) B2B payments seeing accelerating demand

B2B payments is one of the hottest trends to watch coming out of the pandemic as
adoption continues to accelerate particularly in the under-penetrated SMB market
where BILL has a leadership position, but also in the mid-market where AVDX
operates. Solving for both sides of the B2B payments equation, B2B solutions
providers have both buyer and supplier solutions. Buyers benefit from reducing
paper based processes and manual data entry as well as lower fraud, increased
visibility, and better control of spend, saving up to 60-80% of costs associated with
manual processes. Suppliers see better reconciliation, lower costs from less
manual processes and more electronic invoices, and improved working capital
management. Behind BILL and AVDX's sophisticated AR/AP and spend mgmt.
software capabilities, is a scalable two sided network that creates their edge in the
market. Sizing the market opportunity, we estimate that AR/AP automation and
ePayments combined represent a >$94bn US revenue opportunity (growing by
~20%), not including the International opportunity, which could be ~3-5x larger.
We estimate ~25% penetration of the AR/AP automation opportunity (less
penetration in SMB offset by higher penetration in mid and enterprise) and
importantly only 7% electronic Payment penetration which is a key driver of the
revenue model going forward for B2B solutions providers.
18) B2B take rates to rise

FinTechs need to show monetization of their active user bases in the form of
expanding take rates, which would indicate a mix shift towards higher monetization
products and services that would in turn drive higher ARPU. BILL and AVDX in B2B
payments are benefiting from expanding take rates due to low but increasing
penetration of higher monetization offerings (e.g., virtual cards, cross-border FX,
and instant payments). Although net take rates for legacy products such as checks
and regular ACH are in single digit bps, these higher monetization offerings have
gross take rates of ~100bps for Instant Deposit and as high as ~200-250bps in the
case of Divvy, with net take rates estimated at ~50bps and ~50-100bps,
respectively.
19) Apple Pay expanding and bringing payments in-house

AAPL recently announced that, through a multi-year plan, it is developing its own
payment processing technology and infrastructure, which the company will use to
reduce reliance and bring more financial capabilities in-house. Given the size of
APPL in terms of online sales (e.g., App Store, Apple.com, Apple Pay), the company
could stand to benefit significantly from lowering interchange costs. In addition,
AAPL could leverage in-house processing for services like P2P and BNPL
particularly for the repayments, in our view. AAPL recently acquired Credit Kudos
in open banking to further pursue its strategy. However, we do not see AAPL
creating its own competing network to V/MA. In addition, we believe AAPL will
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continue to leverage the networks over time due to the significant growth potential
they provide through their global infrastructure and two-sided network of
consumers and merchants.
20) Monitoring banks and Zelle plans

Banks have faced significant competitive pressures from fintechs, who are
expanding beyond payments into banking and investment services, and have
responded by creating Zelle. Zelle is owned by a consortium of banks and was
originally created to be a P2P platform to compete with the fintechs and drive better
customer acquisition. Zelle benefitted from strong demand through the pandemic
for digital money transfer, delivering ~1.8bn transactions in 2021, which was more
than double compared to pre-pandemic levels. The banks who own Zelle are now
debating whether to use Zelle as a competing network to V and MA, potentially
expanding the solution to retail payments. Bank partners to Zelle have already been
reaching out to merchants for a potential pilot that would make the retail payment
service available as early as this year. Bypassing the networks would allow them to
set the scheme pricing much like V and MA do today. However, there are a number
of challenges to adoption, particularly in the US, where card-based payments are
prevalent and we have seen merchant consortiums in the past fail at gaining
significant adoption in the US (e.g., MCX consortium). In addition, fintechs
continue to attract customers away from the traditional banks (e.g., Chime) due to
their value proposition to consumers which leverages Durbin exempt interchange.
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Moving Beyond Payments

into Embedded Finance
We see FinTechs closing the gap in two ways, namely expanding more into full-
fledged ecosystems and also by taking more control of the end-to-end shopping
experiences to capitalize on economics over time. Expanding into a full ecosystem
of value-added products and services in particular will be critical to driving higher
engagement and capturing more inflows into the ecosystem. As merchants
accelerate their adoption of embedded payments, FinTechs will need to center their
strategy around providing seamless access to their financial products and even
becoming their own network where they can own the end-to-end experience. In
addition, we expect FinTechs to increase their focus on cross-selling the inflows into
new products and services across their ecosystems.
Merchants rapidly adopting embedded finance

Frictionless payments are now expected and consumers are now moving into
embedded finance. FinTechs that can move beyond frictionless payments into
embedded finance are best positioned for the next leg of growth. Embedded
finance is expected to be a ~$3.6trn market just over the next decade as consumers
look to grow their relationship with FinTechs. Embedded finance is about driving
frictionless payment experiences that almost occur in the background, as it allows
merchants to seamlessly integrate financial services (e.g., payments, credit/BNPL,
banking, and insurance) into their core products. For example, merchants such as
Uber and Lyft embed payments into their ride experience and Buy Now, Pay Later
(BNPL) is becoming a popular finance product to offer at checkout.
Figure 1: Expected merchant adoption of embedded finance
Source : OpenPayd
Building the Super App of apps

FinTechs are expanding beyond payments into full-fledged ecosystems which
many are calling 'super apps' or a one-stop-shop for all the consumer financial
needs (e.g., payments, banking, investing, lending, bill pay, et. al.). While super
apps have risen to prominence in East Asia, they have largely not matured in
Western markets. For example, WeChat in China began as a messaging app, but
now offers a wide range of financial services including a digital wallet, bill pay, and
P2P transactions in addition to social media capabilities. Western payment firms
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are seeking to move in the same direction, and in doing so have started acting less
like payment enablers, increasingly becoming platforms for merchants and
consumers to provide new services. Embedded finance is a key part of the super
app model, as it introduces financial services and tools when they are needed,
reducing frictional costs. While growth in embedded finance began with payments,
it has since expanded to include a range of financial services offered by nonbanks
such as insurance, consumer lending, banking, wealth management, and expense
management, alongside other services.
A problem that must be surpassed for embedded finance and super apps to
proliferate is that despite the innovation happening at the leading edge of Fintech,
the technical bar is high, and is supported by legacy infrastructure. Consequently,
while it may be an advantage for companies that develop quality embedded finance
features and experiences, those that do not have the resources to do this often turn
to legacy providers who may have long-running product portfolios, but cannot help
smaller firms launch new features such as virtual cards. Thus, there is a disconnect
between the front-end consumer experience and the back-end, which was largely
developed long before FinTech apps were popularized. Intending to solve this
problem is Highnote, the first issuer processor to launch in a decade. Highnote was
founded by a group of PayPal veterans, and enables companies to differentiate
themselves through embedded payment experiences, shortening their time to
market.
Bank account access and banking APIs/universal access

The advanced use of APIs is central to the embedded finance revolution. APIs are
essentially sets of instructions that connect two software tools to facilitate
exchange of data. They allow data connections between financial institution
accounts, FinTechs and nonfinancial firms, allowing the integration of financial
capabilities inside other apps. A key player in linking bank accounts via APIs is Plaid,
a data transfer network that companies use to offer financial services. The strength
of the product offering appealed to Visa, but its proposed merger was stopped by
the Justice Department.
Before the advent of financial APIs, parties such as retailers needed to invest
significant resources to provide financial services, including partnering with banks.
However, APIs substantially lower the barrier to providing services, allowing
nonbank firms, or FinTech, to offer financial services and create a frictionless, more
convenient, faster, and simpler payment process. For example, e-commerce
merchants and platforms can integrate embedded financing offerings, including
point of sale loans and seller financing, while insurance banks are partnering with
nonbanks to enable API integrations. Essentially, any company can become an
embedded finance provider through financial API integrations.
An example of nonbanks using APIs is Uber, which can pay drivers in minutes, while
also being able to provide them financial benefits such as credit, discounts and fuel
rebates in addition to their Uber Money service. With demand for embedded
finance being driven by the same trends that have pushed forward digitization,
companies have needed to rethink their value chains, their core businesses, and
strategize digital presence, with embedded finance being part of that. This broader
shift is driven by an underpinning of trust, where customers increasingly trust apps
such as Uber and Amazon with their data and are increasingly willing to leverage
it for other services. This necessitates financial services companies to better
perform KYC checks and underwrite compliance or financial risk.
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Integrated experiences and new revenue streams

While embedded finance is a new term, programs that have embedded finance
features have existed for many years. For example, airlines have had loyalty
programs and credit cards in place, and other examples include insurance or
payment plans offered by retailers with the purchase of new products. These
embedded financial services are now moving online with e-commerce retailers
offering banking services on their website without redirecting customers to a bank,
as a result keeping the customer relationship.
Essentially, embedded finance typically means using APIs to integrate financial

services within other applications and ecosystems. This involves a non-financial
company, for example Shopify or Amazon, integrating financial services such as
payments processing, lending, or insurance. Essentially, a brand rents access to the
services provided by the embedded finance providers. As a result, they can build
offerings without rebuilding the technology or compliance feature, making it
possible for them to be very nimble and bring solutions to market quickly. Benefits
for consumers include accessing financial services exactly when needed, rather
than at a separate and unrelated time.
This revolution has dovetailed with increasing consumer interest in using

embedded finance products. According to research by Cornerstone Advisors,
consumers under the age of 40 are far more likely to open a checking account, if
offered, by technology firms, with 46% of millennials aged 26-40 willing to open a
hypothetical account with Amazon, compared to 11% for those in the 56-75 age
range. This is largely due to increased trust with tech companies alongside the
increased convenience they offer. This convenience and easing of friction results in
higher conversion for merchants. For example, based on a Shopify study of its
10,000 largest merchants, Shopify Pay has made checkouts 4x faster, and
increased checkout to order rates by 1.7x while nearly doubling the rate for mobile
transactions.
Industry trends suggest that many enterprise companies will make moves into
embedded finance. Banks and financial institutions as well as non-banks want new
ways to attract customers alongside driving greater customer lifetime value, while
reducing customer acquisition and servicing costs. Embedded finance can help
deliver these properties, and importantly, help drive revenue for both financial
institutions as well as FinTechs. According to our forecasts, we estimate financial
services providers can earn an additional ~$250bn in revenue through embedded
finance by 2025. Furthermore, according to research by Andreesen Horowitz, SaaS
companies can increase revenue per customer by 2-5x, and also open opportunities
in markets that were previously too small.
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Figure 2: DBe embedded finance revenue opportunity ($bn)
Source : Statista, Accenture, Lightyear Capital, Deutsche Bank Research
Use Cases In Embedded Finance

Embedded Lending. In consumer-oriented implementations of embedded
lending, consumers can apply for credit at the point of sale while buying larger
products. This is a departure from the prior model of using a credit card or taking out
a loan from a financial institution, both of which carry high interest rates. However,
financial APIs have changed this process, by providing loans at the point of sale.
Here the customer is given a decision within seconds, with multiple options to make
the payment and a range of down-payment options. BNPL is the most visible form
of embedded lending. However, it encompasses a wide range of loan terms,
interest rates, and loan sizes. Shopify began offering lending services through
Affirm, in addition to providing bank accounts for businesses. SHOP's goal is for
businesses to use their SHOP accounts instead of bank checking accounts to
operate the business.
Other forms of embedded lending include tech platforms extending credit to

merchants. One such implementation is Klarna's collaboration with Liberis to
provide revenue-based financing to Klarna merchants. Liberis can directly integrate
into partner e-commerce and payment platforms, with merchants receiving pre-
approved financing offers, and if interested, the merchant can go through a quick
underwriting process and receive the funds within two business days of applying,
with all of these activities happening inside the merchant's Klarna account.
Other cases include Shopify Capital, which provides loans to merchants, and unlike
traditional bank loans, SHOP purchases a portion of future receivables, with future
revenue then routed to repay Shopify Capital funds. Under this program, SHOP
makes funding rounds from only $200 to $1m, with funding available either as loans
or cash advances. These merchants, who in many cases would not qualify for bank
loans, do not need to submit additional data, with underwriting based on data that
SHOP already has, helping them to either grow their business, or survive leaner
times, making them more likely to be successful, which in turn benefits Shopify as
well. As a result, rather than being a profit center for SHOP, this is viewed as a
service that can be provided to its client base to make them, and SHOP itself, more
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successful.
Embedded Insurance. Embedded insurance includes insurance purchases at

checkout, removing the need for insurance brokers or agents when buying
insurance. For example, previously, the purchase of car insurance was separate
from buying a car. However, today, companies offer integrated options, allowing
customers to buy car insurance at the same time, making the process frictionless.
Insurance options can now be selected as an add-on to their purchase into the
checkout flow. There are three types of embedded insurance: (i) single policy – this
is where companies underwrite insurance policies themselves and integrate them
into purchase flows via APIs, (ii) multiple policies – this is where companies
integrate multiple insurance options into the purchase flow, and (iii) extended
warranties – this is the inclusion of extended warranties in the purchase flow,
typically as a single policy option.
Embedded payments. Embedded payments take out the customer pain point of
physically taking out their credit card and entering the number, a problem that can
cause customers to abandon cart and checkout flow, and in some cases, can help
merchants save fees by using account-based payments. An example is the
Starbucks App, which saves credit and debit card information for quick payments
while customers can still earn rewards points for using the app. There are diverse
applications of embedded payments, for example giving consumers the ability to
pay from their bank accounts directly. For example, the SmartPay Rewards mobile
app for gas stations and convenience stores has discounts and rewards for
customers who use its bank account-based payment tool. This saves fees for
merchants while retaining customers by increasing brand loyalty. In 2019, PayPal
launched a partnership with electronic billing service Paymentus to create a
consumer bill payment experience within the PayPal app. Billers on the Paymentus
platforms can present bills to PayPal customers directly, and allow other billers and
billing platforms to post bills to PayPal customers. Billing has continued to be a
feature within PayPal for its Super App, where it joins other embedded features such
as shopping, savings, and rewards. Paymentus' platform is also part of JPM's own
Digital Bill Payment feature, giving businesses a single platform for customer
engagement, bill presentment and payments. Last spring, in another step of PYPL's
strategy to boost touchless payments, FISV introduced functionality that allowed
enterprises using Clover and Carat to accept payments from PayPal and Venmo
using QR codes at the point of sale. PYPL has made gains in travel since then, with
the Munich airport launching PYPL QR codes at all of its shops and United Airlines
becoming the first airline to launch QR codes for inflight payments. In United's roll-
out, users can make inflight purchases touch free, by showing the flight attendant
their PYPL QR code, even in the absence of WiFi.
Embedded Banking. Previously the domain of only banks, today non-financial

companies are offering banking services to customers. Their goal is to deepen
customer relationships and gather richer data by supplanting traditional financial
institutions by offering services such as checking and savings accounts. Neobanks
such as Chime, Varo, and Monzo have risen to fill this niche, and provide a range of
online banking services, by building a seamless consumer-facing interface and
processes on top of core banking services provided by a bank. Another evolution
taking place, is for FinTechs to acquire bank charters themselves, leveraging them
alongside their technology platforms to other firms, who can in turn provide
embedded banking and financing services. One such neobank is Jiko, which
purchased a Minnesota-based community bank last year and entered the BaaS
space, and has since shifted its focus toward a B2B strategy. Jiko's platform is
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unique in that it replaces bank deposits with treasury bills, spent in real time through
debit transactions. Now, while Jiko's consumer banking app is still available with
Jiko expecting to enhance its features, it is seen as a showroom, with the company's
real commercial prospects being in providing the service to other FinTechs. The
shift was influenced by rising interest in Jiko's services from other FinTechs
interested in using Jiko's technology. As a result, Jiko has opened its platform for
use by FinTechs and is in discussions with several. Areas where Jiko is generating
interest include lifestyle apps, FinTechs, and banks, the latter of which are facing the
challenge of a surge in deposits. A similar shift has been seen in BM Technologies,
spun out of Customers Bancorp last year. It has faced increasing competition from
neobanks such as Chime and Varo, and has made a similar pivot. BMT started
focusing on B2B in 2016, noting its ability to provide embedded banking to large
nonbanks such as
T-Mobile, helping to grow T-Mobile Money into a $1bn bank within two years.
AAPL Working to Bring Embedded Financial Services In-

House
Bloomberg recently reported that AAPL is developing its own payment processing
technology and infrastructure for future financial products as part of a wide-ranging
effort that would lower the company's reliance on outside FinTech partners. AAPL
is developing a multiyear plan that would bring a wide range of financial tasks in-
house, including payment processing, lending risk assessments, credit checks,
fraud analysis, and dispute management, among other capabilities. The effort is
focused on future products, rather than AAPL's current lineup of services. AAPL's
efforts have been dubbed "breakout" and would push the company to become a
bigger player in financial services, building on a suite of products and solutions that
today includes an AAPL-branded credit card, P2P payments, the AAPL Wallet, and
a mechanism for merchants to accept credit cards from an iPhone (similar to SQ's
seller solution). Furthermore, AAPL is also working on its own subscription service
for hardware and a BNPL feature for Apple Pay transactions.
Taken together, this effort represents a significant expansion into the world of
embedded finance and expanding AAPL's product suite into a fully formed financial
ecosystem that could act as a one-stop-shop for all of the consumer financial needs.
As discussed above, one of the key problems that must be surpassed for embedded
finance and super apps to proliferate is the high technical bar. We believe AAPL is
uniquely situated to hurdle that bar given the company's industry-leading tech
solutions and lack of exposure to legacy infrastructure. Furthermore, the typical
disconnect between the front-end consumer experience and the back-end, which
was largely developed long before FinTech apps were popularized can be easily
solved by AAPL. We believe AAPL's full fledged foray into FinTech bears monitoring
given the company's significant scale and tech advantages over other FinTech
players and legacy payment facilitators.
Maximizing inflows
Capturing inflows such as recurring direct deposits moves FinTechs closer to
becoming the consumer's primary banking platform. Although recurring
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paychecks are one of the best sources of inflows, FinTechs are driving inflows
through multiple use cases, such as P2P payments and through crypto funding and
sales for example. Furthermore, companies like SQ are driving inflows through
Cash App Taxes after acquiring the Credit Karma Tax business, where they offer free
tax services each tax season and incentivize the users to deposit their refunds into
the ecosystem. This will in turn drive higher awareness of the direct deposit
capabilities as well as the ecosystem of products and solutions. Cash App
continues to deliver strong inflows of ~$45bn in 4Q21 which grew both year-over-
year and quarter-over-quarter despite the government stimulus disbursements
ending, boding well for future momentum. Inflows are important for FinTechs as
they provide an early indicator of the future potential spend on the platform. We
note that once the inflows are captured into the system, FinTechs must provide
value-added products and services to raise the velocity of payment flows across
their ecosystem. As the actives on the platform adopt more products and services,
this drives higher inflows and visa versa, leading to higher monetization of inflows
over time and higher RPU.
Importance of recurring paycheck deposits

Creating more inflows through features such as paycheck direct deposit increases
the funds in the system. In addition, keeping transactions within the walls of the
ecosystem by creating services that interconnect drives more cash balances and a
higher velocity of payment flows. For example, Chime has been successful at
driving direct deposit sign-ups, as roughly two-thirds of its customers are set up for
recurring paycheck direct deposits, with active customers making an avg. of ~35
transactions per month. Chime's early paycheck capabilities take advantage of the
multi-day ACH system, with the company essentially underwriting the ACH system
(~$3bn in early paychecks each month). Additionally, Cash App recently made
improvements to the direct deposit customer experience by allowing customers to
directly log in to their employer or payroll provider within the app, which provides
another frictionless way for customers to get set up. Furthermore, Cash App has
seen strong Direct Deposit use, with Direct Deposit users ~2-3x more engaged than
other Cash Card users. In addition, customers that adopt two or more products
generate ~3-4x more gross profit.
Tax refunds could drive strong inflows

Another product FinTechs are utilizing to create further inflows are tax refunds. In
January, SQ launched Cash App Taxes, a free tax filing service, which aims to
simplify and digitize the tax filing process in the U.S. Historically, Cash App's gross
profit growth has benefited from the seasonal impact of tax refunds as customers
bring more money into the Cash App ecosystem as consumers benefit from greater
spending power. Additionally, PYPL has integrated Venmo with the Internal
Revenue Service through ACI for income tax payments and distributions. We
believe tax refunds represent an important capability for FinTechs, along with
services like investment capabilities, bill pay, budgeting, overdraft protection, free
cash advances, direct deposit/early wage access, intelligent financial alerts, and
giving reward for spend, all of which will be key to gaining trust and expanding
relationships with merchants.
Creating daily utility

Digital banks and payment FinTechs continue to disrupt traditional bank offerings
due to their ability to attract customers at a low cost and drive high ROI on sales and
marketing investments, allowing them to go after the underserved and untapped
parts of the market. Challenger banks like Chime and Dave are differentiated
through their account ownership, high Direct Deposit sign-up (e.g., Chime has
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around two-thirds of its users signed up), and their ability to generate higher
interchange through card issuance, leveraging smaller banks. Payment FinTechs
like PYPL, SQ, and Stripe have an advantage in their two-sided networks, with
merchant scale and broad ecosystems of value-added services. FinTechs are
leveraging banking services to accelerate daily engagement, and ARPU continues
to expand due to higher core engagement. In addition, new products like Crypto
should be a strong future engagement driver. FinTechs like SQ are even adding
music services (through the Tidal acquisition) in order to drive engagement.
Cross-selling products
After capturing inflows, FinTechs need to expand into multiple value-added
products and services that they can cross-sell to consumers and merchants over
time, driving higher RPU. We note that driving better product attach rates by
leveraging multiple price points for services with little to no cost for slower payment
methods for example and high margins for faster payment products (e.g., instant
transfers/deposits charges ~1-1.5% vs. 2-3 day free transfer) drives better
engagement. In addition, leveraging pricing to drive inflows toward higher
monetization products that keep the funds revolving through the ecosystem (e.g.,
debit cards) drives network effects. We believe Block (SQ) has strong product
innovation and cross-selling capabilities between its Square seller and Cash App
consumer ecosystems, as well as cross multiple products within each platform.
Furthermore, we see acquisitions as a way for FinTechs like SQ, which recently
closed the acquisition of Afterpay, to drive further cross-selling opportunities by
adding significant exposure to new channels rapidly and maximizing synergies
between the organizations.
Block cross-selling Afterpay

Not only should FinTechs be cross-selling their products into the base, they should
also be leveraging acquisitions to drive cross-selling synergies. We believe the SQ/
Afterpay deal is a great example of strong acquisitions that drive significant cross-
selling synergies. The deal importantly connects SQ's two ecosystems and pushes
the company toward becoming a Super App. First, AfterPay opens additional TAM
in BNPL and beyond, lifting the future potential gross profit potential of both Cash
App APRU and Seller through cross-selling synergies. The announced acquisition
also connects Seller and Cash App driving higher velocity of payment flows from
interconnecting more products/services. Additionally, it allows SQ to move closer
to discovery through Afterpay's Shop Directory, which accelerates the company's
omni-channel strategy and positions it as its own network. SQ can also explore
Afterpay's affiliate merchant model leveraging the virtual card to drive greater
acceptance and engagement. We note that our new analysis suggests Afterpay's
faster growth profile and cross-selling synergies alone could accelerate SQ's
organic Gross Profit growth by ~4ppts in FY22 and ~9ppts in FY23.
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Figure 3: Block/Afterpay cross-sell analysis
Source : Company data, Deutsche Bank estimates
Not only does the Afterpay acquisition expand SQ's TAM to BNPL, which is only
~3% penetrated today but should increase rapidly over the next few years, it also
provides the opportunity to expand into new markets internationally, new verticals
beyond retail for BNPL, and further into multiple new adjacencies. Furthermore,
integrating Afterpay into Cash App for in-app product discovery through the Shop
Directory and managing the installments within the Cash App should drive
significantly higher engagement through more daily utility. We see potential for the
Afterpay acquisition to accelerate Cash App net adds from the historical trend of
~2m per quarter to ~3m starting in FY22 and beyond, while also accelerating
Afterpay net adds from ~1.5m to ~1.8-2m per quarter. On a like-for-like basis using
annual actives, we estimate that Afterpay generates slightly higher ARPU
compared to Cash App. In addition, we expect synergies to add ~$4-5 in FY22 and
~$14 in FY23 to both Cash App and Afterpay's annualized gross profit per annual
active user (~$3 and ~$8 in FY22 and FY23 to Cash App monthly ARPU).
Pivoting To Commerce Enablement

Looking beyond the secular shift to online payments, FinTechs such as PYPL have
an opportunity to move up the sales funnel, own the customer and merchant
relationship, monetize the platform holistically, and ultimately increase share of
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checkout. This has resulted in investments to transform the digital wallets over the
next year through an aggressive product road map. We note that we believe this
movement up the sales funnel into commerce enablement and a more complete
ecosystem of products will make FinTechs more ubiquitous both in the online and
physical markets. We believe the accelerated transformation will drive higher
engagement across the product suite and increase PYPL's share of checkout. In
addition, we see PYPL maximizing revenue potential by leveraging a platform-
based pricing approach to monetizing products, with a focus on driving additional
usage of the core buttons as well as lower funding costs by pushing more
transactions toward Balances.
Capturing the consumer relationship

Typically in e-commerce, the customer selects a product to purchase and it is at
checkout where they are subsequently presented with a range of options on how
to pay through the use of buttons. Engagement with the customer this late in the
checkout process limits the FinTech's ownership of the customer relationship and,
as a result, companies are taking a more active role in moving up the checkout
funnel, and helping guide the customer to the merchant itself, rather than only
being present at checkout. This should result in higher monetization by driving a
higher share of the checkout process.
Owning the relationship is critical to becoming the center of the value proposition
from the start of commerce, not just at the end of checkout. As a result, we see
FinTechs releasing multiple new products and services to become an integral part
of the shopping experience from start to finish or a true commerce enabler.
Consequently they will be able to offer their customer base special promotions/
discounts, and use their wealth of data to appease merchants generating more
transactions. We believe the digital wallet build-out will have a profound impact on
checkout share and product monetization.
Looking beyond the secular shift to online payments, we believe FinTechs have a
massive opportunity ahead to move up the sales funnel, own the customer and
merchant relationship, monetize the platform holistically, and ultimately increase
share of checkout. As a result, there has been an intense focus on investment to
transform digital wallets over the next year. We emphasize our belief that this
transformation up the sales funnels into more commerce enablement and a more
complete ecosystem of products will make FinTechs more ubiquitous, both in the
online and physical markets. We believe the accelerated transformation will drive
higher engagement across the product suite and increase share of checkout.
PYPL Launching Several Commerce Enablement Drivers

PYPL is a unique asset because it owns the customer relationship and has merchant
connectivity at scale and has consequently released several new products and
services to become an integral part of the shopping experience as a true e-
commerce enabler. To increase engagement and more frequent use, as part of its
Super App and more broadly, PYPL has added functionalities to its digital wallet
such as Bill Pay, Direct Deposit, Check Cashing, and Cryptocurrencies. If this results
in higher digital wallet usage, this could also improve penetration of in-store QR
codes, bringing PYPL into the Physical POS market. In addition, we see PYPL
maximizing revenue potential by leveraging a platform-based pricing approach to
monetizing products with a focus on driving additional usage of the core buttons as
well as lower funding costs by pushing more transactions toward Balances.
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Commerce enablement through Honey

Honey moves PYPL to the front of the sales channel and more toward commerce
enablement. PYPL will leverage Honey engagement tools such as Wish List item
tracking, Price Monitoring, and Coupons/Rewards, which will complement PYPL's
digital wallet features and drive synergies including increased conversions and
higher ticket prices. We estimate affiliate network commissions of ~3.74%, which
is the majority of Honey's revenue today, but see potential for more direct merchant
relationships over time, which we estimate could increase commissions to ~5.5%.
In addition, PYPL is not currently a checkout option for Honey, which could drive
significant volumes and would further add to the monetization potential. Honey
also allows PYPL to capture off-platform merchant volumes as part of the volumes
that are not being monetized (e.g., Amazon). We have updated our Honey model
estimates in this report.
PYPL announced in October as part of the holiday shopping season, that Honey will
allow users to redeem Honey Gold points for cash back through PYPL while also
receiving credit for their next purchase when paying with PYPL. This follows the
September 2021 roll-out of Honey's Safari browser extension for mobile, which
allows users a seamless way to search for coupons and earn cash back. The new
Honey browser extension for Safari is part of the Honey app update on iOS 15, with
users required to first be on iOS 15 and re-download Honey and then enable "Honey
for Safari".
Pay in 4 helping gain checkout share

We expect PYPL to gain significant checkout share through Pay in 4, given the
competitive pricing strategy and value proposition, which should drive strong
engagement earlier in the sales process. PYPL has the unique advantage to push
Pay in 4 through both the consumer relationship leveraging its digital wallets as well
as through the merchant website. In addition, we expect Pay in 4 to benefit from
better profitability over time as PYPL pushes more transactions to Balances.
Platform-based pricing is a clear advantage PYPL has over other BNPL providers.
In August, PYPL announced it would stop charging late fees for customers using its
BNPL service effective October 1, bringing all markets into alignment with its
preexisting practice in Australia. PYPL noted the example of merchant Samsonite,
which found that customers using Pay in 4 increased AOVs by 25%. Key to PYPL's
broader adoption of BNPL capabilities, is the benefits it brings to merchants with
associated increases in conversion rates. A PYMNTS study has found that the BNPL
offering brings previously inaccessible audiences to merchants, while
simultaneously improving in-store revenue prospects. The study has found that
BNPL users tend to make more in-store purchases than those using other payment
methods.
SQ's Afterpay Deal Moves Customers Into Discovery

SQ has transformed from producing credit card readers to an omni-channel
commerce provider, with products including Square Point of Sale, Square For
Restaurants, Square Online, Square Terminal, Square Stands, Square Reader and
its initiatives within CashApp and most importantly, its recent Afterpay acquisition.
Rather than partnering or building the assets in-house, SQ acquired Afterpay to
jump start its entry into BNPL. The introduction of Afterpay helps SQ become a
broader e-commerce platform even beyond simply implementing BNPL, with value
brought to the merchant through marketing outreach and leveraging the combined
customer base, thus creating significant scale opportunities globally.
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The acquisition helps connect the Seller/Cash App ecosystems of merchants and
consumers, and adds Afterpay's e-commerce discovery website called Shop
Directory, which will be integrated into Cash App. For example, Afterpay
consumers can shop at non-partnered merchants through the Shop Directory app,
where Afterpay generates shared interchange with the issuer and also earns an
affiliate fee from the merchant due to the lead generation. SQ should be able to
leverage its product suite to drive more consumer volumes and higher consumer
engagement to the platform as well as better lead generation for merchants
ultimately leading to greater share of merchant checkout and increased adoption
of consumers and merchants.
We note that Afterpay focuses on high frequency/low AOV use cases which,
although more competitive, tend to build stronger consumer brand awareness and
opportunity for higher daily and weekly platform engagement. A key part of the
potential value proposition is allowing SQ to become its own network, connecting
Seller, CashApp, and APT. SQ could control more of the end-to-end commerce
experience and drive significant platform engagement and product cross-selling,
both online and in-store, leveraging the affiliate model and virtual card as well as
potentially integrating Cash Card.
Affirm Marketplace A Discovery Engine For Merchants

Taking advantage of the notion that they are a service for merchants as much as they
are for consumers, Affirm previously launched their marketplace product to help
with product discovery on the consumer side and generate demand, create new
transactions and bring personalized offers to shared customers for merchants. This
product has taken off very well, and Affirm stated that it is one of the fastest growing
pieces of their business with lots of excitement and room for growth, and as of the
last fiscal year-end in June 2021, 30% of AFRM's transactions were through the
marketplace. The marketplace provides a discovery platform to allow customers to
find products and make purchases from partner merchants. Consumers can use the
marketplace to discover AFRM's latest partners, products, services, and
promotions, while merchants get a qualified user referral platform and a managed
marketing service.
While the Marketplace was originally envisioned as a monetization lever, it is now

a core part of AFRM's product offering, and AFRM expects some merchants to pay
for the marketplace platform just to drive traffic. AFRM can charge affiliate fees and
even advertising fees for its marketplace, and while AFRM has many non-
integrated merchants in its app, and it can earn affiliate fees from them, most
merchants will expect such capabilities as provided by the marketplace. AFRM still
has upside in monetizing Marketplace affiliate fees, with the focus currently being
on optimizing the experience.
Adyen expanding beyond processing into embedded finance

During its recent Capital Markets Day, Adyen announced a new solution for
platforms to indirectly reach underserved SMEs. We find this very encouraging as
the company’s platform has been designed for large volume enterprises but was
not tailored initially to address the needs of smaller merchants. Moreover, Adyen is
going to fully monetize its banking license by offering merchants (pre-approved)
instant capital, called Adyen Capital. Through their dashboard and without any
time-consuming process, merchants can see how much credit they can get
(immediately) while the repayments are being automatically deducted from their
sales on these platforms. While consumer-facing financing has developed and
evolved quickly in the past couple of years, the merchant side of the value chain has
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been less touched (merchant cash advance is one of the few offerings). With
Adyen’s focus being fully on the merchants, this new product gives the an company
an angle to reach more merchants going forward. We expect further innovation
(maybe BNPL for sellers) to come in the next two years. Moreover, Adyen is offering
these merchants multi-currency bank accounts with which they can accept/make
payments in a different currency to avoid exchange rate costs.
Figure 4: Adyen Embedded Finance Platform
Source : Company Documents
Expanding into affiliate marketing

Block could expand into affiliate marketing through Afterpay
Combining Afterpay with Seller and Cash App significantly expands SQ's value
proposition to not only consumers, but also merchants. Afterpay generates most of
its GMV from enterprise merchants and the majority of revenue from merchant
fees. Cash App will manage the repayments, which across the industry we estimate
are typically ~60-70% funded with debit cards, where it can push more funding to
ACH/balances over time, lowering funding costs (acquirer does not participate
when funded through ACH and Balances are the cheapest funding instrument). In
addition, SQ will gain the larger Afterpay merchant base and will have a more
complete ecosystem of omni-channel capabilities aligned to the merchant to
attract more merchants up market. Through its direct merchant relationships,
Afterpay generates merchant fees of ~4-6% of the purchase price, much higher
than the typical merchant discount rate (MDR), due to the significant value
proposition (e.g., +25% AOV increase, +22% lift/conversion, and +20% frequency
of purchase). Afterpay also recently expanded to offer BNPL at some non-partnered
merchants (e.g., Amazon) leveraging an affiliate model. The company introduced
a consumer virtual card issued by Marqeta where it earns shared interchange and
charges an affiliate fee to merchants based on lead generation. Expanding further
into the affiliate model could drive strong acceptance and engagement.
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RTP Use Cases Expanding

Rapidly
RTP boosting revenue
Real-time payments (RTP) are rapidly evolving into new use cases and revenue
opportunities. They have become critical to merchants and consumers through the
pandemic, driving accelerated adoption. RTP include not only fast-growing FinTech
and push payment use cases currently seeing strong demand but also the massive
high-yielding business-to-business (B2B) opportunity. With FinTechs, challenger
banks, tech firms, FIs and payments processors all competing for share of the
growing RTP market, we believe V/MA are best positioned as the rails powering
these players. They have invested significantly in RTP, going after new payment
flows and wrapping value-added services, pushing them further into "new tech"
with faster growth and potential for higher yields.
Disbursements to support RTP growth ramping in 2022

Consumers have grown to expect real-time and instant capabilities in their lives,
which extends to banking and financial products. Additionally, individuals are
willing to pay for instant access to funds, with PYMNTS surveys indicating that one-
third of respondents are ready to pay fees to be paid faster. A potential area of
growth in 2022 is disbursement payments, with PYMNTS.com research finding
that real-time disbursements represented ~17% of all disbursements in 2021, up
from 5.7% in 2020, with growth benefiting from the increasing availability of real-
time payment options for businesses. Companies are also increasingly moving to
pay workers in real-time, reflecting the rise of the gig economy. However, even
companies with more traditional workforces can deploy real-time payments to get
an edge in tight labor markets, particularly with service employees in retail and food
services, which may make an impact on employee retention. Part of the interest
comes from underbanked customers who many not have bank accounts, but have
accounts such as Venmo, Paypal, or CashApp, while others may prefer to use these
apps due to hesitancy over giving out bank account details. Some companies have
noticed adoption of PayPal for payouts, as individuals favor it over checks and ACH,
resulting in push payments to card and push payments to PayPal growing. FISV has
also expanded digital payout options to allow for branded payments into PayPal and
Venmo accounts, with companies now able to pay out funds to customers using
these wallets in real time. Under this program, a receiver can select that the
disbursement goes into their PayPal/Venmo account, and if Venmo, it is visible in the
user's social history with the logo of the company making the payment also visible
to the users' friends. Apart from paying workers, disbursements have many use
cases including insurance firms offering free and real-time payouts, while other
companies can offer real-time payouts as a premium service in a freemium model.
Pandemic accelerates RTP

RTP volumes have accelerated through the pandemic due to increased demand for
faster access to funds, and include new flows, such as push payments through V
Direct/MA Send and B2B leveraging RTP schemes, as well as value-added services.
Demand for use cases such as P2P, earned wage access, payroll, instant transfers,
bill pay, disbursements, and cross-border account-to-account has taken off. A key
reason for growth is a change in customer need, with access to real-time payments
becoming a requirement. For example, homeowners want mortgage payments to
clear instantly after payment, while workers do not want to wait for paychecks to
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clear, with real-time payments ensuring that customer money is available to spend
instantly. There are multiple countries emerging with RTP solutions that are on the
verge of an inflection (e.g., India, Thailand, and Brazil). Even across mature markets
like the UK/China, volumes are expected to grow by double digits and Europe
should benefit significantly from open banking initiatives.
Security a concern in RTP

While customers are always looking for faster and faster payments, historically
there has been a trade-off between speed and security, with one being at the
expense of the other. As a result, ensuring security is key to wider adoption of RTP
by both businesses and consumers. While knowing the party on the other side of
the transaction is naturally important, identity verification is a challenge, and it is
not the sole responsibility of the bank, but of the entire payment chain. As a result,
the companies involved in an RTP transaction can employ a consortium approach
wherein the risk of fraud can be measured across a network through knowing the
identities of the parties transacting, rather than from the perspective of just one
bank. Apart from the payment transaction, FIs can also analyze the individual's
behavior to find anomalies using analytics, rather than depending on passwords
and one-time passcodes, which can be defeated by fraudulent actors. While facial
recognition has been proposed in RTP security, it can be intrusive and may be
superseded by fingerprint-based ID. US Banks tend to be rich in data, resulting in
insights into spending behavior; as a result, data sharing, both between each other
and law enforcement, can be an option to build higher levels of security into real
time payment networks.
Taking share of FinTechs

V/MA are taking share of FinTech, FI and payment processor volumes by investing
in the infrastructure to support RTP expansion. They benefit from FinTech
disruption of traditional banking through digital wallet and RTP expansion into new
monetizable use cases. In addition, they should benefit from increased
competition, with FIs quickly expanding into RTP, leveraging payment processors
like FIS and FISV for Same Day ACH and Zelle/Popmoney P2P payments.
Furthermore, payroll providers such as ADP/PAYX are leveraging RTP for instant
payroll to compete. Boding well for further momentum, V recently acquired
YellowPepper to speed up time to market for issuers and connectivity to V Direct,
B2B Connect, and value-added services. Although the V deal with Plaid was
canceled, we believe V remains well positioned and should be able to fill most of the
revenue shortfall through accelerating its partnerships, including Plaid and organic
investments.
Accelerated adoption of real-time payments

Real-time payments (RTP) include new payment flows, namely push payments
leveraging V Direct/MA Send and B2B utilizing RTP schemes, card-based solutions
(e.g., T&E/virtual), and cross-border account-to-account capabilities, as well as
value-added services wrapped around the payments. We note that RTP adoption is
starting to accelerate globally, including across the US market, due to strong
demand from merchants and consumers as well as the introduction of new use
cases and investments in infrastructure from the FinTechs, FIs, networks,
consortiums, and governments. In particular, the rise of FinTechs and the
significant investments by the Networks, namely V and MA, have been significant
drivers of the use case expansion and infrastructure build-out. In addition, the
pandemic has driven increased demand for RTP use cases. Highlighting the
accelerated adoption through the pandemic, six countries over the past year more
than doubled the number of RTP transactions year-over-year and four doubled the
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transaction value according to the FIS annual RTP report. We see RTP as a key
theme in 2022 and beyond, with V and MA being key beneficiaries as the rails
supporting the infrastructure and use case expansion across the ecosystem of
players vying for share. Looking beyond the cross-border business for V and MA,
which may benefit from easy comps and improving travel demand through the year
as the vaccine is rolled out, we expect RTP use cases and new flow opportunities
with value-added services wrapped around the payment to boost volumes and
revenue growth over the next several years.
Moving beyond card-based payments into new flows

RTP goes beyond traditional card-based payments into new payment flows such as
peer-to-peer (P2P) payments, payroll, instant transfers, bill pay, disbursements,
commercial payments, and cross-border remittances. V/MA are going after the
opportunity, leveraging their Network of Networks or Multi-Network strategy. In
particular, Visa Direct and MasterCard Send offer a solution for the lower-value,
high-velocity opportunity, leveraging push payment capabilities and multiple third-
party alternative networks (e.g., ACH networks). The remaining B2B opportunity
can be addressed through card-based solutions, AR/AP flows, and cross-border.
The majority of the B2B opportunity is large domestic AR/AP but most of the
revenue near term is expected from card-based solutions and cross-border for
larger enterprises. Solving AR/AP remains a large opportunity that requires
additional value-added capabilities and software solutions where the networks are
partnering and building capabilities.
Leveraging multiple alternative networks

Vand MA leverage multiple alternative networks as the rails of card-based
transactions, including V Direct and MA Send, and to enable new flows. For
example, in addition to leveraging V's networks – namely PLUS, Visa B2B,
Earthport, and Connect – the company leverages alternative card networks, RTP/
ACH rails, where MA is investing in infrastructure, SEPA, SWIFT, and
correspondent banks. In fact, V Direct utilizes ~16 card-based networks, ~65
domestic ACH schemes, ~7 RTP schemes, and ~5 payment gateways. Earthport
and Transfast acquisitions have given V and MA access to nearly every bank
account globally, representing a significant account-to-account opportunity – and
the Networks have further reach through partnerships with closed loop networks
(e.g., PYPL and SQ). In addition, MA acquired Nets corporate services, which it will
leverage to go after the B2B opportunity. MA also recently acquired SessionM as
well as Truaxis, Pinpoint and RiskRecon, with the company having a larger partner
network. We believe V and MA are well positioned to capture new flows from their
network of networks strategy, layering value-added services on top and partnering
with software providers and key payment players in the market.
Significant RTP infrastructure expansion

MA is investing to build out the infrastructure as the rails to monetize the
opportunity through its acquisitions of VocaLink and Nets. In addition, V plans to
leverage the infrastructure to focus on the applications and services opportunity.
Although AR/AP represents the majority of the volume opportunity, where V and
MA are leveraging B2B Connect and B2B Hub, card-based solutions and cross-
border represent the most significant near-term revenue opportunity. MA is active
in all five geographic regions, building RTP rails and continuing to win share country
by country, competing through RFPs and leveraging scalable technology across
multiple markets in some cases. In addition, there are multiple private RTP
networks in the US. For example, The Clearing House (TCH), which is owned by
commercial banks, has reached institutions that hold ~75% of all US deposit
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accounts and FIS has partnered to launch its real-time payments managed service
for FIs. In addition, the Federal Reserve's FedNow is expected to be implemented
by 2023/2024. Overall, countries with a live real-time payment scheme have grown
from ~14 six years ago to >56 today, with many more in the pipeline, and we believe
V and MA are best position to take share of the volume opportunity.
RTP capabilities driving value across the ecosystem

RTP offer a solution for friction-filled use cases by making the payment instant and
enriching it with data for better customer experiences and analytics. Consumers
benefit from the convenience of real-time payments – faster access to funds and
instant transfers – while merchants and businesses benefit from new revenue
streams, increased retention, less payments friction, and increased operational
efficiencies. RTP solves business-to-business (B2B) payment challenges by
integrating business software solutions with the payment. RTP supports a range of
use cases that ultimately provide businesses with benefits such as increased
efficiencies, lower costs and less time spent, and streamlined working capital
operations. In particular, they provide faster processing, instant settlement, and
have better data attached to the payment, allowing for automation of accounts
receivable (AR)/accounts payable (AP) payment processing.
FinTechs driving demand for RTP use cases

FinTechs PYPL and SQ, as well as Neobanks and tech providers like APPL/GOOG,
leverage RTP for peer-to-peer (P2P) payments through Venmo and Cash App as well
as accelerating access to funds through instant deposits/transfers and other
monetizable use cases such as payroll. The key is transforming real-time
capabilities into services that incentivize platform ubiquity and solve for a use case
previously filled with friction. FinTechs leverage P2P for attracting new customers
and monetize users through products such as instant deposits. We note that they
leverage the V and MA networks and push payment infrastructure – Visa Direct and
MasterCard Send – for debit card use cases, as well as RTP networks such as The
Clearing House (TCH) in the case of PYPL/Venmo for direct checking account use
cases. FinTechs have created significant demand for RTP services and FIs are
rapidly expanding into RTP to compete. Although competition continues to
increase and RTP networks such as Zelle and TCH could increase disintermediation
risks including more competition from FIs and other parties, we believe the
FinTechs remain well positioned. We view V and MA as the best ways to play the
RTP, given their position as the network powering the FinTech use cases.
FIs leveraging RTP to compete in the digital ecosystem

Financial Institutions (FIs) are leveraging issuer/payment processors such as FIS
and FISV to gain access to digital payment technologies including same-day ACH
and Zelle/Popmoney P2P payments. Zelle is offered by >750 FIs across the US
supporting both businesses and consumers. Zelle provides FIs with the ability to
offer P2P and other value-added RTP services competing with the FinTechs. For
example, FISV now has >500 Zelle clients, +5x from a year ago with ~3x more FI
clients than any other provider. Another RTP network that is still in development by
the Federal Reserve, FedNow, has the potential to further expand the availability of
RTP capabilities to banks and other payment players. We note that real-time
payments provide additional value-added services that FIs can offer to their
customers that not only provide a monetization opportunity but also the ability to
better attract and retain customers. FIs can also benefit from real-time payments
through efficiencies with least-cost routing and fraud detection, leveraging multi-
factor authentication, for example.
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Open banking creates more opportunity than risk

Open banking initiatives in Europe (PSD2) provide significant opportunity that we
believe more than outweighs the risks. In particular, we expect account access to
third-party payment providers (TPPs) to continue to drive competition, including
among FinTech and new flows for the Networks. Although we will continue to
monitor disintermediation risk from alternative networks, we believe V and MA are
well positioned due to their scale and global ubiquity. In addition, similar to the
Durbin Amendment regulations on interchange in the US, multilateral interchange
fee (MIF) regulations in Europe have not had a material impact on the Network fees,
in our view, which are a small component of the MDR.
Understanding the rapidly evolving RTP landscape

RTP systems can be built around any number of use cases. For instance, if a
business wants to make a payment to another business (B2B), FIs can build a
system to cater for these specific types of payments, so that they can be made on
demand if certain conditions are satisfied. When considering the potential
disruption to the payment landscape through immediate payment systems, it can
be helpful to break it out by category of payment, namely Business to Business
(B2B), Business to Consumer (B2C), Consumer to Business (C2B), Domestic Peer to
Peer (P2P) and Cross Border Peer to Peer (P2P/cross-border). B2B includes things
like supplier payments and B2C can be payments such as legal settlements,
insurance claims and employee wages. C2B includes things like Bill Pay, Hospital
Co-pays or even just basic payments at a traditional merchants POS. P2P includes
basic payments to friends/family and for those instances where it is to individuals
outside of the country, it can encompass things like remittances.
Although RTP was originally a solution meant to solve B2B payment, P2P is what
has really taken off and seen strong adoption. In the US market alone, there are
north of 20 apps that enable such payment on smartphones, leveraging a user's
bank accounts/debit cards to complete the payment. This rapid growth has largely
been driven by the accessibility and ease of use that allows users to send fast and
convenient payments to friends and family. Bringing such an attractive user
experience to all use cases, RTP payments will likely take off across all categories.
Real-time payment demand is strong

Real-time payment (RTP) capabilities are in high demand due to the expansion of
smart devices and secular trends toward online commerce. RTP networks, such as
Visa Direct and MasterCard Send, as well as VocaLink, allow for faster and more
payments between businesses, consumers, and governments. Consumers can
leverage RTP for making payments to peers, merchants, and billers, as well as
receiving payments from businesses and governments. In addition, there are
multiple different use cases for how merchants, corporations, financial institutions,
and governments can use RTP for payments. The Euro Retail Payments Board
(ERPB) defines real-time payments (RTP) or instant payments as "electronic retail
payment solutions available 24/7/365 and resulting in the immediate or close-to-
immediate interbank clearing of the transaction and crediting of the payee's
account with confirmation to the payer (within seconds of payment initiation)". The
transfer of funds between bank accounts includes two main steps:
n Clearing: When the funds become available in the recipient's account and
are debited from the payer.
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n Settlement: When the banks involved actually transfer the funds between
them.
With real-time payments, recipients usually receive available for use funds
instantaneously. However, the settlement between banks may take a bit longer in
certain occasions. In comparison to credit cards, these transactions see immediate
guarantee of payment; however, recipients usually do not receive the funds in real-
time and therefore do not have them available for use.
Though they sound like a modern world concept, real-time payments are not new
and can be traced back to as early as the late 1900s in Japan and Switzerland,
although more modern networks were implemented in Mexico (2004) and South
Africa (2006). Notably, the UK implemented an instant payments system in 2008
called "Faster Payment", which was the first true around-the-clock network in the
world, and would become the blueprint for future RTP. However, in today's society,
most payments are made through what is known as an Automated Clearing House
(ACH). Though some forms of real-time payments like the real-time gross
settlement (RTGS) system exist (used in some countries for high value
transactions), RTP for everyday transactions has only recently become a trending
initiative gaining importance along with the development of global RTP networks.
Current framework
To understand the current payment framework, it is essential to highlight that most
of the globe currently deals with payment clearing and settlement in a different way
from RTP. Most large-value transactions, typically between banks, are undertaken
by something similar to the real-time gross settlement (RTGS) system (used in the
US), which are ran by central banks and work on one transaction at a time to
minimize risk. However, on more common day-to-day transactions, the clearing
and settlement is dealt in batches at the end of each day to optimize the central
bank's liquidity. The most common network to take on these transactions are
entities commonly known as Automatic Clearing Houses (ACH), which are typically
operated by a central bank as well.
Real-time Gross Settlement (RTGS)
Typically used for intra-bank transactions of high value that require automatic
settlement and clearing, these special systems transfer electronic funds in real time
and on a gross basis (unbundled). Transactions are usually settled as soon as they
are processed. However, once processed, these payments are final and irrevocable.
In some countries, real-time gross settlement systems are the only way to get same
day funds. However, most regular payments do not use this type of network and
instead use a national payment network such as ACH which is mentioned below.
RTGS systems are typically operated by a country's central bank to ensure secure
payments and efficiency, which is critical for any country's economy. Though RTGS
systems deal with payments in real time, their use is limited to large transactions
and there is a lot of variance in the execution from different systems around the
world.
Automated Clearing House (ACH)
The Automated Clearing House is an electronic network that handles electronic

payments and automated money transfers allowing banks to move money without
the need of paper check, wires, cards, or cash. Users (consumers, governments, or
corporates) of the nationwide ACH network utilize the system to electronically send
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or receive funds. ACH transactions typically operate in a batch environment

handling millions of transactions at the end of each day, where issues with
payments could arise 24-72hrs after the transaction was originally made. ACH
transactions work on a flat fee-based system that usually ranges somewhere
around $0.25-$0.50 per transaction. These electronic transactions can be either
debit or credit and can be posted to either a checking or savings account where the
value of the transactions can range from small to large. Transactions can be single
or recurring; however, they must conform with the formatting requirements
provided by the National Automated Clearing House Association (NACHA).
NACHA is the administrator that sets all the rules for ACH and takes on the role of
educating the public. The actual network is operated by the central banks and The
Clearing House (TCH), who actually process and route transactions. However, the
ACH system is made up of computers working to process payments automatically
without the need for any manual labor. Common ACH transactions include direct
deposits, recurring bill payments, and business payments to vendors/suppliers.
ACH handles everything from Social Security and salaries, to mortgage and credit
card payments, and according to NACHA, in 2021 alone, ACH moved 29.1bn
electronic payments (~$72.6trn), making it one of the largest systems in the world.
ACH volume has been steadily growing over the years, especially with the recent
introduction of same-day processing in 2016. The data indicates that growth
reached an inflection point in 2016, accelerating in 2017 (with the introduction of
same-day processing). In 2018 and 2019, volumes continued to accelerate and we
can see that the trend continued into 2021, potentially driven by the surge in digital
payments amid the pandemic.
Figure 5: ACH payment volumes (USD trn)
Source : NACHA
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Figure 6: Rapid growth in same-day ACH volumes (USD bn)
Source : NACHA
Solution to seamless cross-border payments

Since the 1970s, international money transfers have been made on legacy inter-
bank cross-border payment rails which, on average, take about a day or more to
reach their destination. According to the Bank for International Settlements (BIS),
60% of cross-border payments require manual intervention and payments may be
routed through multiple banks before reaching their final destination, increasing
fees and time delays. In addition, often times there is no guarantee of validity for the
destination account unless it is a recurring payment. Innovation has been slower for
these forms of payments because cross-border payments tend to be increasingly
complex due to the need to bridge closed loops of multiple currencies and domestic
payment systems in addition to having a number of regulatory hurdles presented
by the numerous overseeing bodies across the globe. Domestic markets have
already pushed for RTP services; however, the main challenge with cross-border is
achieving interoperability. Central banks must come together and figure out how
the RTP systems in each market can communicate with one another to embrace the
opportunities that frictionless cross-border payments in real time can bring.
Interestingly, some markets across the world are making strides in this direction. In
fact, the central banks in Thailand, Malaysia and Singapore worked together to
enable a real-time payment service across the entire Malay Peninsula. In addition,
the P27 initiative, in the Nordics, allows for multicurrency cross-border payments
between Denmark, Finland and Sweden enabled by the interconnection of their
central banks. Furthermore, the more recent European Payments Initiative (EPI),
which is supported by ~20 banks across five different countries in Europe, will offer
a single pan-European payment solution leveraging SEPA Instant Credit Transfers.
The solution is said to include card, digital wallet and P2P capabilities for any
consumer across Europe with the hope of becoming the standard means for
payments across all transaction types in the continent, rivaling card giants and
payment firms.
RTP taking off in the US market

Unlike other countries with mandates and regulation driving real-time payment
implementation, US banks have been free to add these capabilities at their own
pace making the rollout of such capabilities slow. With the development of
technology, processing payments more frequently has become increasingly
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feasible and as that technology has become more accessible and inexpensive,
things are beginning to change. As a result, the US now has more than 130 financial
institutions that are currently implementing real-time payments (5x over the
previous year) with RTP showing significant growth over 2020 of 69%, according
to research by Deloitte. In addition, due to the takeover of smart phones in today's
society, access to commerce anywhere and at any time has created a higher
demand for faster 24/7 fund transfers, especially in the retail space. Real-time
payments in modern society have been around for some time now, with apps like
Zelle, Venmo, and CashApp; however, they only address the instant transfer of
funds for P2P transactions. We are now seeing a growing presence and
developments in the US market, with incumbent payment players and FinTechs
adding incremental real time features and new rails being conceptualized to
address the growing demand and RTP volumes projected for the next decade.
According to Visa, the total NA opportunity for RTP represent $18.5trn in
addressable payment volumes, but in order to take advantage of the opportunity,
innovation must be brought upon the current system.
Current RTP infrastructure and solutions

In November 2017, The Clearing House of the US, New York-based banking
association/payments company owned by some of the largest financial institutions
in the country, launched an RTP platform, which was the first innovation to the US
payments structure in the nation in over 40 years. The Clearing House (TCH) and a
conglomerate of financial services firms had been working on a solution since
2014, with plans to bring an RTP network to the US and ubiquity of B2B as well as
consumer transactions by the end of 2020. According to The Clearing House, the
RTP Network currently reaches only ~61% of demand deposit accounts (DDA) but
can be made available to ~75% of US DDAs because many FIs that are not yet part
of the network can join through banking technology providers such as ACI
Worldwide or Jack Henry. Getting universal RTP in the US depends highly on the
ability to reach smaller banking institutions, and through partnership with major
payment/processor players like the recent deal with FIS in September 2020, the
TCH is creating the potential to do just that. Interestingly, TCH claims that it is set
to add north of 150 banks and credit unions to its RTP network over the coming
months.
When it comes to the US market, given its breadth and size when compared to other
global markets, there is a need and value for a diverse set of RTP solutions. The table
below shows some of the most commonly used RTP solutions in the US with the
differing attributes to each. All of the below solutions can post funds in real time.
However, not all can settle immediately. In addition, each solution has its own
unique set of rules and they sometimes use different clearing and settlement
mechanisms and networks. Interestingly, these solutions are not yet aligned with
the ISO20022 which is a messaging standard that many RTP solutions around the
world have adopted or are working to adopt because it creates a common approach
to providing payment information to accompany transactions.
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Figure 7: RTP solutions in the US market
Source : Deloitte
FedNow program
Although the private sector tends to be adopting RTP, governments have
historically found it difficult to support these forms of payments. What they are now
starting to realize is that RTP networks bring serious benefits such as preventing
fraud and even increasing tax collection. In August of 2019, sensing that existing
RTP were not accessible enough, The Federal Reserve announced that it would
develop an RTP settlement service of its own called FedNow. This system will
essentially compete with The Clearing House's 2017 initiative in supporting faster
payments and could significantly boost the US adoption of RTP. FedNow will enable
multiple RTP models and be available for use to banks of all sizes across the nation.
The service is estimated to be ready around 2023-2024 adding an extra provider for
RTP which in turn would likely boosting volumes. In addition, since the Fed's
network wont be owned by major banks, it may enable them to offer lower fees and
make it more attractive to FIs than the TCH's network.
Trends across the globe have shown that having system choice drives adoption and
transaction volume, benefiting multiple parties in the payments system. And, that
is exactly what FedNow will do. According to a pre-pandemic ACI and GlobalData
Plc report, RTP in the US is expected to increase from an 8.9% share of volumes in
2019 to 20.9% in 2024, driven by RTP volumes rising from $734m in 2019 to ~
$4.2bn by 2024 (42.1% CAGR). This will affect players across the system including
acquirers and processors, which will likely have to adopt new alternative payment
methods including RTP as their clients begin to request those capabilities.
Merchants and Acquirers/Processors alike will benefit from an increase in
conversion rates as a result of enabling these types of transaction, as well as
increased volumes.
The networks
To avoid disintermediation from networks, TCH offers non-card immediate
payment capabilities, and MA has been expanding its own cardless fast payments
offering, challenging RTP systems in the process. The networks already have
established relationships with FIs, merchants, and consumers all over the world,
which gives them an edge in gaining market share and adoption in comparison to
some of the newer, developing networks. Interestingly, TCH and MA have taken
different approaches in going after the RTP opportunity. MA is looking to build out
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an infrastructure play through acquisitions like VocaLink, whereas TCH plans to use
the networks already in place and partner with application providers in order to
facilitate transactions, providing value-added services for RTP operators. See the
Infrastructure section in this report for further details on the differing strategies that
the networks are implementing.
Challenges
Although instant payments are in high demand from consumers, and although they
have the potential to greatly benefit merchants and payment players, there are a
number of challenges that must be overcome before these types of payments
become ubiquitous. As an increasing number of users begin to leverage RTP
networks, security threats are likely to grow, and users are likely to be at risk. Proper
protocols will need to be put in place to safeguard end users from the threat of
security breaches, hacks, and account takeovers. In addition, given that a common
characteristic of instant payments is that they are irrevocable, fraud is likely to be
a main concern, as fraud is practically impossible to combat once a payment is
made. As a result, networks will need to develop enhanced processes to counteract
fraud (or come up with a way to address this risk to the consumer). Moreover, like
any system, real-time payment networks have maintenance costs, which could
result in rising fees that are typically passed on to the end user. This could be
addressed through new regulations. However, current regulations (like money
laundering laws) will need to be updated as well in order to include real-time
payments.
The post-COVID RTP world

The COVID-19 pandemic has driven the acceleration of faster payment adoption by
FIs, governments, and business institutions, and while instant payments are still in
their infancy, this space is set to experience meaningful growth over the coming
years. The crisis has led to the addition of new, faster payment options and solutions
in the marketplace, including TCH's launch of commercialized bill pay and FISV's
launch of the Dovetail platform to connect banks to the TCH network. In what was
already projected to be a strong growing trend, the pandemic put further pressure
on incremental growth in the real-time space, due to the need to reduce
dependance on traditional payment mechanisms and accelerate the transition to
contemporary digital and contactless payment ecosystems. In 2022, we see a clear
road to increasingly higher adoption and ubiquity of RTP, with an expansions of use
cases (including instant cross-border transactions). In addition, as technology
continues to advance in the space and interest continues to rise, we see an evolving
open banking landscape, with innovative features potentially leveraging
technologies such as smart contracts and distributed ledgers.
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Figure 8: US RTP Historical Timeline
Source : Deloitte
China a mature RTP market

Through the use of digital wallets and QR codes, China is one country that has
revolutionized P2P, retail, and business transactions into real-time payments.
Alipay and WeChat are the two largest payment systems in China (and some of the
largest across the globe). Alipay runs through China's version of Amazon – Alibaba
– and WeChat runs through the country's version of Facebook – Tencent. This new
payment system took over the Chinese commerce market in less than a decade,
with each platform growing to over 1bn users. The new system revolutionized the
way the average person transacts. With over 1bn consumers on each platform,
dominating the commerce market in a matter of around ten years, China's banks
have been displaced in this alternative payments system that is beneficial to
merchants but bad for banks, as banks are essentially losing out on what was once
a key revenue generator. In most developed countries, banks play a major role in the
payments system, but FinTechs are starting to take real-time payments to another
level.
The unique payments system in China was spurred by a number of factors. In a time
when magnetic strips and card-based terminals were popular among developed
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economies, China experienced significant pushback. In particular, Chinese

merchants were reluctant to adopt such terminals, given their desire to avoid
paying fees and their opposition toward passing the fees on to the customer. In
addition, these terminals also require some kind of connection to a telephonic
system, which entails set-up costs – another cost that merchants were reluctant to
pay for, adding to the slow adoption of such card readers. As a result, cash remained
the dominant form of payment. However, this was not optimal – particularly in
China, where the largest denomination of the yuan is 100 (equal to ~USD16). As a
result, it was unnecessarily challenging to execute transactions – particularly larger
ones. With merchants resisting card transactions and cash providing a number of
challenges, the Chinese payments system was vulnerable to the development of an
alternative methodology.
As carrying cash became increasingly more inconvenient, and as smartphone use

began to spread, mobile payments seemed like the logical solution to Chinese
payments. One possible solution was to use the NFC capabilities of phones to make
tap-to-pay payments. However, NFC-enabled terminals can be expensive, and they
still require an online connection. The development of QR codes soon came to
fruition, as they seemed like the best alternative, since either party can be offline in
order for a transaction to take place. The merchant's responsibility to have a
connection to the internet was eliminated, and a simple QR code (similar to a bar
code) on a printed piece of paper was all that was needed. In turn, this led to lower
costs for merchants, especially for those that found it difficult to connect to the
internet. It also created a system by which transactions could take place even if one
party lacked a smart phone. This payment method now dominates transactions in
China, with the vast majority taking place through China's two dominant platforms,
Alipay and WeChat Pay.
The payment system created by these two apps integrates two main technologies
that are widely available but not commonly used – digital wallets and QR codes. All
it takes is for either party in the transaction to scan the other's QR code, and the
funds can either be paid or requested. This serves as a major advantage, as card-
reading terminals are completely cut out of the process, and parties can transact
directly form account to account in real time. This increases the speed of the
transaction while cutting costs, and it explains why China has so few POS terminals
and extremely low ATM sales today.
Faster payments in Brazil: an opportunity for FinTechs

Brazil's central bank promotes instant payments
Brazil's central bank, Banco Central do Brasil (BCB), has implemented instant
payments (IP) in the country based on mobile phones and QR codes, without the
need for cards or a POS terminal. The platform is called PIX and is part of a wider
innovation program in the country to promote a better financial system. Instant
payments are electronic transfers in which the payment messaging and funds are
available in real time, with the service open for use at any time. Given that there is
no intermediary between the payer and payee, transaction costs are lower. In
addition to leveraging QR codes for initiating payments, users can utilize other
methods, such as social security or company registration numbers, as well as email
addresses or phone numbers. Benefits include faster payments, lower costs,
increased security, automated reconciliation, and an overall better user experience.
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The BCB is the infrastructure provider, with banks and FinTechs being able to
provide services underpinned by the IP platform.
Bringing the unbanked and underserved into the fold

One of the significant benefits of adopting of IP is that it typically supports financial
inclusion, bringing the unbanked and underserved into the digital payments
ecosystem. Smartphone usage is widespread in Brazil, where 67% of the adult
population has access to smartphones. However, more than 45m adults in Brazil do
not have a bank account. As a result, we expect implementation of IP in Brazil to
result in more digital transactions over time, creating opportunity for payment
players like PagSeguro, which offers QR codes and a full ecosystem of financial
services through PagBank without the need for a bank account. In addition, as IP
brings more people into the digital financial ecosystem, FinTechs that offer digital
banking services (like those offered by PagBank) should be able to further capitalize
on the opportunity by selling additional services, such as credit.
Lower transaction costs, but similar acquirer economics

Merchants and other IP platform users will certainly benefit from lower transaction
costs, given the absence of an intermediary between payments. However, the
overall economics for the bank acquirers and FinTechs that leverage IP (such as
PagSeguro) are similar, and they could, in fact, be even be better due to the lack of
costs required in regard to interchange or card scheme fees. We note that
PagSeguro is agnostic as to whether a POS device or a QR code is used. In addition,
there should be no impact to credit card usage. Although it does take time to
migrate consumers from card transactions, QR codes should naturally gain
acceptance over time and become another payment option for merchants/
consumers that wish to use their PagSeguro balances to make purchases. Overall,
we believe that players (like PagSeguro) with an agile culture and business model,
technology DNA, and capabilities to launch and rapidly scale new products should
benefit from offering services on top of the PIX IP platform.
Instant Payments System (SPI) overview

The Brazilian IP ecosystem includes the open scheme owned by the BCB, the
Instant Payments System (SPI), and the payment service providers. The SPI,
operated and managed by the BCB, is the centralized and sole settlement
infrastructure of the Brazilian IP ecosystem for settling transactions in real time. It
is available twenty-four hours a day, seven days a week, with a centralized
architecture based on ISO 20022 messaging standards (similar to other
jurisdictions). In addition, the BCB is the developer, operator, and manager of the
solid and centralized proxy database, with the database storing the information.
Please see the figure below for an example of the BCB's system.
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Figure 9: Instant payments system in Brazil
Source : Central Bank of Brazil

SPI: Instant Payments System
STR and Selic: Possible Sources of Liquidity
Global interoperability
In today's societies, consumers expect to have instant access to services and
resources 24 hours a day, seven days a week, and a global real-time payments
system is becoming increasingly necessary. The ideal environment would be one in
which payments could be delivered instantly in a secure and effective manner, even
across borders. However, that is currently not the case. Given all of the regional
development that is taking place, the possibility of a global, real-time payments
network is very real. However, most systems currently do not support cross-border
payments, due to a lack of quality data and inconsistency, which lead to different
interpretations that require manual intervention before processing. Before this can
ever become a reality, central banks, regulators, and financial institutions across
the world would need to reach a certain level of interoperability, with a consistent
form of payment messaging. In turn, friction in the cross-border exchange of funds
would be reduced, and costs would be significantly lower.
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ISO 20022 and SWIFT gpi

The most prevalent efforts toward the initiative of global interoperability with RTP
is the adoption of the ISO 20022 standard, which has been implemented more than
80 times worldwide. ISO 20022 is a multi-part, international standard prepared by
ISO Technical Committee TC68 Financial Services, used by the financial industry for
electronic data interchange. The standard works with various payment types, and
it offers the flexibility that could provide the solution to complying with potential
interoperability needs of RTP systems in the future. However, ISO 20022 is far from
becoming a universal standard, as it has received significant pushback from the
private sector, due to the high investments required to obtain proper technology in
order to participate.
In addition, SWIFT (the Society for Worldwide Interbank Financial

Telecommunication), which is a secure payment messaging network that enables
millions of monthly payment messages in international transactions, recently
launched SWIFT gpi to help address issues with cross-border payments. The
initiative aims to improve the SWIFT payment experience, which has typically
included a lack of visibility, high routing fees, and delayed payments. On a positive
note, the gpi initiative offers real-time payment tracking capabilities across the
globe, offering payment transparency (even across borders) with predictable fees,
providing clarity on transaction costs in advance. In addition, up to 140 characters
of remittance information can be transferred (unaltered) to recipients, which helps
in payment reconciliation and could be leveraged for RTP systems.
Real-time payments adoption is accelerating

RTP adoption has accelerated over the past few years globally, but we see a long
runway ahead for both penetration and expansion of use cases. We believe that V
and MA are best positioned as the rails for RTP, and we expect them to benefit from
the accelerated FinTech adoption and FI expansion into RTP uses cases. We note
that RTP opens new payment flow opportunities for the networks which are ~10x
the cash PCE opportunity, and we believe RTP is reaching an inflection point in
adoption and acceptance due to the pandemic. As a result of the crisis, recent
research has found that real-time payments have accelerated, with real-time rails
now offering capabilities beyond instant payments. According to FIS' annual report
on RTP, six countries have more than doubled their number of RTP transactions Y/Y
and four have seen transaction values double. Adoption has been on the rise not
only in mature markets (like the UK) but also across Europe – including the P27, for
example, as well as the US market and emerging economies (such as Brazil and
Thailand). Even across mature markets like the UK, RTP volumes are expected to
grow by double digits over the next several years.
Infrastructure investments have significantly expanded the acceptance of RTP use

cases globally beyond card-based solutions (such as push payments) by leveraging
Visa Direct and MasterCard Send. For example, >56 countries already have real-
time payments systems in place, with several more expected to launch solutions
within the next 2-3 years (compared to ~14 just six years ago). In particular, MA
acquired VocaLink, the RTP scheme in the UK market, and it has since won a
significant share of new RTP infrastructure expansion initiatives globally through
RFPs country by country. Furthermore, push payments riding the network rails
(namely Visa Direct and MasterCard Send) have accelerated the adoption of RTP
use cases, such as P2P, disbursements, and cross-border remittances. We view
acquisitions like Earthport and Transfast by V and MA as strategic as well, helping
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companies to move beyond cards into account-to-account via infrastructure

acquisitions (like Finicity by MA), driving synergies.
See the figure below for some of the major and more established RTP markets
across the globe, with volumes for 2019 and five-year projected CAGRs. In our view,
the key countries and regions to watch for real-time payment growth include the US
(an expected 42.1% CAGR), the Nordic countries included in the P27 initiative (an
expected 20.9% CAGR), ASEAN (an expected 39.0% CAGR) and Europe. In
addition, the new countries to RTP (namely Malaysia, Finland, and Belgium) are
expected to have the strongest growth.
Figure 10: RTP volumes across markets
Source : ACI Worldwide
Pandemic highlights the need for real-time government payments

Real-time payments are on the rise across the globe, giving ample room for banks,
processors, acquirers, and national infrastructure providers to capitalize on the
opportunity and grab market share. The pandemic gave the world a glance at how
important immediate funds can be for maintaining continuity and how they can
truly make a difference and help solve a variety of problems in the payments
ecosystem for both consumers as well as businesses. For instance, in a time when
many were struggling and the urgency to get stimulus checks to consumers was
paramount, the US Treasury Department would have greatly benefitted from an
RTP network to disburse funds. In fact, while disbursing checks for the CARES Act
using ACH payments (some checks were mailed), the Treasury encountered several
issues that delayed payments to consumers (such as account verification, fraud
prevention, and timeliness of getting funds to the recipients' accounts). However,
disbursing the funds was only half the battle, as some consumers then had to
convert checks into available funds, and given the urgency created by the crisis, the
need for immediate funds was critical. An RTP ecosystem would have greatly
expedited this process, allowing for immediate push payments directly to
consumers' bank accounts/digital wallets, ready for use.
Real-time payments benefit everyone in the ecosystem

Real-time payments could greatly benefit all players in the payments ecosystem
(including [but not limited to] financial institutions, merchants, and consumers) by
providing better visibility on day-to-day payments, enabling better cash flow
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management, and helping businesses to operate more efficiently each day through
improvement liquidity management, for example. Consumers demand faster
solutions in all aspects of their lives (especially in today's society), and the
frictionless 24/7/365 payments that RTP systems could bring would address this
need, providing speed and efficiency for emergency payments (and any payment
in general). Corporations stand to benefit from RTP networks, given their efficiency
and the clarity of the payments being made (invoicing/billing), which improve
liquidity and help optimize WC management. Historically, governments across the
globe have been the most resistant to abandoning their old payment schemes.
However, these entities could greatly benefit from an RTP system as well through
use cases, such as traceable emergency benefit payments and increased tax
revenue from GDP growth as a result of higher payment volumes.
Pre-crisis business use cases for real-time payments

The figure below shows several real-time payment use cases, based on the
percentage of organizations surveyed in the 2019 AFP Electronic Payments Survey.
The survey shows pre-crisis use case demand for last-minute bill payments (~47%);
emergency payments, such as payroll (~45%); making an accounts payable (AP)
payment on the last day of discount availability (~29%); and making payments to
major suppliers (~25%). We note that ~14% use RTP for most payments and are
interested in using it for as many payments as possible. Furthermore, ~13% use RTP
to pay temporary consultants and gig workers.
Figure 11: Pre-pandemic RTP use cases
Source : 2019 AFP Electronic Payments Survey
Moving beyond traditional, card-based payments

RTP has moved beyond traditional, C2B, card-based transactions, and it is
permeating once friction-filled use cases with extended settlement period times
and transfer wait times by making value-added use cases, such as peer-to-peer
(P2P) transfers, bill payments, and cross-border remittances instant. Although a
significant portion of the RTP opportunity can be addressed through card-based
solutions (e.g., via push payments using Visa Direct and MasterCard Send and
commercial/virtual cards for B2B), there is also an opportunity to go after account-
to-account and other non-card-based opportunities – namely cross-border and
domestic accounts receivable/payable (AR/AP) transactions. We note that V and
MA are leveraging a Network-of-Networks or Multi-Network strategy. For example,
Visa Direct and MasterCard Send debit networks partner with multiple alternative
networks (such as ACH networks) to facilitate push payments. In addition, they are
going after the non-card-based RTP opportunity by building infrastructure (e.g.,
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MA acquired VocaLink and most recently Nets, with both V and MA focused on
application and services in order to drive value in B2B payments). Overall, we see
significant opportunity for RTP use case expansion and new flows for the networks
as well as FinTechs, FIs, and payments processors.
Figure 12: Real-time payments categories
Source : Deloitte analysis
Leveraging a Network-of-Networks strategy

Vand MA are leveraging their Network-of-Networks or Multi-Network strategies to
go after RTP and new flows opportunities. In addition to leveraging their own
networks (such as V Direct and MA Send for debit and push payments, VocaLink for
RTP use cases, B2B Connect/B2B Hub and Nets for business-to-business (B2B)
payments, and Earthport/Transfast for account-to-account flows), V and MA
leverage multiple third-party alternative networks, including multiple RTP/ACH
networks globally, as well as SEPA, SWIFT, and correspondent banks. For example,
Visa Direct grew to ~5bn transactions in FY21, utilizing ~16 card-based networks,
~65 domestic ACH schemes, ~7 RTP schemes, and ~5 payment gateways across
more than 180 countries. We note that V and MA are taking a partnership approach
that is agnostic to the payment player, and their use cases are focused on driving
their band to the top of the wallet and capturing incremental volumes from new
flows.
Push payment use cases are expanding

Visa Direct is expanding into new use cases (such as cross-border P2P, where the
company sees significant opportunity). For example, in Turkey, Ozan is looking to
provide global mobile remittance services to the underbanked and gig economy
workers, which represent roughly one-fourth of Turkey's ~83m population. In
addition, VTB Bank in Russia (the country's second-largest bank, with ~15m
customers) is leveraging Visa Direct for card-to-card transfers across ~64
countries, and KoronaPay remittance centers are leveraging Visa Direct for cross-
border money transfers. In Canada, TD Bank now offers retail customers a mobile
platform for P2P, with cross-border capabilities. Furthermore, Visa sees
opportunities across use cases, such as earned wage access and payroll, which
have generated significant demand throughout the pandemic. For example, in
Europe, earned wage access provider Wagestream has recently partnered with
Visa Direct. In addition, after just two months with Visa Direct, earned wage access
provider Immediate now uses the solutions for ~50% of its disbursements.
Meanwhile, in the US market, PNC is providing commercial clients with B2C
disbursements (e.g., traditional payroll processing).
Strong demand for value-added services

Value-added services create revenue opportunities beyond consumer payments,
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and the convergence of physical and digital commerce is creating surging demand
for services. As a result, throughout the pandemic, there has been pent-up demand
for Visa and MasterCard's value-added services (e.g., digital issuance, token and
fraud management, authorization optimization, and data-driven solutions).
Services help customers grow revenue and reduce costs as well as improve the
consumer experience. Services innovation is not limited to one part of the
ecosystem. It spans all players, connecting them together. Despite a long history of
pricing pressure across many different commoditized offerings, payment players
are gaining pricing power through services innovation. Due to their non-
transaction-based nature, value-added services growth across the networks,
acquirers, and FinTechs has been more resilient during the recent crisis. V has
highlighted that with more sellers across the globe opting for digital/omni
capabilities due to the crisis, this has created the opportunity to deliver more value-
added services, such as cybersecurity and risk-related services.
Visa Direct and MasterCard Send growing rapidly

Visa Direct and MasterCard Send allow for push payments, with money flowing
both ways over the networks. As a result, these solutions have opened a large range
of new uses cases, such as insurance disbursements, gig economy worker payouts,
and faster merchant settlement for small businesses. In addition, these solutions
can be used for plug-and-play payment flows for massive subscription bases across
players like Apple, Facebook, and Oracle (to name a few). Visa Direct is built on
VisaNet's foundation, leveraging its global reach as well as its risk management and
compliance capabilities. V acquired Earthport, expanding the company's reach to
99% of bank accounts in 88 countries and allowing the company to reach an
additional ~1.5bn accounts with Visa Direct. V partners with global P2P brands like
PayPal, Venmo, Square Cash, Google, and Apple, powering a total of >100 P2P
programs and driving >100% year-over-year growth in the segment. In addition, the
company supports bank-led P2P programs (e.g., in Russia and the US, with clients
like Zelle). Similar to areas like the gig economy, marketplace payouts comprise
another area of high growth. MasterCard Send has also had strong success with
new payment flows. Recent wins include Bank of America for business-to-
consumer card disbursements exclusively in the US, Allstate in the insurance
space, and PayPal for use across ten new markets in Asia Pacific and Europe in order
to enable fund transfers from wallets to cards. The company is also continuing its
cross-border expansion. Overall, both Visa Direct and MasterCard Send should
continue to allow the network to expand into new flows and capture significant
incremental volumes over time.
Economics of Visa Direct and MasterCard Send

Vdoes not expect to generate yields that are similar to typical card transactions at
merchant POS/websites. Instead, it expects yields to be more similar to those of
domestic-based ACH and wire networks. In place of a percentage fee, the company
captures a fixed, per-transaction fee or flat rate for operating the network. It
generates higher yields on cross-border transactions than domestic transactions
(P2P generates the lowest yields, with domestic disbursements being the second
highest, behind cross-border transactions).
Similar to Visa, MasterCard varies charges based on the use case of Send. In most
instances, it charges a flat fee for each transaction, with cross-border transactions
also incurring an FX spread fee. Unlike Visa, the company does not disclose growth
rates or the size of MasterCard Send.
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Massive B2B opportunity

B2B represents a massive $120trn opportunity, and RTP solves many B2B
challenges via faster settlement and better data. Impacted throughout the
pandemic by a slowdown in T&E, commercial payments represent ~12-15% of
volume for V/MA, but we expect the RTP opportunity to accelerate growth over
time, with the recovery in travel potentially adding to volume growth and slightly
less to revenue growth over the next few years.
V's B2B volumes mostly come from card-based products (~$1trn today), and they
have attractive yields compared to the other components of B2B, cross-border
account-to-account, and AR/AP, which entail slightly lower yields. On the card-
based front, V is seeing increased interest for digital payments in the wake of the
pandemic, and it is addressing the demand by supporting issuance, expanding into
new verticals and investing in order to streamline operations and enable
acceptance. V previously launched YeePay in China to support a virtual card
program in both OTA and education, and it announced a new set of solutions,
partnering with Stripe to enable buyers to use virtual cards for payments. In
addition, the company has recently partnered with FinTech Boost, which focuses
on B2B payment acceptance, aiding the expansion of card adoption by
streamlining manual acceptance processes for suppliers, enabling automated data
reconciliation and offering flexible economics.
Building infrastructure for RTP use cases

Beyond the V Direct and MA Send addressable market, RTP networks are being
built globally, focusing on B2B solutions and the AR/AP opportunity, which
represent $125trn of volume for the networks globally. The real-time payments
(RTP) opportunity is an important area for network growth, offering opportunity for
payment players across the industry as well. There are over >50 live RTP networks,
and many more are in the pipeline to go live globally (e.g., the Federal Reserve is
building a faster payments service in the US, called FedNow). Building core
infrastructure (historically backed by governments or bank consortiums, but with
increasing interest from payment networks) requires upfront investment (in many
cases, highly customized to individual markets), and it is typically open for use by
market participants at a regulated fee. MasterCard acquired VocaLink, which built
and operates UK Faster Payments, complemented by the subsequent acquisition of
Nets. While MasterCard is expanding globally into RTP infrastructure through its
full-service approach, with the company live or having signed with many of the top
GDP markets and taking share from domestic players by winning RFPs country by
country, Visa plans to use all available open RTP systems. We note that both Visa
and MasterCard are focused on going after applications and services, where much
of the revenue and profitability is, representing ~5x the current card opportunity.
Networks are going after real-time payments with differing strategies

The payment networks, namely V and MA, are going after the real-time payments
opportunity in different ways. MA has gained a foothold in real-time payments
through an infrastructure play, acquiring VocaLink, which originally powered the
UK Faster Payments service. In addition to powering infrastructure and software for
real-time payments, VocaLink provides applications, services, and infrastructure to
the UK. Furthermore, MA is leveraging VocaLink's infrastructure capabilities to
expand real-time payments to new markets globally. MA believes that there are
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synergies in participating in all three areas – namely applications, services, and

infrastructure – which should lead to optimized incremental revenue streams.
Contrary to MA's strategy to own the infrastructure for real-time payments, V plans
to leverage available real-time payment systems to move money as part of its
network-of-networks platform, partnering with application providers to facilitate
transactions, and delivering key value-added services to real-time payment
operators, such as tokenization, authentication, fraud detection, and dispute
resolution. Real-time payments (RTP) play an important role in V's network-of-
networks strategy. There are >45 live RTP networks with >30 in progress. We note
that the networks see real long-term growth in differentiated, value-added services,
such as tokenization or offering disputes in a more "rail-agnostic" way, now
possible through their Verifi acquisition. V/MA also currently power most digital
wallets, as well as features like Instant Deposits from players like SQ and PYPL,
leveraging push payments through MasterCard Send and Visa Direct.
MasterCard is expanding real-time payments globally

In addition to MasterCard Send (the company's real-time solution for push
payments, etc.), MA acquired VocaLink, an infrastructure provider for real-time
payments. It also recently acquired Nets, which it can leverage to enable faster
payments infrastructure across a variety of markets. MA has acquired the clearing
and instant payment services, as well as the e-billing solutions of Nets' Corporate
Services business in the Nordics. Nets should complement and strengthen the
company's capabilities across all three layers (applications, services, and
infrastructure). In addition, MA has recently won real-time payment deals in the
Philippines, Peru, and Saudi Arabia, and it has partnered with P27 to deliver real-
time and batch payments in the Nordics. P27 represents the population of the
Nordic region (~27m). MA captured the P27 deal through VocaLink, where it plans
to leverage Nets. The new platform leverages its VocaLink assets, and it will replace
existing payments infrastructure and provide instant and secure payments across
the region. In addition, The Clearing House (TCH) recently announced that it would
launch MA's phased financial crime solution for AML compliance in the US. Bill-pay
expansion (including MA's acquisition of Nets and Transactis as well as the Bill Pay
Exchange network) should also drive incremental growth in the future.
Some of the deals that MA is signing are software deals, and others will allow the
company to be the infrastructure and run everything. For example, in the
Philippines, MA was chosen to enhance the InstaPay real-time retail payment
system in the country, including operating the infrastructure and providing services
like anti-money laundering to an institution called BancNet, the national clearing
switch in the Philippines. MA plans to do this through a regional hub in Asia Pacific.
In Saudi Arabia, MA is licensing its RTP software to the Saudi Arabian Monetary
Authority (SAMA) to upgrade their system, providing similar capabilities to those of
the US, Ireland, and Singapore. In Peru, MA plans to modernize and operate the
country's electronic payment infrastructure. Overall, MA remains involved in
multiple RFPs around the globe. We note that the key to growing its multi-rail
strategy is supplementing growth through selling more value-added services and
switching more transactions, which ultimately bring higher yields. The more
switched transactions MA sees, the more data it can sell/share with issuers and
merchants through critical client services (e.g., fraud prevention).
V's B2B Connect and Earthport are enabling cross-border payments

Growth of non-travel, cross-border business is a large priority for Visa, including
new use cases using Visa Direct, like remittances and cross-border business
through B2B Connect as well. At its Analyst Day last February, V pointed out that
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within the $120trn new commercial payment flow opportunity, cross-border

payments make up ~$10trn. These payment flows are largely untapped and ripe for
disruption due to a lack of reach and transparency, which are significant challenges
in cross-border transactions. Cross-border payments (especially large ones) move
from one financial institution to another on a bilateral basis, often times lacking
speed and visibility and entailing increased costs. To address these issues, Visa
developed B2B Connect, a multilateral network by which payments and data can
move from one FI to another around the globe. The network operates in >70 markets
globally, with expectations to reach over 100 markets by 2022. B2B Connect
currently covers a large majority of global trade flows in payment corridors, and
although it is already live, V is still working on building out the endpoints for this
network by working with network integrators and engaging FIs that process their
own payments to join the network.
In 2019, V acquired Earthport, a critical element in conducting cross-border

disbursements and remittances. Earthport gives customers/partners access to
both card and account rails through a single connection to Visa. The acquisition
gave V access to bank accounts across ~90 countries, due to their direct connection
to ACH and RTP systems worldwide. Due to the local nature of these systems, it can
become incredibly complicated for consumers to manage payments across
borders. Earthport allows V to remove that burden from its customers and assume
the regulatory, file format, and all other complexities that come with navigating
payments around the world. Earthport gives V extensive coverage in order to enable
consumer choice, allowing payments to be sent and received in any way across the
globe. Earthport also brings more choice and global ubiquity to multinational,
marketplace-type environments. Through a single partnership with V, Earthport
can offer many forms of payment everywhere on the globe. Earthport is set to scale
in 2021, as volumes are ramping, and V has signed a number of clients, including
major players in the remittance space, such as MoneyGram, Western Union, and
Remitly. Remittances constitute a large use-case opportunity, and they are
expected to ramp up fast over the coming years. V is spending a lot of time and effort
to ensure that the Earthport platform can scale, driving cross-border flows not only
for consumer payments, but for a whole range of other new use cases as well.
Figure 13: Network-of-Networks transactions: cross-border examples
Source : Visa
Applications and services revenue opportunity

Real-time payment (RTP) ecosystems have three layers, namely user applications
for accessing the infrastructure to move money and make payments, services used
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by the participants in the ecosystem, and the actual core infrastructure.

Applications and services represent a large majority of the revenue and profit
opportunity. The infrastructure requires significant investment to build and
typically has a lower return with limited scalability and low network effects. In
addition, the infrastructure is usually controlled by the government or a bank
consortium. However, the infrastructure is also typically open for use across all
participants in the ecosystem for moving funds at a regulated price. As a result, we
believe both V and MA remain well positioned to capture the real-time payments
opportunity through their various strategies. V will go after the application and
services layer, partnering with the infrastructure providers, while MA will go after
all three layers by owning the infrastructure and partnering with other players in the
ecosystem. Overall, real-time payments, or RTP, is an increasing trend in the
payments space, and the real-time ACH opportunity is ~5x larger than the current
carded space.
Recent acquisitions expanding RTP capabilities

MA recently announced the acquisition of the clearing and instant payment
services as well as e-billing solutions of the Nets' Corporate Services business in the
Nordics. The acquisition will position the company in real-time payments as an
alternative to traditional ACH, cash and checks to drive efficiency, rich data, and a
robust user experience. In addition, the acquisition builds on the company's real-
time payment wins, including in the Philippines, Peru, Saudi Arabia and through its
partnership with P27 in the Nordics. MA also recently acquired SessionM, which is
a US-based technology company that provides end-to-end loyalty solutions for
merchants. The acquisition is expected to strengthen the company's ability to
provide a complete platform-based loyalty solution starting from data
management to campaign execution and program measurement to merchant
customers. SessionM has a growing user base of leading customers including
McDonald's, PepsiCo and Lowe's.
In addition, V recently completed the acquisition of YellowPepper which extends

V's network of networks strategy, lowering the time to market for issuers, creating
a more seamless integration to V Direct (Visa's push payments platform) and B2B
Connect, and increasing the adoption of value-added services. YellowPepper is a
Latin American FinTech pioneer that was founded in 2004 with a proven platform
that enables financial institutions to easily launch card and account agnostic RTP
solutions in addition to providing other value-added services. The company
operates in nine Latin American countries and serves 50 clients with >5m monthly
active users.
FinTechs leveraging real-time payments

Not surprisingly, merchants dislike the fact that they must pay fees to a number of
payment players to process transactions. Given the universal acceptance and use
of card payments, however, they have practically no alternatives. Positively, with
the growing ability of account-to-account interbank payments in real time coupled
with merchant pressures for a better solution, we have seen a rise in alterative
payment methods provided by FinTechs that cut out the card rails and intermediary
players. In addition, enabling such payments requires real-time payments
technology, which also helps improve operational efficiencies for these firms and
boosts customer engagement and satisfaction. Getting faster access to money is
also becoming increasingly more critical to consumers, especially in a time where
managing funds has become more and more complicated. Many FinTech players
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were quick to realize these pain points and addressed them by being some of the
first to provide services that have allowed payment methods of all types, enabling
the flexibility and freedom consumers are used to seeing in other aspects of their
life. Companies such as PYPL and SQ benefitted from a first movers advantage in
the instant P2P space, and as a result, they are now the dominant players in that
market (along with Zelle). As RTP systems have continued to develop, these
FinTechs have expanded their instant payment capabilities to other services and
solutions in their product suite, driving convenience and better experiences for end
users.
PYPL RTP developments

PYPL is engaged across different real time developments across the globe and it is
the single largest user of the faster payment system in the UK, which was one of the
first actual RTP systems in the world. Although the expectation was that there
would just be a shift in volume from legacy systems, PYPL in fact claims that the
new rail actually created new volumes and brought about new business. PYPL is
also known in the instant payments space for its popular P2P app Venmo, which
allows fast payment transfers between two users. During the pandemic, the Venmo
app saw acceleration in revs and a surge in daily transactions driven by new use
cases. In addition, the app was also seeing strong adoption from new users with
accelerated numbers of net new actives. Furthermore, PYPL has also for some time
now enabled instant deposits, which allow users to instantly transfer funds from
their Venmo/PayPal account balances to an eligible debit card.
More recently, through a relationship with JP Morgan that allows PYPL to leverage
The Clearing House RTP network, PYPL users can transfer funds from the PayPal
and Venmo app to bank accounts in real time. In 2020, PYPL integrated NPIL's/
NPCI's Unified Payments Interface (UPI) to its international money transfer service
Xoom, allowing it to enable remittances to India in real time. The integration also
makes it increasingly easier for users to send money into the country, as the only
thing the overseas sender needs to know is the receiver's UPI identity. India is an
important market for PayPal, and consumers now have the option to transfer money
to 66 banks in the country in real time. Furthermore, the development follows an
initiative PYPL implemented for its Xoom users in the US, which allows residents to
send money directly to the bank account of a recipient.
In addition, PayPal and V extended their global partnership in September 2020,

which expands instant access to funds for consumers and small businesses who
are transferring money via PayPal, Venmo or Xoom. The partnership expansion
leverages Visa Direct for RTP capabilities and allows users to move money from
their accounts to an eligible Visa card across global markets, while also enabling
fast domestic and cross-border digital payments. In addition, the global partnership
also gives PYPL the capability to expand its global white-label V Direct payout
services to its Braintree, Hyperwallet and Zettle solutions, allowing small
businesses real time access to earnings, eliminating cash flow struggles. Following
this news, PYPL also announced a similar partnership expansion with MasterCard,
expanding the Instant Transfer service leveraging MasterCard Send to Europe. The
previous partnership saw a successful launch in the US and Singapore, with the
expansion bringing the services to Bulgaria, Bosnia, Germany, Italy, Romania,
Serbia, Slovenia, Spain and UK. For V and MA issuers, the instant transfer features
could be beneficial in the form of increased consumer engagement and follow-on
spend.
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Square's RTP solutions

Similar to PYPL's Venmo app, SQ's Cash App also competes in the space and has
seen growth accelerate throughout the pandemic. Strength was driven by the
pandemic and stimulus money, which increased P2P volumes as well as created
new use cases for sending money to friends and family. In addition, SQ's instant
deposit feature, which allows users to transfer the funds in their Cash App balance
instantly to their linked bank account, has also seen an uptick due to the crisis.
Furthermore, to address SMB's needs for quick access to cash, SQ for some time
now has offered two options for faster transfers than the traditional two-business-
day standard. Users can opt for same-day transfers to have funds available in their
linked account by end of day, or in the case where funds are needed on-demand, SQ
also offers instant transfers. Instant transfers are available to send your eligible
balance on-demand, 24 hours a day, seven days a week.
During the pandemic, to address the cash flow struggles of the >80m hourly
workers across the US, SQ also recently began offering instant payment payroll
services allowing businesses to store and use funds in their SQ balances to pay their
employees faster. Rather than having to submit payroll four days in advance the
traditional way, SQ Payroll users can pay their teams faster using Instant Payments
or On-Demand Pay. Instant Payments allows employees to receive their pay on the
next business day with direct deposit or instantly if they are Cash App users (incl.
weekends). On-Demand Pay allows eligible employees to transfer up to $200 of
their earned wages whenever they need them to Cash App at no cost in any given
pay period. When the employer processes payroll down the line for the employee,
SQ Payroll automatically adjusts the employees' earnings at the time of their next
regularly scheduled payroll.
FIs driving new revenue opportunities in RTP use cases

To realize the advantages RTP brings to an economy, it is important for banks to
participate in the transition away from legacy systems early on. RTP offers
increased data and messaging capabilities, increased security and real time funds
availability when compared to legacy bank transfers. Looking at the US RTP system
in particular, the market has one of the most advanced systems in the world due to
the strong emphasis on data and messaging, which can be partially attributed to the
adoption of ISO 20022. Although speed is a key value of such payments, the data
and messaging capabilities these payment types can carry when they are made are
much richer in comparison to older payment methods. There is so much data that
can be attached to each transaction, such as remittance data, which can result in
operational efficiencies and help improve business performance as well as help
manage fraud and mitigate risk.
Looking at one of the most powerful messaging types, request for payment (RFP),
we can see below how billers can simplify the billing and payment process for
payers. In addition, a 2018 Global Payments Insight Survey conducted by Ovum
found that 85% of banks globally believe that RTP is the foundation for growth and
new product enhancement. Not only would RTP transaction fees boost revs for
banks, but the net interest income from cross-selling opportunities could unlock
further value and revenue uplift. In addition, RTP enables cost savings which,
coupled with the modernization required for such systems, results in better use of
data while increasing operational efficiencies. RTPs allow FIs to focus less on
operating manual decision-making processes and focus their energy on more
important aspects of their business. Enabling such payments does more than just
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add value to consumers, as the introduction of AI and ML capabilities to drive such

technologically driven systems results in operational efficiencies as well. This
compares to traditional payments such as paper checks and money wires, which
require manual intervention and internal approvals. The natural boost of
technological capabilities brings down costs.
Figure 14: RTP bill payment use case example
Source : Deloitte
Payment processors could benefit from real-time payments

A survey conducted by Ovum and ACI Worldwide found that 77% of merchants
surveyed across the globe expect real-time payments to eventually replace physical
payment cards. As a result, merchants and other RTP platform users will certainly
benefit from lower transaction costs as there will not be an intermediary between
the payments. The cost of contactless payments has continuously increased for
merchants driven by the lack of openness and choice on the back-end payment rails
and competition on the front end. RTP could greatly benefit low-value high-volume
merchants who do not necessarily rely on the added benefit from the protections
baked into card rail costs. In addition, acquirers could benefit from increased
economics leveraging RTP due to the lack of costs they will need to incur with
regard to interchange or card scheme fees. Furthermore, by enabling real-time
payment processing and settlement to banks and credit unions, issuer processors
can enable FIs to quickly and cost effectively connect to RTP networks. As a result,
these initiatives could turn out to be lucrative, as they will likely attract new
partnerships with FIs and bring on additional volumes. Previously, FIS partnered
with TCH to bring real-time payment processing to small and mid-sized banks and
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credit unions and their customers. FIS is now offering a new managed service that
seamlessly connects partnered FIs to the RTP network from TCH, enabling them to
initiate and receive real-time payment transactions. Because FIS acts as a host in
these partnerships, FIs can take advantage of the network with little upfront capital
investments.
Open banking initiatives creating opportunity

Open banking refers to the practice in the banking and financial services industry
that gives third-party providers open access to all consumer financial data from all
sorts of financial institutions through APIs (application programming interfaces).
APIs assist consumers in accessing banking services through different online
platforms, resulting in an enhanced user experience as a consequence of
augmented services that are tailored to consumers' specific needs. Open banking
takes the power away from the banks and gives merchants and consumers greater
choice. Offering payment choice is now more important than ever due to the wide
variety of ways to pay, such as BNPL apps, order ahead apps and Apple/Google Pay,
pressuring merchants to cater to payment preferences so as to not risk losing
customers.
We see more opportunity than risk from open banking initiatives and expect the
Networks to benefit from new use cases and payment flows as well as value added
services opportunities. Open banking initiatives across Europe and other markets
globally, namely PSD2, which provides third-party payment services providers
(TPPs) with access to the bank account, have led to increased competition,
particularly among upstarts and FinTechs going after financial services use cases
that leverage account access. FIs are most at risk of disintermediation but are also
innovating and leveraging RTP to compete. In addition, although we will continue
to monitor disintermediation risks to the networks, namely alternative closed loop
networks leveraging open banking, consumer and merchant adoption remains a
challenge and we believe the Networks remain well positioned through their global
acceptance and consumer reach. In particular, we believe they should benefit from
powering new use cases that use open banking access. Overall, we see open
banking creating significant opportunity for the Networks that serve as the
connection between the FinTechs, banks and accounts. Furthermore, although we
will continue to monitor pricing across the industry and regulations such as
interchange caps, Durbin in the US and MIF regulations in Europe have not had a
material impact on Network fees in our view, which are a small part of the overall
MDR.
PSD2 sets up the landscape

In efforts to make electronic payments more secure in Europe and create a more
competitive environment for non-bank players, EU regulators implemented the
PSD2 initiative, which gives third parties access to bank data. Although the
initiative began being enforced in early 2018, the regulation dates back to 2007 with
the original Payment Service Providers Directive (PSD) which aimed to bring one
unified payment market in the EU in efforts to promote innovation, competition and
efficiency. Later on, in 2013, the European Commission brought about an
amendment to the PSD initiative (hence the PSD2 name) aiming to enhance these
objectives and improve consumer protection and payment security as well. The
original PSD contained two main sections: the market rules and business conduct
rules. The market rules describe which type of organizations could provide payment
services and the business conduct rules specify what transparency of information
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payment service institutions need to provide. The directive forces banks to open up
the data they have on consumers to third parties, losing the advantage they have on
other players in the payments ecosystem and creating a more "level playing field"
for the benefit of consumers.
With this initiative, third-party providers such as a financial app would solicit
permission from customers to access their banks data resulting in an enhanced
user experience. Deep insight to customer behavior and data is one of the most
valuable assets a bank holds but with the PSD2 regulation, banks have to open up
their transactional data of cash accounts to third parties making it possible for these
providers to add financial information on behalf of the consumer and make
payments on their behalf using their accounts. PSD2 also brought about Strong
Customer Authentication (SCA) which was one of the major developments in the
revised form of the initiative. SCA introduced a new security requirement that
involves the use of two authentication factors for bank operations including
payments and access to accounts online. The SCA requirement also set stricter
rules on what was defined as an authentication factor, however the initiative also
has several exemptions to the requirement such as transactions under 30 euros as
well as recurring transactions of the same amount.
Although the SCA requirement is technically supposed to be applied in the case of

a transaction with a European issuer and acquiring bank, EU issuers might still use
these rules regardless of the merchant location. The SCA rule will help combat CNP
(card not present) fraud; however, there is a risk that once the fraud is reduced in the
EU, it will increase in other regions across the globe that do not have the same level
of protection, including in the US. For instance, in the past when Europe adopted
chip and PIN card authentication before the US, card present fraud dropped in the
EU which was offset by an increase in the US. The adoption in the US for EMV
payments was slow because merchants had to purchase new POS terminals that
supported chip-enabled payments, but in the case of adopting a new
authentication standard for CNP transaction, it would likely only require a software
upgrade, which is a much easier upgrade than hardware.
Regulation creating more opportunity than risk

Although regulations are always a key risk to the networks, MIF and even the Durbin
interchange regulations have not resulted in any material pressure on the networks'
fees, which are a small component of the overall MDR. In fact, PSD2 through the
open banking initiative creates significant opportunities for the networks in terms
of risk management, authentication and innovation, particularly on the user
experience. The networks can also play the role they always have in the card
payment ecosystem, connecting the banks on one side and third-party service
providers on the other side and serve as the organizer to streamline the connection
between the two with a standard that is already set in place.
The exchange of data between FinTechs and FIs not only allows FinTechs to deliver
different kinds of services to consumers, but can also help banks to enhance their
services as well and provide a broader suite of services. As enablers of the payments
ecosystem, the networks are taking advantage of several opportunities from the
development of open banking ecosystems, such as providing a connection to open
banking functionalities by providing a single universal point of connection
regardless of the API standard or implementation used by any particular player. In
addition, the networks offer services such as near real-time verification of third-
party certificates, helping protect from liability and trust and offering centralized
dispute and resolution services to provide clear and transparent capabilities that are
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consistent across all players in the ecosystem. Other services include open banking
consulting, where the networks offer professional advice and support to FIs to help
them define and execute a strategy in the open banking system.
Monitoring disintermediation risks

The Federal Reserve has discussed the potential to build a faster payments
infrastructure. Although a new faster payments infrastructure could
disintermediate the Networks, the Federal Reserve is only considering feedback at
this time and it would take some time to actually build out the network. In addition,
the Networks have already developed strong real-time and push payment
capabilities through Visa Direct and MasterCard Send, as well as MA's acquisition
of VocaLink. In fact, MA has already launched a real-time payments network with
The Clearing House in the US, taking lessons learned from the UK system and is also
participating in RFPs globally for real-time network opportunities. On the back of
open banking regulations in Europe, namely PSD2 regulations, we have seen new
payment schemes emerge, most notably the Deutsche Bank/IATA relationship.
Although the value proposition to the merchant is clear (lower processing costs,
increased working capital, and lower charge back/fraud), we believe consumer
adoption could be limited due to limitations on incentives as well as opt-in friction
from having to provide bank account information to every merchant.
In addition, with major developments in the RTP space across the globe, especially
from governments developing their own network, there is a potential for the
disintermediation of FinTech players in the ecosystem. For instance, FinTechs like
PYPL and SQ could lose the opportunity to charge fees for the instant transfer of
funds from their user accounts to a bank account. However, these firms are unlikely
to lose business because of the strong customer loyalty they have as a result of their
first mover advantage. In addition, many FinTechs are starting to take an ecosystem
approach, offering full financial and banking capabilities through their platforms
with the goal of keeping funds within their ecosystem through the use of cards and
other products, and thus cannibalizing instant transfers anyways and addressing
this potential risk. Furthermore, RTP creates the opportunity for FinTechs to go into
additional use cases which also offsets the potential risks of losing out on other
services.
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Opportunities and Threats

in Open Banking
The case for alternative payment rails and permissioned account access
After researching the open banking threat to V and MA, we have concluded that
both data calls and account-to-account payments (A2A) are more likely to have a
positive impact on the networks' business models. Open banking alternative
payment rails like A2A payments, which leverage actual payment initiation, remain
relatively nascent and are unlikely to gain much traction (any adoption will likely be
aided by the networks, which will take the majority of the share), in our view. V and
MA have competed successfully vs closed loop domestic payment and ACH
payment schemes for years and have proven to be a better value proposition. We
estimate the market for open banking consumer payments to be a ~$903m revenue
opportunity through 2025. The bigger open banking opportunity is in the emerging
open-banking FinTech use cases that leverage data, such as improved underwriting
and account aggregation, which we estimate to represent ~$21.1bn in incremental
revenue opportunity through 2025. Emerging players include Plaid, Finicity, Aiia,
Tink, Railsbank, Credit Kudos, and Truelayer, which are being used by FinTechs like
Venmo, AFRM including its latest Debit+ product, and Stripe for data services. As
a result, we see incremental opportunities for FinTechs as well as the networks to
participate in new flows and value-added services.
A2A alternative rails generally lack consumer and merchant value

One of the key values of open banking A2A payments is lower merchant transaction
fees, which can be used to incentivize consumers. However, although merchants
have long pushed for lower transaction costs (e.g., MCX consortium), many more
care about the value proposition of conversions and higher tickets (e.g., TGT
RedCard) which is why higher cost products like BNPL are being adopted by
merchants and A2A open banking payments have not gained significant traction.
Payment ubiquity and dispute resolution have always been key road blocks for
competing close-looped payment systems. In addition, just because A2A payment
rails can be cheaper to the merchant, this does not mean the economics are lower
for the networks playing a part in the payment initiation, which in some cases can
generate a larger part of the overall pie through alternative flows. The networks also
have the ability to sell value added services and increase yields further. We note that
although A2A open banking payment-initiated transactions have not taken off,
open banking use cases around data have significant potential. They leverage
pricing on a per API call basis, which we estimate at ~$0.05-$0.10, and often charge
an
on-boarding fee of ~$2-3.
Networks and acquirers embedding themselves in open banking

V/MA and GPN, FISV, and FIS are well positioned in the physical environment
globally and have made significant investments in accepting open banking A2A
payments. V recently acquired Tink, and MA acquired Aiia as well as Finicity, which
price on a per API call basis to accelerate their data capabilities and embed
themselves into the A2A payments value chain beyond payments. Furthermore,
MA continues to leverage acquisitions like VocaLink and Nets to access the A2A
rails. We note that facilitators act like payment initiators in sending the message,
but still need a way to send the funds, and the networks are covering multiple
different payment flows – in many cases using alternative rails like ACH through V
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Debit and MA Send as well as their RTP assets. Although merchants may want to
adopt low-cost rails, consumers value the fraud protection and charge backs that
the networks offer. Alternative A2A rails often do not have charge back rights or zero
liability, so merchants would have to write off more transactions and incur costs to
facilitate these consumer needs in order to drive adoption. As a result, most
attempts at creating alternative rails have failed to result in material share gains
historically over the networks. Merchants will need to incentivize consumers
through rewards and other offers to adopt these alternative rails.
Banks have most to lose in open banking push

Open banking regulations in Europe, through the Payment Services Directive
(PSD2), have given third-party payment service providers (PSPs) access to bank
accounts and the ability to initiate payments. In addition, banks are being forced to
work with open banking FinTechs in the US due to consumer demand for data-
driven FinTech products. As a result, banks have lost some control over the data and
face increased competition and are most at risk in our view. However, with the
banks getting pushed out of the economics in these new models, there is a lack of
incentive to help support frictionless permissioned account access and ACH-based
A2A payment experiences. In fact, banks have the ability to put friction into the
process. For example, financial institutions are able to force the third party
aggregators to obtain permission from the consumer for every use. Banks will
essentially become gatekeepers of the consumer data and will decide in many
cases what PSPs need to do in order to access the data. In addition, banks have
historically used a balance sheet model for assessing consumer and merchant
credit worthiness but should be able to benefit from open banking in multiple ways
including leveraging more real-time analytics and expanding the lending pool (e.g.,
UK Lloyds' Business ToolBox). Banks can also use the data for marketing
effectiveness tools (e.g., Barclays' SmartBusiness Dashboard).
Top open banking highlights

Open banking as a concept has been driven by European regulatory efforts aimed
at increasing competition and innovation by opening up consumer banking data to
third parties. Open banking allows financial institutions and FinTechs to verify
financial information, such as checking account ownership and funding levels,
using APIs to provide third-party access to financial data. The opening up of the
banking system to allow access to digital financial consumer information has
created a whole new set of financial relationships and has given rise to many new
FinTech enablers and use cases. Investor interest in open banking has been strong
recently, particularly around payment initiation and how it might compete with
traditional V/MA payment rails. We define open banking payments as payment
initiations made using a third party payment services provider (PSP) accessing
open banking APIs. While payments facilitated by open banking remain one of the
most cogent open banking use cases today, we believe that the larger open banking
opportunity is around emerging open banking FinTech use cases that leverage
consumer data, including underwriting, financial management, and account
aggregation. Furthermore, open banking alternative payment rails like A2A
payments that leverage actual payment initiation remain relatively nascent and are
unlikely to gain much traction, in our opinion, even as other open banking use cases
become more prevalent in the US and other markets. Some of our key takeaways
on open banking include:
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n Market TAM and opportunity – We estimate the TAM for open banking
represents ~$21.1bn in incremental revenue through 2025. This includes a
~$20.2bn opportunity growing at a ~105% CAGR through 2025 from use
cases leveraging data (e.g., banking, investing, lending, financial
management) as well as an ~$903m opportunity growing at a ~100%
CAGR through 2025 from payment initiation. Furthermore, we estimate
A2A payments will reach ~$61bn in volume by 2025 (~1.7% share of global
e-commerce volumes) growing at a ~90% CAGR.
n Alternative A2A payments lack value proposition – The alternative open
banking proposition lacks the consumer value proposition that cards have,
namely fraud/security and chargeback protection, with merchants also
preferring less friction and higher conversions. In addition, when
interchange is regulated like in Europe, there are not a lot of economic
incentives to go around.
n Open banking in payments is almost non-existent today – Open banking
for payments is almost non-existent except for in the Netherlands, which is
the only place with success in facilitating consumer-to-merchant payments
mainly riding on the local scheme built platform. Furthermore, RTP has
existed for a decade in the UK and PSD2 mandated A2A payments in the EU,
but there is still a robust debit business in Europe and very little actual A2A
volumes to date. Even India is mostly P2P where it is used at small merchant
stalls with cards being used in larger stores.
n Limited actual examples of A2A payments happening without the
networks/acquirers – Even where there are open banking payments, there
are very limited examples of A2A open banking volumes riding alternative
rails that do not include the networks and acquirers. When PSD2 mandated
A2A payments in the EU and the interchange became regulated, the
acquirers and networks built solutions to enable customers to accept those
payments. However, consumers have shown little desire to give their
information over to third-party providers and merchants have little
economic incentive to participate in A2A transactions.
n Direct merchant payment integration needed – Alternative rails need
direct integration with the merchant to work and BNPL initially went this
route but is increasingly leveraging the networks and acquirers to build
further scale and distribution more rapidly. Furthermore, we note that even
though PSD2 mandated A2A payment capabilities in the EU, that does not
mean there is a universal standard across the continent. What differentiates
is not connectivity, it's about providing consistent and meaningful data and
insights across multiple bank accounts and schemes in the market.
n Distinct pricing models in open banking – Open banking data-driven
models (e.g., Plaid, Finicity, and Tink) price on a per API call basis with a
one-time on-boarding fee of ~$2-3 per user and per API call fees starting at
$0.05-0.10 allowing for greater cost benefits for larger-sized transactions.
Pricing is still being tested for payment initiation, but open banking
payments would not have fraud/security and chargebacks which would be
incremental costs. Open banking A2A payments that run over the network
and acquirer rails have pricing based on a bps fee of the transaction size and
includes security/fraud and chargeback protection (DBe ~50bps to
acquirer and ~10bps to networks + $0.0195 per transaction).
n Data fees increase with frequency and complexity – Open banking fees go
up typically with frequency and complexity. For example, a simple API call
to check for funds in an account is less expensive than checking an income
history. In addition, data aggregation (e.g., Mint), which requires constant
API calls to refresh the data is typically priced on a subscription model.
n Additional open banking payment costs – Merchants typically pay the
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merchant discount rate (MDR) on cards even in case of a return. In addition,

card transactions use legacy bank authentication which could actually
increase costs related to declines and conversions. The biggest cost is
increased friction and lower potential conversions.
n A2A payments could be cheaper to merchants, does not mean everyone
loses – Acquirers still get similar economics on open banking payment
initiated transactions and their value add is single point integration,
settlement and reporting for their clients where they look at open banking
as another payment type (the potential to help clients reduce costs is
positive for acquirers). In addition, V/MA should be able to maintain pricing.
They only charge a nominal fee for the value they add and historically have
not seen pressure when the interchange has been regulated.
n Networks and acquirers participating in new open banking products – V/
MA are participating in open banking API fees through acquisitions like
Finicity and Tink, as well as capturing new flows from multiple alternative
payment rails where the economics are not necessarily lower due to less
parties to share with and the opportunity for additional value added
services.
n US open banking models emerging without regulations – Although PSD2
mandated open banking and A2A payments in the EU, the US does not have
similar regulation. Despite that, similar open banking models like Debit+
from AFRM are emerging, although in this case the networks get paid on
the original BNPL transaction the same. Banks must give access to
FinTechs because consumers demand it and they cannot afford to lose
share to competitors despite getting cut out of the economics on these new
alternative open banking models.
n FinTechs like SQ could leverage open banking principles to lower costs
– SQ could leverage Cash App and the Cash Card to create a closed loop
payment funded by the bank account, cutting out the networks and
acquirers (although SQ seems to be content at the moment to push network
payment rails). PYPL boasts ~45% of payments funded through Balances
and ACH without steering and further down the line SQ could do something
similar.
n AMZN pricing tactics driving merchant leverage – Merchants are
increasingly wanting a say in how the payment experience works but card
schemes have historically been more issuer centric. With new products like
BNPL and open banking, we see the networks giving the merchants more
consideration going forward.
Evolution of Open Banking

While open banking has come to prominence recently, it has been around in various
embryonic forms since the 1990s, when in Germany the Federal Post Office started
experimenting with an electronic banking service. Further innovation included the
creation of a customer self-service interface known as the Home Banking
Computer Interface (HBCI) with clear security procedures, transmission protocols
and standardized message formats. This was then evolved into a product called
SOFORT that used screen scraping to collect data from the screen and use it for
other applications. In the United States, precursors to open banking included the
launch of an XML standard called OFX, created by Microsoft and Intuit through a
partnership with electronic payment provider CheckFree. XML allows a messaging
system to exchange information between applications in a format that other
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computers can understand. While there was some concern about sharing data with
external parties, similar requirements would be mandated by PSD2.
Regulatory Impetus A Key Driver

In an effort to make electronic payments more secure in Europe and create a more
competitive environment for non-bank players, EU regulators implemented the
PSD2 initiative, which gives third parties access to bank data. Although the
initiative began being enforced in early 2018, the regulation dates back to 2007 with
the original Payment Service Providers Directive (PSD), which aimed to bring one
unified payment market in the EU in order to promote innovation, competition, and
efficiency. Later on, in 2013, the European Commission brought about an
amendment to the PSD initiative (hence the PSD2 name), aiming to enhance these
objectives and improve consumer protection and payment security. The original
PSD contained two main sections: i) market rules and ii) business conduct rules. The
market rules describe which types of organizations can provide payment services,
and the business conduct rules specify what transparency of information payment
service institutions need to provide. The directive forces banks to open up the data
they have on consumers to third parties, losing the advantage they have on other
players in the payments ecosystem and creating a more "level playing field" for the
benefit of consumers.
Similar to PSD2, another regulatory driver is the CMA order in the UK. In 2016, the
UK found in a report that many large banks did not compete for businesses while
smaller banks faced significant challenges in growth and market access.
Consequently, the Competition and Markets Authority (CMA) passed a rule,
becoming effective in 2018, that required the largest banks to allow start-ups direct
access to their data. The CMA additionally created the Open Banking
Implementation Entity (OBIE) to facilitate creation and delivery of APIs, data
structures, and security architecture that would enable participants to share
financial information.
Moving Beyond To Open Finance

While in Europe and the UK, open banking has largely surged to prominence due
to regulatory orders, the United States has not seen that same level of initiative from
regulators in promoting open banking. However, market participants are
proceeding as if such initiatives will be forthcoming, with open banking being
advanced largely through market competition with the rise of FinTechs that purport
to provide a higher level of capabilities, customer service, and ease of use.
Consequently, banks such as Citi and JPM have already started connecting to third
parties via secure APIs, while other banks continue to develop their data strategies.
The creation and progression of APIs has led to several use cases for open banking,
with banks moving beyond compliance with mandates to become active
participants in creating tools and ecosystems that utilize customer data to create
richer and more useful experiences. This has led to an emerging world of Open
Finance, where banking services are extended by nonbanks for increasingly
tailored use cases. For example, an Italian utility is working with Tink to create an
account aggregation solution and with European payment service firm SIA to
create mobile
banking solutions. Southeast Asia has seen ride-sharing service GoJek and Grab
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offer on-demand services through apps including payments and digital wallets in
addition to transportation and food delivery. In the United States, Uber has
launched its Uber Money division which includes a digital wallet with both debit and
credit cards, giving mobile banking to its fleet of drivers who can access funds
instantly upon earning. Other areas include embedded financing options as
deployed by Shopify with its Shopify Capital small business lending product, and
Amazon, which provides SMEs financing embedded within its marketplace
platform.
Figure 15: Open Finance Will Reshape The Relationship Between Banks And
Their Customers
Source : Forrester blogs, August 11, 2021
European Open Banking Readiness

PSD2 adoption alongside its open banking mandate has resulted in significant
impacts on European Financial services. Despite initial resistance, EU banks have
largely embraced open banking. Many banks have added on-demand account
aggregation services and mobile banking apps, alongside offering payment
initiation services. PSD2 has additionally led to the creation of services such as
account information services between banks, third-party personal finance
management, and digital ID/KYC services. As per PSD2's open banking mandate,
EU Banks must make provisions for account information and payment initiation
services to their online and mobile banking apps. Clients can then use the account
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information statements and transaction histories, allowing them the ability to

perform personal financial management in an app or utilize it in apps from other
providers.
However, there are differences as well between different European nations and
their approach to open banking. Nordic banks favor a regional approach with a pan-
Nordic, cross-border infrastructure (P27) and a Nordic KYC utility. German banks
use the existing online banking FinTS standard between German banks, alongside
the Berlin Group's Open Banking API standard NextGen PSD2 for TPP access. There
are also different approaches toward Open Banking API standards. While a
domestic Open Banking API standard is in place in the UK, France, Germany and
Poland, Spain and Italy outsource their requirement to a single aggregator in order
to provide API access to banks. In Denmark, Norway and Sweden, banks provide
Open Banking API access alongside aggregators that enable connectivity between
Nordic banks and independent PISPs/AISPs – a basic step toward a potential future
Open Banking API. Plus, in many European nations, there are bank-backed
interbank organizations which run digital A2A payment services with the goal of
adding instant payments and mobile P2P payments.
Digital Infrastructure Readiness is mature. In the European nations surveyed by

MA, digital infrastructure readiness appears to be mature as seen in the figure
below. Internet access is essentially a standard in each nation, in addition to a fast-
growing digital commerce space. Smartphone penetration is mature, in addition to
high penetration of 4G LTE internet and 5G internet being launched in nine
countries, with the launch planned in Poland. Digital banking use is also largely
mature, with the exceptions of Italy, Poland, and Hungary which are lagging, with
digital banking usage below 60%.
Open banking infrastructure readiness high but market is fragmented. Open

banking infrastructure readiness has largely matured across the surveyed
countries by the end of 2020. The legal framework is in place, with all countries
adopting PSD2 into national law. Payment initiation and account aggregation have
been added to digital banking. Excluding Hungary, nine countries have adopted
either a domestic Open Banking API standard or an aggregator-supported Open
Banking API model. However, given the large number of Open Banking API sets
across Europe, this indicates a fragmented open banking market.
Digital Payment readiness. The countries surveyed have digital payment apps to
allow payments from the account. Broadly, payment initiation and account
aggregation information has been added to digital banking, with the move to
mobile A2A making progress. Banks are further developing digital banking and
mobile payment services that allow digital credit transfer payments directly from
the bank accounts of participant banks.
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Figure 16: MA Open Banking Readiness Index
Source : Mastercard
Latest Developments in Open Banking

Alternative rails trying to disintermediate cards
There has been increased investor interest on the subject of the continued rise in
importance of open banking and A2A payments, particularly in Europe (e.g., the
UK, the Nordics), as well as in the emerging open banking model in the US. Some
see these developments as a growing threat to the dominance of cards within e-
commerce payment schemes, as the growth in e-commerce transactions
continues to accelerate and FinTechs innovate on A2A payment networks. Open
banking allows payment providers and FinTechs to verify financial information,
such as checking account ownership and funding levels, using APIs to provide
third-party access to financial data. The opening up of the banking system to allow
access to digital financial consumer information has created a whole new set of
financial relationships and has given rise to many new FinTech enablers.
Consumers are demanding flexible, high-income-generating financial products
and 24-hour access to funds. Open banking has created new potential financial
revenue streams interconnecting the financial ecosystem.
The networks and acquirers see new payment flows enhancing their monetization
opportunities, although others see potential disintermediation of the traditional
payment flows or downward pressure on fees. We will continue to monitor the
adoption of open banking, but see more opportunity than risk for FinTech players,
with traditional financial institutions the most at risk from open banking. Open
banking is starting to grow in Europe, but is also gaining adoption in the US and
some strong interest in Latin America. Furthermore, APAC has seen A2A
applications succeed across the region as a number of countries seek to modernize
domestic payment schemes. Examples include: Alipay/WeChat in China, InstaPay
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in the Philippines, DuitNow in Malaysia, PayNow in Singapore, and PromptPay in

Thailand. However, open banking has not had a material impact on the share of
cards and we expect the networks and acquirers to remain embedded in open
payments, particularly on the initial transaction where they can provide scale and
technology capabilities like fraud/security and chargeback protection.
ACH and account-to-account (A2A) payments

One of the many alternative payment methods that tends to take place off of
network rails are ACH (Automated Clearing House) payments. ACH payments are
made using an online network known as the Automatic Clearing House. ACH
payments are usually made in the form of eChecks, where consumers are required
to provide payment information (usually connecting a personal bank account)
along with a payment authorization. ACH payments typically see funds transferred
within 3-5 business days, directly from the consumer's account to the receiver's
account. ACH payments can be considered a subset of a broader payment form
known as Account-to-Account (A2A) payments. A2A payments are designed to
transfer funds directly from one account to another without using intermediaries or
additional payment instruments (e.g., credit or debit cards). A2A payments have
existed for some time and have typically been used for specific payments to trusted,
individual recipients, such as a consumer paying an electric bill, but an A2A
payment has a broader definition and can take any form of direct account payment
(e.g., ERPs, digital wallets). Open banking uses APIs as a way for third-party
providers to enable the direct movement of money from a payer's account to a
merchant. This means that A2A payments can be made at the POS instead of just
through card payments, offering additional speed and convenience without the
need for additional data entry or intermediaries adding to the cost of transacting.
Consumers also have the opportunity to use digital wallets for everyday
transactions, a practice that is becoming increasingly popular, particularly across
Europe.
Positive pricing opportunities from alternative rails

The primary value proposition of open banking and A2A payments, in our opinion,
comes from the cost savings on transaction fees realized by merchants, which can
often times be passed on to the consumer in the form of rewards/incentives that are
used to drive additional sales. The typical merchant discount rate (MDR) paid by the
merchant for card-based transactions is ~2.5-3.5%, whereas the cost of an A2A
transaction could be as little as $0.50, which is the price charged on a per API call
basis. As a result, larger transactions will benefit more from moving to A2A as they
avoid volume-based MDRs. In fact, A2A transactions can be aggregated and batch
processes have the potential to lower fees even further. In addition, merchants are
typically charged the fees on card-based transactions even in case of a return and
refund. Beyond the benefit from lower fees, there are also procedural impacts that
provide benefits for merchants and consumers. For example, card-based
transactions have to go through legacy bank authentication, which could
unnecessarily increase, decline, or cut conversions. Furthermore, certain use cases
are better suited to A2A in our view (e.g., gaming). Importantly however, although
merchants have long pushed for lower transaction costs (e.g., the failed MCX retail
consortium), they care more about the value proposition, namely increased
conversions and higher tickets (e.g., TGT Red Card) which is why higher-cost
products like BNPL are being adopted rapidly by merchants.
Challenges to adoption
While the pricing value to merchants related to A2A payments is clear, there are a
number of trade-offs that must be considered. First, is the value proposition to the
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consumer. Certain transactions lend themselves naturally to A2A, particularly

when completing repeat transactions with a trusted third-party (e.g., utility bill pay).
However, there are a number of transaction types, particularly consumer retail
purchases, where consumers appreciate protections provided by networks like V/
MA, including returns, chargebacks, and fraud protection. On the merchant side of
the equation, the value of reducing transaction costs via A2A payments must
outweigh other marketing goals such as basket size, customer acquisition costs,
retention, engagement, and loyalty. As they stand today, A2A payments have more
friction embedded in them as compared to card payments and, if this incentivizes
a consumer away from shopping with a particular merchant, the value proposition
of A2A erodes for the merchant.
Regulation also creates new avenues for innovation despite the risks
Although regulation is always a key risk to the networks, MIF and even the Durbin
interchange regulations have not resulted in any material pressure on the networks'
fees, which are a small component of the overall MDR. In fact, PSD2 through the
open banking initiative creates significant opportunities for the networks in terms
of risk management, authentication and innovation, particularly on the user
experience. The networks can also play the role they always have in the card
payment ecosystem, connecting the banks on one side and third-party service
providers on the other side, serving as the organizer in order to streamline the
connection between the two with a standard that is already set in place.
The exchange of data between FinTechs and FIs not only allows FinTechs to deliver
different kinds of services to consumers, but it can also help banks to enhance their
services as well and provide a broader suite of services. As enablers of the payments
ecosystem, networks are taking advantage of several opportunities stemming from
the development of open banking ecosystems, such as providing a connection to
open banking functionalities by providing a single universal point of connection,
regardless of the API standard or implementation used by any particular player. In
addition, the networks offer services such as near real-time verification of third
party certificates, helping protect from liability and trust and offering a centralized
dispute and resolution service to provide clear and transparent capabilities that are
consistent across all players in the ecosystem. Other services include open banking
consulting, where the networks offer professional advice and support to FIs to help
them define and execute a strategy in the open banking system.
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Figure 17: Largest Opportunities in Open Banking
Source : Ovum, Omdia, Deutsche Bank Research
Sizing the open banking opportunity

Payments facilitated by open banking are initiated when consumers grant access
to open banking FinTechs to initiate payments on their behalf, and they remain one
of the most cogent open banking use cases today. Investor interest in open banking
payments and how they compete with traditional V/MA payment rails has been
strong. Open banking payment volumes are small today, and we expect this market
will be characterized by intense competition between the networks, banks,
FinTechs, and even governments in the coming years. To this end, we have
attempted to size the open banking market by payment volumes. According to our
estimates, the value of global payments facilitated by open banking will reach
~$61bn by 2025, growing at a ~90% CAGR from our 2021 estimate of nearly ~$5bn.
We expect growth to be driven by increasing consumer familiarity with open
banking, along with further development associated with PSD2 in Europe – where
Juniper Research expects ~75% of all open banking transactions globally to take
place by 2026. We also believe the secular shift toward e-commerce, as well as
recent regulatory support in places like the US will provide further tailwinds for open
banking facilitated payments in the coming years. However, we believe the bigger
open banking opportunity is around emerging open banking FinTech use cases
leveraging the data, such as improved underwriting and data aggregation which we
estimate will represent ~$20.2bn in incremental revenue opportunity by 2025.
Please see below for our high level open banking analysis. Please contact us if you
would like to see our detailed calculations.
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Figure 18: DBe global open banking payments initiation opportunity ex. China
Source : eMarketer, Dynamic Yield, Deutsche Bank Research
Figure 19: DBe global open banking data revenue opportunity
Source : Juniper Research, Statista, Finaria, Open Banking Implementation Entity, Deutsche Bank Research
Figure 20: 2026 open banking payment transactions by global region
Source : Juniper Research
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FinTechs taking advantage of permissioned account access

Plaid providing alternative payments infrastructure
Plaid was founded in 2013 and is a financial data network based in San Francisco.
The company focuses specifically on enabling consumers to securely and
conveniently share their financial account information with thousands of apps and
services (e.g., Acorns, Chime, Wise, and Venmo). The company generates revenue
from FinTechs, leveraging a transaction-based model where it charges a per-click
transaction fee that varies depending on the product. In addition, the company's
revenue model has a multiplier effect, with users connecting to multiple FinTechs
and FinTechs using multiple products. Plaid provides secure connections for ~80%
of the largest US FinTech apps. The company has ~11k bank and financial service
companies, ~2.6k FinTech developers, and >200m consumer accounts, including
one in four people with a US bank account.
In early 2020, V agreed to acquire Plaid for $5.3bn, more than double the company's
previous valuation. Following a suit from the Department of Justice alleging that the
proposed merger would limit competition in the payments industry, the two
companies mutually agreed to scrap the deal. Plaid was recently valued at
~$13.4bn as part of its latest $425m funding round. Plaid grew ~60% last year
through the pandemic as the company serviced players like COIN, Chime, and
AFRM, which contributed to strong growth rates. Plaid reached annual revenue of
~$170m in 2020 as the company continues to benefit from being the infrastructure
for FinTechs. Despite the failure of the V deal, and although FinTechs have grown
rapidly in the past few years, the opportunities facing Plaid remain highly
underpenetrated, in our opinion, as the company is attempting to revolutionize
industries and take share from traditional financial institutions. In January 2020,
when the V merger was announced, Plaid only held a single-digit market share in
each of its target verticals, representing ~3.5% of the TAM in North America.
The core application works as follows: users download a third party app, while
filling in their bank account log-in credentials. Plaid then captures that information
and sends it to the bank, which then verifies the existence of the account, and
notifies Plaid. Plaid then confirms that the user has a valid account, allowing them
to make ACH deposits. Plaid additionally has tokenized versions of the user's login
credentials, particularly for apps that regularly engage the user's bank.
Unusually for software applications which are typically expected to run nearly all
the time, Plaid runs only 95-98% of the time, with Plaid's page showing connections
to banks with an uptime in that range. This means that up to five out of every 100
authentications with a bank will fail, typically an unacceptable outcome for most
applications, but in this case due to the resistance from banks. Banks in the United
States have been reluctant to share data with third parties that do not help their own
profitability.
Plus, despite Plaid's leading position, it is facing several competitive threats, not
only from other FinTechs but from the banks themselves. If banks were to join
together to form their own APIs, it may impact Plaid's business model. Additionally,
in the United States, despite the large number of FDIC-insured institutions, a small
number of large banks control the majority of assets. As a result, if banks focus on
cutting costs there may be further challenges to Plaid's model. As a result, the
company is focused on expanding the uses of the product, largely through
expanding the different ways bank accounts can be used. Opportunities include
hospitality, travel and shopping, where Plaid can help firms understand user
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behavior and make better offers.
An important part of Plaid's view is that not only are many firms becoming (or trying
to be) technology firms, many firms need to also become financial firms which can
embed financial products into their offering. Plaid is experimenting with use cases
in mortgages alongside helping others move away from credit card transactions,
resulting in lower fees for customers.
Earlier this year, Plaid announced a new partnership with SQ to provide streamlined
ACH payment options for merchants, where these payments will be directly
debited from bank accounts at a lower cost to merchants vis-à-vis credit cards (i.e.,
1% with a minimum transaction value of $1). Plaid will link bank accounts directly
to payment portals, allowing merchants to process ACH debits without SQ or the
merchant needing to hold personally sensitive customer data. For SQ, the
partnership allows the company to target larger businesses than the SMBs that
have historically characterized its base of sellers. For Plaid, the move represents a
shift into creating new payment channels while meeting increased demand for
account-to-account transfers as customers increasingly look to avoid steep card
costs.
AFRM using Plaid for Debit+

AFRM recently launched the Debit+ card, which is a hybrid debit/credit installment
product riding V's rails. Debit+ gives consumers the option within 24 hours of the
transaction of paying for purchases in full or through an installment plan. AFRM
takes on the risk and underwrites the amount while the decision is being made. V
will capture the initial transaction but may only partially benefit from the
subsequent repayments which will be mainly funded through ACH. Debit+ can be
uniquely linked to any bank account for repayments leveraging Plaid, and a
consumer's bank(s) must be recognized by Plaid in order to use Debit+ at this time.
We note that the banks are getting cut out of the interchange on the Debit+ card.
AFRM will keep most of the unregulated debit interchange itself, sharing a portion
with the issuer, namely Evolve Bank. Although we find it somewhat surprising that
V is providing a platform with Plaid for AFRM without holding deposit balances to
gain access to consumer deposits at any bank, V could potentially benefit from
lower incentives if there is a shift to multiple smaller banks. In addition, having
access to the consumer's bank account at all times provides significantly more data
that can be used for underwriting. This data also helps with adaptive checkout
where machine learning (ML) is being used to automatically present the most
optimized set of offers to each customer.
Stripe Connect and Stripe Treasury designed to meet A2A/open banking

needs
Stripe has developed several service offerings aimed at simplifying the challenges
related to A2A payments and open banking initiatives for its merchants. As
examples, Stripe Connect and Stripe Treasury are designed for the payment burden
to fall on Stripe, as opposed to the merchants they serve. As a firm, Stripe turns
many actions into API calls, where a developer can use Stripe Treasury to open bank
accounts, or use Stripe Issuing to issue virtual or physical cards associated with an
account.
Stripe Treasury, launched December 2020, is a BaaS API that provides modular
components for its clients to build full-featured, scalable financial products for their
customers. This essentially lets Stripe's clients provide bank accounts to their
customers, propelling both Stripe and its partners deeper into the world of
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embedded finance, where financial services are placed close to the end consumer
inside another product offering. With Stripe Treasury, platforms can create a simple
stored-value account, a full-featured bank account replacement, and anything in
between. Stripe aims to make the platform straightforward, enabling it to add
capabilities so that clients can experiment and iterate in order to build the best
product for their customers. An example is Shopify, which will use Stripe Treasury
to power the back end for Shopify Balance, so a SHOP merchant can hold or spend
money by opening a bank account in Shopify Balance directly, skipping traditional
bank accounts entirely.
Stripe has partnered with global banks (incl. Goldman Sachs, Citi, and Barclays) to
enable ACH and wire transfers, interest-earning accounts, and faster access to
payments funds, all accessible within each client's platform. Stripe Treasury is built
to handle all upfront bank negotiations, compliance processes, and regulatory
requirements which, combined with Stripe's technology, makes it simpler for
clients to get started and scale their businesses.
Stripe Connect is a new version of Stripe's payment service that allows users of any
website to accept credit card payments, which includes anyone who sells a product
in an online marketplace, website creators or invoicing systems. This is expected to
grow the number of users who can accept payments and increase payment
volumes. Participants include Shopify, Skillshare, and Reddit. Stripe Connect
facilitates data sharing with third party services, growing the ecosystem of support
tools for the platform.
It is designed as a set of programmable APIs and tools that lets merchants facilitate
payments using in-house software platforms while also providing the opportunity
for clients to build unique marketplaces and pay out sellers or service providers
globally—all while having Stripe handle payments compliance. Stripe Connect
provides pre-built user interfaces and allows merchants to design their own custom
flows to help customers get started with their online shopping experience. It also
allows companies to integrate other systems with Stripe data such as accounting,
CRM, and other analytics tools. Stripe handles all identify verification and Know
Your Customer (KYC)/compliance requirements. Stripe Connect was designed to
help deal with the stringent regulations associated with paying out money in
different regulatory regimes across the globe, and it shifts payment compliance
obligations from the merchant to Stripe. Stripe Connect offers card data
tokenization to help with PCI compliance, provides verification systems to manage
KYC checks, and leverages Stripe's unique licenses and relationships around the
world.
Other FinTechs playing in the market

Beyond major players such as Plaid and Stripe, a number of other private start-ups
have entered the A2A/open banking space. A few examples are below:
Finicity provides solutions for developers through its real-time data aggregation
platform to enable apps that provide financial management, investing, payment
and lending. Both consumers and small businesses can use the platform to give
third parties permission to use their data, which can then be leveraged by firms such
as Brex, Rocket Mortgage and Experian for their services. For example, Experian
uses Finicity to pull bill payments in its Experian Boost feature to help users raise
FICO scores. Developers can access financial data and verify account details with
the goal of developing richer experiences for financial management, wealth
management, expense reporting and digital banking. MA acquired Finicity in
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November 2020 for $825m.
Tink is a Stockholm-based firm that provides a single API allowing customers to

connect to bank accounts from their own apps. Tink originally started as a financial
management tool, since pivoting to allow other businesses to use its technology.
Customers can use its API to access account statements, bank information and
send payments. In Europe, despite the existence of PSD2, which mandates open
FIs to provide open banking interfaces, there is no universal standard. However,
Tink can integrate with 3,400 institutions, with 300 banks and start-ups using its API
with clients including PYPL, BNP Paribas, AXP and Lydia with 250 bank customers
across Europe. Visa announced it will acquire Tink in June 2021 for EUR 1.8bn, a few
months after abandoning its pursuit of Plaid, and closed the acquisition in March
2022.
Railsbank is an open banking and BaaS firm that builds APIs for banking, payment
cards and lending products for a range of businesses. The London-based start-up
believes it is distinct from competitors as it has built much of its infrastructure, as
noted by the "rails" in its name, while other players are built as software products
that run on platforms of legacy providers. With Railsbank, non-financial firms can
offer embedded financial services such as retailers offering own-branded credit
cards, neobanks building front-end services without the banking infrastructure.
Additionally, unlike peers, Railsbank is a regulated FI and a card issuing member of
V and MA networks, freeing users from the work of engaging with legacy
infrastructure, operations and risk policies.
Credit Kudos leverages open banking for more accurate credit scoring, and
charges lenders a monthly fee for its data based on transaction volume. The UK-
based start-up calls itself a "challenger credit bureau" focused on replacing current
methods of credit assessment with the goal of making credit more accessible to a
broader population. Credit Kudos can securely analyze bank account data through
open banking in addition to transaction data such as repayment history, and the
company believes it allows lenders to make faster and more accurate credit
decisions, apart from being more inclusive, plus at a lower cost than other methods.
Credit Kudos was acquired by Apple in March 2022.
TrueLayer is a London-based start-up that provides payments, payouts, user

account information and verification to neobanks, crypto start-ups, wealth
management apps, e-commerce firms, and gaming platforms. TrueLayer provides
a gateway for applications to connect to FIs. Use cases include CreditLadder, which
uses TrueLayer to view rent payments directly from the bank, in order to create
reports for credit agencies. In e-commerce, firms can use leverage TrueLayer to
reduce checkout friction, as shoppers can pay for their purchase in a few clicks with
little data entry, in the company's own checkout flows, in addition to simplifying
refunds, boosting conversion rates, and reducing fraud and chargebacks.
Aiia is a Danish open banking firm that allows customers to run digital solutions
through a direct connection to banks through one API. Aiia was previously known
as the Nordic API Gateway, an indication of the leading role played by Nordic
nations in the advancement of open banking. Aiia connects to 2,900 banks in 18
markets with 43 bank customers and more than 10m user logins per month.
Mastercard acquired Aiia in the fall for an undisclosed sum, to add to its open
banking acquisitions of Finicity.
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Networks supporting multi-rail strategy

Open banking initiatives in Europe (e.g., PSD2) provide a significant opportunity for
the networks that we believe more than outweighs the risks. In particular, we expect
account access to third-party payment providers (TPPs) to continue to drive
competition, including among FinTech and new flows for the Networks. Although
we will continue to monitor disintermediation risk from alternative networks, we
believe V and MA are well positioned due to their scale and global ubiquity. In
addition, similar to the Durbin Amendment regulations on interchange in the US,
multilateral interchange fee (MIF) regulations in Europe have not had a material
impact on the Network fees to date, which are a small component of the MDR.
Vopen banking initiatives

In January 2020, V announced the proposed acquisition of open banking FinTech
Plaid for ~$5.3bn (~$4.9bn cash and ~$400m in RSU) which, in our opinion, would
have allowed the company to expand its high growth financial data network
business internationally and integrate payment capabilities into Plaid to accelerate
network volumes and be better positioned to compete and partner with FinTechs
globally. Although the acquisition of Plaid was eventually canceled, primarily due
to the prolonged litigation related to the proposed transaction by the Department
of Justice (DOJ), we believe V remains well positioned to capitalize on open
banking, particularly following the company's acquisition of open banking platform
Tink for ~$2.15bn, including cash and retention incentives. Tink, a Swedish
FinTech, offers a single API for customers to connect bank accounts across different
apps and services. The announcement came several months after V abandoned its
attempt to acquire Plaid, highlighting the importance the company places on future
open banking opportunities. We see this new acquisition as a continuation of V's
broader strategy around new flows and value-added services. Furthermore, we see
this acquisition as a way for the company to achieve some of the revenue expansion
that would have been realized through Plaid, given the accelerated opportunity in
real-time payments (RTP).
While the open banking opportunity is still in its early stages for V, we believe the
company is well positioned to help open banking participants determine the best
routing for different transactions types. Some open banking transactions lend
themselves well to A2A (e.g., bill pay), but there are also many transaction types
(e.g., consumer purchases) where people appreciate protections provided by
networks like V. By acquiring Tink, V will be able to learn and adapt in order to
provide new value-added services across the open banking ecosystem, even on
transactions routed on different network.
MA acquisitions put company in pole position

MA has been an active participant in open banking and recently acquired Aiia, a
leading European open banking player whose platform, expertise, strong API
connectivity, and payment capabilities complement MA's existing open banking
assets. MA will combine Aiia's European footprint with Finicity's connectivity to
bank accounts in the US. More than 60 markets globally are already participating
in open banking and MA has a strong presence in the two largest markets, namely
the US and Europe, with plans to expand into Australia, Canada, and Brazil next
year. Open banking revenue grew ~50% over the past year with particular strength
in Asia and Latin America. Furthermore, MA is well positioned with recent
acquisitions such as Finicity and Aiia, as well as partnerships with Rocket
Mortgage, Experian, and Tesco.
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Although we see some potential risks associated with new alternative networks
leveraging open banking, historically these initiatives have lacked the incentives on
the consumer side to drive widespread adoption, and tend to be specific to single
industries or use cases. Demand for open banking is such that these networks will
handle more than $116bn annually in global transactions by 2026 (according to
Juniper Research), up from less than $4bn this year and MA should be able to
participate, given the assets they have acquired and built. MA continues to win
RFPs country by country and to build RTP networks by leveraging VocaLink/Nets,
and acquisitions of Earthport/Transfast by V/MA, respectively, significantly
expanding cross-border account-to-account capabilities. MA's acquisition of Nets
positions it to capture share in Europe, with further tailwinds provided by Finicity
and Aiia, leveraging their open banking platforms.
MA had been working on open banking for some time before its acquisitions of
Finicity and Aiia, with the goal of integrating payments that are either new or do not
access traditional card rails and leveraging open banking capabilities to develop
new revenue streams, such as verification of income, employment, and assets to
enable better credit decision-making. This is seen in its launch of MA installments,
a BNPL effort, but one that also leverages its open banking capability to allow
lenders to determine creditworthiness. In MA Installments, lenders can use
account-level transaction histories as part of the underwriting process, extending
credit to a broader population. Open banking tools are further used in the
customer's choice of repayment, which can be checking accounts, savings
accounts, an MA debit card or another product.
In March 2022, MA announced that it is introducing two new payment solutions to

lower risks while improving costs, boosting speed, reducing friction and making
payments smarter. The two new smart payment decisioning tools are called the
Payment Success Indicator and the Payment Routing Optimizer and are a part of
Finicity's open banking suite of services that help facilitate payments and account
creation. Retailers can tap advanced data analytics and machine learning to make
payments both safer and smarter. The Payment Success Indicator uses
permissioned real-time account information to enable the payment originator to
access a person's balance and history for every transaction while the Payment
Routing Optimizer interprets the best day and payment rail (such as Same Day ACH
or Next Day ACH), taking into account cost, speed and risk.
Role Of Acquirers In Open Banking

While there is no PSD2-type law in the United States, many industry participants are
proceeding as if it will be similarly implemented. Open banking allows more
sophisticated analysis of consumer data, which improves the level of services
provided to consumers, which can then be monetized. These developments are
further driven by an expanding scope of third party apps, which previously were
mainly financial-management focused, but now include payment services. This
has created both compliance and logistical concerns for banks that are looking to
embrace open banking, while still maintaining strong customer relationships.
Furthermore, the entry of a wide range of players has led to a highly competitive
space between the merchant and the operator of the merchant account, which
should increase further with growth in open banking. With open banking, providers
can operate new payment channels that can sidestep current payment methods.
This results in both greater urgency as well as opportunity for acquirers to facilitate
the transition to API banking by partnering with banks and FinTechs.
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There are several opportunities for acquirers to participate in the changing dynamic
brought about by open banking. We note that acquirers see similar take rates.
n A2A Payments. One such value-add option is account-based payments, a

faster and more convenient way to send payments in order to complement
card-acquiring capability. We note that acquirers see similar take rates from
open banking-initiated A2A payments as they do with any other payment
method. Acquirers' value add is acting as a single point of integration,
settlement, and reporting for their merchant clients and A2A payments are
just another payment method they have the opportunity to provide.
n Payment Initiation. A new role that has emerged with open banking is
Payment Initiation Service Providers (PISP) who create the infrastructure
for account-based transfers. Acquirers can use these PISPs to create
alternative methods of payments from bank accounts.
n Security. Acquirers can also offer services to merchants, particularly for
solving security problems. This is particularly relevant in the world of open
banking, where the opening up data brings with it a number of security
concerns.
FIS – Open Banking Hub

In the summer of 2020, FIS launched Worldpay Open Banking Hub, which allows
customers to pay directly from their bank account, reducing risks and acceptance
costs for merchants. Customers that use this solution do not need to enter card or
account information into a site as it links directly into their personal bank account.
Worldpay's Open Banking hub provides a single API integration to banking
providers, and when consumers make a purchase through the Hub, they are
directed to the bank's app to finish the order. During checkout, consumers can see
bank balances, choose the account and make a payment in real time. For refunds,
merchants can credit the bank accounts in real time.
FIS has also launched the Ethos ecosystem that provides both a repository and data
management system for data aggregation of FIS and third parties. Plus, FIS' Code
Connect and Event Broker systems can access data for authorized users from
FinTechs and banks alongside triggering actions based on the aggregated data. In
a related effort, in April 2021, FIS unveiled FIS RealNet, a SaaS platform that enables
A2A transactions for businesses, consumers, and other stakeholders over RTP
networks in order to simplify both domestic and cross-border payments. FIS
RealNet works to identify in real-time the fastest and most cost-efficient method for
payments, whether that be ACH, wires, or RTP, and automates the end-to-end
payment process.
FISV – Building API-based ecosystems

FISV is approaching open banking through leveraging APIs to third parties, while
allowing FIs to use its open banking toolset. FISV has created centralized access
points for third-party data aggregation, letting banks connect to payment and other
financial apps. Capabilities include a Developer Workspace, where FinTechs get
access to open APIs, enabling creation of new tools and concepts in a secure
developer workspace; a Solutions Marketplace, where FIs can find and buy Fintech
products already integrated into Fiserv solutions; and an Open Banking Platform,
where banks can partner with FinTechs through a hosted platform, enabling the
delivery of financial services as built-in features within apps and channels.
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FISV additionally believes that smaller banks are at a disadvantage, with fewer
resources and different priorities compared to their larger peers. To serve this
market, FISV has created a product called AllData Connect, which validates user
credentials while maintaining information inside FISV's firewall. The data is then
delivered via an API to third-party apps to facilitate payments and other services.
AllData Connect links to the bank's core system, the online banking service, and the
third party app. As a result, its network of 4,000 core platform clients can avoid
managing different API connections to the range of new payment apps.
GPN – Cloud-based issuer processing platforms

GPN has partnered with AMZN to deliver a cloud-based issuer processing platform
for financial institutions. GPN will collaborate to change the core issuing platform
so it can deliver secure and innovative solutions for the payment industry. GPN will
use AWS to build customer relationships, enabling deployment of technologies to
institutions of various sizes and expand the customer base for GPN's issuer
processing services. This allows GPN to participate in the growth of open banking,
by allowing the platform's cloud-based architecture to give clients the ability to use
needed services by reducing time to market, flexibility, and best-in-class experience
for customers.
Banks attempting to thwart competition

Banks naturally have a record of granular financial data – what customers are
spending on, in addition to the level of savings and loan activity. With that data now
being shared with third parties under open banking, this naturally leads to risks of
disintermediation for banks. Most problematic for banks are e-commerce, tech,
and social media companies that have preeminence in commanding customer
attention, leading them to be the first point of contact for new financial products.
Additionally, with the growth of open banking, customers will have more choice
and information, allowing them to better understand their financial picture, and
gain benefits such as interest rates on savings, reduced mortgage rates, and other
fees. This also means margin sharing for banks, as they will have to pay out to digital
platforms in order to facilitate customer acquisition.
The problem is most pronounced for larger banks with significant market share. It
is now easier for customers to migrate accounts and account history, allowing
customers to take advantage of banks that can offer specialized solutions such as
international transfer or a more specialized credit card product.
Use data to create value-added products

Despite the disintermediation risks, banks have the ability to constructively engage
these trends. Banks have the opportunity to position themselves as gatekeepers for
the core data that they retain. They can survey customers to develop insights into
which tools they want to make their data available to. In retail banking, banks can
leverage open banking technology to improve customer relationships and retention
by helping customers manage their finances better, and provide value added
services rather than just executing transactions. For example, banks that focus on
mortgage lending can determine which customers may look for a next home, or
potentially a vacation home while banks focused on commercial clients can use
data to determine which financial services the firm could benefit from next, whether
it is treasury management, capital markets, or bespoke loan products.
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Leveraging APIs To Support Open Banking

With open banking, banks can make APIs available to other parties, who can
leverage them to provide more services. Banks need to go beyond opening up
access to data via APIs, but rather understand the full customer experiences
needed while opening access to facilitate creation of that experience. Banks also
need to try to own as much of the experience as possible, but if unable to do so, then
they need to find partners who can provide it. This is while ensuring security and
handling access rights and having a plan for dispute resolution.
Figure 21: Growing API Catalogues
Source : Innopay
Upgrading core systems to embrace open banking

Opportunities for banks include deploying systems that can leverage their unique
position by deploying open systems that increase their flexibility and reduce time
to market. This can be a system such as a dashboard fed data by APIs including
credit card, bank accounts, tax returns, and others that can create a projection of
the customer's creditworthiness. This is the approach enacted by ~$8bn asset Live
Oak Bank (LOB), in September which completed migrating its core systems to a
core banking system from Finxact that runs on AWS. Finxact is a real-time, cloud-
native, Core-as-a-Service platform with an open banking API. LOB has
consequently replaced its legacy deposit infrastructure with an ecosystem of
providers that connect via APIs to Finxact. This helped them generate ~$2bn in PPP
loans, followed up by the introduction of new commercial savings and term deposit
products on the platform. The bank's system now has 16 suppliers specializing in
solutions across loan origination, issuer card processing and customer service, all
having seamless API connectivity to its core system. Deploying a product such as
Finxact, banks can leverage its open APIs and extensible components to develop
and launch products on demand and integrating services as needed.
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Figure 22: Banks with most advanced open banking models
Source : Innopay
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Latest Developments in
BNPL
Over the past few years, BNPL demand has accelerated, driven by the shift to e-
commerce with the merchant value proposition being higher close rates, larger
ticket sizes, low customer acquisition costs, better retention, more recurring
payments and the consumer value proposition providing convenience, deferral
payments, access to credit (often avoiding higher rates/penalties) and budgeting.
In fact, we expect BNPL to grow from ~3% of online volume globally in 2021 to
nearly ~4% by the end of 2022, with volumes rising due to increasing acceptance,
as multiple competitors, from FinTechs to banks to the networks, move to capitalize
on the accelerating demand. In addition, volumes should benefit from greater
penetration, as large retail partnerships ramp up and new products like hybrid debit/
BNPL cards drive engagement both online and in-store. Working closely with the
FinTechs and new BNPL competitors, the networks offer significant scale in
acceptance but also security, fraud, and charge-back protection, which is
becoming increasingly important as potential BNPL regulations come to the
forefront. With the BNPL industry evolving so rapidly, we wanted to take a closer
look at recent developments and key questions/ debates.
Pricing pressure coming with more entrants in BNPL

Low average order value (AOV) BNPL transactions are less complex and have seen
accelerated competition and lower pricing strategies compared to high AOV use
cases. PYPL first offered Pay in 4 with no additional fees following typical pricing of
2.9% + $0.10 per transaction and MA Installments also leverages lower pricing of
~2.5% plus core interchange, compared to typical pay in 4 pricing of ~4-6%. Large
distributors often step in and pay the MDR for the seller since they have higher
margins to offset the higher cost which allows AFRM to offer more 0% loans and
drive more sell through. It will be important for BNPL players to develop affiliate
marketing relationships providing value by bringing its customer base directly to
merchants (this is how they will get pricing power). AFRM is differentiated by its
high AOV capabilities which have won the company multiple large retailer and
marketplace partnerships. Although high AOV products have a higher take rate
(e.g., ~8% for 0% loans paid by the merchant and ~18% for interest-bearing
products paid mainly by the consumer), these products generate revenue similar to
traditional financials through consumer interest and gain on sale of loans to third
parties, making them more sensitive to macro and interest rates. Investors are
beginning to ask more questions about profitability of BNPL models.
Affirm's Debit+ disintermediating the banks from debit interchange?

AFRM recently launched the Debit+ card which is a hybrid debit/credit installment
product riding Visa rails. Debit+ gives consumers the option within 24 hours of the
transaction of paying for purchases in full or through an installment plan. AFRM
takes on the risk and underwrites the amount while the decision is being made. The
networks will still capture the initial transaction but may only partially benefit from
the subsequent repayments which will be mainly funded through ACH. Debit+ can
be uniquely linked to any bank account for repayments leveraging Plaid. We note
that the banks are getting cut out of the interchange on the Debit+ card. AFRM will
keep most of the unregulated debit interchange itself, sharing a portion with the
issuer, namely Evolve Bank. Although it is surprising Visa is providing a platform
with Plaid for Affirm without holding deposit balances to gain access to consumer
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deposits at any bank, Visa could potentially benefit from lower incentives if there is
a shift to multiple smaller banks. In addition, having access to the consumer's bank
account at all times provides significantly more data that can be used for
underwriting. This data also helps with adaptive checkout where machine learning
(ML) is being used to automatically present the most optimized set of offers to each
customer. We believe we will see multiple FinTechs announce similar structures like
Debit+ in the near future.
Mastercard Installments creating new BNPL platform

MA launched MA Installments and will also integrate installment capabilities into
click-to-pay as well as other participating wallets. Although MA Installments likely
requires integration with each of the banks so that they can offer BNPL at the POS
and online, installment capabilities can be more easily extended to merchants that
already use click-to-pay or a participating wallet with no integration needed. MA
will leverage attractive pricing equal to the average of core interchange plus an
installment fee of ~2.5%, which will be shared by the open loop scheme
participants (DBe ~3.5%-4% gross take rate). By integrating directly with the banks,
MA is able to lower the funding costs. Total economics split by the scheme are
higher than traditional cards but lower than competing BNPL offerings of ~4-6%
making for an attractive offering to all the parties.
Amazon enters BNPL partnership with Affirm

Last year, AFRM expanded its partnership with AMZN with AFRM gaining
exclusivity as the only dedicated BNPL provider through January 2023 with AMZN
getting warrants as a result (AMZN likely to add BNPL players/ options in future).
Positively, only part of the warrants are currently exercisable with the rest being
vested over time linked to performance. To date, AFRM installment loans on the
AMZN have been entirely higher gross take rate interest-bearing loans, which can
hit either interest income and/or gain on sale depending on whether AFRM sells the
loan (AFRM takes lower gross profit on loans sold but revenue is recognized
immediately), with monetization coming from the consumer. Although AMZN is
interest-bearing with high gross take rates, the benefit is more back-end weighted,
which should positively drive future revenue through interest and/or gain on sale.
However, economics are likely shared with AMZN and there will also be potential
for 0% promotions which could impact the take rate periodically but are key to
driving significant volumes and checkout share. For any 0% promotions, AFRM
makes an MDR from the seller and we estimate AMZN pricing is slightly higher than
breakeven, which is ~3-4% compared to typical pricing of ~8% (distributors may
also pay part of the AMZN fee). We estimate AFRM sees low-to-mid-single-digit
checkout share for interest-bearing loans with limited marketing compared to
significantly higher share from 0% products. As a final point of reference, AMZN
contributed ~15ppts to GMV growth in 2Q22.
SQ/Afterpay acquisition coming into focus

With the SQ/Afterpay closing in 1Q21, we continue to see significant synergy
opportunities from cross-selling BNPL into the Cash App and the Seller base as well
as from extending Cash App and Seller solutions to Afterpay consumers and
merchants over time. With Cash App growth rates potentially bottoming in the mid-
to-low 30s range and numbers getting reset, Afterpay should drive strong upside to
expectations over the next few years. Afterpay also recently expanded to offer BNPL
at some non-partnered merchants (e.g., Amazon) leveraging an affiliate model
which SQ could expand over time. Higher value-add and affiliate pricing could help
the BNPL industry drive future profitability. SQ will also benefit from moving closer
to discovery through Afterpay's Shop Directory, which should accelerate the
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company's omni-channel strategy and position it as its own network. On the

company's 4Q21 earnings call, SQ pointed to AfterPay's growth outlook,
suggesting gross profit growth of 25% to 30% in February (our prior expectations
for AfterPay Gross Profit were 40% for FY22) and that Afterpay is expected to add
an additional ~$1bn in non-GAAP operating expenses, making the overall deal
dilutive in year 1. For a deep dive into SQ/Afterpay Synergies, see our August 18
report: Square: Diving Deeper on Afterpay Synergies.
FinTechs bringing BNPL to POS

Klarna and Curve have launched similar products to Debit+, looking to bring BNPL
services to the physical POS. Klarna's card is powered by and allows for payment
upfront or over time through installments (currently in Sweden and Germany). In
addition, Klarna has additional features that, for example, allow all repayments to
be scheduled for month-end to better align with consumer preference. Beyond the
Klarna card, the company is exploring new strategic initiatives, including a
partnership with Stripe offering BNPL solutions to Stripe merchants as well as
several acquisitions (e.g., Pricerunner, Hero, Stocard) highlighting Klarna's
ambitions to be a one-stop e-commerce marketplace. Furthermore, Curve has
created an all-in-one card through MA that combines all of the consumer's credit,
debit and loyalty cards into one card. These new hybrid cards are essentially
mimicking a digital wallet but in a card form. Since building loyalty in BNPL is
difficult, hybrid cards help solve that issue by making the card a part of the
consumer's daily lifestyle and adding rewards further increases engagement.
Leveraging open banking capabilities in BNPL

MA acquired Finicity to gain access to its open banking platform. With Finicity
integrated into MA Installments, pre-approval decisioning for installment
purchases is made easier. In addition, Finicity helps consumers select from
different funding instruments for repayments. In both cases, Finicity generates
revenue per API call. AFRM also leverages Plaid to gain access to the bank account
and the data for underwriting loans and funding repayments. Plaid continues to be
a key conduit in getting financial access. After it failed to complete its acquisition
of Plaid (blocked by the DOJ), Visa moved on to acquire Swedish open banking
FinTech Tink for $2B. As a result, V and MA are becoming integral parts of the
FinTech BNPL offering online and in-store. V and MA have differing approaches to
the BNPL opportunity. V is taking a more partnership by partnership approach while
MA Installments appears to be a more full-fledged platform and infrastructure
provider for competing BNPL solutions, from banks to FinTechs. Even in the case of
ACH repayment, we see potential for V/MA to benefit through their multi-rail
strategies (rails for account-based repayments depends on the market).
WMT Rewards Mastercard launch in Canada

WMT Rewards MasterCard, issued by Duo Bank, launched its first payment
installment plan in Canada last year and is an example of how retailers, banks and
other FinTechs can leverage MA Installments. The typical 2.5% Installment Plan
setup fee is being waived by WMT for a limited time; interestingly, it will be charged
to the consumer, unlike other BNPL solutions that market the product as free to
consumers with no interest or late fees. Promotional campaigns like WMT's should
make the pricing more competitive with 0% offerings, driving stronger adoption
and volumes. In addition, the strong value proposition for the scheme participants
in MA's open loop model should accelerate acceptance across other large
merchants, banks and FinTechs.
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Keeping an eye on Apple Pay Later

Apple recently launched its own BNPL solutions, namely Apple Pay Later, with
Goldman Sachs as the lender. This will allow Apple Pay users to split purchase
payments into four interest-free installments, with payments made every two
weeks, or spread across several months with interest. Consumers can use the
credit card of their choice to make repayments. Apple Pay Later requires users to
opt-in and be approved. Apple Pay has seen strong adoption, particularly online and
in-app, but Apple Pay Later could drive further adoption including in-store, which
we will monitor.
Regulations starting to become part of BNPL conversation

Although regulations in the US, UK and Australia have started to focus more on
BNPL lately, they are mainly looking to protect the consumer from burdensome
debt and offerings that take advantage of them. Positively, BNPL solutions put
consumer trust at the center, with no interest or late fees in many cases, making
them more affordable with shorter durations and controls limiting incremental debt
from being accrued when payments are delinquent. We will also continue to
monitor unregulated debit interchange.
BNPL growth driving incremental sales

According to a survey by McKinsey, ~30% of respondents have used BNPL for a
purchase, representing a 3ppt increase over 2020. However, while the increase in
penetration is modest, there may be reason to believe usage trends are stronger
than penetration as customers make purchases they would not have in the absence
of BNPL, with 31% citing BNPL being a "low-cost financing option" as a reason for
use. Within the group of people that used BNPL, ~29% would have made a smaller
purchase or no purchase if BNPL was not available. An additional ~39% chose
BNPL over a credit card, while the remaining ~31% used BNPL as a substitute for
debit cards and cash. The survey finds that BNPL's impact on sales is unsurprisingly
the highest in discretionary categories with impulse purchases such as apparel,
laptops, and beauty products, with ~20% of respondents saying these purchases
would not have happened without BNPL. Naturally, this incremental conversion is
lower, in the 3-5% range, for categories such as tires and auto parts, home
appliances, and home improvement.
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Figure 23: Growth in BNPL penetration
Source : 2021 McKinsey Digital Payments Survey, McKinsey.com
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Figure 24: Payment methods in absence of BNPL

(1) Figures may not sum 100% due to rounding
DB global BNPL projections

We estimate that the total global BNPL market (incl. physical goods and travel/
events) stood at ~$170bn in 2021 and will grow to ~$241bn in 2022 and ~$482bn
by 2025. Our analysis includes travel/events, which have weighed on growth since
the start of the pandemic but are beginning to show signs of recovery and are a
burgeoning use case for BNPL installment loans. Our volume estimates assume
that BNPL penetration of global e-commerce values will increase from ~3.0% in
2021 to 3.8% in 2022 and eventually reach 5.6% by 2025.
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Figure 25: Global BNPL market analysis
Source : Deutsche Bank estimates, company data, US Census Bureau, eMarketer, Statista, Signifyd, IATA
Pricing pressure for low- and high-AOV transactions

BNPL transactions broadly come in two forms, determined by the pricing and the
way they are offered to customers. The first is a "low-AOV" product, typically offered
by FinTechs at the point of sale. The second is a "high-AOV" product for larger
purchases, offered through a merchant partnership with a financial institution, or
a FinTech.
Lower AOV focuses on transactions in the sub ~$50-$75 AOV range and is naturally
less complex with simpler payment terms. This is the best-known form of BNPL,
popularized by firms such as Afterpay, composed of zero-interest installments of
typically four payments over approximately 6-12 weeks. These products come with
low credit limits from a few hundred dollars and can extend credit to a broad range
of buyers without a hard credit pull, but with the potential for credit line increases
as customers prove their creditworthiness. While consumers do not pay interest or
late fees, merchants pay a discount of 4-6%. This is still greater than the interchange
on a traditional credit transaction. However, like credit cards, they help to bring in
new customers. The low-AOV vertical has seen intensifying competition, and in the
case of some retailers, manufacturers with their higher margins can step in to
absorb a portion of the discount.
High-AOV focuses on interest-bearing installments for larger purchases and longer

payback periods, and is typically offered by merchants. Unlike the interest-free low-
AOV loan types, here lenders charge consumers interest rates of up to ~30% and
payback periods can be 6-60 months. This product type is more similar to a
traditional finance product, where financing is obtained through external funding
such as warehouses and gain on sale of loans to third parties. Naturally, this makes
these firms more akin to spread lenders and therefore sensitive to the level and
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trajectory of interest rates. Going forward, particularly when rates rise, these loan
types can be set up through closed-loop BNPL providers such as AFRM, which is
distinguished by having offerings in both the low- and high-end, as well as open-
loop solutions created by the likes of MA Installments, where banks and other
lenders can create more distinct loan types.
We note that most of the competition is coming from low-AOV pay-in-four type of
models. As a result, pricing is becoming more competitive in low-AOV, where
players like PYPL and MA Installments undercut the typical pay-in-four pricing
model. High-AOV seems to be more differentiated, where AFRM has strong
capabilities.
BNPL payment flows

Split pay structure
For consumers, the value proposition for 0% APR BNPL solutions is clearly the
access to credit at lower costs than traditional revolvers such as credit cards.
However, the cost for merchants can be materially higher than the cost of accepting
traditional payment methods such as credit or debit cards. For 0% APR pay-in-four
installment loans with short repayment periods, BNPL providers typically charge
MDRs in the range of 4-8%, which compares to average fees of ~3% plus a nominal
processing fee if the same payment is made using traditional e-commerce
gateways, or even lower if the consumer uses a credit/debit card processed by
traditional merchant acquirers (~1-3%). Furthermore, BNPL providers tend to have
variable pay schedules and SMB merchants tend to pay higher rates than larger
merchants, which may have customized agreements. While merchants can
theoretically add a surcharge to consumer purchases made using BNPL service
providers, the benefits of up-front/in-full payments, higher conversion rates, and
larger AOVs need to offset the fact that merchants receive a smaller net share of
consumer purchases when BNPL is used at checkout. Below we have a simplified
flow showing how a hypothetical $100 purchase is split between the merchant,
BNPL provider, issuer, network, and acquirer in a 0% APR split pay transaction with
the assumption that all repayments are made using a card:
1. BNPL providers typically charge merchants ~4-8% of the purchase amount

and some providers also charge a flat fee per transaction (e.g., $0.30). This
compares to standard e-commerce rates of ~3%.
2. The merchant receives the full price of the product minus the agreed upon
MDR/merchant fee to the BNPL provider for its services. By partnering with
the BNPL provider, the merchant expects increased volume and AOV to
more than offset the costs paid.
3. The BNPL provider then receives installment payments from the consumer
at the agreed upon terms and timeline, typically through linked debit (~60-
70% of the time by our estimates), which are subject to interchange and
assessment fees just like any other card-based transaction. Though there
are different variations of BNPL flows, many companies manage all of the
economics associated with the repayments, including network/issuer
fees. When repayments are funded with ACH and/or Balances, which we
estimate is typically ~30-40% of the time today, the associated processing
fees are reduced for the BNPL provider and yields are increased.
4. It is important to note that since the repayment plan includes multiple card
transactions (one up front followed by three biweekly payments thereafter
in many cases), issuers and networks benefit as they are able to receive
more transaction-based fees as a result (volume-based fees stay the same
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no matter how many times you split the payment). Interchange rates
(typically the largest portion of total credit card transaction fees) are
charged by issuing banks to cover risk, and are non-negotiable as they are
determined by the networks (e.g., V, MA). Interchange rates vary by the
type of card used, card brand, and type of business (among other factors),
but a typical card-not-present transaction processed by V includes a
volume-based portion (e.g., 1.75% of total transaction value) and a fixed
fee per transaction (e.g., $0.20). Assessment fees are also non-negotiable
and consist of volume-based and fixed portions, as determined by the
networks.
Figure 26: Illustrative 0% APR split pay flow
Source : Deutsche Bank Research, Affirm, Afterpay, Visa, Mastercard

Note: Fees are for illustrative purposes only; actual rates vary by country, provider, etc.
Interest-bearing BNPL installment structure

Many BNPL providers also offer interest-bearing products in addition to 0% APR
offerings as a way to expand consumer purchasing power, typically for larger ticket
items. BNPL providers will often offer interest-bearing solutions by directly
integrating with merchant partners, though companies like AFRM offer direct-to-
consumer virtual card offerings as well. Interest-bearing installment products are
tailored to a consumer's needs, with APRs ranging from 10-30% for a company
such as AFRM. Durations are also typically much longer than for split pay solutions
at 3-60 months, while basket sizes tend to be much larger as well. Below we have
a simplified flow showing what portion of a hypothetical $1,000 purchase reaches
the BNPL provider in an interest-bearing installment loan, assuming a 20% APR.
While there are many similarities between split pay and interest-bearing BNPL
loans, a number of differences end up impacting the economics realized by BNPL
providers. Some of the key differences between interest-bearing installment loans
and 0% APR split pay transactions include:
1. MDRs are typically lower for interest-bearing products since BNPL

providers are able to improve unit economics thanks to the interest they
collect from consumers. Rather than the typical ~4-8% charge of a split pay
transaction, MDRs for interest-bearing BNPL loans tend to range ~2-5%.
2. The APR charged by BNPL providers can vary dramatically, with ~10-30%
being a standard range. Interest collected from consumers makes up the
lion's share of revenue on interest-bearing installment loans, well above
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the merchant and interchange fees collected.

3. While the initial transaction (typically for ~1/4 of the total purchase
amount) is often completed using credit or debit cards, repayments on
interest-bearing loans are much more likely to be linked directly to
consumer bank accounts and repaid via ACH.
4. Depending on how the BNPL provider chooses to fund its interest-bearing
loans (e.g., warehouse facilities, securitization, etc.), funding costs tend to
range between ~1-5%. Funding of BNPL loans can occur either on or off-
balance sheet.
5. Just as with any other loan product, when consumers are unable to repay
BNPL installments, this acts as an expense item. Given the unique access
that BNPL companies have to consumer data, they often realize lower
credit losses than those seen in traditional credit models.
6. Revenue recognition typically depends on whether loans are sold to third
party investors or held on the BNPL provider's balance sheet. When loans
are held on the BS, BNPL providers recognize interest income over the life
of a loan but they must also take an upfront provision for expected credit
losses as well as funding costs, discussed above. For loans that are sold to
third party investors, there is no provision expense or funding cost, but
BNPL providers typically still see processing and servicing costs.
Figure 27: Illustrative interest bearing installment loan flow
Source : Deutsche Bank Research, Affirm, Afterpay, Visa, Mastercard

Note: Fees are for illustrative purposes only; actual rates vary by country, provider, etc.
Debit+ hybrid card and Adaptive Checkout

Initially announced in February 2021, AFRM's Debit+ is a decoupled debit card
running on the V network. Consumers are able to use Debit+ in-store or online, just
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like any other debit card, wherever V cards are accepted. Then, using a post-
purchase feature found in the Debit+ companion app, consumers have 24 hours to
convert any eligible transaction (currently between $100 and $1,000) into one that
is pay-over-time. While initial transactions are conducted on existing debit rails,
repayments of installment loans will primarily rely on ACH for settlement.
Furthermore, Debit+ has no sign-up, annual, or late fees and consumers are able to
seamlessly connect to existing bank accounts. We note that because Debit+ is
fundamentally a software offering, AFRM plans to regularly add new features and
functionalities to the card in a consistent, piecemeal manner via the companion
app. Overall, AFRM sees Debit+ as a fundamentally new category of product
combining the functionality of traditional debit cards with omni-channel BNPL
capabilities, untethered to a single bank account and for use virtually anywhere. At
its analyst day in September 2021, AFRM noted that it expected less than 10k cards
to be released to the public by year-end before indiscriminately fulfilling the existing
wait list of >1m. The product is now in its initial roll-out phase and mgmt. noted on
the company's 2Q22 earnings call that the number of weekly transactions from
existing Debit+ users (excl. AFRM employees) is "an order of magnitude" greater
than a typical AFRM customer.
Debit+ features
AFRM has positioned Debit+ as not just a traditional debit card, but rather a
fundamentally new product category combining all of the safety and security of the
debit transaction experience while also giving consumers access to credit
offerings. Debit+ offers a number of compelling features that should attract
consumers on a wide scale, including:
n Link multiple banks: Debit+, like any other debit card, links directly with
existing bank accounts where funds are withdrawn after making a
purchase. However, unlike a debit card issued through, say, a bank, Debit+
is not tethered to any single account and consumers are able to add multiple
bank accounts for funding purposes.
n No credit impact when registering: The registration process for Debit+ has
no impact on the consumer's credit score because it is treated as a true
debit card, directly linked to one or more bank accounts. Consumers then
have the option after making a purchase to pay in full for a transaction or
have it split up into multiple installments.
n Omni-channel payment: While many BNPL offerings today require direct
merchant integration, Debit+ offers consumers omni-channel access to
installment loans anywhere V debit cards are accepted.
n Choice to finance after purchase: Debit+ is unique in that it operates just
the same as any traditional debit card at the POS, in-person or online, but
consumers are presented with the option to pay in-full up front or to split
eligible purchases into four interest-free payments using the Debit+
companion app. Consumers have up to 24 hours to enter the app and
choose whether they want any specific transaction to be paid in
installments.
n Reduced cost of consumer credit: When consumers take advantage of
AFRM's 0% APR offering, they will be able to realize a lower cost of credit
vs traditional revolving lines of credit, such as credit cards, that typically
carry high APRs. Specifically, younger consumers have taken strongly to
BNPL offerings and the introduction of Debit+ should introduce a wider
swath of the public to zero-interest installment loans.
n Cash back and rewards: One key feature of the Debit+ card is AFRM cash
back and rewards, which are notably absent from most traditional debit
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offerings. As consumers transact from the AFRM app using the Debit+ card
or make on-time repayments of installment loans, they will earn rewards
that can be used to make purchases or payments, or can be deposited
directly into a personal checking or savings account.
AFRM has noted that the company expects Debit+ to be such a powerful
standalone product that many consumers will end up discovering AFRM for the first
time through the Debit+ offering. From there, consumers will then be able to
expand further into other AFRM products and offerings. Going forward, the
company believes that in the second half of 2022 AFRM will be able to start
generating real metrics and forecast the potential future contribution from the
product.
Debit+ economics
While AFRM is initially launching Debit+ with only the company's Split Pay offering,
the Debit+ product roadmap contemplates adding monthly interest-bearing (up to
30%) and longer-term 0% APR offerings to the card at a later date, with terms
ranging from six weeks to 60 months. As AFRM introduces interest-bearing loans,
the company would also earn consumer interest in addition to interchange fees and
MDR. AFRM earns interchange fees of ~1-1.5% on both traditional debit and pay-
over-time transactions with Debit+. On the expense side of the equation, AFRM
expects to see fraud and dispute charges, marginal costs of funding, as well as
some incremental servicing costs. For those transactions using Split Pay, AFRM will
also incur costs associated with credit losses, though these losses are likely to be
lower than for typical installment loans. Overall, the economics AFRM will realize
depend heavily on consumer uptake of post-purchase finance offerings. As AFRM
continues to develop Debit+ features and adjacent revenue streams, we believe
Debit+ will be able to deliver strong returns in the long run, though we will wait to
see how the economics develop in the short term. As Debit+ expands into everyday
spend transactions and AFRM is able to grow its share of the wallet, the company
expects Debit+ to reduce a portion of the volume that is currently running on the
company's single use virtual card offering. Currently, AFRM has not factored
potential volumes, revenues, or transaction costs into its revenue from the roll-out
of the Debit+ card, but the company has noted that it believes the product will be
a meaningful contributor in FY23.
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Figure 28: Key Debit+ metrics
Source : Company documents
Adaptive Checkout
Another recent announcement from AFRM is the company's new Adaptive
Checkout feature. Adaptive Checkout is an integration of AFRM's monthly, interest-
bearing installment offerings and its low-AOV split pay. Merchants partnering with
AFRM will now have the ability to offer customers the choice between four biweekly
interest-free installments or monthly payment options in a single integrated
checkout solution across both high- and low-AOV use cases. AFRM automatically
optimizes the set of offers shown to consumers (using machine learning) in order
to maximize sales and customer satisfaction. Adaptive Checkout makes use of
AFRM's smart decision engine to deliver personalized payment options based on
transaction size in addition to performing a real-time underwriting decision.
According to AFRM, merchants with early access to Adaptive Checkout saw an
incremental ~26% increase in conversion as well as a ~20% lift in sales volume.
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Figure 29: Adaptive Checkout overview
MA Installments brings multirail to BNPL

At the end of September, MA announced the launch of a BNPL service called
Mastercard Installments. The service allows customers to pay for both online as
well as in-store purchases through equal, interest-free installments. The service is
powered by open banking, through Finicity in the US and Aiia in Europe, and
depends on Installment Program Providers (IPP), which include traditional and
online banks, FinTechs, non-bank lenders, and digital wallets.
MA has since announced an expansion of MA Installments, revealing that

American Airlines, Fiserv and TSYS will work with MA Installments, while BNPL
firms Humm Group and Limepay have started deploying the service in Australia.
The launch of the program follows MA's previous work with TSYS to offer
installments, available through APIs tied to the consumer's existing credit.
MA does not engage with the customer directly, but lenders such as banks, FinTech
firms, and digital wallets can embed this functionality into payment apps, giving
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customers the choice to use these services. The service works as follows: 1) a bank
or FinTech pre-approves BNPL offers that allow customers to split payments into
repeat payments, including an interest-free, four-installment offering; 2) funds can
be stored in the consumer's digital wallet of choice, or used at checkout but without
needing a new card; and 3) the payment will be accepted at any merchant that
accepts MA.
The economics of MA Installments are attractive with core interchange plus an

installment fee of ~2.5%, shared across the participants in the transaction, and MA
can lower funding costs by integrating directly with banks. As a result, the total
economics of the scheme, while more favorable than for credit cards, are still lower
than those of competing BNPLs, which have economics of 4-6%, providing a clear
benefit to the merchant. Plus, due to the deeper integrations with the consumer
account, lenders can provide consumers with more tailored loans. In addition,
existing integration with the merchant network through MA virtual cards
eliminates integration requirements for lenders.
The program is part of the firm's network of networks strategy of moving money
from across all endpoints. This program broadens the scope of BNPL lenders,
allowing a range of lenders to enter the space. Plus, consumers using the service
benefit from zero-liability fraud protection, while it also allows merchants to use MA
fraud tools.
Visa exploring BNPL projects

Visa has yet to launch a comprehensive BNPL solution in the manner of MA, but it
has been scaling up investment in the space. Management has, on multiple
occasions, underlined its view of the BNPL space as being in a nascent stage, noting
that installment loans represent only a fraction of the $100-$150bn in total industry
payment volume. Visa expects to participate in this space by becoming a
connection point for FIs, FinTechs, and merchants to offer installment loans to a
broad spectrum of consumers. On the company's January earnings call, mgmt.
noted that BNPL FinTechs are increasingly using V virtual cards for installment
loans and it had seen triple-digit payments volume growth Y/Y.
In October, V announced a partnership with Canadian firm Moneris to provide

installment payment options to eligible cardholders in Canada on qualifying
purchases starting in 2022. This gives cardholders the option to pay in full or in
smaller payments over a defined time period with their existing credit card. Visa is
also partnering with FIS, in addition to expanding its relationship with Klarna to
access new markets.
Another initiative from Visa is its development of installment solutions released

through Visa Developer, which allows clients to develop and test installment
experiences for their customers. Consumer payment options include Pre-
purchase, During purchase (at checkout), and Post-Purchase, where a consumer
turns a card transaction into installments. Visa's APIs will include the ability to
create such installment plans while allowing the issuer to define parameters such
as installment loan duration, participating merchants, and interest and fees. During
a transaction, the API will be able to look up eligible installment plans for a
transaction, which the merchant displays during purchases. Benefits to consumers
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include an increased number of payment options on existing cards, while

merchants can increase sales volumes and conversion rates.
Networks battling disintermediation

One threat to the credit card networks is that a traditional credit transaction does
not pass SKU-level data through the network, limiting the tailoring of offers for the
consumer from both the issuer and merchant sides. BNPL solves this by allowing
sellers, merchants, and closed-loop BNPLs to provide financing of various types,
including zero-interest installments for low-AOV and interest-bearing BNPL loans
for higher-AOV items.
In the early days of credit card acceptance, merchants were reluctant to accept
credit cards until it became clear that it would drive customer traffic. Similarly, with
BNPL popularity rising among consumers who prefer interest-free installments
with a clear payoff, BNPL is an opportunity to increase customer traffic by
broadening the number of potential customers. This is an opportunity for networks
to engage with banks, merchants, and processors to drive the creation of open-loop
BNPL ecosystems that expand the customer base, while still producing more
tailored offers.
As a result, while closed-loop BNPLs have the potential to threaten the dominance
of card networks like V/MA, the card networks have started responding to that
threat. Networks are partnering with merchants and banks to allow them to create
their own bespoke BNPL offerings. This is particularly valuable for low-AOV items
where it would be cumbersome for merchants to underwrite for installment
payments for a sub-$75 product. As a result, rather than being a threat to their
business model, we believe there is plenty of opportunity for card networks to
create value.
AFRM partnership with AMZN

In August, AFRM announced a partnership with AMZN whereby AMZN customers
can split purchases of $50 or greater into monthly payments by using Affirm.
Customers can see the total cost of their purchases upfront and avoid hidden fees,
in-line with AFRM's business. We believe this deal is a positive for all BNPL players
given a solidification of the sector by AMZN and further advancement of industry
adoption. The AMZN announcement comes on the heels of AFRM's recently
announced partnership with AAPL in Canada, while the company's deal with SHOP
is still in the early stages of ramping. Given the recent push into large marketplaces,
we will monitor contribution margins going forward but see the potential for
accelerated volumes and additional wins over time.
In its 4Q21 earnings release, AFRM provided details on the economics with AMZN
with a warrant structure designed to align the incentives of the two companies. We
note that AFRM's partnership with AMZN is set to expand based on the results of
the early testing phases and represents a significant future opportunity (see our
note, "First Estimate on AMZN Partnership Impact"). AFRM will be the only BNPL
provider for AMZN shoppers in the US through the next two holiday seasons.
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Curve Flex, a new BNPL solution

Curve is a card Fintech based in the UK. It is building a super app that aims to be a
comprehensive financial app for consumers. The app allows customers to
consolidate banking and credit cards into a single card and app. Curve has built
credit capabilities with Curve Credit, which extends credit on purchases made with
the Curve card, paid back over time in installments. Unlike other POS lenders, the
service does not partner directly with merchants at checkout, but extends credit to
customers when they use a Curve debit card at checkout.
In September, building on these capabilities, Curve launched Curve Flex, a BNPL

offering that allows customers to pay later for nearly all purchases at any merchants
and from any card. Significantly, the service allows the user to convert into
installments purchases made up to a year ago. Whenever a customer wants to split
a purchase – including retail, online orders, and household bills – into installments,
they swipe a transaction and select the number of installments. This is then
refunded in full nearly immediately, with the customers now having improved
control over their money. CurveFlex has been in testing since September 2020, with
1,600 beta users having converted ~7,000 transactions into installment loans of
over GBP 1m.
Klarna rapidly expanding footprint and services

Klarna, a Swedish POS financing provider, was founded in 2005 and maintains a
network of over 400,000 retail partners and 147m active users across >45 markets,
including the US, UK, and Germany. Klarna became the second most valuable
FinTech start-up in the world in June after the company raised $639m in new money,
reaching a valuation of ~$46bn. Furthermore, Klarna is exploring a number of new
strategic initiatives to expand its geographic footprint and suite of services. In
October, Klarna and Stripe agreed to a strategic partnership to offer Klarna's BNPL
payment method to its merchants. As well as partnering globally, Stripe and Klarna
also strengthened their relationship in North America, where Stripe is now used in
~90% of Klarna's payment processing volume in the U.S. and Canada.
Furthermore, Klarna has gone out and acquired a number of companies in the back
half of 2021 to extend the company's suite of services, highlighting Klarna's
ambitions to be a one-stop e-commerce marketplace. Acquisitions announced by
Klarna since July 2021 include Swedish price comparison company Pricerunner (~
€930m), UK-based social shopping platform Hero (~$160m), German discount
shopping app Stocard (~€113m), Swedish influencer marketing platform Apprl
(undisclosed), and US-based travel planner Inspirock (undisclosed). Klarna also
offers a card similar to AFRM's new Debit+ card, called Klarnakortet ("the Klarna
card"). Klarna's card is powered by V and allows for payment upfront or over time
through installments. However, the Klarna card was launched in Sweden in 2018
and Germany in 2019 and currently has no presence in the US. In addition, Klarna
has additional features that, for example, allow all repayments to be scheduled for
month-end to better align with consumer preferences.
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Upgrade – a growing new FinTech providing responsible

credit
Upgrade is a FinTech focused on helping customers use their credit more
responsibly. It has issued ~$10bn in credit through credit cards and personal loans,
and expects to issue $8bn in credit in 2021. Founded in 2016, and led by former
Lending Club CEO Renaud Laplance, it has recently raised a Series F round at a $6bn
pre-money valuation, up from its August Series E round at $3.325bn. Upgrade's key
product is a rewards credit card that offers 1.5% cash back on all purchases, in
addition to another card that allows bitcoin rewards. However, if the consumer is
unable to pay the credit card balance, Upgrade will combine the charge into a
monthly installment plan to be paid back over 24-60 months at a fixed rate with
equal monthly payments. The firm has also launched checking accounts and debit
cards with no minimum balances and rewards on debit card purchases. Upgrade
also offers personal loans with APRs of 5.94-35.97%, and management has
previously noted that its flagship credit card generates ~$1bn in credit lines per
year.
AAPL dipping a toe into BNPL

According to a Bloomberg report over the summer, Apple and Goldman Sachs have
begun partnering to launch their own BNPL services through Apple Pay with
Goldman as the lender, to be known as "Apple Pay Later". The service will allow
Apple Pay users to split payments for purchase into four interest-free installments,
with payments made every two weeks, or spread across several months, with
interest. Consumers will be able to use the credit card of their choice to make
payments, while also avoiding late fees and processing fees, with the only expense
being interest. Users interested in Apple Pay Later must be approved through an
application in iPhone's Wallet App (where they also manage payments).
While Affirm, Afterpay and other BNPL providers saw share price declines on the
news, there is reason to be skeptical that BNPL players will be imperiled by the entry
of Apple. According to an August survey by PYMTS.com, only 6% of iPhone users
in the US use Apple Pay In-store, even as the number of consumers with Apple Pay-
eligible devices and the number of merchants accepting Apple Pay increase. This
limited adoption constrains the pool of potential users of Apple's BNPL service,
which additionally requires users to opt-in and be approved.
As a result, Apple Pay Later is being positioned as an add-on solution to the broader
Apple Pay portfolio. This strategy of deploying BNPL as a niche feature inside other
broader payment solutions may be an approach other large firms may seek to
deploy as part of building their own feature-rich ecosystems rather than becoming
an immediate threat to Affirm or Afterpay.
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Figure 30: Adoption of Apple Pay
Source : PYMNTS.com
UK BNPL study from the University of Chicago

In February 2022, academics associated with the University of Chicago put out a
report on UK BNPL trends. The paper outlined the immense growth that installment
loans have seen in the UK over the past two years. It found that BNPL volumes in Dec
2021 were 20x those in Jan 2019 and, intriguingly, that BNPL usage via credit card
was far more prevalent among younger consumers and consumers in economically
"deprived" areas of the UK vs more affluent areas. Other key findings from the paper
include that in 2021 a BNPL instalment was charged to 19.5% of all active credit
cards in the UK and that ~40-50% of all BNPL loans are charged to credit cards. The
paper's authors conclude that charging a 0% interest, amortizing BNPL debt to
credit cards, where typical interest rates are 20% and amortization schedules
decades-long, raises doubts over consumers' ability to pay for BNPL. Given the
continued concerns over the long-term health of consumer credit, we believe the
trends highlighted in this paper bear monitoring, particularly in other geographies
such as the US.
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Merchant Acquiring in the

Spotlight
Integrated payments and software ownership
Integrated payments refers to combining payment processing functions with other
important software-based business solutions. While the core processing of
payments has become commoditized over time, combining payments with value-
added software solutions has allowed acquirers to differentiate themselves from
competitors, capture the attractive SMB opportunity, and drive better revenue,
margins and retention as well as new business win rates. Integrated payments help
merchants save time, money, and the resources needed to grow their business by
streamlining accounting processes, reducing manual intervention and duplicate
data entry, eliminating unnecessary overhead expenses, and improving the
accuracy, efficiency, and reporting/forecasting of data collected. Not only do
integrated payments streamline business management functions for merchants,
they also enhance the customer experience and can lead to significant
improvements in sales. As a result, integrated payments are becoming extremely
popular, particularly among smaller businesses, which have historically lacked
these abilities and are more resource constrained.
Payments can be integrated into multiple different types of software, from

accounting or ERP systems to customer relationship management (CRM) tools,
inventory management, data and analytics, and tax preparation solutions. The
overall market appears to be trending more and more toward vertical-specific
software solutions that cater to the specific needs of merchants and are integrated
with payments. Software providers typically choose a payment processor and
combine this technology with their platform. Many of the merchant acquirers have
also created developer-friendly APIs and SDKs to encourage software development
and integration with their payment technology. Some of the merchant acquirers
have taken it a step further by actually owning the software assets themselves and
diversifying into these more recurring and predictable revenue streams. Other
acquirers have either built their own POS hardware solutions and/or acquired the
hardware while embedding software and payments throughout the platform.
We believe integrated payments will continue to play an important role in the

merchant acquiring market for the foreseeable future as penetration rates remain
low in the US market as well as globally and the benefits to merchants are clear. We
believe the players best positioned to win will be those with both fully and semi-
integrated payment processing solutions tailored to work with multiple business
applications and software solutions, with the ability to accept a wide variety of
payment form factors, including mobile. In addition, partnerships with leading ISVs
is critical to overall success as the software component delivers the most business
value and often leads the initial conversations while also delivering attractive
referrals.
Payment evolution toward ISVs

Payment evolution has gone through a number of steps, starting with the shift to the
ISO model in order to go out and sell more payments, then becoming integrated
payment companies through the ISV model. In this evolution, merchant acquirers
and issuer processors, namely FISV, GPN, and FIS, continue to move into value-
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added services and technology-based verticalized software solutions. An example

of value-added services for acquirers is integrated payments, which allow for
multiple software-based business solutions (e.g., CRM, marketing, payroll, and
reconciliation), data analytics and insight, and fraud detection.
ISVs have become the first point of merchant contact, with payment processing
firms teaming up to capitalize on referrals. While acquirers have been successful in
growing revenue and expanding margins through value-added services, we have
seen some shifting of the economics to software, with tech-savvy players such as
Global Payments moving into owning the software and end-to-end stack as a result.
In addition, players like Finix Payments are helping the software companies become
PayFacs by providing infrastructure-as-a-service, as opposed to more expensive in-
house offerings.
Benefits of adopting integrated payments

Streamline operations, improve accuracy and consolidate data
Integrated payments provides merchants with the ability to sync their back-office
business solutions systems with payment processing, which can help to eliminate
duplicate accounting. As a result, merchants benefit from more streamlined
operations. Greater automation also results in improved accuracy, translating into
fewer losses. In addition, consolidation of data allows for advanced reporting and
analytics.
Save time and resources devoted to manual tasks
Integrating payment processing with other business software solutions allows for
electronic payment transactions to automatically flow into business solutions such
as the merchant's accounting or ERP system following a sale. This automation
typically saves time and resources that would have otherwise been directed at
manual efforts such as inputting, monitoring, tracking/reconciling and reporting
transactions, while also reducing the chances of human error. Merchants can also
benefit from a single point of contact for support issues, which saves time and
improves the experience.
Reduce expenses through efficiencies and lower processing fees
Redirecting resources toward more value-add activities not only allows merchants
the opportunity to improve and grow their business, but it also reduces expenses
associated with those previously manual tasks. In addition, merchants can benefit
from lower processing fees through automatically submitting line-item details at
the POS. For example, by utilizing integrated payments, merchants can eliminate
the need for a gateway solution and the associated fees and equipment. For
corporate purchases that are priced differently to consumer credit card
transactions, Level 3 processing through integrating payment acceptance into the
ERP system can reduce interchange rates.
Improve forecasting and marketing capabilities
Not only can merchants benefit from improved internal forecasting through
enhanced visibility into their finances, but they can also benefit from advanced data
analytics on their customer base over time. Merchants can leverage the data and
analytics to improve their marketing campaigns, helping them retain more existing
customers and acquire new customers, resulting in increased sales and lower,
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more targeted marketing costs.
Enhance the customer experience
Integrated payments can help merchants reduce the checkout time, leading to an
improved customer experience. In addition, gift card processing and loyalty
solutions, in many cases, are part of the integrated solution provided to the
merchant. As a result, merchants can use these value-add tools to improve the
customer experience.
Simplify and automate tax preparation
Centralized reporting and automated accounting make it easier for merchants to

prepare their taxes each year. In fact, many of the integrated payment solutions
providers have specific software-based functionality that can be used to prepare
taxes.
Payment Facilitator model gaining prominence

Payment Facilitators, or "PayFacs", are service providers registered by an acquirer
to facilitate transactions on behalf of submerchants. Acquirers must register a
payment provider as a payment facilitator with the networks, with specific rules to
be followed. In addition, we see PayFacs as a merchant service provider that offers
a simplified and streamlined merchant sign-up process. The PayFac model
essentially makes it easier for smaller merchants to accept payments as it reduces
the complexities typically associated with setting up their own merchant account.
Visa and MasterCard allow submerchants to have a charge volume of up to $1m
annually before they have to establish their own independent merchant account.
The payment facilitator benefits from being able to service a larger number of
merchants while still having control of and access to the payment data.
Square, Stripe and PayPal have set the stage for the next generation of acquiring,
namely the period of PayFacs. Importantly, PayFacs utilize a submerchant platform
that allows merchants to be onboarded under the PayFac's master merchant
identification number (MID), which is sponsored by a bank, rather than requiring
the merchant to have their own MID, according to PYMNTS.com. In this model, the
PayFac underwrites the merchants as they process transactions over time. As a
result, the PayFacs take on the financial processing and fraud risks for the
submerchants. Other costs of the model include risk management capabilities,
compliance, funding, infrastructure development, and integrations. However, the
benefit is improved customer acquisition through a more seamless onboarding
experience (minutes versus days) and better internal control.
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Figure 31: PayFac structure
Source : PYMNTS.com, Deutsche Bank
Payment facilitator advantages

There are a number of advantages of becoming a payment facilitator. As a PayFac,
organizations can benefit from being able to offer services to a broader range of
merchants and are able to reduce costs related to signing and supporting
merchants with lower volumes. PayFacs are able to add merchants quickly and
control the onboarding process, as well as generate greater revenues by integrating
the payments into software. Payment facilitators typically retain a larger revenue
share as they do not have to pay the middleman to process their transactions. In
addition, they could benefit from higher margins than traditional merchant
accounts. Operational costs are typically lower for onboarding merchants as
PayFacs tend to be good at online customer acquisition. Payment facilitators have
greater control of merchant services and support, and can drive better customer
experiences than the payment processors in some cases.
ISOs and software vendors looking to become more PayFac-like

Similarly, there is an increasing number of ISOs looking to adopt PayFac-like
models. Larger, more tech-savvy ISOs could build their own PayFac solution and/or
acquire ISVs to expand into becoming a solutions provider. However, traditional
ISOs that leverage third-party solutions to sign up merchants without the
technological capabilities may find the transformation more difficult, in our view.
Software vendors are also leveraging the PayFac model and partnering with leading
acquirers. Other sponsors include First Data and Total System Services. Sponsors
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are required to do the due diligence on prospective PayFacs. The software vendors
want to be able to offer their small merchants a streamlined and simple way to
accept payments as part of their overall solution. In addition, the PayFac model has
become increasingly in demand in areas such as events, where companies such as
GPN's ACTIVE Networks offers this capability.
Disintermediation risks overstated

There is a perception that the business model of merchant acquirers faces
disintermediation risks, due to competitive threats from other FinTechs such as SQ
and TOST. There is also a fear that newer payment modalities such as open banking
and BNPL could potentially cut acquirers out entirely.
GPN is mainly focused on the SMB market, FISV on SMBs through Clover and large
merchants through Carat, and FIS on Enterprise, Software-led SMB, and Global e-
commerce solutions. The trio are facing competition from firms targeting smaller
vendors, such as SQ and TOST, which are more focused on micromerchants and are
attempting to move upmarket. However, these companies face limitations in
scaling solutions as businesses grow. In terms of product set and level of service,
the micromerchant segment is very different to SMB and larger enterprises with
different niches. Additionally, the trio of acquirers have knowledge, experience and
feature sets associated with specific industry verticals, which the newer FinTechs
do not. As a result, we believe the merchant acquirers are well-positioned to defend
and grow in their respective niches, even in the face of mounting competition.
Risks and opportunities in open banking

It has been argued that open banking could potentially result in a longer-term
contraction of growth prospects, driven by disintermediation from payment rails
being able to avoid acquirers completely. However, this may still be theoretical as
acquirers still get similar economics on open banking payment-initiated
transactions and their value add is single point integration, settlement and
reporting for their clients. As a result, acquirers look at open banking as another
payment type (the potential to help clients reduce costs is positive for acquirers).
Plus, there are reasons to be skeptical of the idea that acquirers can be cut out of the
payment loop entirely. Even where there are open banking payments, there are very
limited examples of A2A open banking volumes riding alternative rails that do not
include the networks and acquirers. When PSD2 mandated A2A payments in the
EU and interchange became regulated, the acquirers and networks built solutions
to enable customers to accept those payments. However, consumers have shown
little desire to give their information to third-party providers and merchants have
little economic incentive to participate in A2A transactions. Please see our recent
report, "Opportunities and Threats in Open Banking", for more details on the topic.
Limited threat of disintermediation from BNPL

Similar to open banking, BNPL is seen by the market as a potential threat whereby
payment modalities can potentially bypass the acquirers. However, in our
discussions with management teams, the transition away from cash and check
should be a driver of growth for the firms, with merchant acquirers benefiting from
moves toward digitization. Acquirers believe that merchants will look to accept
whichever payment consumers are using, across branded cards, A2A, ACH, P2P, or
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other rails. As a result, regardless of the scenario, as long as merchants accept

digital payments, they are well-positioned to participate and grow. Please see our
recent report, "Monitoring Top 10 Trends in BNPL", for more details. The trio of
merchant acquiring firms also have issuer divisions and can participate in virtual
card issuance. This is particularly important as many BNPL transactions use virtual
cards, with some estimates indicating that virtual cards are responsible for 90% of
BNPL volumes. Other opportunities include participation in low cost payment
forms such as ACH, which GPN participates in through its TouchNet subsidiary.
FISV merchant growth expected to accelerate

Clover to drive accelerated merchant growth
In March, FISV gave a detailed presentation of its Merchant business and its
strategy to accelerate growth in the segment going forward, from a ~7% CAGR over
FY19-FY21 to +11.5% through FY25 (excluding FX and M&A), driven mainly by
strength in Clover as the company shifts from selling individual point solutions to
operating systems. Although Merchant guidance assumes accelerated Clover
growth of ~27% going forward from expanding merchant count, increasing RPU
through increased adoption of software and services as well as new offerings, and
expanding internationally (e.g., India, Brazil and Australia), the growth algorithm
does not include potential upside from going after processing and the back book of
merchants with Clover, which have historically had strong conversion. In addition,
FISV expects yields to benefit over time from increasing RPU and the company
continues to expect margin expansion in Merchant from scale and operating
leverage. FISV reiterated its mid-term guidance of ~7-9% through FY23, including
9-12% in Merchant, but it expects to be at the higher end of Merchant over the FY25
period.
Clover acceleration driven by increased ARPU and VAS
FISV also laid out its growth roadmap for Clover, which the company expects will
drive up revenue from ~$1.3bn in FY21 (+27% two-year CAGR) to ~$3.5bn by FY25
(representing ~60% of total Merchant growth in that period). Clover's growth will
be centered on three key verticals – Restaurants, Retail, Services – that today make
up >50% of segment revenues and will be key drivers of increasing merchant ARPU
through the increased adoption of software and services. For example, restaurants
that use Clover have a merchant LTV that is 1.5x greater than non-Clover restaurants
on the FISV platform. Furthermore, the company expects this value to expand to
~3x in the future as churn declines and software and services revenue increases
ARPU and unit economics. We believe Clover is likely to add verticals going
forward, with a bias toward those with the necessary size and scale to drive LTV lift.
Furthermore, FISV is expanding Clover internationally in places such as India (with
ICICI), Brazil, Germany (with Deutsche Bank), and Australia (with National Australia
Bank). Today, Clover has ~560k merchants, up from ~255k in 2017 (+22% CAGR),
and nearly 90% of new Clover customers are new to the overall FISV platform. Going
forward, FISV will focus on continuing to add new customers, but it may turn to the
backbook as needed, which has historically seen a ~10% conversion rate to the
Clover platform. Finally, mgmt. commented on the importance of Clover as part of
the broader FISV ecosystem and noted that it expected continued investment to
attract new clients and partners, ultimately driving overall Merchant segment
growth.
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Figure 32: Clover growth
Source : Company Documents
Merchant acquirer share

Traditionally, the best metrics for assessing merchant acquirers' credit businesses
have been network credit metrics published by V and MA. Whether the acquirers
grow faster than, keep pace with, or grow slower than the networks can indicate
market share gains and losses. In the most recent quarter, V's US volumes grew
22% Y/Y and Global volumes grew 20%, while MA showed 26% Y/Y US and 25%
Global volume growth. Most recently, in February, FIS reported volume growth
slightly below V/MA in the US (19% Y/Y) and globally (17% Y/Y). Management
attributed this not to market share losses but rather to mix, as FIS was
disproportionately hit by Omicron vs. the networks due to its business mix, which
includes significant UK exposure (13% of merchant revenue comes from the UK).
GPN, on the other hand, showed strong 24% volume growth in 4Q21, on par with
the networks, indicating that it is maintaining strong market share. For GPN,
volume growth was above revenue growth largely due to a slower recovery in its
software businesses. FISV reported core merchant volume growth of ~18%, below
the networks. However, the firm expects growth to accelerate going forward with
strong growth in Clover, increased software adoption and international expansion.
Looking at global data over 2018-2020, FISV saw moderate growth in this period,
likely helped by its fast-growing Clover asset. GPN saw a slight increase in its share
of the global merchant acquiring market (see below), a trend we expect to
accelerate in the coming years as the company's mid-term strategy, with its
emphasis on new tech-enabled services, plays out. FIS, on the other hand, saw
steady declines, potentially losing share to competitors such as JPM and Sberbank.
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Figure 33: Global merchant acquiring market share (as % of transactions)
Source : The Nilson Report, Deutsche Bank Research
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Leveraging Crypto Interest

to Drive Engagement
Crypto keeps growing in popularity
The global pandemic has resulted in a rapid expansion of the cryptocurrency
market, with the market capitalization of Bitcoin and Ethereum rising past $700bn
and $300bn, respectively, as of February 2022. While there have been other boom/
bust cycles in the past, this current boom is notable for its rising institutional interest
in the space. Despite broader interest in cryptocurrencies as an asset class, they are
not broadly accepted as currency, with a key barrier to acceptance being the asset's
price volatility, which can rise or fall by as much as 30% overnight. As a result,
businesses have been reluctant to accept cryptocurrency payments, with
consumers having to convert to fiat on exchanges before purchasing items.
However, given rising valuations and interest, FinTechs are increasingly eager to
leverage cryptocurrencies as an engagement driver. Consequently, they have taken
several approaches to leveraging growing interest in cryptocurrencies as an
investment or crypto trading, a form of payment, and as an entryway into
decentralized finance or DeFi applications.
While cryptocurrency penetration is still limited, there has been a sharp rise in
adoption, with users interested in its investment potential. According to a
McKinsey survey, one in five respondents reported either holding or previously
having held crypto assets (up sharply from just 6% in the prior year). ~74% of
respondents were familiar with crypto but did not own it, out of which ~41% said
that this was due to limited understanding of the asset class, implying plenty of
runway for increased penetration.
Among the group of people who own or have previously owned crypto, ~43% were
motivated by its potential as an investment, and within that group, ~41% allocate
at least 5% of their portfolio to crypto, with three quarters of crypto investors
holding Bitcoin. Other drivers of interest in owning crypto were interest in
technology, with ~21% holding it in order to make purchases. We note that while
11% of respondents reported a lack of trust in the US dollar, only 5% of respondents
noted a lack of trust in banks.
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Figure 34: Ramping Interest In Crypto Driven By Investment Potential
Crypto investments and trading

The role of crypto trading/investing as an engagement driver can be seen in the
response to PYPL's launch of the service in late 2020. Within a few days of
launching their cryptocurrency trading services, PYPL was already seeing strong
engagement results, with users who were trading cryptocurrencies on their
platform opening their wallets several times per day looking for updates on their
investments. Plus, in April 2021, PYPL launched crypto capabilities on Venmo, so
customers can now view cryptocurrency trends, trade crypto, and access in-app
guides and videos to help answer commonly asked questions and learn more about
the world of crypto. Customers using crypto on Venmo can choose from four types
of cryptocurrency – Bitcoin, Ethereum, Litecoin and Bitcoin Cash – and when they
make transactions, customers can also choose to share their crypto journey with
their friends through the Venmo feed. This is positive to the ecosystem, as it helps
drive adoption of the app for other services leading to increased engagement.
Similarly, SQ has reportedly seen success in its Cash App's Bitcoin trading and
investing services, leading to increased engagement and use of other monetizable
features/services within the app. SQ has found Investing or Bitcoin actives tend to
generate more than double the annual revenue compared to other Cash App
customers, and the services also drive increases in stored funds, which creates a
more top-of-mind relationship with the app. As a result, active users tend to return
to the app for multiple uses, resulting in daily utility, feeding the flywheel effect of
increased engagement and usage. Interestingly, Bitcoin actives also have 2x the
attach rate to products like the Cash Card, and due to the products reinforcing each
other, users turn to the app on a more regular basis.
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Crypto purchases still in early stages

The other major way for FinTechs to integrate crypto, and one that is still in the early
stages, is by using it as a payment method. The key limitation to broader adoption
of crypto as a payment modality is its high volatility compared to other assets. As
a result, both merchants and consumers are reluctant to view cryptocurrencies as
a payment method. However, there are some efforts to implement crypto-based
payments. In March 2021, PYPL introduced Checkout With Crypto, giving PYPL
customers in the U.S. with crypto holdings the ability to seamlessly use
cryptocurrencies at checkout. Customers can convert crypto into fiat through PYPL
and then pay a business for purchases in one seamless checkout flow. The option
automatically appears in users' PYPL wallets at checkout if they have sufficient
crypto (of a single type) to cover the transaction. All transactions are settled in USD
and converted to the applicable currency used by the business (meaning PYPL has
crypto exposure). SQ currently does not have an option to pay with crypto on its
Cash App business, and its Seller business does not yet support crypto as a
payment option, resulting in further opportunity for development of this payment
modality.
Figure 35: Volatility of Bitcoin vs. Select Asset Classes
Source : Deutsche Bank, Bloomberg Finance LP.
Figure 36: Interest in Adopting Crypto Payments
Source : Deutsche Bank dbDIG
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Biden executive order embraces crypto as an area of innovation

On March 9th, President Biden signed an executive order aimed at establishing a
single, government-wide policy on cryptocurrencies and digital assets. The White
House aims for the United States to maintain leadership in the space and noted that
~16% of the population, or 40m Americans, use or have previously used
cryptocurrencies. The executive order has six areas of focus: 1) consumer and
investor protection, 2) protecting financial stability, 3) preventing illicit finance, 4)
economic competitiveness and advancing US leadership in the global financial
system, 5) promoting financial inclusion, and 6) encouraging responsible
innovation. While the order did not mandate the creation of a Central Bank Digital
Currency (CBDC), it clarified that research on the topic was of high urgency.
The EO addresses several key risks spanning consumer protections, financial

stability, and the usability of crypto by nefarious actors. Without mentioning
stablecoins directly, the EO orders the Financial Stability Oversight Council to
identify and make policy recommendations to specifically limit systemic risks. This
helps to address concerns that a private-sector digital currency, such as Meta's
previously proposed Diem stablecoin, could disintermediate monetary tools that
central banks use. Another key risk concern that the EO addresses is not only
promoting US leadership, but also preserving the dollar's place as the world's
reserve currency. The government is also naturally focused on limiting the ability of
sanctioned nation-states and criminal enterprises to evade regulations through
crypto. In addition, there is an emphasis on limiting the climate impact of crypto
currencies, in a nod to the high level of power consumption used in bitcoin mining.
The order also aims to develop innovation in the delivering of crypto benefits. One
area that has been of interest is the improvement of access to financial services for
poor and unbanked individuals, with an obvious use case in remittances.
Consequently, the order directs the Treasury to produce a report on ways to drive
more equitable economic growth and financial innovation.
Broadly, the Executive Order seems to view cryptocurrencies as an opportunity to

drive innovation, rather than merely viewing it through the lens of all the risks posed
by the space. The EO emphasizes supporting innovation, while at the same time
also mitigating the risks it poses to consumers, businesses and the broader
financial system. Treasury Secretary Janet Yellen announced that the Treasury
would create an interagency task force to produce a report on the future of money
and payment systems that will support innovation while managing risks.
Consequently, the market responded positively to the news, with Bitcoin rising 9%
in response, and with many viewing it as the most favorable outcome they could
have anticipated from the executive order. From the EO, it is clear the US
government is keen to address how to resolve the two goals of managing the risk
to consumers and the financial system, while not losing leadership in innovation to
other countries. The EO also indicates that fears of a heavy-handed regulatory
regime covering crypto may not transpire, with the US viewing crypto as a
legitimate and important part of the economy.
Emerging uses in decentralized finance

Decentralized finance, or DeFi, is the provisioning of financial services through the
use of smart contracts that intend to replace financial institutions. The most
prominent example of DeFi is bitcoin. While it is widely known as the first
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cryptocurrency, it can also be thought of as a DeFi application that allows users to

store and send currency through the use of smart contracts. DeFi is permissionless
to create and use, trustless in the sense that users do not need to trust a central
institution, and yet transparent, with the code visible on the blockchain and with
transactions also available for public view.
The decentralization aspect of DeFi seeks to disintermediate the intermediary role

of entities such as financial institutions or government entities in transactions. In
typical, or "centralized" applications, data is called from a centralized server, so
when a user checks a bank app on their phone, the app checks the data server in the
bank's data center before loading balances. In this situation, the data is held by the
bank, and the user needs to have a high degree of trust in the financial institution.
On the other hand, a decentralized application pulls data from a blockchain which
is where the data is stored. Being a distributed ledger, the blockchain is
decentralized, and thus the application itself is decentralized. No single entity
controls the user's data, and smart contracts ensure the data is shared in a secure
manner.
Key Elements
One of the key functionalities necessary for DeFi is the smart contract, which is a
program running on the blockchain that executes automatically upon meeting
certain conditions. Smart contracts are not controlled by a user, but run as
programmed each time when deployed to the blockchain. Users can engage with
a smart contract through submitting transactions, which in turn execute a function
defined in the smart contract. Smart contracts cannot be deleted, have irreversible
interactions and always enforce rules via code. Smart contracts are permissionless,
in the sense that anyone who knows how to code in a smart contract language and
has enough currency (typically Ethereum) can deploy the smart contract.
Benefits of leveraging smart contracts include:
n Trustless money transfer. Since a smart contract is a self-executing

program on the blockchain that responds to present events, the contract
can automatically execute what is mandated by agreements, such as
paying or transferring funds. Due to being decentralized, transactions are
executed between two parties who do not need to trust each other or an
intermediary institution.
n Embedded logic. The ability of smart contracts extends to calling data for
blockchain and serving as the main logic system for applications. As a
result, trading, lending, payroll, betting, and other transactions can happen
automatically without the intervention of a third party.
n Limited counterparty risk. While exchanges often need to pair buyers and
sellers, decentralized exchanges can use smart contracts with supply and
demand coded into the logic. Buyers can therefore purchase assets from a
pool, with counterparty risk removed as collateral for the other side is
already part of the smart contract.
n Speed and Timing. DeFi transactions take place in a few seconds, at any
day or time, with no connection to business hours, as execution is done by
programs on a blockchain without intervention.
Decentralized Apps
Blockchains and smart contracts allow for the creation of applications with
increasing sophistication and capability known as decentralized apps, or "dapps".
Dapps can hypothetically allow strangers in different parts of the world to negotiate
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automated loans without a financial institution. Other use cases of Dapps include
creating stablecoins, earning interest on crypto, lending money, exchanging
assets, and implementing automated investment strategies. We note that these
apps are not managed by an institution and its employees, but rather the rules are
written via code into a smart contract. As a result, DeFi apps run themselves, with
limited intervention such as upgrades and bug fixes.
Stablecoins: One example of a stablecoin dapp is a project called Maker. The Maker
Oasis dapp lets users borrow stablecoins called Dai, while being collateralized by
a range of cryptocurrencies. Dai are pegged to the dollar. Another stablecoin
project is USD Coin (USDC) where each USDC token is backed by one US Dollar held
in a bank account.
Lending and Borrowing: DeFi applications include capabilities for users to earn
interest through lending cryptocurrencies, or alternatively, borrow
cryptocurrencies. Compound is one such dapp where users can lend crypto in
exchange for interest, while borrowers can deposit crypto into the Compound dapp
as collateral and borrow against it. Compound automatically matches borrowers
with lenders, adjusting interest rates based on supply and demand. Other dapps
that have this functionality are Aave and dYdX, with data available through
aggregators such as LoanScan to track rates across different dapps.
Decentralized Exchanges: While exchanges such as Coinbase store crypto and

hold private keys, there are token exchanges that let users trade tokens directly from
the wallet. They are often described as automatic market makers (AMMs), which
use mathematics to set the price of tokens in a liquidity pool, or a bid/ask system
where traders set their own order prices. One example is Uniswap, which runs
entirely on smart contracts, and uses a mechanism called Automated Market
Making to settle trades. Users can also become liquidity providers by providing
crypto to Uniswap contracts and earning exchange fees in a process called
"pooling". OpenSea is another similar marketplace, but allows users to trade digital
goods such as non-fungible tokens (NFTs) in a trustless setting using a smart-
contract-based escrow system. Other dapps that provide similar capabilities, albeit
through different technologies, include AirSwap, Kyber, and Radar Relay.
Prediction Markets: In Prediction markets, users can vote for and exchange value
based on the outcome of events. Like other markets, market prices in these dapps
are indicators of an event's likelihood. The most prominent such market is Augur,
a decentralized prediction market protocol. Here, users can vote on the outcome of
events, alongside attaching a value to the vote. Events can include sporting events,
election results, and economic events, among others.
PYPL leveraging crypto for inflows and engagement

PYPL views crypto trading as a tool to move to the front of the sales funnel and
become a crypto enabler. The roll-out of crypto trading on PYPL's platform has been
a key part of this strategy, and we believe the company's "Checkout with Crypto"
initiative adds incremental upside to the crypto-related revenues the company
could generate. PayPal has since launched a service to buy, hold, and sell crypto in
the UK, as well as the Cash Back to Crypto feature with the Venmo Credit Card.
PYPL's crypto initiatives can also be seen in its Super App, which combines
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disparate services including BNPL, crypto, and savings, with in-app shopping and
rewards. Management has noted a strong customer response to the Super App,
with a 15% increase in first-time users transacting with crypto.
There are four ways PYPL is thinking about cryptocurrencies. First, it is allowing
users to treat crypto as an asset that they can hold or trade on PYPL's platform. PYPL
has been able to create a seamless experience for first-time crypto customers to be
able to buy or sell crypto, and management sees the potential to expand this service
to other countries. Second, PYPL believes that crypto has the potential to add utility
to payments. Conventional fiat currencies can be digitized, which is an appealing
prospect for both PYPL as well as financial institution partners. Third, there is
potential for central banks to launch CBDCs, with PYPL having previously stood up
a business unit to work on the underlying infrastructure. Fourth, PYPL is looking for
ways to modernize the infrastructure to reduce transaction times and frictional
costs, improving the process for remittances and helping create a more inclusive
financial system.
Block early adopter of crypto as an engagement driver

SQ was early to delve into the world of crypto, launching the ability to buy Bitcoin
in Cash App in 2018, with a view toward cryptocurrencies potentially becoming the
native currencies of the internet. Management's interest in cryptocurrency and
blockchain represent one of the reasons for the renaming of the firm to Block Inc.
with crypto-related activities predominantly in their Cash App and TBD businesses.
SQ's efforts have resulted in significant growth in its crypto trading business, with
crypto now representing nearly half of 4Q21 revenue. SQ recognizes revenue when
the customer purchases Bitcoin and is transferred to their account. Bitcoin users
are twice as likely to have and use the Cash Card vs. non-users, for example. In
addition, Bitcoin holders appear to use the Cash App as a store of funds, creating
a more durable top-of-mind relationship with the app and, in turn, driving up daily
usage. For example, SQ often sees a small transaction in Bitcoin shortly followed by
a small transaction on the user's Cash Card for a similar amount.
In 4Q21, SQ updated the P2P functionality within Cash App to allow users to send
fractional shares and bitcoin from Cash App balances to each other. Bitcoin
customers are more engaged within the broader Cash App ecosystem, delivering
higher gross profits than the average user. As a result, management believes they
benefit from network effects, with the launch of new products strengthening their
prior offerings and increasing the time spent and usage on the app. Currently, users
can readily convert funds into bitcoin, by first depositing them into Cash App and
executing an auto buy on the bitcoin tab. Users that want to get paid in bitcoin, can
set their Cash App to buy bitcoin in line with their pay period.
In January 2022, SQ announced that Cash App had integrated with the Lightning
Network, which allows transactions between parties not on the blockchain
network. This move helps to scale the cryptocurrency further, as it reduces the load
on the bitcoin blockchain by creating a separate network where users transact,
creating minimal engagements with the bitcoin blockchain, and resulting in lower
fees and faster transactions. Users can now send bitcoin to any Lightning address
in addition to any address that is on the bitcoin network. To use the Lightning
Network, users scan a Lightning QR code using cameras, confirm payment details
and tap on "Pay".
In a differentiated step, SQ has also actively invested in cryptocurrency for its own
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balance sheet. In October 2020, SQ purchased 4,709 Bitcoins for a total of ~$50m
in value (or ~$10,618 per BTC), followed by an additional purchase of 3,318 Bitcoin
in February 2021 for a total of ~$170m in value (or ~$51,236 per BTC). SQ expects
to hold bitcoin for the long term, but will continually reassess its position.
Other projects within the cryptocurrency space are in its TBD subsidiary, which was
created to build an open developer platform to make it easy to create noncustodial,
permissionless and decentralized financial services focused on Bitcoin. In
November, TBD released a whitepaper describing a decentralized protocol for
exchanging assets known as tbDEX. The protocol aims to create both on-ramps and
off-ramps for individuals to benefit from innovation in cryptocurrencies. TBD is also
working on projects to serve bitcoin developers, including a non-custodial
hardware wallet and a bitcoin mining system.
FinTechs getting into stablecoins

In terms of future projects, PYPL confirmed in January that it is considering
launching its own stablecoin. The news came after an engineer noticed hidden code
in some of Paypal's source code that referenced a "PayPal Coin". Potential uses for
such a stablecoin include entering the cross-border remittance market. According
to a report by PYMNTS.com, a Stellar Development Corporation study released in
September 2021 estimated the fees associated with US outbound remittances at
~$3.5bn. Implementation of stablecoins could result in both lower fees and
improved remittance speeds, while improving engagement with the PayPal app.
Other opportunities for the Paypal Coin include using it as a currency within the
Super App, potentially usable by PYPL's vast network of merchants and
consumers. Despite the potential applications of such a stablecoin, there are
significant regulatory concerns associated with stablecoins that have impeded
projects such as Meta's Diem stablecoin.
Central Bank Digital Currencies (CBDCs)

With increasing retail and institutional interest in cryptocurrencies, central banks
may also enter the fray and issue their own digital currencies. In fact, according to
a survey conducted by the Bank for International Settlements, one in ten central
banks (representing approximately 20% of the world's population) expect to issue
their own digital currencies within the next three years. Despite the apparent
groundswell of interest, there are significant issues that need to be resolved before
a roll-out of CBDCs becomes a reality, with the primary issue being the potential
disintermediation of the role played by commercial banks in money creation and the
extension of credit. With central banks not typically involved in directly extending
credit to customers, it may prove to be a hindrance in the development of CBDCs.
However, if CBDCs do become a reality, they would be naturally complemented by

digital wallets from companies such as PYPL and SQ. This trend creates a
significant opportunity for FinTechs to partner with central banks and regulators
across the globe and help form a more modern and inclusive financial system built
on a more efficient digital infrastructure. In addition to partnering with central
banks, FinTechs will likely look to partner with licensed and regulated
cryptocurrency platforms around the globe to further explore the potential of digital
currencies, helping improve financial services and ensuring that they are faster as
well as more secure and inexpensive.
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Regulatory Issues In Crypto

A key regulatory issue within the cryptocurrency space is how US regulatory bodies
approach and interpret cryptocurrencies. Particularly relevant is whether they are
considered securities. When determining if a crypto is a security, the SEC needs to
determine whether the asset is an "investment contract". For it to be an investment
contract, it must meet three criteria: it involves the investment of money, in a
common enterprise, with a reasonable expectation of profits derived from the
efforts of others. Current SEC Chair Gary Gensler publicly said that the SEC
considers many digital assets to be securities under this framework, and has
indicated that crypto exchanges will be a focus of the SEC in 2022.
In December 2020, the SEC filed a lawsuit against Ripple Labs Inc. and some of its
executives for raising more than $1.3bn through an unregistered digital securities
offering of XRP. The case is still ongoing and its outcome will help further guide the
industry as to which digital assets are considered securities and which are exempt.
In June 2019, the SEC charged Kik Interactive for violations of the Securities Act of
1933 for raising nearly $100m from investors by selling its digital tokens without
registering them as securities. The SEC subsequently won the case, forcing Kik to
pay $5m in penalties. Another SEC enforcement action targeted BlockFi, which
offered interest-bearing accounts for users to lend crypto assets to BlockFi. The SEC
charged BlockFi with not registering these accounts as securities as they were
investment contracts with investors promised a variable rate based on BlockFi's
deployment of the assets. BlockFi did not admit wrongdoing, but paid $100m to
settle the investigation.
With the recent Russia-Ukraine war, the United States has responded with
sanctions on Russia, including cutting off many Russian banks from the SWIFT
messaging system. As a result, there has been a nascent concern that sanctioned
states may be able to bypass sanctions by using cryptocurrency. There is potential
for this, as Bitcoin was designed to allow peer-to-peer transactions without using
any financial institution as an intermediary. Nations such as Iran and North Korea
have indeed used bitcoin to evade sanctions in the past, and there are tools such as
DeFi exchanges to obscure crypto transactions even more than the default level.
There are blockchain intelligence firms such as Chainalysis and Elliptic that deploy
blockchain tracking tools based on the fact that transactions on the Bitcoin
blockchain are public. Blockchain intelligence firms track these transactions to
identifiable wallets used in the past, which may not be applicable for entities looking
to avoid sanctions. Plus, there is significant depth in the bitcoin market, with
transaction volumes in excess of $3trn last year according to NYDIG. However,
while sanctioned entities might still be able to move funds through the blockchain,
it is a separate challenge to spend them on actual goods and services, with many
countries shutting off Russia's access.
These swirling questions have led to concerns of stepped-up regulations on crypto,

particularly for payments. ECB President Christine Lagarde noted in February that
sanctions on Russia have resulted in renewed urgency to implement
cryptocurrency regulations under its upcoming Markets in Crypto Assets (MiCA)
regulatory regime. The United States is also weighing crypto regulations, with
debates centering on whether to focus on enforcement and consumer protection
or to promote a fertile ground for innovation. If crypto is used as a tool to avoid
sanctions, it may help tip the debate toward the former. There are additional
complications with DeFi exchanges and privacy coins. The IRS believes it can target
DeFi exchanges, and if Dei or privacy coins were made illegal, the risk of criminal
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charges would sharply impact their usage.
Figure 37: Attitudes Towards Crypto Regulation
Source : Deutsche Bank Research
Figure 38: Differing National Regulatory Approaches To Crypto
Source : Deutsche Bank Research
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Survey Shows Increased

Focus on Engagement
FinTech adoption remains strong
Our FinTech survey this year covered ~1,398 tech-savvy mobile payment users. We
are seeing a strong increase in engagement, driven by new offerings such as BNPL
and crypto. Overall FinTech payment adoption was flattish, with 80% having
completed an online payment transaction over the past year. PYPL continues to be
the dominant mobile payment service with 78% adoption, which has held relatively
steady over the past two years despite Apple Pay and Google Pay seeing modest
increases in adoption. In addition, although Venmo usage appears to be
moderating, Cash App remains strong, particularly when it comes to engagement,
driving inflows through products such as Direct Deposits, and the adoption of Cash
Card continues to increase (see our detailed Venmo vs Cash App analysis in this
report). Additionally, Zelle adoption moderated this year to 25% from 28% in 2020,
which we will continue to monitor as banks ponder the idea of expanding Zelle use
cases to retail payments (our survey shows little interest). Furthermore, BNPL has
shown strong adoption but only 11% of respondents have used the service over the
past year, showing the potential for continued strength, but we will also be
monitoring default risks given that 33% expect to miss a payment over the next 12
months. We believe SQ's Cash App had the strongest metric improvement since
our last survey 15 months ago and remains well positioned to connect its seller and
consumer ecosystems, especially with its recent expansion into BNPL via its
Afterpay acquisition.
Engagement and inflows expanding

We note that we saw notable strength in users expecting to spend more across all
of the apps over the next 3-6 months, reflecting the strong FinTech moment. In
addition, both PYPL and Cash App saw notable increases in engagement, with
users increasing their frequency of use toward daily and weekly from monthly and
less than monthly. Cash App engagement in particular was strong: 47% said they
have been using the app more often over the past year, up from 30% last year.
Although PYPL engagement increased with 46% saying they have been using the
app more frequently over the past year, Venmo moderated to 33% from 45% last
year. Apple Pay rose to 44% from 39% last year, while Google Pay moderated
slightly. Cash App also showed strength in inflows, with 44% of users leveraging
direct deposits compared to 29% for PayPal and 28% for Venmo. As a result, 62%
of Cash App users hold balances, up sharply from 33% last year and 52% in 2019
as the company focused on driving inflows and maximizing the velocity of payment
flows across the ecosystem. Furthermore, roughly 34% of Cash App users were
"very interested" in using a commerce platform to shop directly through the app, up
from 26% last year, showing strong potential for future synergies with the Afterpay
acquisition. For PayPal this figure was 28%, up from 24% last year.
Increased usage of new services and offerings

PYPL was the only app with a notable portion of users who use the offering as their
primary banking account, at 14%, vs. Cash App's 6%. However, Cash App had the
highest adoption of instant transfers at 75%, compared to PayPal at 58% and
Venmo at 50%. Turning to Crypto, 48% say they are using a mobile payment app,
compared to 63% who use a crypto exchange like Coinbase. Besides Coinbase,
which was the most popular Crypto outlet, occupied by 44% of users, PYPL showed
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strength with 41% saying they use the app to store, trade, or transact with Crypto;
29% say they use Coinbase most often compared to PayPal at 28%. We note that
~40% say they access their Crypto wallet at least once a day to check balances,
trade, and/or make purchases with Crypto, with 45% of Cash App users accessing
the account at least daily compared to PayPal at 28% and Venmo at 26%. As a result,
we believe Crypto will continue to be a strong tool to leverage to drive increased
engagement across the platform.
Monitoring BNPL adoption and credit risks

Across the ~154 BNPL users surveyed, ~44% have used Afterpay over the past year
for at least one transaction, compared to ~41% for PayPal, ~36% for Affirm, and
~32% for Klarna. Surprisingly, PayPal was used most frequently over the past year
at ~33%, showing promising engagement for the PayPal destination app. Looking
at BNPL monthly engagement, penetration rates for users show PayPal at ~59%,
Affirm at ~54% and Afterpay at ~52%. Debit and credit cards account for ~62% of
loan repayments, with debit making up a significant portion, but ACH already
accounts for ~30% of repayments and new products like Affirm Debit+ should
further drive repayment through the bank account leveraging Stripe. We note that
~27% of BNPL users across the providers say they have missed a payment in the last
12 months, while ~67% have not missed a payment. Meanwhile, 33% believe they
could miss a payment in the next 12 months while ~60% believe they are unlikely
to miss future payments, potentially showing a slight increase in missed payments
going forward.
Key survey takeaways

Demographics of the survey
n Our FinTech survey across the US focuses on ~1,398 tech-savvy mobile
payment users surveyed in March 2022 (vs prior survey in December 2020).
This year we added new topics such as BNPL.
n Of these tech-savvy US consumers that have used mobile payments for
peer transfers and/or purchases online/in-store over the past year, ~80%
say they have engaged in an online retail transaction and ~75% have used
mobile payment banking apps to access their bank or pay bills, down from
~83% and ~78% last year.
n Roughly ~11% say they have used Buy Now, Pay Later (BNPL) services to
make a purchase.
n Roughly 18% of our survey have a 800+ FICO score, 25% have 720-799,
14% have 660-719, 10% have 601-659, and 17% have 300-600, with 1%
less than 300.
Mobile payments adoption

n PayPal continues to be the dominant mobile payment service at 78%
adoption, which has held relatively steady over the past two years (77% in
2020 and 78% in 2019).
n Apple Pay and Google Pay had the largest increases in adoption over the
past year at 23% and 24%, up from 21% and 20% in 2020 and vs. 19% and
24% in 2019.
n Venmo adoption rose to 33%, up from 32% in 2020 and 19% in 2019, while
Zelle adoption moderated this year to 25% from 28% in 2020 and 22% in
2019.
n Of the ~154 Buy Now, Pay Later (BNPL) users, ~44% have used Afterpay
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over the past year compared to ~41% for PayPal, ~36% for Affirm, and
~32% for Klarna. However, more BNPL users say they used PayPal's Pay in
4 most often over the past year at 33%, compared to 24% for Affirm and
16% for Afterpay.
Frequency of use and engagement

n PayPal and Cash App have both seen notable increases in frequency of use
toward daily and weekly from monthly and less than monthly.
n Roughly 47% of Cash App users say they used the app more often over the
past year, up from 30% in 2020.
n PayPal engagement rose with 46% saying they have used the service more
over the past year, up from 45% last year, but for Venmo the figure was 33%
compared to 45% last year.
n Apple Pay engagement rose to 44% saying they used the app more over the
past year, up from 39% last year, while Google Pay moderated to 27% this
year from 45% last year.
n Across all of the FinTechs, we saw notable strength in users expecting to
spend more through these apps in the next 3-6 months.
Types of usage
n The primary use case for Venmo, Cash App, and Zelle is sending/receiving
money to/from family or friends, whereas for PayPal and Google Pay it is
making a payment online and for Apple Pay and Samsung Pay it is making
a payment in-store.
Key products
n PayPal is the only app with a notable proportion of its users (~14%) utilizing
it as a primary banking account, compared to Cash App at ~6%.
n Cash App had the highest adoption of the "instant transfer" feature at 75%,
compared to PayPal at 58% and Venmo at 50%.
n Cash App was also the most used for inflows through Direct Deposits with
44% using this feature, compared to PayPal at 29% and Venmo at 28%.
n Roughly 34% of Cash App users were "very interested" in using a
commerce platform to shop directly through the app, up from 26% last year.
For PayPal the figure was ~28%, up from ~24% last year.
Venmo
n Roughly ~53% of users say they are likely to use Venmo for future online
retail purchases, down from ~65% last year. For in-store purchases, 39%
say they are likely to use Venmo, down from ~57% last year. The likelihood
rises to ~67% and ~66% when there are discounted offers involved from
retailers. Even if there were in-app ads, ~50% of users would still continue
to use Venmo.
n Most people use Venmo because it is convenient and easy to use (at 35%)
or because their friends/family use it (at 32%). Only 2% use it because they
feel it is better than other apps, and 3% because of its interface and features.
n Roughly ~28% carry a balance in Venmo, which was down from ~39% last
year and ~36% in 2019. Willingness to carry a balance in Venmo also
moderated to ~41%, compared to ~53% last year.
n Venmo Debit Card had ~18% penetration, in line with last year's survey (vs.
~9% in 2019), and ~32% showed interest in the product compared to ~37%
last year. A slightly lower percentage of ~31% were interested in the Venmo
Credit Card.
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n In terms of leveraging reward programs, budgeting tools, and paying bills

or trading stocks, ~41% were interested in using Venmo, down from ~57%
last year.
Cash App
n Roughly ~80% of Cash App users are likely to leverage Cash App for future
online purchases, down slightly from ~85% last year, while ~79% plan to
use it for in-store purchases, compared to ~80% last year. These numbers
increase to ~82% and ~86% when discounts and rewards are offered. Even
if there were in-app ads, ~80% would keep using Cash App, showing their
strong preference for the app.
n Most people use Cash App because it is convenient and easy to use (at 29%)
or because their friends/family use it (at 24%). Positively, ~19% use it
because they feel it is better than other payment apps and 9% due to the
interface and features.
n Roughly ~62% of Cash App users hold balances, up sharply from ~33% last
year and 52% in 2019, with ~57% willing to hold a balance compared to
~62% last year.
n Roughly ~61% of users have a Cash Card debit card, up from ~50% last
year, while ~69% are interested in a debit card and ~70% are interested in
a credit card.
n For other financial services like rewards, budgeting, and trading, 69% are
interested in using Cash App.
BNPL
n Roughly ~59% of PayPal Pay in 4 users have used the service at least
monthly, compared to ~70% of Zip users, ~54% of Affirm users, ~52% of
Afterpay users, and ~46% of Klarna users.
n Affirm is the most popular for large AOV purchases along with Zip, while
PayPal Pay in 4, Afterpay, Zip, and Sezzle are more common for low AOV
purchases.
n Debit card and ACH are the two most popular funding methods across all
BNPL providers, with users on average funding 62% of transactions with a
debit or credit card.
n Roughly 30% on average say they fund repayments through direct bank
account/ACH.
n About 27% of BNPL users across the providers say they have missed a
payment in the last 12 months, while ~67% have not missed a payment.
n Roughly ~20% of BNPL users say they are very likely to miss a payment over
the next 12 months and ~13% say they are somewhat likely.
Crypto
n Coinbase is the most popular crypto wallet at 44% adoption, compared to
PayPal at 41% and Cash App at 25%.
n Coinbase is also used most often to store, trade, and transact at ~29%, but
PayPal and Cash App also showed strong usage at 28% and 8%.
n Showcasing the strong engagement Crypto can drive, ~40% say they
access their Crypto wallet at least once a day to check balances, trade, and/
or make purchases with Crypto. Roughly 45% of Cash App users of Crypto
access the account at least daily, compared to PayPal at 28% and Venmo at
26%.
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Survey demographics
In conjunction with dbDIG, we conducted an online survey of 1,398 U.S. mobile
payment app users in March 2022. The survey results are representative based on
our ongoing U.S. national consumer survey, with data based on Census across
gender, age, income, region, and race/ethnicity. Trend data is from a similar survey
conducted in December 2020. Below is the full detailed analysis of the results with
some Y/Y comparisons to our previous survey conducted in late 2020 (please click
on this link for the detailed 2020 survey report). This year, we added questions on
credit worthiness and found that ~18% of our survey have a 800+ FICO score, ~25%
have 720-799, 14% have 660-719, ~10% have 601-659, and ~17% have 300-600,
with ~1% below 300.
Figure 39: Survey demographics
Source : dbDIG FinTech Payments Survey, Deutsche Bank Research
Understanding mobile payment app usage

Of the 1,398 mobile payment participants who engaged in a peer transfer and/ or
mobile transaction online/in-store over the past year, PYPL was used in the last 12
month period by ~78% of tech-savvy mobile payment survey respondents. This is
more than double the usage of PYPL's closest competitors, with Venmo used by
~33% of respondents and SQ's Cash App used by ~31%. We note that usage
remains relatively unchanged when compared to our 2020 survey results, namely
PYPL ~77%, Venmo ~32%, and Cash App ~31%. Additionally, Zelle adoption
moderated this year to 25% from 28% in 2020, which we will continue to monitor
as banks are looking to expand Zelle use cases to retail payments.
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Figure 40: Usage history by app - 2022 Figure 41: Usage history by app - 2020
Source : dbDIG FinTech Payments Survey, Deutsche Bank Research Source : dbDIG FinTech Payments Survey, Deutsche Bank Research
LTM user frequency and engagement

Of the payment services users over the past 12 months, ~85% of PayPal, ~85% of
Cash App, and ~63% of Venmo users accessed the products at least monthly, with
~60%, ~60%, and ~27% using the apps weekly. Notably, Venmo usage fell
materially from our last survey, when ~79% of Venmo users accessed the product
at least monthly and ~32% at least weekly. Furthermore, both PayPal and Cash App
have seen notable increases in frequency of use toward daily and weekly from
monthly and less than monthly. In regard to daily usage, Cash App, PayPal, and
Samsung Pay all saw notable increases. Cash App daily usage rose to ~26% vs
~14% in our previous survey, while PayPal rose to ~19% from 10% and Samsung
Pay rose to ~25% from 18%.
Figure 42: Frequency of use by app - 2022
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Figure 43: Frequency of use by app - 2020
In addition, across all of the rising FinTechs in the survey, most payment services
users are accelerating their engagement, with the majority citing more usage over
the past six months than in our last survey. For example, ~44-47% of PayPal, Cash
App, and Apple Pay customers used those platforms more in the past six months,
while only ~7-9% used the products less. Conversely, only ~33% of Venmo users
say they have used the app more often over the past twelve months, with ~16%
using the app less, which compares negatively to our last survey at ~45% and ~8%.
Figure 44: LTM user engagement in the past 6 months vs 12 months ago - 2022
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Figure 45: LTM user engagement in the past 6 months vs 12 months ago - 2020
User satisfaction
Most of the payment services providers scored well in the high 80s to low 90s when
it comes to overall satisfaction with the product offering; Samsung Pay was the only
outlier with ~63% of users satisfied and ~33% unsatisfied (vs ~73% satisfied and
~10% unsatisfied in our last survey). PayPal scored the highest when it comes to
satisfaction, with ~93% of users satisfied. Zelle also scored a ~93% satisfaction
rate, while Cash App, Venmo, and Apple Pay were close behind at ~90%, ~90%, and
~89%, respectively.
Figure 46: LTM user satisfaction - 2022
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Figure 47: LTM user satisfaction - 2020
Services being used

Similar to in the 2020 survey, Venmo, Cash App, and Zelle are still primarily used for
P2P transactions, while Apple Pay, Samsung Pay, and Google Pay are mainly used
for in-store/online purchases. Interestingly, while more than half of PayPal users
utilize the app for online purchases (~55%), app usage is more balanced than at its
competitors, with ~46% using it for P2P transactions and ~35% using it to make
in-store purchases. We note that Cash App, which was originally a P2P provider,
has ~30% of users making payments for goods or services, showcasing the strong
uptake of the Cash Card and integration with SQ Seller terminals.
Figure 48: Type of usage - 2022
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Figure 49: Type of usage - 2020
Instant transfer and direct deposit users

A material revenue generator for many of the FinTech payment services providers
is instant transfers. On a Y/Y basis, Cash App remains at the top with a ~75% (+5ppt
vs prior survey) penetration rate for instant transfers, which compares to ~50% (-
3ppt vs prior survey) for Venmo, and ~58% (+3ppt vs prior survey) for PayPal.
Figure 50: LTM users who use the instant transfer feature - Figure 51: LTM users who use the instant transfer feature -
2022 2020
Survey shows strong interest in Cash App and Venmo

LTM user demographic
Looking deeper into the largest P2P apps, namely Venmo and Cash App, while the
data seems to show a predominantly female user base for the two apps, this is partly
explained by the survey demographics, which are ~60% female and ~40% male. In
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terms of age, comparing the two side by side shows that Cash App skews younger,
with its largest user base in the under 44 range, whereas Venmo's largest user base
is in the 45-54 age range. Geographically, Venmo is the most balanced, with a
strong presence across the Northeast, South, Midwest and West, while Cash App
has concentrations in the South and West. Additionally, while the largest portions
of users across both apps are in the $50-$99k income range, Cash App is skewed
toward lower income brackets, while Venmo has greater representation in the
$100k+ cohort.
Figure 52: Gender
Figure 53: Age
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Figure 54: Geography
Figure 55: Income
Reasons for using Cash App and Venmo

Looking at Venmo's and Cash App's users in the last 12 months, the drivers of
interest in using these apps are largely convenience and ease of use, and because
friends and family use them. Of Venmo users, 35% cite convenience and ease of
use, while 32% cite friends and family using it. However, only 2% feel it is better than
other payment apps. While Cash App shows similar patterns with 29% citing
convenience and 24% citing friends and family, 19% of respondents use it because
they feel it is better than other apps, and 11% note that they trust it (compared to
7% for Venmo).
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Figure 56: Drivers of interest in Cash App and Venmo
Online and in-store purchases

Customer willingness to use Venmo and Cash App for future online and in-store
purchases is high. Venmo users are ~29% likely and ~25% somewhat likely to make
online purchases (net ~53% likely), and ~22% likely and ~17% somewhat likely to
make in-store purchases (net ~39% likely). Interestingly, Cash App's user base
outperforms Venmo's by ~30-40pts on a net basis, with ~53% of its base likely and
~27% somewhat likely to make a future purchase online (net ~80% likely), and
~51% likely and ~29% somewhat likely to make a future purchase in-store (net
~79% likely).
Figure 57: Use for future online/in-store purchases
If retailers were to offer discounts for using the service provider's platform, the
likelihood of customers using them for both online and in-store purchases would
increase, especially for Venmo. An incremental ~14% and ~27% of users would be
interested in Venmo in-store and online purchases, respectively, if a discount was
offered. For CashApp, the incremental increase in likelihood of usage is smaller at
~2% for online and ~7% in-store.
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Figure 58: Discounts as incentive for future online/in-store purchases
In-app balances
Looking at the number of users who keep balances within their digital wallet, ~28%
of Venmo and ~62% of CashApp users tend to keep a balance in their account,
compared to the 2020 survey results of ~39% and ~33% respectively, indicating a
sharp rise for Cash App but a decline for Venmo. When it comes to willingness to
keep a balance in their accounts, ~41% of respondents were very willing or
somewhat willing to keep a balance in Venmo and ~57% in CashApp, vs. ~53% and
~62% respectively in the 2020 survey. Despite the declines, the survey indicates
that there is interest in keeping balances inside these apps, and opportunities to
drive growth in both balances and customer engagement by increasing the utility
of the apps.
Figure 59: LTM users who carry a balance - 2022 Figure 60: LTM users who carry a balance - 2020
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Figure 61: Non balance holders willing to carry a balance - Figure 62: Non balance holders willing to carry a balance -
2022 2020
Card ownership and interest

We surveyed Venmo and Cash App users to estimate the current level of adoption
of their debit cards. We found that only ~18% currently have a Venmo debit card,
in-line with our 2020 survey, showing a limited increase in penetration, while ~32%
of non-debit card users are interested in one, down from ~37% in 2020. For Cash
App, the percentage of users with a debit card rose to ~61% from ~50% in 2020.
Despite improving penetration, interest in getting a Cash App debit card remains
high at ~69% of non-debit card Cash App users, compared to ~61% in 2020.
Figure 63: LTM users who own a debit card - 2022 Figure 64: LTM users who own a debit card - 2020
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Figure 65: Non-debit card owners' interest in having one - Figure 66: Non-debit card owners' interest in having one -
2022 2020
In addition to the strong demand for debit cards, we still see high interest in the
adoption of credit cards across both providers. For Venmo, ~31% of users were
interested in a credit card, ~6pts down from the 2020 survey. In comparison, a
striking ~70% of Cash App users are interested in a credit card, a ~23pts increase
over 2020, and well above Venmo.
Figure 67: Credit card interest among LTM users - 2022 Figure 68: Credit card interest among LTM users - 2020
Interest in other financial services

Underserved merchants and consumers continue to adopt financial services
offered by the fast-growing FinTechs and are increasingly looking to use these
players for other financial services. About 41% of Venmo users and ~69% of Cash
App users, compared to ~57% and ~68% in 2020, showed an interest in using these
platforms for services such as rewards programs, budgeting tools, paying bills, and
even trading stocks.
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Figure 69: Interest in other financial services
In-app advertisements
Neither Venmo nor Cash App has advertisements built into its app yet. However,
this could be another incremental revenue source for PYPL and SQ, contingent on
them offsetting the potential loss of customers. A potential downside of
introducing ads is a decline in usage and user engagement. However, there is
reason for optimism, with ~50% of Venmo users and ~80% of Cash App users
indicating they would likely keep using the apps even if there were in-app ads.
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Figure 70: LTM users' willingness to keep using with in-app ads
BNPL app insights

New to our survey this year, we added questions on BNPL given the rapid rise in the
popularity of installment lending over the past two years. Of the 1,398 respondents
polled in our survey, 154 (or ~11%) had used a BNPL service/app over the past 12
months. We note that survey results around specific BNPL platform usage and
market share should be viewed as directional only and not strictly representative
given the smaller sample size of users.
Going forward, we expect BNPL participation to continue to grow due to increasing

acceptance, as multiple competitors from FinTechs to banks to the networks move
to capitalize on the accelerating demand. In addition, volumes should benefit from
greater penetration as large retail partnerships ramp up and new products like
hybrid debit/BNPL cards drive engagement both online and in-store. Interestingly,
among respondents to our survey who have used BNPL services to fund a purchase
in the past 12 months, PayPal Pay in 4 was the app respondents said they used most
frequently at ~33%. Affirm (~24%), Zip (~17%), Afterpay (~16%), and Klarna
(~10%) were the next most popular apps.
LTM user frequency and engagement

Of the BNPL users in our survey, over the past 12 months, ~70% of Zip, ~59% of
PayPal Pay in 4, ~54% of Affirm, and ~52% of Afterpay users utilized the products
to make a purchase at least monthly. While Zip users appear to be an outlier with
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~62% of respondents using the app to make purchases weekly, Affirm, Afterpay,
and PayPal Pay in 4 all saw strong double-digit weekly usage rates at ~15%, ~12%,
and ~11%, respectively.
Figure 71: Number of purchases in last 12 months of use by app
Repayment methods
In our previous deep dive on BNPL (see link to our 11/21/21 report, "Emerging
Payments: Monitoring Top 10 Trends in BNPL"), we estimated that ~60-70% of
BNPL installment loan repayments were made through linked credit or debit cards
and ~30-40% through ACH or stored balances. These estimates roughly align with
the results of our survey: on average, ~62% of respondents said they made
repayments with credit/debit and ~38% said they used ACH/stored balances. This
varies by provider: for example, ~64% of respondents using Afterpay made
repayments with credit/debit, while only ~51% of respondents using Affirm did the
same.
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Figure 72: Repayment method by app
Missed payments
When it comes to missing payments, ~27% of BNPL users across the providers say
they have missed a payment in the last 12 months, while ~67% have not missed a
payment. Furthermore, ~20% of respondents say they are "very likely" and ~13%
"somewhat likely" to miss a payment in the next 12 months, while ~60% believe
they are unlikely to miss future payments.
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Figure 73: Missed BNPL installment

payments over past 12 months
Figure 74: Likelihood of missing scheduled payments over next 12 months
Crypto interest in the spotlight

Usage trends showed Coinbase to be the most widely used crypto wallet or
platform with ~44% of respondents using it, closely followed by PayPal at ~41%,
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with sizable numbers using Crypto.com and Cash App at ~26% and ~25%
respectively. When asked about their most frequently used apps, Coinbase
continued to lead the way with 29% saying it is their most used app, closely followed
by PayPal at 28%, while significant numbers said Crypto.com at ~18%.
Figure 75: Percent of respondents using each crypto app
Figure 76: Most used crypto apps
The survey indicates that niche, crypto-focused tools such as Circle, Skrill, BitPay,
Binance, Cryptopay, and Gemini show strong engagement trends when it comes to
users who log in to check crypto balances, trade crypto, and make purchases with
crypto. However, among the most widely used apps such as Cash App, PayPal,
Venmo, Coinbase, and Crypto.com, while others are ahead in terms of user
preference, Cash App is the leader in engagement, with ~24% of its users reporting
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they log in several times a day to check balances, trade, or make purchases,
followed by ~21% for Venmo and ~18% for Crypto.com and PayPal. Similarly, ~21%
of Cash App's users use the app once per day, above PayPal's ~11%, Coinbase's
~7% and Venmo's ~5%.
Figure 77: Crypto usage by app
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B2B Payments Accelerating

Post Pandemic
AR/AP automation is changing B2B payments
As interest rises and adoption of AR/AP automation as well as ePayments continues
to expand, we take a deeper look at the key trends, opportunities, partnerships,
sales channels, and competition impacting the B2B solutions market. With many
businesses still relying heavily on time-consuming and costly manual processes for
their financial operations (e.g., mailing invoices, paper checks, signing contracts),
there is significant opportunity for B2B solutions providers to leverage AR/AP
automation software, driving operational efficiencies for buyers and streamlined
working capital for suppliers. By leveraging technologies like straight through
processing (STP), real-time payments (RTP), and ePayment products, including
virtual cards, instant deposits, and cross-border payments powered by V and MA,
B2B solutions providers can add incremental value and shift more volumes toward
higher monetization solutions over time, increasing take rates. Sizing the market
opportunity, we estimate that AR/AP automation and ePayments combined
represent a ~$94bn US revenue opportunity (growing by ~20%), not including the
international opportunity, which could be ~3-5x larger. We estimate ~25%
penetration of the AR/AP automation opportunity (less penetration in SMEs, offset
by higher penetration in mid-size and enterprise businesses). We note that there is
only 7% electronic Payment penetration, a key driver of B2B solution providers'
revenue models going forward.
Sizing the addressable market in B2B payments

Our US B2B addressable market estimate includes ~$30bn from AR/AP automation
(~$9bn from AP and ~$21bn from AR), growing ~12%, and ~$60bn for the
ePayments opportunity, growing ~23%. Compared to consumers, businesses have
been more reluctant to adopt digital payments, but the pandemic has placed
increased emphasis on digital operations. We estimate that businesses that made
>90% of their B2B payments digitally grew by +12ppts in 2021 (faster than market),
and momentum is expected to continue for the next few years. Although
enterprises are farther along in the shift to digital and adoption in the mid-market
has steadily increased over time, the SME market has witnessed a strong inflection
from the pandemic – much like consumer adoption of digital payments. SMEs act
more like consumers responding to marketing dollars and word of mouth. They are
also more nimble and have been underserved in the past. As a result, the SME
market is growing much faster than the mid- and enterprise markets. We estimate
the SME market is growing by ~30%, compared to the mid-market at ~20% growth
and the enterprise market at ~15% growth (see below for a detailed addressable
market analysis).
Solving a two-sided network equation

Solving for both sides of the B2B payments equation, B2B solutions providers have
both buyer and supplier solutions. Buyers benefit from reducing paper-based
processes and manual data entry as well as less fraud, increased visibility, and
better control over spending, saving up to 60-80% of costs associated with manual
processes. Suppliers benefit from better reconciliation, lower costs from fewer
manual processes and more electronic invoices, and improved working capital
management. Buyer solutions include automating paper invoicing and check
processing. Supplier solutions can include enhanced ACH, leveraging straight
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through processing (STP) and commercial cards in order to manage spending. After
enrolling buyers on the platform and integrating their data, there is opportunity to
cross-sell solutions to their suppliers. Businesses can be both buyers and suppliers.
Due to how the relationship typically starts on the buyer side before branching out
to the supplier, AP automation is farther along compared to AR automation (and
more complex, in our view). As a result, buyers and suppliers represent a significant
opportunity for driving adoption and monetization of offerings.
Driving adoption of higher-monetization products

Most B2B transactions have historically leveraged fixed-price products, such as
regular ACH and checks. In fact, roughly one-third of suppliers and buyers use
checks more often than any other method, and around one-fifth use regular ACH as
their primary method. Checks typically take 3-7 days to be delivered and 3-10 days
to clear, and ACH takes ~24 hours to deliver and less than three days to clear.
However, B2B solutions providers are leveraging new technologies and payment
rails, such as STP, electronic checks, and RTP to drive value and monetization. They
are also pushing volumes over to digital ePayment solutions, like virtual cards,
cross-border payments, and instant transfers, in order to drive financial operation
efficiencies. These variable-price solutions carry a higher take rate for B2B solutions
providers (e.g., Bill.com's revenue per transaction is ~$7.04), and over time, mix
shift should drive expanding take rates (contrary to many other FinTech payment
models). B2B solutions providers also have the opportunity to expand into
adjacencies, such as spend management, supply chain lending solutions, data
analytics and subscription insights, as well as more services for marketplaces.
V/MA are powering B2B with "new tech" capabilities

B2B solutions providers leverage the RTP networks operated by The Clearing House
(TCH) as well as V and MA, including V Direct and MA Send as well as V B2B
Connect and MA B2B Hub and Track. V Direct and MA Send are the card-based rails
powering ePayment solutions, namely cross-border payments, instant transfers,
and virtual cards. In addition, V B2B Connect and MA Track combine real-time ACH
and ePayment solutions for B2B solutions providers, along with other value-added
services in a platform approach. RTP represents a significant opportunity for B2B
solutions providers to increase revenue and drive better value for businesses, with
V and MA being the key beneficiaries as the rails and payment technology
providers. For every ~25bps of share gains in the large B2B market, we estimate
~3ppts/~7ppts of V/MA volume growth, and we expect B2B to add ~2-3ppts/
~2ppts to V/MA revenue growth annually over the next few years.
B2B payments are one of the hottest trends in FinTech

Many businesses have historically been burdened with manual and paper-intensive
B2B payment processes, even as seamless digital payments and near-
instantaneous solutions have become the norm for consumers across the globe.
Although secular tailwinds were already causing a broad-based shift to digital
payments and the cloud, the COVID-19 pandemic has accelerated these trends and
forced nearly every business to reexamine the way they make B2B payments.
According to recent research from yStats, the proportion of businesses that made
>90% of their B2B payments digitally grew by 12ppts in 2021, and similar levels of
growth are expected for at least the next two years. Furthermore, the pandemic and
the economic pain points caused by it have only served to accentuate the negative
impact that inefficient B2B payment processes have on businesses. A recent study
from Atradius found that ~43% of B2B invoice TPV was impacted by late payments
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in 2020, up substantially from ~25% in 2019. This research serves to highlight the
significant value that enhanced B2B payment processes could have for most
businesses, particularly those without mature AR/AP capabilities.
Beyond digital payments, companies have a litany of needs surrounding their B2B
processes and workflows. Innovations, such as AR/AP automation and B2B
financing services, could not only make invoicing processes more efficient in the
current economic environment, but they could confer distinct competitive
advantages as the recovery broadens. B2B solutions providers leverage software
integrations and partnership channels to drive increased sales and expanded
monetization opportunities. Integration with the specific accounting systems used
by small and mid-size businesses is key, as it simplifies the payment process for the
buyers and has the ability to drive higher value for the customer through
streamlined operations. Equal in importance, integrations offer B2B solutions
providers the opportunity to expand into incremental value-added services (e.g.,
spend, management, cash flow management, and trade financing) while also
maximizing on-platform payment volumes.
Monitoring key trends in B2B payments

A large addressable market with low penetration
B2B solutions providers are going after the AR/AP automation opportunity and
shifting volumes toward ePayments over time, representing a significant
addressable market. Although businesses have lagged consumer adoption of
digital payment solutions and penetration is low, the pandemic and the significant
value proposition of AR/AP software players is driving strong adoption rates –
particularly in the SME market – with steady, strong adoption trends in the mid- and
enterprise markets. We estimate the that US B2B solutions market represents a ~
$94bn revenue opportunity, growing ~20% (with international being ~3-5x larger).
Digging deeper into the US market, we estimate a ~$30bn opportunity from AR/AP
automation, growing ~12%, and a ~$63bn ePayments opportunity, growing ~23%.
We estimate penetration of the AR/AP opportunity to be ~25%, while we estimate
only ~7% for ePayments, where we see significant opportunity, however, to drive
future revenue growth.
Small businesses are growing rapidly vs. mid-size and enterprise

While larger enterprises are more likely to already have digital financial operations
and electronic payment solutions integrated into their businesses, small and mid-
size businesses still rely heavily on manual processes and are ripe for digital
disruption. The SME market is different from mid-size businesses and enterprises
in that the former is small enough to act more like a consumer responding to
marketing dollars and organic word of mouth, with the pandemic driving increased
awareness. In addition, SMEs have historically been underserved, and as a result,
they are likely further behind in the shift to digital. Mid-size businesses are also
rapidly shifting to digital, but at a more steady pace, typically requiring additional
sales and integration expertise. As a result, the SME market in which Bill.com
operates is growing much faster than the mid- and enterprise markets. We estimate
that the SME market is growing by ~30%, compared to the mid-market at ~20% and
the enterprise market at ~15%. Companies approaching smaller markets focus on
user experience for SMBs, as the same individual handling invoices may also
handle accounting, improving the process. Firms targeting larger enterprises start
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with a focus on deep procurement and front-end processes before an invoice is even
created, followed by management of complex purchase orders. The middle-market
space requires a combination of both approaches, helping businesses with spend
management, procurement, and business rule complexity.
AR/AP automation is displacing manual processes

Businesses small and large are rapidly adopting digital payments and AR/AP
automation due to the significant value proposition. Many businesses still rely
heavily on manual processes for financial operations, including mailing invoices,
writing paper checks, and signing contracts, which can be time consuming,
inefficient, costly, and vulnerable to fraudulent activity. B2B solutions providers
(e.g., Coupa, MineralTree, and Bill.com) offer AR/AP automation software that pays
customers faster, eliminates labor-intensive processes and paperwork, and drives
operational efficiencies for buyers and suppliers, driving significant savings (+60-
80% in many cases). AR/AP automation software tends to be sticky in terms of
customer retention because once a company is integrated on a particular platform,
cash flow and invoice management becomes a mission-critical product rather than
an elective one. Such a product is particularly important in a remote-working
environment, with different employees spread across different workspaces.
Pushing volumes toward higher-monetization products

Using land-and-expand strategies, once an AR/AP solution has integrated into an
organization's workflow, cross-selling opportunities open up, allowing more
services to be offered at higher price points while also growing transaction
revenues that, taken together, can drive growth in both TPV and take rates. Moving
volumes over from fixed-price products (like checks and regular ACH) to variable-
priced products (like virtual cards and cross-border payments) represents a
significant opportunity. For example, Bill.com is in the early stages of driving
adoption across higher-monetization products. As of quarter-end June 2021,
virtual card represented just ~2.2% of TPV and cross-border payments ~4.1% of
TPV, but the company is targeting respective penetration rates of 5-10% and 10-
20% in the long term. Moving volumes from lower to higher-monetization products
over time will likely be a significant contributor to the future growth rates of B2B
solutions providers.
Leveraging RTP and push payment solutions

Real-time payments (RTP) include new payment flows – namely push payments,
leveraging V Direct/MA Send; and B2B, utilizing RTP schemes, card-based
solutions (e.g., T&E/virtual), and cross-border account-to-account capabilities, as
well as value-added services wrapped around the payments. We note that RTP
adoption is starting to accelerate globally, including across the US market, due to
strong demand from merchants as well as the introduction of new use cases and
investments in infrastructure from FinTechs, FIs, networks, consortiums, and
governments. In particular, the rise of FinTechs and significant investments by
networks, namely V and MA, have been significant drivers of the use case
expansion and infrastructure build-out. MA estimates that new flows from B2B
payments represent a volume opportunity of ~$135trn for networks across card-
based solutions (e.g., T&E, virtual cards), cross-border (e.g., B2B connect and B2B
Hub), and AR/AP, leveraging partnerships. However, B2B payments only constitute
one of many use cases in the corporate cash cycle flow chart. A more complete view
of that flow includes procurement, receiving goods, inventory, supplier payments,
cash visibility, collections, and analysis. Digitizing the cash cycle through RTP
allows for more efficiency within the payables business process box, as well as
more effective communication with other parts of the business flow, to the overall
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advantage of an organization.
Horizontal and vertical approaches

Payment Software providers in this space look to penetrate the market in two ways:
vertical and horizontal. Vertical strategies entail penetrating each industry vertical
by partnering with the accounting and software systems that are very specific to
that industry. This is key, as software providers in each industry provide a unique set
of services that tightly integrate into a businesses' operations. Examples of
industry-vertical-specific software include RentManager, Yardi, and MRI in Real
Estate; Caliber Software, Tops [ONE], and Condo Manager in Homeowners
Associations; Sage Construction & RE, Sage 100 Contractor, and Vista in
Construction; and Jack Henry, Fiserv, and FIS in Financial Institutions. Software
providers looking to engage companies in different verticals need to develop deep,
purpose-built integrations with accounting and other software providers that are
specific to each industry. As a result, this creates a competitive advantage for
software providers that have this capability, and barriers to entry for those that do
not. The other strategy is a horizontal strategy, which involves integrations with
broad-based products, such as Oracle Netsuite, Sage Intacct, MS Dynamics, and
Quickbooks.
Leveraging integrations and partnerships to expand

B2B solutions providers integrate and partner in order to drive increased sales and
expanded monetization opportunities. In addition to integrating with the customer,
they integrate with third-party software providers such as accounting systems that
are specific to each industry. Integrations increase the stickiness of the product,
particularly in the mid- and enterprise markets, by driving higher value for the
customer through more streamlined operations, making it more difficult and costly
to switch. More importantly, integrations open additional opportunity to expand
and further monetize the relationship by maximizing volumes and selling
incremental, value-added services. Beyond integrating with the customer and
software provider, B2B solution providers can also partner with financial
institutions and accounting firms to drive increased sales and referrals. These
partnerships tend to have revenue share structures in which a portion of
transaction, software, and interchange fees is shared between the B2B software
provider and the partner in question. They also partner with networks in order to
leverage their B2B capabilities (e.g., fast ACH and push payments), scale across
issuers and financial institutions, and gain access to small businesses. B2B
solutions providers also leverage direct sales models in order to go after various
vertical market opportunities.
Significant, data-driven sales opportunities

Digital payments typically come with a vast amount of data, which companies can
use to offer new and innovative services to better serve customers and help further
streamline B2B operations, control cash flows, and discover new insights about
their back-end processes. One way in which B2B payments providers can offer new
solutions to their customers is through application programming interfaces (APIs)
and data integrations, which give businesses enhanced visibility into their finances
and help prepare them for the future as payment processes around the world
continue to go digital. B2B providers can also offer data analytics from payment
flow data in order to create additional utility for their customers and leverage value
across their networks. For example, data allows for a range of unique products
(such as invoice tracking, early payment and supply chain financing, utility and
electric bill management), and it can also provide spending insights and analytics.
Furthermore, B2B solution providers should be able to leverage their data-driven
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networks to drive more marketplace services for businesses in the future. Current
revenue models are centered on payment transactions and software subscription
services, but we believe there is tremendous whitespace in the B2B market to use
historical and emergent data to create new monetization opportunities in the long
run.
Emerging tech in B2B provide further monetization

Looking forward beyond traditional ePayment methods and RTP, a number of B2B
payment innovators across the globe are gaining traction with solutions that
embrace multi-rail strategies or new infrastructure (like blockchain) to complete
B2B transactions. For example, in Australia, Azupay is focused on developing a new
k, Kerreal-time payment rail in the country, New Payment Platform (NPP), and it
recently announced an integration with Xero that will enable SMBs to generate
invoices using a QR code, allowing recipients of invoices to use NPP to make real-
time invoice payments. Furthermore, MA Track is increasing its emphasis on the
B2B market with its latest collaboration with FinTech EedenBull. The new
relationship will allow EedenBull's banking partners to access MA's automated
B2B payment solution that streamlines data exchange between buyers and
suppliers. The collaboration will enhance EedenBull's existing Commercial
Payments-as-a-Service platform, using MA Track to deploy a multi-rail strategy in
order to streamline commercial payments and offer a variety of solutions to
optimize how B2B payments are made across those rails. In addition, while most
popular attention surrounding blockchain technology is focused on
cryptocurrencies and NFTs, there is significant optimism that the technology could
have a positive knock-on effect in B2B payments. In the US, CoreChain
Technologies announced a $1.25m pre-seed funding round for its blockchain B2B
payments network. The firm is focused on addressing friction-filled reconciliation
processes, manual workflows, and fraud risks that are inherent in traditional B2B
payment processes. CoreChain believes that blockchain's speed and security
offers a unique value proposition for commercial payments, and it notes that its
solution can also unlock capital via financing for businesses that struggle with
collecting invoices on a timely basis. In China, the province of Yunnan recently
announced that as of June 2021, ~200 businesses have used a government-
developed blockchain payments platform that aims to streamline B2B cross-border
payments and money transfers down to 15 minutes.
Breaking down the B2B revenue opportunity

One key distinguisher between B2B payment providers is the swim lanes on which
they focus in terms of customer size. For example, BILL is focused on building a
great user experience for SMBs and sole proprietors, where a single individual often
receives and manages invoices as well as the accounting function. On the other end
of the spectrum is Coupa, which focuses on the enterprise market. Coupa starts
with deep procurement and integrated front-end processes that are established
before an invoice is even created. The company's software integrates into
businesses' existing functions and manages complex payment flows tied to
specific purchase orders. In the middle exist other providers that serve the unique
needs of middle-market customers such as MineralTree. The middle-market is
characterized by light spend management and procurement functions, along with
a fair amount of complexity tied to the industry vertical in which the business
operates and the specific ERP systems needed for that environment. Historically,
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businesses (particularly those in the middle-market and SMBs) have been slower to
change and adapt to digital advancements compared to consumers. Larger
enterprises are typically more likely to have mature digital financial operations and
ePayment solutions, while small and mid-size businesses still tend to rely on
manual, paper-intensive processes. As a result, we believe that underserved
middle-market and SMBs represent significant addressable markets that are ripe
for disruption.
To this end, we attempt to size the AR/AP automation and B2B ePayments
opportunity in the US across all three markets: enterprise, middle-market, and
SMBs. While there are a wide variety of definitions for enterprises, middle-market
companies, and SMBs, for the purposes of this analysis, we assume that
enterprises have annual revenues of >$1bn, middle-market companies are those
with between $10m and $1bn in annual revenues, and SMBs constitute any
company that generates annual revenues of <$10m. Our analysis shows a ~$94bn
market opportunity in the US between B2B ePayments and AR/AP automation.
Furthermore, we believe that the global addressable market for B2B ePayments and
invoice automation may be ~4-5x the size of the US market.
Analyzing higher-monetization offerings

Using publicly available information on US B2B payment volumes and our
estimates on volume share and net take rates for B2B payment providers, we
estimate the current US enterprise B2B ePayments TAM to be ~$28.4bn, the US
middle-market B2B ePayments TAM to be ~$18.9bn, and the US SMB B2B
ePayments TAM to be ~$16.2bn (or ~$63.5bn in total). We note that we believe our
current rough estimates have the potential to expand materially as the US economy
continues to grow and more and more businesses come to market, led by a
generation of new leaders who came of age in a digitally native world. Furthermore,
the secular tailwinds driving increased digitization could result in take-rate
expansion for payment players as companies realize the benefit and necessity of
digital B2B payments. Overall, we estimate that the SME B2B ePayments market is
growing by ~30%, compared to the mid-market's ~20% growth and the enterprise
market's ~15% growth (roughly ~23% overall). See below for our expanded US B2B
ePayments TAM analysis.
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Figure 78: DBe US Enterprise B2B Payments TAM
Source : MasterCard, NAICS, Deutsche Bank Research
Figure 79: DBe US Middle-Market B2B Payments TAM
Source : MasterCard, US Census Bureau, Deloitte, Nasdaq, Deutsche Bank
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Figure 80: DBe US SMB B2B Payments TAM
Source : MasterCard, US Census Bureau, US Small Business Administration, Deutsche Bank
We estimate the current global B2B ePayments TAM to be roughly ~5x the
opportunity of the US (based on MA estimated global B2B payment volumes).
Using similar logic and data to our US analysis, we estimate the global enterprise
B2B ePayments TAM to be ~$141.8bn, global middle-market B2B ePayments TAM
to be ~$94.5bn, and global SMB B2B ePayments TAM to be ~$81.0bn (or ~$317bn
in total). See below for our expanded global B2B ePayments TAM analysis.
Figure 81: DBe Global Enterprise B2B Payments TAM
Source : MasterCard, NAICS, Deutsche Bank Research
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Figure 82: DBe Global Middle-Market B2B Payments TAM
Source : MasterCard, US Census Bureau, Deloitte, Nasdaq, Deutsche Bank
Figure 83: DBe Global SMB B2B Payments TAM
Source : MasterCard, US Census Bureau, US Small Business Administration, Deutsche Bank
Understanding the AP automation opportunity

Our TAM analysis on the addressable market for automation shows that the largest
opportunity exists among SMBs that have the least mature/sophisticated
accounting departments. We estimate the current US SMB AP automation TAM to
be ~$5.6bn, the US middle-market AP automation TAM to be ~$3bn, and the US
enterprise AP automation TAM to be ~$658m (or ~$9.3bn in total). As with the B2B
ePayments opportunity, we believe that the total addressable market for AP
automation will continue to expand along with secular tailwinds, driving increased
digitization and a generational effect as millennial and Gen Z business leaders who
came of age in the digital world move away from extant manual and paper-based
processes. Overall, we estimate that the AP automation revenue opportunity in the
US will grow at a ~12% CAGR for the foreseeable future. Furthermore, given the
current ratio of suppliers to buyers and the portion of the market that is currently
underserved by existing supplier financing solutions, we estimate that the AR
automation TAM in the US is more than double the AP automation opportunity at
~$21bn. Similar to ePayments, we believe that the global addressable market for
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invoice automation may be up to ~4-5x the size of the US market. See below for our
expanded US B2B invoice automation TAM analysis.
Figure 84: DBe US AP Automation TAM
Source : US Census Bureau, Small Business Administration, Nasdaq, NAICS, SAP, iPayables, Deutsche Bank
AR/AP automation is displacing manual processes

B2B payments are already cheap. Therefore, in order to make inroads, software
providers offer a range of services in addition to payments, such as accounts
payable (AP) automation and accounts receivable (AR) automation. Software
providers approach this space in different ways, with some offering AR automation,
some AP automation, and some providers having both sets of services, in some
cases integrating them with a payments functionality and a corporate card
business.
Software providers broadly target two groups of customers, 'buyer' customers and
'supplier' customers, with some employing a 'flywheel' model that integrates both
sides on the same platform. Buyers are potential AP automation customers, and
suppliers are potential AR automation customers. For buyers, benefits include
handling complex rules-based approvals, as well as routing, invoice management,
payment fulfillment, and integration with middle-market accounting systems. For
suppliers, solutions help to manage cash flow needs with tools that include
accelerated invoices, payment tracking, and future cash flow forecasting.
These cloud-based platforms allow firms to automate their financial processes,

particularly AR/AP and corporate cards. Plus, customers benefit from efficiency,
saving both time and money while gaining real-time insights into cash flow and a
more accurate view of spending.
Problems with manual AR/AP processes

Cost of accepting checks. According to a survey conducted by the Association of
Financial Professionals, businesses can spend up to $30,000 per month for
processing 20,000 checks. For smaller businesses that process 2,000 checks per
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month, it results in an annual expense of ~$36,000. Other surveys highlight even

higher costs for accepting checks, as a survey by the Aberdeen Group found that the
average cost of a paper check was $7.78, while a Bank of America survey identified
reported costs in the range of $4-$20, including the costs of mailing and processing.
Figure 85: Estimated monthly cost of receiving 2,000 checks per month
Source : HighRadius, Association for Financial Professionals
Cash gaps. Inefficient/manual processes impact cash flow, particularly for smaller
businesses who are more sensitive to managing working capital effectively.
According to research by PYMTS.com, of the firms that have not upgraded to
instant payment platforms, 70.3% have experienced cash gaps, while this figure
falls to only 29.7% for businesses that have used instant payment platforms.
Lower profitability. Along with efficiency issues, there are additional problems
with profitability. According to a survey by Forrester, over half of payment decision-
makers noted that more than 7% of payments had failed in the prior 12 months. This
impacts firms via high recovery costs (80% of respondents indicated a cost of 16-
20% of average payment size), bad debt (over one-third of US B2B business leaders
noted 20% or more failed payments), customer churn (>11% of payment failures
resulted in customer churn), and lower profitability.
Benefits of AR/AP automation

While many larger businesses have built out capabilities in order to automate
financial functions (such as AR/AP automation), smaller businesses do not have the
wherewithal to develop such internal solutions. This forms the market opportunity
for software providers, as many small/mid-size businesses use manual processes,
including issuing paper checks, mailing invoices, and manually signing contracts.
As a result, when businesses sign on with these software providers, they engage in
the service for the first time, rather than replacing another technology solution.
Customers paid faster. Within accounts receivable, a significant number of firms

rely on manual processes, particularly in the construction and healthcare space,
based on research from PYMNTS.com. Manual AR processes hinder payment
acceptance, and firms that do not invest in AR solutions have longer collection
terms. As a consequence, AR automation results in companies being paid faster.
This is particularly important, as slow payment collection impacts cash flow. For
example, a Forrester Survey of 297 payment decision-makers in the US found that
time taken to receive payment has increased over the past 12 months, and 80% of
the respondents said that it takes them more than 20 days to receive payment.
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n Credit checks are a bottleneck in the AR process, as companies that use

manual tools for credit checks experience delayed payments, which
lengthens their days sales outstanding (DSO).
Cumbersome processes and paperwork eliminated. Similarly, for accounts

payable, legacy processes are bogged down by excess paperwork, cumbersome
manual processes, and potential for security and compliance errors. Problems
include lost invoices, approval bottlenecks, understaffing, duplicates, excess
paperwork, and mistakes. Based on a survey by AP automation provider Stampli,
AP automation drives faster invoice approval, reduction in paper volumes, lower
late-payment fees, higher employee productivity, and better regulatory
compliance.
Increased efficiency. Additional benefits of automation include lowering the

delinquency rate, increasing processing speed, and improving team efficiency, all
while controlling headcount. The last benefit is significant, as according to the
Forrester survey, despite significant investments, nearly 85% of US-based
respondents had more than 20 full-time employees managing payments.
Figure 86: Survey respondents on benefits of AP automation
Source : Stampli, Deutsche Bank
Benefits for software providers

The AR/AP automation software space is sticky in terms of customer retention.
Once a company starts using a platform after a trial, they integrate users across the
organization. Once the organization has users collaborating to manage payment
flows, it becomes a mission-critical product, rather than an elective one. Such a
product is particularly important in a remote-working environment, with different
employees spread across different workspaces.
With a land-and-expand strategy, once an AR/AP software provider has integrated

into an organization's workflow, it creates opportunity to cross-sell more services.
This leads to selling more services with higher price points, and growing transaction
revenues that can drive growth in both TPV and take rates.
Higher ARPU from middle-market firms

Moving up into the mid-market space, these companies naturally tend to have far
more users than the small/mid-size firms, which results in more seats, and
consequently, greater subscription revenue. Middle-market firms also tend to sign
annual contracts, which results in less attrition. Finally, these companies also
execute a more diverse range of demands, including cross-border transactions,
batch payments, improved security, and single sign on, which result in greater
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growth potential for transaction-driven revenue.
Capabilities of receivables automation

AR automation offers the ability to streamline the entire receivables process, from
invoice creation and delivery to client to funds collection and synchronization with
the accounting system. The end result is that customers that deploy AR automation
are paid faster. Some key AR capabilities offered by players in today's market
include:
n Upgraded Invoicing: Customers can create customized invoices, tailored

to their brand, using a reusable template. Furthermore, they can
synchronize invoices with their accounting software while having a range
of ways to send them (including email or mail). Other benefits include easy
tracking of invoice status alongside "nudging" customers with automated
reminders.
n Digitization of Workflows: AR software can automate the creation of
invoices, their delivery, and fund collection, all while providing customers
with more visibility into the accounts receivable process (in some cases
offering the ability to view when invoices are delivered, opened, authorized
to be paid, and when payment is received).
n Client Payment Portals: AR Software provides customers with a branded
client portal by which clients can make payments with ACH/credit cards.
According to a Bill.com survey, this results in customers being paid twice
as fast compare to other AR methods – plus, the client can have access to
bills and other payments, along with collaboration tools to enable
communication between the customer and clients.
Capabilities of payables automation

AP automation streamlines the full payables process, starting with receiving a bill,
through the approvals workflow, to payment and finally synchronization with the
accounting system. Such platforms give customers a full view of their cash in and
outflows, alongside other benefits including:
n Facilitating invoicing and approval: Customers have multiple ways to

upload invoices without manual entry and synchronize them with
accounting software along with deploying their own branding. Customers
can design approval workflows that fit internal rules while software routes
the bills.
n One way of facilitating invoices is the method favored by Stampli
which turns each invoice into a hub, connecting all stakeholders,
including the vendor and uses machine learning to recognize
patterns around cost allocation, managing approval workflows and
extracting data.
n Document management: Some software providers assign an email
address to the customer to be distributed to suppliers, which in turn use it
to send invoices to a dedicated inbox. Mailed invoices can be scanned and
uploaded through the software. These document management capabilities
assist customers in making payment decisions, answering supplier
queries, and providing supporting documentation to accountants and
auditors.
n Intelligent bill capture: Software allows customers to capture data from
their bills, as bills are machine-read, with critical data fields like due date,
amount, and supplier name being pre-populated so that staff only need to
review the results before routing internally for approval.
n Digitizing workflows: Activity is sped up through policy-driven workflows,
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with one of the most used features being bill approvals. The platforms
speed up workflow via suggesting payment dates and helping to avoid late
payment penalties, etc.
n Spend management: Some firms provide spend management capabilities,
which allow customers to build strategic budgets, increasing control over
and visibility into company spending. Using proprietary credit cards, spend
management allows customers to manage payments and do away with
expense reports, while using real-time tracking for business transactions.
n Most businesses use card payments for some portion of AP
activity. This can be manifested in the form of an owner's card, or a
corporate card program. Some solutions tie a corporate card to
software controls that allow businesses to have both visibility and
control over card spend.
Driving adoption of higher-monetization offerings

While the value proposition for real-time payments and e-payments is apparent,
monetization is an ongoing challenge, particularly as competition for e-payments
software providers is typically not each other, but rather checks and ACH payments.
Checks are cumbersome to process, but their competition in ACH payments is
cheap. The Payments Cost Benchmarking survey by the Association for Finance
Professionals found that the median cost of an ACH transaction is in the $0.26-
$0.50 range, compared to ~$3.00 for check transactions. This is also cheaper than
credit and debit card payments, with a median cost of $1.50, according to the
survey. As a result, payment software providers drive revenue in this market in two
ways – first, by offering accelerated transfer options (such as instant transfers), and
second, by providing other value-added services (such as accounts payable/
receivable automation).
Subscription and transaction revenue streams

As a result, revenue comes in two forms: subscription and transaction revenues.
Subscription revenue is typically a recurring fee that the customer signs up for.
Growth drivers include increasing the customer list (particularly via penetration into
larger enterprises that have a greater number of employees and additional user
licenses) or from upselling into higher-value packages.
n For payment providers, such as Coupa, subscription fee margins for

payment products are expected to be similar to other software, with a gross
margin of ~72% for the firm.
n In bank partnerships, the subscription product is sold to the FI on a
wholesale, discounted basis, and the FI sets the price for the end customer.
However, the FI makes minimum revenue commitments while they handle
sales, marketing, and customer support. As a result, although the product
is sold at a lower price than via the regular channel, the margin is similar.
Transaction revenue results from increasing utilization of software packages by

migrating legacy processes into newer products and upselling new services to
customers. Growing transaction revenue is the most scalable way to increase
revenue and profitability, as this offers the benefits of increasing transaction
volumes and increasing product utilization for existing customers. The most
prominent example is migrating check and ACH payments into payment products
offered by software providers. However, software providers employ variable pricing
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per each transaction, resulting in higher revenue for the providers, which shows up
in both increasing TPV and take rate.
n For Coupa, transaction fees for payments are recorded as net revenue, as
they are a gain share from a bank or another partner. Over the long term,
they should be accretive to revenue and result in margin improvement.
Increasing TPV penetration through ePayments

The vast majority of businesses predominantly use cumbersome and manual
methods of transferring funds (such as checks and ACH payments, as seen below).
These methods have the additional disadvantage of taking several days to settle,
which naturally poses problems for companies that are looking to manage their
working capital levels. To this end, software providers have built out solutions that
can help automate the payment and receivables process, which greatly improves
the payment process; making the billing and payment process easier for
employees.
Figure 87: US B2B Payment Volume by Method
Source : MasterCard, Deutsche Bank
However, the true monetization potential lies in convincing businesses to forego

these legacy payment methods in favor of new-generation payment methods ,such
as instant transfers, cross-border payments, and virtual cards.
Challenges to implementing these solutions not only include ensuring that the
funds are transmitted electronically, but that they are also usable via computer.
Customers also need to ensure that suppliers are able to absorb the data from an
automated reconciliation process. This is particularly relevant, as although a
customer may adopt a more modern payments platform, vendors can struggle to
capture transaction data and automate reconciliation.
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Levers to increasing take rates through penetration

Virtual cards can be seen as the first step toward B2B payments modernization.
This is largely because many firms already have the back-office systems and
workflows to handle the data. A virtual card program allows customers the
opportunity to negotiate card rebates and early payment discounts. Additional
opportunities to leverage virtual cards include using machine learning and AI to add
value to data from virtual card transactions.
Instant transfer: Instant transfers allow the user to be paid in minutes rather than
in days or weeks. Unlike ACH and checks, the economics are far better for the
software provider, as customers pay ~1% of the transfer amount. While this should
be a growth driver for monetization, it is expected to be a niche tool, favored by
smaller businesses (which are more sensitive to payment timing in order to meet
working capital needs) rather than larger businesses with more resources.
Cross-border transactions: Unlike the other payment modalities, international

transactions are currently expensive under the current banking model. In particular,
small firms do not have dedicated treasury sales or FX capabilities. This creates
significant opportunity for payment providers to increase penetration. Strategies to
appeal to this market include adding cross-border payment capabilities to a
platform alongside other payments. For example, for payment providers like BILL,
despite cross-border transactions representing ~20% of TPV, only 4.1% of cross-
border transactions go through the company's platform rather than going through
a bank. Other strategies include helping suppliers to obtain money in the correct
currency, particularly pertaining to smaller businesses that cannot negotiate rates
with banks.
Repeat transactions: One key theme among payments firms is sustainable

penetration, rather than maximizing penetration, which they pursue by
emphasizing repeat transactions. For BILL, 80% of the transactions that it
processes are repeat transactions (i.e, the buyer and supplier have conducted
transactions within the previous three months). BILL's management believes that
it can increase customer penetration via virtual cards. However, emphasizing
repeat transactions has resulted in higher recurring revenue.
Cross-Border B2B Payments are Accelerating

Consumers have grown accustomed to being able to quickly and easily transfer
funds to peers across the globe at relatively low costs through services like Venmo,
Zelle, and Western Union, etc. However, B2B cross-border payments continue to
present difficulties for the payments industry. Cross-border B2B payments still rely
heavily on the correspondent banking system, by which funds travel through a
network of correspondent banks, adding time and fees at each step along the
journey. Correspondent banking channels lack transparency, and compared to
typical P2P payments, they can require far more complicated know-your-customer
(KYC) processes and documentation. For SMBs, especially those that tend to move
smaller amounts of money, problems often arise given high costs and often multi-
day transaction times, alongside little visibility on when and how a payment will be
processed. All of these problems are compounded for transactions that involve
multiple currencies, particularly for less liquid currency pairs. While a number of
legacy payment players have been working on easing these pain points, new
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entrants, particularly FinTechs, have entered the market looking to remediate long-
standing problems in the world of B2B cross-border payments.
Banks maintain the lead with enterprise-level clients, but FinTechs are
gaining share down market
Historically, traditional financial institutions and banks have dominated the global
B2B transfer market for larger corporations, and this largely holds true today.
However, FinTech companies have seen notable market share gains among
customers that move smaller amounts of money, specifically SMB and mid-market
clients. For example, with its focus on small merchants down to the sole proprietor
level, Bill.com allows customers to send payments internationally to >137
countries in >106 different currencies, and Coupa, which focuses on larger clients,
has partnered with TransferMate to facilitate cross-border payments on its Coupa
Pay platform for global suppliers. Another example of FinTechs making headway in
cross-border B2B payments is Flywire and Billtrust's partnership, allowing
customers to automatically collect international payments at lower costs than
through traditional channels. Other players, such as MineralTree (recently acquired
by GPN), FleetCor, WEX, and Lightspeed, have also entered the international B2B
payment space. However, the future of cross-border B2B payments will be broader
than just legacy players vs. FinTechs. The market is seeing a shift toward greater
cooperation, even as these disparate players continue to compete for the same
business. Banks, networks, and FinTechs all rely on each other for various services
that fall outside of their core competencies.
Current cross-border B2B processes

Today, most legacy payment players use the SWIFT cross-border payment network
to complete cross-border B2B payments. Correspondent banks (~11k of which are
members of SWIFT) settle payments received from front-end providers (e.g., banks
or money transfer operators), which customers then receive via the method
specified by the money sender. The current SWIFT-based system was built before
the full development of the internet. As a result, it creates disproportionately high
costs compared to the value of the payments being sent. Beyond the SWIFT
system, many companies still process cross-border transactions through wire
transfers, which often requires senders to fax paper invoices to recipients (which
has presented numerous issues throughout the course of the pandemic with
employees working from home). While it is not optimal, large multinationals can
deal with inefficiencies inherent in the current system by having international
offices with localized treasury functions, or perhaps advanced currency trading and
risk-management programs. SMBs and mid-market companies, on the other hand,
typically need banks to help make cross-border payments. Broad-based interest in
instant payment rails and digital payments has grown, as firms and their employees
expect to quickly receive their funds, even when transacting internationally.
Technologies such as AR/AP automation, RTP, and blockchain are receiving more
attention from businesses, especially amid the continued expansion of cross-
border transaction data volume.
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Figure 88: Typical cross-border payment structure
Source : EY.com
Cross-border B2B payments are set to rebound from COVID-19 lows

A recent study from Juniper Research suggests that the transaction value of B2B
cross-border payments of all types will exceed $42.7trn in 2026 (up from $34trn in
2021 and a COVID-19 low of ~$27trn in 2020). This growth of >25% by 2026 will
likely be primarily driven by increased popularity of e-commerce marketplaces,
which are typically cross-border in nature. According to Juniper, by 2026, wire
transfers will comprise ~80% of the overall transaction value of B2B cross-border
payments (an increase from ~70% in 2021), while instant payments will account for
a relatively low proportion of B2B wire transfers, at ~22% by value in 2026. Until
cross-border instant payments are ubiquitous, Juniper states that payment
vendors must cover gaps and ensure that alternative, easy-to-manage methods
(such as virtual cards) are available to businesses. However, Juniper believes that
the greater value of instant payment adoption is in the new capabilities that the
payment schemes enable – as extant RTP schemes are built on ISO 20022, which
unlocks additional messaging capabilities and can be used to inject transparency
and build new services like automation, which carries the potential to add
significant value to complex, cross-border AR/AP processes.
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Figure 89: Total 2026E cross-border B2B payments value ($bn) across eight key
regions
Source : Juniper Research, Deutsche Bank
RTP opportunities in B2B payments

Unlike P2P payments, B2B payments are complex and difficult to manage by
nature, as invoices can include several variables, payment amounts, addresses,
and varying terms. This leads to an elevated level of manual work in reconciling
them. These cumbersome and complicated workflows have been exposed by the
COVID-19 pandemic, as businesses have had to operate fully remotely.
This challenge is scaled up further by the sheer volume of business payments.

According to Juniper Research, the average North American business made 2,275
domestic payments in a year. Given that a vast number of businesses there are small
businesses, Juniper estimates that the average number of payments made by large
corporates could be ~100,000 per year, or over 270 per day. As a result, managing
and monitoring these payments is a significant task, made greater by complexity
from the multiple channels, payment terms, and different due dates involved.
However, there are now software providers that inject speed and transparency into
the process of B2B payments, easing burdens, and reducing frustration for both
customers and their vendors. The catalyst to this change has been the introduction
of instantaneous, or Real-Time Payments. These schemes allow payments to be
sent in under ten seconds. Particularly relevant to B2B, these payments can come
with additional remittance information, which can further benefit automation.
RTP solves for friction-filled use cases through instantaneous payments, alongside
enriching it with data for a better customer experience and improved analytics.
Customers gain faster access to funds, while merchants and businesses see higher
retention, less payment friction, and more operational efficiencies. In B2B use
cases, RTP helps integrate business software solutions with payment functionality,
providing businesses with benefits like increased efficiency, lower cost, less time
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spent, and streamlined working capital operations. This is accompanied by faster

processing, instant settlement, and better data associated with transactions,
allowing for increased automation of AR/AP processing.
Significant opportunity
Originally meant as a solution to solve B2B payments, P2P is where RTP has found
the most traction and adoption. In the United States alone, over 20 apps enable
such payments on smartphones. The accessibility and ease of use that allows users
to send fast and convenient payments should also result in increasing traction over
time in B2B payments. B2B represents a massing $120trn opportunity, with RTP
solving many challenges via faster settlement and better data.
Use cases in B2B payments include cards, cross-border payments, and AR/AP
automation. The vast majority of organizations are not using RTP, but according to
The Clearing House 70% of organizations plan to adopt it over the next 1-2 years
(and >20% plan to adopt it over the near term). While V/MA are leveraging lower-
value, high-velocity opportunities through their networks, there are still additional
opportunities. The majority of the B2B opportunity can be found in large domestic
AR/AP flows, and there is significant near-term opportunity for software providers
to leverage V/MA card-based solutions and cross-border capabilities while also
solving for AR/AP over time through software solutions and vertical market
expertise.
Software providers are building upon back-end networks

Broadly speaking, there are two groups of back-end systems in RTP. The first is
country-by-country RTP networks, which can (but not always) be built under
governmental support. These payment networks are more expensive to build out,
and they cater to larger transaction sizes.
n One example is the Federal Reserve's FedNow payments service,

announced in 2019, which will support an around-the-clock RTP and
settlement service that incorporates clearing functionality into settling
each payment.
The other back-end system is comprised of the payment networks launched by Visa
and Mastercard, which offer Visa Direct and Mastercard Send. These networks run
on the respective firms' debit network rails, and they largely cater to smaller
transaction sizes.
n Mastercard also offers a B2B payment platform called Mastercard Track,

which allows buyers and vendors to manage payments more efficiently, as
vendors can manage how they are paid, while buyers are able to automate
efficiencies in payments while seeing improved reconciliation and better
management of cash flow.
An additional network is the platform launched by The Clearing House in November

2017. Its network reaches only ~56% of US DDAs, as many FIs can join through
providers such as ACI Worldwide or Jack Henry. Achieving universal RTP in the US
is dependent upon reaching smaller institutions as well as partnerships with
payment/processor firms. As a consequence, TCH plans to add over 150 banks and
credit unions to its RTP network over the coming months.
Software firms provide an added service component

A key issue facing the B2B RTP space is the marked difference in size and cost
compared to P2P or C2B transactions. B2B transactions tend to be large, with the
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transaction cost being much lower compared to consumer transactions. Plus, the
payment rails are provided by other entities. As a result, with limited opportunity for
profit in transmitting payments, firms operating in this space are differentiating
themselves by providing an added service component.
Software providers typically earn money in two ways: first, by charging a

subscription fee for the software platform, and second, via interchange fees on
transactions. These transactions include cross-border payments, instant transfers,
and virtual card transactions. These are characterized by scalability, driving income
from increasing transaction volumes, and they allow firms to capture superior
economics in order to wire/ACH transfer payments, resulting in improved
monetization.
Immediate opportunities in Real-Time Payments

Increasing usage of Real-Time Payments can be seen in the creation of entirely new
services, such as instant transfers and virtual cards, alongside the evolution in
cross-border transactions. We describe services that are witnessing increasing
RTP leverage below:
Instant Transfers. This is a feature seen in some payment software providers that
allows customers to be paid in minutes rather than days. Currently, standard
payments take approximately one week, starting with scheduling the transfer,
withdrawing the funds the next day, and going through days of processing before
funds are deposited into the recipients account. When the payment is initiated, the
recipient is given the choice to receive the funds instantly, and if the recipient
accepts, they immediately gain access to the funds. For example, through its
instant transfer product, BILL is able to disburse funds quickly through the Clearing
House RTP network. It has also partnered with Stripe to execute transfers for
customers' debit cards, using V Direct and MA Send. This allows suppliers to be
paid instantly, rather than in a matter of weeks.
n Unlike ACH and checks, the economics of instant transfers are far better for
the software provider, as customers pay 1% of the transfer amount.
n Instant transfers work on different networks rather than ACH (which only
works on banking business days, not on weekends or holidays).
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Figure 90: Standard payments vs. instant transfers
Source : Bill.com website
Virtual Card. Also known as pseudo- or temporary cards, a one-time card is created
through a request to a bank, after which the bank or issuer generates a random card
number, expiration date, and security code.
The main difference between virtual cards and traditional credit/debit cards is the
elevated level of security. Virtual cards use randomly generated numbers, the
virtual card number is never entered online, and it can only be used once. This is
important to businesses, as detecting fraudulent activity can be difficult due to high
levels of payment volumes, particularly when multiple employees have been issued
with company cards and are making various expense payments.
n Virtual cards compete with check payments, and they allow payment
providers to capture interchange fees. As a result, increasing penetration of
virtual cards should result in growth of both TPV as well as take rates.
n Vendors receive payments faster, eliminating the time that it takes to
receive and process checks while also receiving data in order to reduce time
spent on payment reconciliation.
n Merchants have to opt into receiving virtual card payments, and payment
firms are looking to grow their merchant footprint by identifying which
merchants are good candidates for a virtual card payment, and connecting
with them through a supplier enablement team.
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n Vendor Direct (BILL's virtual card offering) has been an area of intense
growth, and it still offers additional growth opportunity. For example, as of
quarter-end June 2021, BILL had recorded TPV growth of 300% Y/Y in
virtual cards. Yet, Vendor Direct still only represents 2.2% of TPV, and
management believes that the payment service can reach the 5-10% TPV
range.
n Some providers also provide physical cards. For example, after its
acquisition of Divvy, BILL gained the ability to deploy physical cards
through partnerships with Marqeta and WEX Bank. BILL's platform
provides mobile capabilities as well as integration with partners and
customers with APIs.
Figure 91: Virtual card process
Source : Coupa Software Inc.
Cross-border payments accelerating, but not yet real-time

Swift, seamless payments can be a major asset for companies that make cross-
border transactions. However, a significant number of firms process cross-border
transactions through wire transfers, a process that can require faxing paper
invoices to recipients, a problem exacerbated by employees working remotely. This
makes it an ideal area for improvement via RTP integration.
Many payment software providers have stepped in to provide solutions that transfer
funds on an accelerated basis, particularly to certain nations. However, these
transactions are not truly real-time (see Figure 92 regarding BILL), as recipients in
a significant number of countries (namely the EU, Canada, the UK, and Mexico) can
receive funds the next day. However, for recipients in other major nations (such as
China and Japan), the transaction process can take up to four days, despite being
an accelerated payment. This leaves plenty of opportunity to make international
payments faster.
n This focus toward international growth led to BILL's acquisition of

Australian firm Invoice2Go, a mobile-first AR software provider that makes
it easier for businesses to manage invoicing and interact with customers.
We note that Invoice2Go brings with it an international customer base, as
60% of its customers are based outside of North America, with a large
presence in Australia, New Zealand, Canada, the UK, and Europe.
n For BILL, cross-border payments represented 4.1% of TPV in FY21,
growing to $5bn in FY21 vs. $2bn in FY20. This has led to growth in BILL's
take rate, which was up 44% Y/Y to 8.7bps in FY21.
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Figure 92: Cross-border payment times – BILL.com
Source : Bill.com website
Sizing the massive B2B opportunity for networks

B2B payments represent a massive $125trn opportunity, and RTP solves many
associated challenges due to faster settlement and better data. Commercial
payments represent ~12-15% of volume for V/MA (which saw some slowdown
throughout the pandemic given a decrease in T&E), but we expect the B2B growth
opportunity to accelerate over time – along with the recovery in travel, potentially
adding to volume growth and slightly less to revenue growth over the next few
years. Furthermore, penetration of the higher-yielding B2B opportunity should
drive overall company yields higher over time. For every ~25bps of share gains in
the large B2B market, we estimate ~3ppts/~7ppts of V/MA volume growth, and we
expect B2B to add ~2-3ppts/~2ppts to V/MA revenue growth annually over the next
few years. See below for our detailed analysis.
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Figure 93: New flows – B2B analysis
Source : Company documents, Deutsche Bank estimates
V's B2B volumes mostly come from card-based products, and they have attractive
yields compared to the other components (B2B, cross-border, account-to-account,
and AR/AP), which have slightly lower yields. On the card-based front, V is
witnessing increased interest for digital payments in the wake of the pandemic, and
it is addressing the demand by supporting issuance, expanding into new verticals
and investing in order to streamline operations and enable acceptance. V has also
developed Visa Payables Automation, a set of tools that encompasses spending
control alongside automation of payments to suppliers by replacing checks and
reducing processing work. Buyers can manage and pay suppliers with a V card,
allowing seamless digital payments. With Payables Automation, customers can
send their AP files directly to either V or their financial institution, eliminating
processing steps. This helps to reduce staff time spent on manual processing,
alleviating time spent on traditional invoice processing and reconciliation. Plus,
customers receive an on-demand, off-balance-sheet credit for up to 55 days, and as
the supplier is on a V account, the customer only needs to pay when the bill comes
from the financial institution, allowing more flexibility and access to funds.
MA has focused on developing its Mastercard B2B hub, a full-service accounts

payable solution, designed for middle-market firms. Underpinned by a third-party
AP automation provider in a white-label partnership, it is a platform that helps small/
mid-size businesses optimize invoicing and payments via accounts payable
automation. B2B Hub is an end-to-end automated tool that uses digital tools to
maximize payments across both cards and data-enriched ACH. It takes advantage
of MA's network of issuing banks and helps SMBs transition from using checks to
virtual cards, ACH, and newer forms of e-payments. MA believes that this should
drive increased penetration of MA virtual cards as well as payment modalities that
use ACH rails, bringing in transmission of richer transaction data.
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B2B interchange incentives for better data collection

V and MA offer discounted interchange rates for B2B payments (such as
commercial cards and virtual cards) to help incentivize businesses to adopt
ePayment solutions, which are more costly to process than checks and regular
ACH, but which also carry significant benefits. The more data businesses are able
to submit along with a transaction, the better the rates. For example, businesses
that are able to submit Level 2 and Level 3 data are able to participate in the lower
interchange compared to Level 1 data. In particular, since data is easier to collect
for online transactions, businesses processing online B2B transactions are able to
benefit the most. For example, according to CardFellow, providing Level 2 and Level
3 data can save businesses as much as 1.05% on commercial credit card
transactions. Higher costs is a hurdle to adoption of ePayments, but interchange
could be used as a future lever to drive demand, in our view.
B2B Go-to-Market Strategies

Direct sales, strategic partnerships, and referral channels
There are two broad sales approaches within the go-to-market strategy for software
providers in the payment space – direct channel and strategic partnerships. Direct
channel sales is based on selling to vertical-specific business process
configurations and accounting system integrations. Payment providers have
developed their go-to-market strategy by creating an ecosystem that joins direct
sales with partnerships with accounting firms, enterprise software providers, and
financial institutions.
Strategic partnerships are an indirect channel by which software providers can

form tight product integrations with strategic partners in order to create a sticky
product with significant switching costs. Potential partners include banks,
resellers, and software products, such as ERP and accounting that can potentially
form a mission-critical piece for the customer.
Banks are a natural ground for strategic partnerships, as they are entities with
which every business constantly engages. Banks themselves benefit by providing
a wider suite of products to customers when they package a payment software
product. The software provider benefits, as banks can leverage their long-term
customer base and relationship to sell the software.
Software/Referral partners are another avenue by which payment providers can

integrate into third-party products while establishing flexible revenue-sharing and
commission agreements. Reseller and referral partners can include property
management software, expense management, and accounting providers.
However, the software vendor typically provides training, implementation, account
management, and customer support. In our view, accounting software can be a
powerful lever to generate sales, particularly in the B2B space, as all businesses use
it, and it is tightly integrated into the firm's core systems. As a result, when
businesses adopt the software, it is easier for the payment provider to generate
sales.
Deploying a combination of GTM strategies

The go-to-market strategy of payment software providers tends to encompass all
of the methods discussed above. Payment providers are focused on being at all of
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the different touch points of their potential clients. This is true even for providers
focused on the SME space such as BILL. They sell directly to small businesses
through digital channels, in addition to partnering with accounting firms. This is in
addition to partnerships with software providers such as Intuit, Netsuite, and
Intacct.
Differing approaches for customers of different sizes. Companies approaching

SMBs focus on the user experience and how to improve processes, as the same
individual handling invoices may also handle accounting. Firms targeting larger
enterprises begin by focusing on procurement and front-end processes before the
invoice is even created, followed by the managing of complex purchase orders. The
middle-market space requires a combination of both approaches, helping
businesses with spend management, procurement, and handling complexity with
business rules.
Banking relationships a key driver. Furthermore, even those providers focused on

smaller-sized businesses, have partnerships with money-center banks such as
JPM, BAC, and WFC. These large banks have a reach that spans millions of
businesses, and payment platforms can be integrated as a white-label solution into
their business banking offering. Money-center banks sell software to middle-
market commercial businesses with $10-100m annual revenue, while regional
banks, such as BILL's partner KEY, sell software across their entire business
customer base.
Financial institutions benefit as the payment platform helps them to better serve
their customers, deepening their relationship-based business. BILL, for example,
saw a significant increase in performance obligations over the past year, up ~
$100m from the prior year as large FIs deployed its platform more heavily.
Freemium network model. Another strategy for increasing penetration is the

deployment of a freemium network model. Customers can join the network without
buying anything, and it includes the customers' suppliers and clients. When a
supplier, for example, is invited to join the network, they can accept, and securely
share payment details with the software provider; after this, the supplier can receive
all payments electronically, while customers can link to the supplier without
constantly repeating the process. When both trading partners are in-network, the
customer can see when invoices are delivered, opened, authorized, and payments
received. This model allows the payment provider to benefit from network effects,
resulting in improved customer penetration and monetization.
Overview for SMEs, MMs, and Enterprise Markets

SME
These are businesses with less than $5m in annual revenue and 1-50 employees.
With an estimated ~23m of SME businesses in the US, this is a significant market
in terms of sales, despite having much lower revenue per business than their larger
peers. SMEs, given their size, have little back office and supply chain complexity
and typically use products such as Xero and Quickbooks for accounting.
Middle Market
These are businesses between $5m and $1bn in revenue and 50-1,000 employees.
These present a greater challenge in both back office and supply chain complexity,
with middle-market businesses also showing greater international payment
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exposure than their SME peers. Software products typically favored by MM firms
include Sage Intacct, Netsuite, and SAP Concur.
Enterprise
The largest firms, with over $1bn in revenue and more than a thousand employees.
These firms have highly complex back office systems and can feature sprawling
supply chains that span multiple countries. Representative software products used
by these firms include Oracle, Workday, and SAP Business One.
Competition in the B2B Market

Given the continued secular trends of digitization and the migration to cloud,
businesses are adopting new B2B payment technologies to streamline operations,
receive funds, and pay bills at a faster pace than ever before. As B2B payments
remain front of mind for businesses of all sizes, a number of legacy payment
providers and new FinTech entrants have already begun positioning themselves to
capture a portion of the large B2B TAM, both in the US and internationally. For the
purposes of this report, we have grouped some of the key private and public
competitors in the B2B space into three major categories.
The first is companies that focus on AR/AP automation. While many of these
companies (e.g., Bill.com, Coupa) are driving growth from their proprietary
payment platforms, these providers are distinguished by their capabilities to
automate financial functions such as AR/AP, cash flow management, invoicing and
approvals, and bill pay. A key distinguisher of these companies are the target
markets they go after. Beyond specific verticals, AR/AP automation providers tend
to focus on companies of a specific size. For example, BILL focuses on sole
proprietors and smaller SMB while Coupa addresses the needs of enterprise-level
customers. The second group of companies are primarily payment software
providers with material exposure to B2B payments. These software providers tend
to integrate a number of B2B services within their payment functionality and other
offerings such as corporate cards (we have included companies focused on spend
management here). Like companies focused on AR/AP automation, payment
software providers often tend to focus on specific verticals that align with the core
capabilities. Flywire, for example, focuses its B2B offerings on companies in the
manufacturing, technology, and professional services sectors, while Lightspeed
focuses on B2B services for retailers. The third and final group are legacy payment
providers that have begun to emphasize the importance of B2B payments. Beyond
the networks, we have focused on companies that offer B2B services beyond
payment processing.
AR/AP Automation Companies

Bill.com
Bill.com provides cloud-based software for back-office financial operations for
SMBs, encompassing AP, AR, and international payments. BILL's AI-enabled
software platform allows users to generate and process invoices, streamline
approvals, send and receive payments, and manage cash flows. The company's
proprietary platform dashboard creates a unique view for users to manage cash
inflows and outflows while monitoring bills coming due. BILL offers bill capture and
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document management while also providing a number of payment services,

including check ACH, virtual card, and cross-border. BILL is focused on serving
SMBs and companies in the bottom end of the mid-market and, with the company's
recent acquisition of Invoice2go, is expanding further to serve sole proprietors.
Figure 94: Bill.com products and services
Figure 95: BILL target market
Last year, BILL announced two acquisitions that materially expand the company's
offerings. In May 2021, BILL announced a definitive agreement to acquire Divvy,
which extends the company's services to the corporate spend management space.
Divvy is a modern solution that combines expense management and budgeting
software to create smart corporate cards. The combination of the two companies
provides customers with an expanded platform to manage all their B2B spend in
one place and creates more value for their customers faster, providing real-time
insight with sophisticated budgeting and expense management tools.
Furthermore, in July 2021, BILL announced plans to acquire Invoice2go, a leading
mobile-first AR solution used by more than 225k SMBs, including sole proprietors
and freelancers, in the US, Australia, Canada, the UK and >150 additional countries.
Invoice2go enables SMBs to develop bid proposals, send invoices, and get paid
instantly. The Invoice2go acquisition should open up opportunities for BILL to
transition businesses to ePayments on its platforms and capture a meaningful
share of those payments given the company's value proposition and the need for
businesses to digitize and automate their financial operations.
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Figure 96: Divvy transaction overview
Figure 97: Invoice2go transaction overview
AvidXchange
AvidXchange is a software-enabled payments and AP automation company
founded in 2000 with the mission to transform how middle-market companies
manage, receive, and pay their bills. The company's founders observed that many
businesses, particularly in the middle market, were paying most bills by paper
check, with complicated manual and paper-intensive processes to ingest, review,
approve and pay invoices with few software enablement solutions to help. Since
then, AVDX has adopted the mission to transform the way middle market
companies pay their bills and rid their AP process of all paperwork and manual
process. In 2012, in order to meet customer demand for faster and more efficient
payment methods, AVDX launched the company's AvidPay network. One of the
industry leaders in AP automation, AVDX helps over 8,000 companies in North
America cut costs, improve invoice visibility, and increase efficiencies by
automating complex, manual, and paper-intensive legacy invoice processes.
Today, AVDX serves over 8,000 buyers as well as a network of over 825,000
suppliers enrolled in the company's AvidPay network, leading to over $180bn in
spend under management and ~62m transactions processed annually. Leveraging
the company's deep domain expertise, AVDX has purpose-built a powerful two-
sided network that connects buyers and suppliers, drives digital transformation,
increases efficiency and accuracy in AP workflows, accelerates payments, enables
insight into critical analytics, and lowers operating costs for buyers. Today, AVDX
offers industry-specific solutions through its vertical offerings to eight key sectors,
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namely, Real Estate, HOA, Construction, Financial Services, Healthcare & Social
Services, Construction, Education, and Media.
Figure 98: Key AVDX metrics
AVDX's bread-and-butter solution is its AP process automation software, which

includes >210 integrations with the most common accounting software systems in
the middle-market, including Oracle Netsuite, Sage Intacct, Microsoft Dynamics,
and Intuit Quickbooks. The software allows customers to receive, track, and
approve invoices using existing workflows without the manual and paper-based
processes that typically cause inefficiencies. AVDX clients can make fast, secure
payments to suppliers leveraging several different ePayment options, scale with
growth and reduce costs and fraud. A key growth driver for the company has been
through its AvidPay offering, which is an automated bill payment software that
allows customers to pay suppliers 100% electronically, via virtual card or AvidPay
Direct (an enhanced ACH solution). AvidPay offers fast and secure B2B payments
to AVDX's network of >825k suppliers, creating custom workflows and around-the-
clock visibility into payment status and approvals. AvidPay reduces bill payment
processing costs as it eliminates check printing, envelopes, postage, and employee
hours spent tracking down uncashed checks.
Beyond AP automation and AvidPay, AVDX also offers a number of other products,
including, invoice automation, purchase order software (AvidBuy), payment
management for suppliers, and automated utility payment processing (AvidUtility),
among others. Taken together, these services work to create a powerful flywheel
effect designed to create a great user experience and maximize transactions
processed on the AVDX platform. Like its competitors in the space, AVDX will look
to maximize ePayment penetration through its broad supplier relationships and
continue to convert paper checks while leveraging the unique data its systems
generate to drive further value across the network.
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Figure 99: AVDX flywheel
Coupa
Coupa provides a cloud-based business spend management platform that
connects enterprise-scale organizations with suppliers globally, while also
providing visibility into, and control over, how companies spend money, manage
cash flow, and optimize supply chains. Coupa's platform consists of procurement,
invoicing, payment, and expense management modules that form the transaction
engine for managing its clients' business spend needs. Coupa also offers more
specialized modules, including spend analysis, supplier risk management, supply
chain design and planning, strategic sourcing, contract management, contingent
workforce, and treasury management. Taken together, Coupa's services enable
businesses to achieve savings that drive profitability. Coupa's platform
encompasses ~2,500 businesses and over 7m suppliers, with customers across
various industries, including retail, healthcare and pharmaceuticals, financial
services, manufacturing, and technology. Coupa has >$3.3tn in spend under
management across >125 different countries.
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Figure 100: Coupa business spend offerings
Last summer, Coupa hosted its investor day which highlighted the company's
progress toward a comprehensive, synergistic solution that leverages AI
technology and focuses on the maximum value creation for its customers. The
primary facets of this strategy are the progression of Coupa Pay, Coupa
Community.AI, business spend management (BSM), and marketplace, in addition
to the transactional core that sits behind all of Coupa's solutions. Despite the
positive strategic initiatives and expansion of TAM, management maintained most
of its financial outlook, apart from a slightly raised FCF outlook. Coupa Pay, the
company's unified payments and working capital management solution, remains
a point of focus as the product's early adopters showed continued interest in
potential expansion. Furthermore, AI technology increasingly appears to be a core
tenet of Coupa's portfolio, enhancing the company's status in BSM, while also
demonstrating continued innovation and commitment to value creation for the
company's customers.
Figure 101: Coupa’s competitive moat
Billtrust
Billtrust provides cloud-based software and integrated payment processing
solutions that simplify and automate B2B commerce, focused on AR automation at
both the enterprise and mid-market levels. The company offers a variety of solutions
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that span online ordering, invoices, credit decisioning and monitoring, cash
application, and collections. Billtrust's solutions integrate with various ecosystem
players, such as banks and other financial institutions, enterprise resource planning
systems, and AP software platforms, to help customers transition from paper
invoices and check acceptance to electronic billing and payments. Billtrust's
proprietary tech platform offers its customers multiple methods to present
invoices, including online, email, AP portal, and print/mail, as well as multiple
avenues to receive payments through credit card, ACH, email, phone, and paper
check. Billtrust serves customers across diversified industry verticals comprising
technology, healthcare, industrial, wholesale distribution, consumer packaged
goods, and others.
Figure 102: Billtrust at a glance
Payment Software Companies with Material B2B Exposure

FleetCor
FleetCor provides digital payment solutions for businesses to control purchases
and make payments. It offers corporate payments solutions such as AP
automation, virtual cards, and cross-border payments to international suppliers, as
purchasing cards and travel and entertainment cards for its customers to manage
corporate spend. The company also provides employee expense management
solutions, including fuel solutions, lodging solutions, and electronic toll payment
solutions for businesses and consumers in the form of radio frequency
identification tags affixed to vehicles' windshields. In addition, it offers gift card
program management and processing services in plastic and digital forms that
include card design, production and packaging, delivery and fulfilment, card and
account management, transaction processing, promotion development and
management, website design and hosting, program analytics, and card
distribution channel management. Furthermore, it provides other products
consisting of payroll cards, vehicle maintenance service solution, long-haul
transportation solution, prepaid food vouchers or cards, and prepaid transportation
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cards and vouchers. The company serves business, merchant, consumer, and
payment network customers in North America, Brazil, and Internationally.
Figure 103: FleetCor B2B offerings
FleetCor has been on an acquisition spree in recent years to expand its corporate
B2B Payments capabilities. Comdata (acquired in 2014) provides virtual card
issuance and expanded FleetCor more into AP corporate payments. In 2017,
FleetCor acquired Cambridge Global Payments, a leading B2B international
payments provider, for its global cross-border payments and currency hedging
solutions. NvoicePay (2019), a provider of full AP automation for businesses, works
with a number of P2P players and sits in the space of being a non-bank payment hub
outsourcer, which provides technology and managed services to its clients. In
2020, Fleetcor acquired AFEX, which offers AFEXDirect, a secure online platform
that provides live exchange rates and full visibility of currency balances as well as
incoming and outgoing payments and foreign currency risk management. Finally,
earlier this year, FleetCor acquired Roger, a global AP cloud software platform for
small businesses which extended the company's portfolio of AP automation
solutions to small businesses.
Flywire
Flywire operates as a payment enablement and software company in the United
States and internationally. Its payment platform and network, and vertical-specific
software help clients to get paid and help their customers pay. The company's
platform facilitates payment flows across multiple currencies, payment types, and
payment options, and provides direct connections to alternative payment methods,
such as Alipay, Boleto, and PayPal/Venmo. It serves businesses in the education,
healthcare, travel, and B2B verticals. B2B payments is a relatively new vertical for
Flywire and the company now has hundreds of customers in the sector. Flywire is
focused on accounts receivable payments in the manufacturing, technology, and
professional services sectors, which have been largely underserved with paper
checks and an antiquated international wire system. The industries served by
Flywire have huge potential to digitize over the coming decade and there are also
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many global developments helping to accelerate this trend, according to the

company. Concurrently, Flywire sees significant TAM of ~$10trn that the company
hopes to tap into in the near to medium term.
Figure 104: Flywire B2B payments TAM
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Lightspeed
Lightspeed provides a commerce-enabling SaaS platform for SMBs, retailers,
restaurants, and golf course operators internationally. The company's SaaS
platform enables customers to engage with consumers, manage operations,
accept payments, and is designed to incorporate an omni-channel consumer
experience, comprehensive back-office operations management suite, and the
facilitation of payments. Lightspeed functionalities include full omni-channel
capabilities, order-ahead and curbside pickup, point of sale, product and menu
management, employee and inventory management, analytics and reporting,
multi-location connectivity, loyalty, customer management, and tailored financial
solutions. The company also offers Lightspeed Loyalty, Lightspeed Analytics,
Lightspeed Payments (a payment processing solution), and Lightspeed Capital (a
merchant cash advance program). Furthermore, the company sells a suite of
hardware products to complement its software solutions for the retail and
hospitality segments, such as customer-facing displays, stands, barcode scanners,
receipt printers, cash drawers, payment terminals, and an assortment of other
accessories, as well as providing installation and implementation services.
Lightspeed recently acquired Ecwid, an e-commerce infrastructure provider for
SMBs, and NuORDER, which provides tech that connects merchants and suppliers.
Ecwid essentially connects customers to other customers, allowing individuals to
sell through marketplaces, social media channels, and quickly spin up e-commerce
sites. NuORDER connects suppliers into POS networks and should fit well into
Lightspeed's long-term commerce goals. Taken together, the company hopes
these moves will extend its omni-channel leadership and accelerate value creation
in the B2B space as the company moves from POS payments to a full-scale
commerce platform. Taken together, these two acquisitions materially expand the
company's presence within B2B payments, which should be a larger focus for
Lightspeed going forward.
Figure 105: Ecwid and NuORDER transactions overview
Paya
Paya provides integrated payment and commerce solutions that help customers
accept and make payments, expedite the receipt of money, and increase operating
efficiency. The company operates through two segments, Integrated Solutions and
Payment Services. Paya processes payments through credit and debit card, ACH,
and check payment processing solutions. The company serves customers through
approximately 2,000 distribution partners with focus on targeted verticals, such as
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healthcare, education, non-profit, government, utilities, and other B2B goods and
services. Paya has a long history of ERP payments integration and support and
provides the tools, technology, and expertise needed to help software providers
deliver a complete payment solution to their clients that begins with an API-first
integration and continues with ongoing customer support. Through Paya's
payment platform, businesses can issue invoices, get paid on time through the
channels that are most convenient for their customers, optimize interchange rates,
and reconcile financials on the back end with automated post-back and enhanced
reporting and analytics.
Paya has announced two recent partnerships that work to extend the company's
B2B footprint. In July, Paya formed a partnership with RECUR360, which will offer
RECUR360's clients enhanced capabilities and support for integrated card and
ACH. The partnership will also give "new, underserved markets" — including
distributors, wholesalers and field service providers — access to Pay and
RECUR360, a cloud-based software and automation company offering recurring
payment, invoicing and collection tools for B2B markets. Furthermore, in
September, Paya announced it is working with the software firm Paradigm to help
people working in the building industry supply chain collect and process payments
in real-time. Concurrent with the partnership, Paya announced the launch of
Paradigm Payments, which gives contractors, dealers, distributors and
manufacturers greater back-office efficiencies and the opportunity to increase on-
site sales. Paya is now able to provide integrated payments solutions to more
companies in the building industry, as well as in-home service tech professionals,
offering increased efficiency and ease-of-use and allowing companies in this space
to more easily collect and process revenue and, ultimately, support their bottom-
line growth.
WEX
WEX provides financial services internationally and operates in three segments:
Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit
Solutions. The Fleet Solutions segment offers fleet vehicle payment processing
services, including account activation/retention, authorization and billing inquiries,
and account maintenance services, credit and collections services, and ancillary
services and tools for fleets to manage expenses and capital requirements. This
segment markets its products directly and indirectly to commercial and
government vehicle fleet customers with small, medium, and large fleets, as well
as with over-the-road and long-haul fleets, as well as indirectly through co-branded
and private label relationships. The Travel and Corporate Solutions segment
provides payment processing solutions for payment and transaction monitoring
needs. Its products include virtual cards that are used for transactions where no
card is presented and that require pre-authorization; along with prepaid and gift
card products that enable secure payment and financial management solutions
with single card options, access to open or closed loop redemption, load limits, and
with various expirations. Finally, the Health and Employee Benefit Solutions
segment offers healthcare payment products and software-as-a-service consumer
directed platforms for the healthcare market, as well as payroll-related and
employee benefit products in Brazil.
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Incumbent Payment Companies

V/MA
Beyond the addressable market through V Direct and MA Send, B2B represents a
massive opportunity across cards, cross-border transactions, and AR/AP, which
can be solved through RTP networks, among other solutions. There are over 50 RTP
live networks, with many more in the pipeline set to go live globally (e.g., the Federal
Reserve is building a faster payments service in the US called FedNow). MA
acquired VocaLink, which built and operates UK Faster Payments, complemented
by the subsequent acquisition of Nets. MA is expanding globally into RTP
infrastructure through its full-service approach, with the company live in many of
the top GDP markets (or having signed many) and is taking share from domestic
players by winning RFPs country by country. Meanwhile, Visa plans to use all
available open RTP systems. MA believes there are synergies in participating across
all three areas – namely applications, services, and infrastructure, which will lead
to optimized incremental revenue streams. We note that both V and MA are focused
on going after applications and services, where much of the revenue and
profitability is, representing ~5x the current card opportunity. Although >70% of
organizations are currently not utilizing RTP, nearly 70% plan on adopting it over the
next ~1-2 years and >20% near term.
MA is winning RFPs country by country and building RTP networks by leveraging

VocaLink/Nets, while the acquisitions of Earthport/Transfast by V/MA, respectively,
have significantly expanded their cross-border account-to-account capabilities.
MA's acquisition of Nets positions it to capture share in Europe, with further
tailwinds provided by Finicity, leveraging its open banking platform. V's B2B
volumes are mostly coming from card-based products (~$1trn today) and have
attractive yields compared to the other components of B2B, namely cross-border
account-to-account and AR/AP, all of which have slightly lower yields. On the card-
based front, V is seeing increased interest for digital payments in the wake of the
pandemic and is addressing demand by supporting additional issuance, expanding
into new verticals and investing to streamline operations and enable acceptance.
For instance, in 4Q20, V launched with YeePay in China to support a virtual card
program in both OTA and education, and it also announced a new set of solutions,
partnering with Stripe to enable buyers to use virtual cards for payments. In
addition, the company partnered with FinTech Boost, which focuses on B2B
payment acceptance, aiding the expansion of card adoption by streamlining the
manual acceptance processes for suppliers, enabling automated data
reconciliation and offering flexible economics.
GPN
As part of the company's recent investor day, GPN announced the acquisition of
MineralTree, a leading software-led B2B payments company, formally defining the
B2B market as part of its growth strategy. MineralTree's SaaS offerings automate
key procurement processes, including invoice capture, coding and approval, and
enable virtual cards and integrated payment options across a variety of key vertical
markets to digitize payables for thousands of customers. Combined with GPN's
existent B2B payments capabilities, including commercial payments, domestic
and international acquiring, payroll, data and analytics, access to non-card based
rails and virtual card provisioning, MineralTree's cloud native solutions materially
expand GPN's TAM and provide significant incremental avenues for growth in an
attractive market. GPN will also provide differentiated advantages for buyers,
suppliers and employers through the creation of new virtual networks and a deeper
competitive moat through an expanded offering of marketplaces and ecosystems.
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Figure 106: MineralTree at a glance
Figure 107: GPN B2B ecosystem following MineralTree acquisition
GPN acquired MineralTree at a roughly mid-teens revenue multiple,

complementing the company's existing TSS assets and materially increasing
GPN's position in B2B payments. It expects modest EPS dilution in the near-term,
which will be fully absorbed in FY22. MineralTree should add ~$20m to revenue,
growing ~20%. B2B represents a significant TAM with outsized growth potential
due to the highly fragmented market. MineralTree provides the foundation to create
a more comprehensive ecosystem led by software and AP automation and GPN will
leverage its global scale.
EVOP
Through the company's B2B offering, EVOP provides integration solutions to ERP
software to enable companies utilizing this software to accept card payments from
their customers. EVOP's tech-enabled division also supports B2B customers via
proprietary solutions sold directly to merchants and via ERP software dealers or
integrators. EVOP has emerged as a capable partner for 3rd party referrals due to
the company's focus on integration through its proprietary solutions, high
merchant satisfaction levels, the ease and speed of boarding systems for new
merchants, and a consistent approach to risk and underwriting. EVOP's B2B
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business demonstrated revenue growth in the high-teens in 2Q21, consistent with

its historical growth trends both before and during the pandemic. In 2Q21, the
company launched EVO ACH to enable merchants to send and receive ACH
payments directly to and from customers via the company's PayFabric gateway. As
EVOP continues to focus on growing its B2B business, the company is making
additional investments in its proprietary gateway and pursuing incremental M&A
opportunities including additional ERP integrations. We believe EVOP's emerging
B2B offerings in North America (particularly AR automation), which now make up
more than 20% of revenue and are growing faster than the overall business, are key
for EVOP as the company builds on its global gateway strategy.
Figure 108: EVOP B2B payments automation overview
Acquisitions have been a key driver of EVOP's B2B business. In May 2018, EVOP
acquired Nodus Technologies, which develops proprietary integrations to ERP
solutions such as Microsoft AX and Microsoft Great Plains, which enables
merchants to seamlessly integrate payment solutions into third-party ERP
solutions by leveraging existing Nodus technologies. In addition, the acquisition
included the PayFabric gateway, which enables B2B merchants using any ERP
system to leverage EVOP's payment processing capabilities as well as the
company's business automation solutions through a single integration.
Furthermore, in September 2019, EVOP acquired Delego, which offers proprietary
integrations to SAP solutions. The acquisition further expanded the company's
ability to offer a broad suite of B2B payment solutions for companies utilizing
Microsoft, Oracle, and SAP solutions.
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Evolving Regulatory
Landscape
Increasing FinTech scrutiny
Historically, the FinTech players have been able to avoid significant regulation
thanks to the simple fact that they are not financial institutions. This is particularly
relevant when compared to the banks, which are regulated by the Federal Reserve
Board, FDIC, and OCC among others, resulting in restrictions on business practices
and capital levels.
However, the lines are starting to blur, with some FinTechs pursuing bank charters,
allowing them to offer a broader portfolio of services and avoid addressing separate
regulatory requirements across states. In addition, banks are engaging with
FinTechs to deploy their disruptive capabilities while still pleasing customers.
Since 2015, FinTechs have been seeing increasing regulatory pressure, with
regulations seeking to address consumer mistreatment, privacy violations, and
KYC issues among others. The heavy focus on consumer treatment may be due to
the customer preference for protection in FinTech services that are bank-like but
come from non-bank channels that prioritize ease of access.
One of the major challenges for regulators is to set rules that promote healthy
competition without hampering innovation. As a result, increased regulation may
pose a threat to some segments, such as consumer credit-oriented products (e.g.
BNPL), but may actually benefit other segments that increase customer choice and
innovation (e.g. Open Banking).
The coming year is set to be particularly interesting in terms of potential regulation.

In December, the Consumer Financial Protection Bureau (CFPB) began an inquiry
into the risks of BNPL. The CFPB wants Affirm, Afterpay, Klarna, Paypal and Zip to
alleviate fears about regulatory arbitrage, debt burdens on consumers, and data
harvesting.
Growing regulatory scrutiny of BNPL

The growing scope and reach of BNPL solutions has led to calls for greater
regulatory scrutiny of the practice. Lawmakers, regulators, and other organizations
have begun to question whether BNPL encourages customers to take on too much
debt. Similar issues have been raised for small-dollar and payday lenders, which
have been criticized for making unaffordable loans. There are two broad issues that
regulators seek to address: affordability of loans and transparency to consumers.
The latter is less of a concern given the fairly simple and clear repayment terms
available to consumers. However, the affordability of loans could become a
concern, particularly if BNPL induces customers to take on unsustainable levels of
debt.
The United States has not seen significant regulation of the market yet, but that is
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starting to change. In July 2021, the CFPB published a blog that struck a cautious
tone, while explaining BNPL and its risks. While the industry was encouraged by the
lack of stern warnings, data is coming to light that casts doubt on the
creditworthiness of some BNPL borrowers. A report published by Credit Karma
showed that a third of US BNPL customers have missed at least one payment. This
also results in problems when customers have multiple BNPL loans, which are not
reported to credit bureaus, with BNPL providers typically basing credit decisions on
"soft" credit pulls. The CFPB is concerned about affordability and the "cycle of
debt"; if there is sufficient evidence to support its fears, the agency can make use
of its authority to propose rules to more tightly regulate BNPL lending. In 2017 the
CFPB used this authority to propose a rule that would require payday lenders to
underwrite an applicant's ability to repay loans. While this rule was rescinded, a
more aggressive CFPB may renew its efforts and broaden its scope to include BNPL,
particularly if there is evidence of consumer harms.
In the UK, BNPL providers have previously been able to escape regulation through
what is essentially a loophole, as they technically make loans to the merchants, who
offer payment terms to customers. However, in February 2021 the UK government
announced its intention to regulate BNPL, with the head of the Financial Conduct
Authority (FCA) urging the UK Treasury to bring BNPL into the FCA's regulatory
purview. The UK Treasury concurred, expressing concerns regarding the
affordability of these loans alongside the lack of visibility of the impact on credit
files, potentially impeding lenders in making affordability assessments. In
February, the FCA announced that BNPL would be regulated by the agency, and
BNPL firms must comply with customer protections provided by the Consumer
Rights Act 2015 (CRA). Consequently, the agency asked Clearpay, Klarna, Laybuy,
and Openpay to address its concerns about customer protection. These four
companies have agreed to improve the terms of customer contracts to make them
fairer and easier for customers to understand, and to better reflect how they are
used in practice. Some of the firms have offered refunds to customers who have
been charged late fees for installments due after they canceled online purchases.
Australia is the most mature BNPL market. However, there are still concerns
regarding consumer protections. In March, an industry group called the Australian
Finance Industry Association published its own "Code of Practice" for BNPL. This
seeks to address the affordability topic by requiring signatories to account for
customer vulnerabilities during the underwriting process. We note that these
vulnerabilities are not limited to financial status, but also extend to other
circumstances including domestic violence, the possibility of breakdowns in
personal relationships, and cultural attitudes toward money.
Debit interchange
In 2021, trade associations challenged the 2011 Durbin amendment that requires
the Federal Reserve to limit the fees banks charge acquirers. Currently, the Durbin
Amendment limits the interchange fee for banks with over $10bn in assets to 21
cents plus 5bps of the transaction value, with an additional one cent for certain
fraud prevention measures. FinTechs such as neobanks and other credit card
issuers may survive on these fees alone, making them highly sensitive to these
regulations. These firms have also been able to take advantage of the Durbin
amendment's restrictions to partner with Durbin-exempt institutions.
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However, FinTechs can avoid Durbin restrictions through the use of decoupled
debit cards. Decoupled cards are issued and operated by entities linked to the
customer's bank account through a third party such as a FinTech or a neobank.
These include companies such as Chime, Current, and Varo Bank. As the bank is not
the direct debit card issuer, these cards are not subject to the same rules, and allow
brands to build their own loyalty and rewards programs.
The usage of decoupled cards has become more popular, and with the Federal
Reserve required to review the fee structure every two years, regulations may
change. For example, Durbin restrictions may be extended to all card-not-present
transactions, potentially eliminating the $10bn in assets distinction, weakening the
economics for neobanks. Other proposed changes include mandating issuers to
offer two separate debit networks for processing.
Open banking a potential beneficiary of increased regulation

Open banking regulations in Europe, such as the Payment Services Directive
(PSD2), have given third-party payment service providers (PSPs) access to bank
accounts and the ability to initiate payments. In addition, banks are being forced to
work with open banking FinTechs in the US due to consumer demand for data-
driven FinTech products. As a result, banks have lost some control over the data and
face increased competition, putting them at risk of getting pushed out of the
economics in these new models. Thus, there is a lack of incentives to help support
frictionless permissioned account access and ACH-based A2A payment
experiences.
However, regulation may play a role in helping FinTechs achieve success, with
some believing it to be beneficial to their business prospects. Plaid, for example, has
argued that open banking should be mandated by Section 1033 of the Dodd-Frank
Act, and believes it to be important for the growth of the sector. Section 1033
provides consumers with a right of access to their financial information, which
could include information related to consumer transactions or account usage. This
section also has the potential to enable consumer-friendly innovation, as data
access could enable both competition and innovation in financial services,
depending on how the regulatory framework unfolds. In support of this, the Biden
administration produced an executive order in July 2021 to encourage competition
in the American economy, with one of its provisions encouraging the CFPB to
consider rulemaking under Section 1033 to facilitate the portability of financial
data, making it easier for customers to move between financial institutions and use
new financial products. This has been helped by leadership changes at the CFPB,
with the current CFPB director emphasizing increasing competition in the financial
services sector. Naturally, this provides the legal framework to encourage the
growth of the still-nascent Open Banking space, and is a key reason why some
FinTechs are strongly supportive of increased rulemaking in this space.
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Monitoring Cross-Border
Travel
Travel volumes beginning to inflect
Travel volumes continued to improve through the fall before leveling off as the
impact of the Delta variant hit the US. TSA throughput briefly surpassed pre-
pandemic levels in the days leading up to Christmas, before pulling back as US
COVID-19 cases hit record-highs driven by the Omicron variant. While volumes
have been somewhat volatile vs 2019 levels, TSA throughput is trending in the right
direction. As borders gradually reopen and travel restrictions are lifted, we expect
to see continual improvement over time and would not be surprised if travel
volumes consistently exceed 2019 levels by late this year.
Figure 109: TSA throughput growth vs. 2019 levels
Source : TSA
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Figure 110: Global RPKs (bns per month)
Source : IATA Economics, IATA Monthly Statistics
Figure 111: RPKs, % change vs. the same month in 2019
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Figure 112: Passenger ticket sales, 7-day moving average in %ch vs. 2019
Surveys show pent-up demand for travel

The recent AXP 2022 Global Travel Trends Report shows that consumers are ready
and eager to travel and book trips. Among other findings from the survey, AXP notes
that:
n 74% of respondents agree they are willing to book a trip for 2022 even if they
might have to cancel or modify it later, up from 56% last year.
n 86% of consumers expect to spend more or the same on travel in 2022
compared to a typical pre-pandemic year.
n 62% of respondents plan on taking 2-4 trips in 2022 and 76% of
respondents agree they plan to travel more with family in 2022 than they did
in 2021.
n 56% of respondents stated they held off on traveling for major
entertainment events last year but have plans to return to these types of
events this year.
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Tracking Trends in Retail

Sales and eComm
Retail sales data have shown steady improvement in the back half of 2021 and YTD
through February, despite comps starting to reflect the recovery phase of the
pandemic, which is seen in the relative deceleration in growth rates compared to
early 2021. Please see below recent retail sales data showing the trends. Most
importantly, we will watch for any sharp deceleration, particularly driven by
persistent inflation or any potential new COVID-19 variant, as comps become
slightly more difficult and volumes continue to benefit from pent-up demand.
Figure 113: Retail sales Y/Y (2009-2022 YTD)
Source : FRED
Figure 114: Retail sales Y/Y (2020-2022 YTD)
Source : FRED
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Figure 115: Retail sales M/M (2009-2022 YTD)
Source : FRED
Figure 116: Retail sales M/M (2020-2022 YTD)
Source : FRED
Tracking the recovery in small business

Consumer spend has continued to improve, although small businesses have
suffered more than larger enterprises throughout the course of the pandemic. We
note that acquirers and FinTechs have benefited from strong new business
formation and additional merchants expanding into digital channels, including
contactless payments and e-commerce/omni-channel use cases, which we expect
to continue. Furthermore, small businesses should benefit from the recovery in
consumer spend over time.
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Figure 117: Percentage change in number of small businesses open
Source : tracktherecovery.org, Womply
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Figure 118: Percentage change in small business revenue
Source : tracktherecovery.org, Womply
Figure 119: Percentage change in consumer spending
Source : tracktherecovery.org, Affinity
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E-commerce spending strong

E-commerce growth remains strong both in the United States and globally. We
expect this to continue as the world adapts to the pandemic, with a greater
preference for digital channels.
Figure 120: US retail/eComm landscape
Source : Digital Commerce 360, U.S. Department of Commerce
Figure 121: Year-over-year growth in US online sales, 2012-2021
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Figure 122: Year-over-year growth in US online sales, Q1 2019 - Q4 2021
Figure 123: US eComm sales as a % of total retail spend, 2012-2021
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Figure 124: Global Y/Y eComm growth by vertical
Source : Signifyd
Deutsche Bank global e-commerce projections

We estimate that the total global e-commerce market (incl. physical goods and
travel/events, excl. China and AMZN) stood at ~$2.5trn in 2021 and will grow to
~$2.7trn in 2022 and ~$3.6trn by 2025. Our analysis includes travel/events, which
have weighed on growth since the start of the pandemic but are beginning to show
signs of recovery. Looking only at the e-commerce physical goods market (excl.
China and AMZN), we expect growth of ~9% Y/Y in 2022, representing a notable
deceleration from the exceptional growth of ~24% Y/Y and ~13% Y/Y in 2020 and
2021, respectively. For the total market, we see growth continuing to abate,
returning closer to historical growth levels of ~10% Y/Y, ~9% Y/Y and ~9% Y/Y in
2023-2025, respectively, due to harder comps that should be partially offset by
improving travel/events trends.
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Figure 125: Global eComm market analysis
DB global BNPL projections

We estimate that the total global BNPL market (incl. physical goods and travel/
events) stood at ~$170bn in 2021 and will grow to ~$241bn in 2022 and ~$482bn
by 2025. Our analysis includes travel/events, which have weighed on growth since
the start of the pandemic but are beginning to show signs of recovery and are a
burgeoning use case for BNPL installment loans. Our volume estimates assume
that BNPL penetration of the global e-commerce value will increase from ~3.0% in
2021 to 3.8% in 2022 and eventually reach 5.6% by 2025.
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Figure 126: Global BNPL market analysis
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Monitoring Consumer
Credit
Being viewed as a technology company rather than a financial company has
significant implications for valuation. For example, although low-AOV (Average
Order Value), shorter-duration BNPL loans like PYPL's Pay in 4, AFRM's Split Pay
offering, and SQ/APT's core product face increased competition because they are
less complex, they generate revenue mainly from the Merchant Discount Rate
(MDR), and thus have low gross take rates of ~3-5% and net take rates of ~1-2% but
very little credit risk. High-AOV, longer-duration loans, mainly offered by AFRM –
which is the company's differentiator, particularly among larger merchants (e.g.,
AMZN, SHOP, WMT, and TGT) – look more like traditional financial models as they
rely mainly on consumer interest (~10-30%) and gains on sale to generate revenue.
High-AOV, longer-duration loans have higher gross take rates of ~10-15% and net
take rates of ~6-10% but come with additional credit risk. We believe that in order
to be viewed as a technology company rather than a financial company, credit
exposure needs to be limited to roughly ~10-15%. Given this increased focus on
tech vs financial revenue, the health of overall consumer credit has been a point of
increasing investor focus in recent months.
US credit card delinquency data

While US credit card delinquencies ticked up slightly in the last measured period
(4Q21), we are still near the lowest levels of the past 30 years based on data tracked
by the St. Louis Fed. Even if delinquencies continue to tick up, the American
consumer has rarely been in a better position to deal with rising inflation/energy
costs. Even if that means savings dwindle, we believe there are still positive
tailwinds that are likely to show up in consumer spending data.
Figure 127: Delinquency rate on credit card loans, all commercial banks
Source : FRED, Deutsche Bank Research
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BNPL securitization delinquencies

We have been monitoring ABS delinquencies for BNPL players such as AFRM and
alternative credit players like UPST and there appears to have been a notable uptick
in delinquencies in recent months, particularly for newer cohorts (e.g., 2021). For
AFRM specifically, we believe delinquencies are going up in part because of a mix
shift. The shift from high-AOV, 0% APR loans through the likes of PTON to lower-
AOV, interest-bearing loans through AMZN/SHOP will naturally lead to more
delinquencies given the nature of the end consumer. As AMZN and SHOP continue
to grow as a percentage of GMB, the rate of delinquencies could continue to climb.
We believe AFRM is now getting into vintages where the credit model is expected
to settle closer to where delinquencies were pre-COVID-19. However, if AFRM runs
into a scenario where the mix shift stays the same and delinquencies are still going
up within vintages, we believe that would be indicative of deteriorating credit
quality and increased credit risk for the company.
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Keeping an Eye on Private

FinTech Growth
Stripe: Growing the internet economy
Stripe is a payments company that has adopted an aspirational corporate mission
to "increase the GDP of the internet". Founded in 2010 by Irish brothers John and
Patrick Collison, Stripe now has more than 7,000 people working in 23 countries. In
its most recent shareholder letter, Stripe reported that businesses on its platform
processed more than $640bn in payments in 2021, up 60% Y/Y. This is supported
by its growing roster of businesses, with Stripe adding 1,400 new companies and
100 nonprofits in 2021. Stripe has continued to retain businesses and grow with
them, with more than 100 businesses each day crossing $1m in lifetime revenues
processed on Stripe. It was boosted by behavioral changes towards eComm during
the pandemic, and, as a result, the company does not expect to match the same
growth rate in 2022. In the longer term, however, with online spending only 12% of
global spend in 2021, according to the IMF, there is plenty of runway for growth for
Stripe and others.
Stripe's core business model is designed to reduce friction for merchants

conducting business online by providing a product suite that saves them money,
time, and the resources necessary to begin accepting online payments from
customers. Stripe allows businesses to accept payments from credit cards (nearly
instantly) and transfer those payments directly into bank accounts controlled by the
business. In just over a decade since Stripe was founded, the company has moved
from simply accepting payments to providing a comprehensive and growing suite
of offerings aimed at streamlining the process to start and run an online business.
Stripe's long-term goal is to help companies across the world to launch and grow
their businesses, and it has adopted a strategy to serve companies ranging from
start-ups all the way up to established enterprises.
This is done by helping shift activity to the internet, while enabling projects that
would not be possible in the offline world. Management believes there are four
ways in which it can be constructive:
(i) New business creation: Boosting new business creation by reducing the cost and
complexity of starting a business. Stripe's early customers were developers
starting companies, and Stripe has grown in tandem with startup clients. Of note,
according to the company, ~60% of the tech companies that went public in 2021
were Stripe customers. Over the last year, Stripe has launched Payment Links to
limit coding requirements for small firms and Stripe Tax to reduce the complexity of
taxes, expanded global coverage for Stripe Invoicing, and launched Revenue
Recognition to automate revenue recognition. Of note, Atlas, Stripe's platform for
forming companies, is used by one in ten Delaware C Corps.
(ii) Offerings for established businesses: Another lever for growth is helping more
established businesses tailor their offerings and business model to the internet.
Management believes Stripe's origins in the startup world was previously a
drawback in the eyes of more mature businesses. This has changed in recent years
with established businesses looking to match the customer experience that
startups offer, and legacy technology hindering them. Further, management
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believes that improving the payment experience results in more direct relationships
with customers, allows business models that use subscriptions and marketplaces,
and helps businesses go global and more seamlessly integrate in-store and eComm
channels.
(iii) International growth. Stripe believes it can drive cross-border commerce by

simplifying otherwise complex international payments. We note that international
commerce has become a key contributor to growth as the majority of new
businesses joining Stripe are outside the US. The number of businesses in Latam
and APAC grew 518% and 106%, respectively, through the pandemic, with 85
European companies passing the $1bn "unicorn" valuation milestone in 2021.
(iv) Security and reliability. This helps lower the costs of scaling businesses through
providing APIs and services that are secure, reliable, and developer-friendly. To this
end, Stripe has built elastically scalable infrastructure that helps customers handle
growth spurts while maintaining security and reliability, an area in which Stripe is
investing hundreds of millions of dollars. Cybersecurity is another key area of focus
given the increasing scale and sophistication of attacks, along with the efforts
needed to comply with data regulations such as GDPR and CCPA. Reliability is also
a point of focus with customers depending on Stripe for a key part of their
operations. Management has noted that it handles more than 500 million API
requests daily with 99.999% uptime, rising to 99.9998% during this past Black
Friday/Cyber Monday.
In March 2021, Stripe raised $600m in its latest round of funding, with investment
dollars coming from Ireland's National Treasury Management Agency, Allianz SE,
AXA SA, Baillie Gifford & Co. and Fidelity Investments, putting its most recent
valuation at ~$95bn (up from $36bn in April 2020) and making it the largest start-up
in the US, according to Bloomberg. The introduction of capital is being used to
accelerate Stripe's global expansion, with Stripe now operating in 47 countries, in
addition to further investing in enterprise capabilities.
Figure 128: Stripe funding history
Source : Bloomberg Finance LP, TechCrunch, Company documents
Part of what sets Stripe apart from its competitors, and what has led companies
such as Amazon, Yelp, Spotify, Uber, Lyft, and Reddit to use Stripe as their preferred
payments processor, is the company's integrated approach to payments, which
allows it to focus on specific integrations and use cases tailored to its clients. Stripe
has benefited as some of its early customers (e.g. Instacart) that started out small
grew rapidly into significant companies. Going further, Stripe has made a concerted
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effort to expand beyond simply being a payments processor and is entering

different areas of the FinTech value spectrum. For example, in February 2021, Stripe
announced a partnership with Afterpay to allow both new and existing Stripe
merchants to offer Afterpay's BNPL services as a payment option in Australia, New
Zealand, and the US (the feature will soon be available in the UK and Canada).
Regarding BNPL, Stripe has also partnered with QuadPay, enabling consumers to
shop in installments of up to $500 anywhere that Visa is accepted.
Stripe's focus on increasing the GDP of the internet also extends to subscription
payments. In January, Spotify noted it was increasing subscription offerings
powered by Stripe to include paid monthly content. Podcast Subscriptions tied to
Stripe Connect supports currencies and payments in 34 countries and the payment
infrastructure underpinning it supports dozens of currencies for thousands of
creators in more than 30 countries. This is part of the broader project of building the
creator economy, allowing individual creators to monetize subscriptions, accept
payments, and launch recurring revenue streams, while still continuing to engage
more deeply with their fans. Stripe has noted that creators on 50 platforms powered
by the firm have earned nearly $10bn in revenue.
Figure 129: Select Stripe partnerships
Source : Stripe
How Stripe works

At its most basic level, Stripe's integrated payment platform is designed to allow
businesses to take payments (including recurring payments) from customers and
transfer those payments directly into the merchant's bank account. Stripe
eliminates the need for merchants to store credit/debit/ACH information as
customer payments go directly to Stripe's secure servers, so platform owners do
not need to maintain sensitive customer data. Upon completing a transaction,
business owners immediately see money in their accounts rather than having to
wait for clearance. For customers, the checkout process is all but unchanged, and
there is no need for online users to visit a third-party payment site. Typically, Stripe
charges 2.9% of total value and $0.30 for each online transaction (in-person
transactions using Stripe Terminal have a lower fee of 2.7% plus $0.05 per
successful transaction). After paying other parties, Stripe's take rate is typically 0.5-
1% of the transaction value. Stripe does not charge platforms for recurring charges
or refunds, which compares to the $10/month that PYPL charges for the same
services.
One of Stripe's largest differentiators is the ease with which the company allows
platform owners to build their own integrations that can easily merge with Stripe
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technology to fulfill unique business requirements. Stripe has expended well

beyond simply processing payments, and it now offers a wide ranging suite of
products and services (explained in greater detail below). Stripe's fully integrated
payments stack provides applications to manage nearly every aspect of running a
business on top of the company's core payments engine.
Figure 130: Stripe payments stack
Source : Stripe
Integrated capabilities provide differentiated merchant benefits

Stripe was founded after John and Patrick Collison saw an opportunity to improve
the burdensome online payment experience. While Stripe was created with start-
ups and small businesses in mind, the company has entered into a number of
partnerships with massive companies (including Facebook, Expedia, Macy's, and
Target), given the material benefits that the platform offers to merchants. In 2018,
Stripe commissioned Forrester Consulting to conduct an economic impact study to
examine the potential ROI that enterprises might realize by partnering with Stripe.
Some of Forrester's key quantifiable findings included:
n Up to $3m in annual incremental revenue from new platform volume,

driven by features enabled with Stripe Connect, equating to a 10% revenue
uplift on average. By fixing the limitations of the previous payment solutions
and delivering new features catered to their sellers' experience,
organizations were able to attract new sellers to their platforms, increasing
transaction volume by up to 10% by Year 3.
n An average two-week improvement in seller onboarding time, increasing
average annual revenue for new sellers. Organizations saw up to a 10%
increase in annual revenue for new sellers due to faster onboarding enabled
with Stripe Connect.
n Just under $1m in annual time saved by replacing manual processes with
Stripe Connect. Organizations saw various savings for accounting, finance,
developer, and customer support roles by eliminating or significantly
reducing the manual work associated with prior payment platforms.
n Up to a 67% reduction in expansion costs due to ease of expansion with
Stripe Connect. Organizations were able to expand into international
markets more cost effectively and at a faster pace than with previous
platforms, entering an additional four international markets than was
previously planned, on average.
n Reduction in compliance risk: In addition to reducing time spent on
compliance processes, noted above, organizations felt that their risk of
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noncompliance decreased following their Stripe investments.

n Reduction in chargeback rates: By improving buyer experience through the
Stripe Connect investment, some organizations noted an up to 25%
decrease in their chargeback rates.
n Improvement in seller conversion rates. Organizations saw an
improvement in seller conversion, driven by a faster onboarding process
and an improved seller experience on their platform.
Payments stack and value-added offerings highlight Stripe's platform

Stripe's core offering is its powerful payments engine, which is designed to make
moving money easier than with traditional alternatives. Stripe's initial product was
simple – several lines of code that allowed merchants to accept one-off payments.
Since 2011, Stripe's payment processing capabilities have dramatically expanded,
and the company now accepts payments for platforms, subscription and invoice
payments, offline payments for online native brands, and much more. A brief
overview of Stripe's payment offerings can be found below.
Online payments
Stripe offers a complete payments stack that allows business ranging from e-
commerce stores, to subscription businesses, to platforms and marketplaces to
accept payments across all channels of operation. Stripe's online payment offering
helps protect customers from fraud, and it increases authorization rates on every
payment through the use of machine learning and data aggregated across the
millions of different businesses with which Stripe interacts. Stripe currently
accepts payments in >135 currencies and through dozens of different payment
methods, helping clients launch in new international markets and adapt to their
customers' preferred methods of payment, helping to increase conversion abroad.
Figure 131: Overview of cards, currencies, and payment methods accepted by

Stripe
Source : Stripe
Stripe Terminal (in-person payments)

Stripe Terminal enables merchants to build individual in-person checkout
experiences in order to accept payments in the physical world. Built with platforms
and modern retailers in mind, Stripe Terminal seeks to unite online and offline
channels by providing merchants with flexible developer tools, pre-certified card
readers, and cloud-based hardware management. Stripe Terminal allows
merchants to manage all online and offline sales in one place with a single Stripe
integration, helping to simplify reporting and reconciliation, and providing a single
view of customers across all channels. Stripe Terminal is designed to be integrated
with other Stripe offerings, including online payments, Stripe Connect (discussed
in greater detail below), and billing (also discussed below). Stripe Terminal is yet
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another example of Stripe's laser focus on security, as each Terminal provides end-
to-end encryption, supporting both chip cards and contactless payment methods,
such as Apple Pay and Google Pay, which helps protect merchants against liability
and counterfeit fraud. Since its 2018 launch, Stripe has expanded into nine more
countries across four continents, including France, Germany, Australia, and the UK.
Stripe Terminal has benefited strongly this year from the return to in-store shopping,
with Stripe announcing in January that Terminal payment volume had increased
sixfold. Also in January, Stripe agreed to acquire its terminal manufacturing partner
BBPOS, with which it recently launched three new card readers, including the
Stripe Reader. This vertical integration should allow Stripe to drive further
innovation in card readers.
Stripe Connect
Stripe Connect is a set of programmable APIs and tools that lets merchants
facilitate payments using in-house software platforms while also providing the
opportunity for clients to build unique marketplaces and pay sellers or service
providers globally—all while having Stripe handle payments compliance. Stripe
Connect provides pre-built user interfaces and allows merchants to design their
own custom flows to help customers get started with their online shopping
experience. Stripe handles all identify verification and Know Your Customer (KYC)/
compliance requirements. Stripe Connect was designed to help clients deal with
the stringent regulations associated with paying out money in different regulatory
regimes across the globe, and it shifts payments compliance obligations from the
merchant to Stripe. Stripe Connect offers card data tokenization to help with PCI
compliance, provides verification systems to manage KYC checks, and leverages
Stripe's unique licenses and relationships around the world.
Billing subscription management

Stripe Billing allows merchants to collect one-time or recurring payments via card,
ACH, and other popular payment methods instantly. Stripe's billing services
provide flexible billing logic, allowing clients to charge for a wide variety of services
ranging from per-seat pricing to metered billing out of the box. Stripe Billing
provides support for coupons, free trials, prorations, add-ons, and overages as a
built-in feature of its service. Stripe notes that its billing services helped business
recover an average of 41% of failed invoices in 2019, using features such as smart
retries, automated failed payment emails, and an automatic card updater.
Figure 132: Stripe Billing services overview
Source : Stripe
Stripe re-enters crypto

In March, Stripe reentered the crypto space after exiting it four years prior. In
October, Stripe announced it was launching a new crypto team to build Web3
payments. Stripe now offers on-ramp and off-ramp services for crypto exchanges
and scalable fiat APIs for businesses, digital wallets, and NFT marketplaces. This is
joined by KYC, identity verification, and fraud prevention. Stripe now supports on-
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ramp of fiat to crypto exchange in 180 countries, with off-ramp services using Stripe
Connect. Part of Stripe's motivation comes from the view that crypto companies
have been treated poorly by payments providers, with low authorization rates and
reliability, and Stripe expects to improve the business, making crypto more
accessible.
Stripe began support of crypto payments in 2014 but ended support at the
beginning of 2018, due to technical issues such as lengthening transaction
confirmation time, growing failure rates, high transaction fees, and consequently
a decrease in demand from both clients and retail customers. Only two years ago,
CEO John Collison said that crypto was not part of the firm's business, but the
skepticism has since faded with Stripe citing blockchain infrastructure advances
and growing interest among major financial institutions. Apart from crypto, this
reflects interest in broader applications in DeFi and Web3 in the proposed
blockchain-based next generation of the internet. Stripe has signed a number of
crypto clients including Bitcoin.com, the FX/FTX.US exchanges, NFT marktetplace
Nifty Gateway, and Just Mining, which provides staking, masternode and crypto
mining solutions. These clients can benefit from a seamless checkout experience
that parallels mainstream retailers. Most exchanges require selfies and uploaded
photos of ID documents, with failures resulting in manual reviews. However,
Stripe's ID verification can expedite the time required for KYC processing, resulting
in more automated approvals.
Financial Services and Business Operations

As mentioned earlier, Stripe is committed to being more than just a payments
company, and it is working to build the infrastructure of the internet. To those ends,
Stripe has two business verticals (Financial Services and Business Operations) that
provide its clients with a broad array of applications and platforms, offering
merchants the end-to-end support needed to successfully run an online business.
A brief overview of Stripe's financial services and business operation offerings can
be found below.
Stripe Capital
Stripe Capital was first started in September 2019, offering customers and
businesses financing options through its online platform. Stripe Capital allows
clients to log on to see if they are eligible for funding based on a number of factors,
including payment volumes and history on Stripe's other platforms. Businesses
then have the ability to select the size of loan that fits their business needs. Once
approved, funds are deposited directly into the client's Stripe account, and the loan
is automatically repaid using a fixed percentage of daily sales until the total amount
is repaid. In December 2020, Stripe went live with a new feature of Stripe Capital
that enables online platforms to offer financing to their customers through Stripe
Capital. Stripe Capital now equips clients with an end-to-end lending API through
which they can provide financing options, and it enables clients to offer additional
services to customers. Stripe has been able to step into SMB lending as larger
financial institutions have scaled back lending to small businesses since the
financial crisis, and it is able to offer a differentiated product, featuring rapid lending
decisions derived from unique data culled from clients' past performance on
Stripe's platform.
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Figure 133: Illustrative Stripe Capital lending arrangement
Source : Stripe
Corporate cards
The Stripe Corporate Card allows companies to handle expenses on the same
platform that Stripe provides for payment processing. Stripe allows clients to
instantly provision cards and manage spending in real-time, and it automatically
provides access to larger lines of credit as businesses grow. Rather than forcing
clients to deal with complex rewards programs, Stripe simply gives extra cash back
in the categories where clients spend the most. Stripe also has a feature (Stripe
Issuance) that allows clients to create, manage, and distribute both virtual and
physical cards for specific uses. For example, Postmates gives couriers Stripe-
issued cards that can only be used at specific merchants to purchase items ordered
by end-customers. Stripe Issuing operates at significant scale in the US. It was
launched in Europe in April 2020 and is now available in 20 countries across the
continent.
Stripe Treasury (banking-as-a-service)

Launched in December 2020, Stripe Treasury provides modular components for its
clients to build full-featured, scalable financial products for their customers. Stripe
has partnered with global banks (incl. Goldman Sachs, Citi, and Barclays) to enable
ACH and wire transfers, interest-earning accounts, and faster access to payments
funds, all accessible within each client's platform. Stripe Treasury is built to handle
all upfront bank negotiations, compliance processes, and regulatory requirements,
which, combined with Stripe's technology, makes it simpler for clients to get
started and scale their businesses. With Stripe Treasury, platforms can create a
simple stored-value account, a full-featured bank account replacement, or
anything in between. Stripe aims to make the platform straightforward, enabling it
to add capabilities so that clients can experiment and iterate in order to build the
best product for their customers.
Radar: fraud and risk management

Stripe Radar helps detect and block fraud for any type of business using machine
learning that trains on data across millions of global companies. Radar is built into
Stripe and requires no additional setup for companies to get started. Old ways of
combating fraud were never designed for modern internet businesses, and they can
lead to lower acceptance rates and lost revenue. Radar was designed to help
distinguish fraudsters from customers and apply Dynamic 3D Secure to high-risk
payments. Stripe's partnerships with Visa, Mastercard, American Express, and
leading banks let Radar use data like TC40s, SAFE reports, and early dispute
notifications to help identify fraudulent charges before they are disputed. Radar is
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fully integrated with the rest of the platform. Hence, Stripe's systems can instantly
use rich payment information like customer details, shipping and billing addresses,
and other properties to improve machine learning performance.
Sigma: custom reporting

Given the company's access to vast amounts of structured and unstructured data,
Stripe Sigma was created to help platforms identify which customers are least likely
to churn this year, look up which geographies contribute the most revenue, and see
which products are most popular at certain times of the year, among other features.
Sigma allows users to write SQL queries to create custom reports and get instant
answers, right inside Stripe's Dashboard, without the need for dedicated engineers
to build or maintain data pipelines or warehouses. Sigma is incorporated in such a
manner that it frees data from different silos across an enterprise and allows
teammates from different functions (such as finance, support, product
management, and other teams) to run reports directly and take action faster.
Atlas: start-up incorporation

Stripe Atlas is a safe and easy-to-use platform for forming a company. Stripe has
removed a number of steps involving lengthy paperwork, legal complexity, and
numerous fees to help founders launch their start-up from anywhere in the world.
To date, thousands of founders from more than 140 countries have formed their
companies using Stripe Atlas, taking advantage of the service's best-in-class legal
structure that is built for scale. According to Stripe, companies that have used Atlas
to incorporate have raised more than $2bn in funding.
Figure 134: Illustrative incorporation using Stripe Atlas
Source : Stripe
Climate: carbon removal

In October 2020, Stripe launched the first product that allows any online business
to donate funds to technologies that directly remove CO2 from the atmosphere.
With Stripe Climate, platforms can automatically direct a fraction of their revenue
to help scale emerging carbon removal technologies with just a few clicks. Stripe
does not take any fees for Stripe Climate contributions, and 100% of the funds are
used to accelerate the development of carbon removal technologies. Stripe has
partnered with a group of ambitious businesses changing the course of carbon
removal, including:
n Climeworks: Climeworks uses renewable geothermal energy and waste

heat to capture CO2 directly from the air, concentrate it, and permanently
sequester it underground in basaltic rock formations.
n CarbonCure: CarbonCure injects CO2 into fresh concrete where it
mineralizes and is permanently stored while improving the concrete's
compressive strength.
n Project Vesta: Project Vesta captures CO2 by using an abundant, naturally
occurring mineral called olivine.
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n Charm Industrial: Charm has created a novel process for preparing and
injecting bio-oil into geologic storage.
Challenger banks and alternative/POS lenders

Chime – Serving strong digital banking demand
While often referred to as a digital bank, Chime is a FinTech that provides banking
services to consumers through partnerships with banks such as The Bancorp Bank
and Stride Bank to offer FDIC-insured checkings and savings accounts, small loans
of up to $200, and debit cards with a network of 60,000 ATMs that customers can
use without fees. Launched by former Visa executive Chris Britt and Comcast Corp
alum Ryan King in 2012, Chime's revenue is primarily from interchange fees, with
purchase transactions growing driven by the increased demand for digital banking
and higher engagement during the pandemic. Chime completed its latest funding
round in August, raising $750m at a valuation of $25bn.
Chime monetizes its customers primarily through interchange fees, and purchase
transactions have grown due to increased demand for digital banking and higher
engagement during the pandemic, boosted by stimulus. We note that Chime has
been successful at driving direct deposit sign-ups, with ~2/3 of its customers set up
for recurring paycheck direct deposits. Driving the strong direct deposit sign-up
growth is Chime's ability to solve its members' most critical needs, including early
access to paychecks, bridging to the next pay day, automatic savings, building
credit responsibly, and sharing expenses with friends, delivered in a customer-
centric way without hidden fees. All of the company's free value-added services
require direct deposit sign-up, which is key to driving transactions and
monetization through interchange fees. Chime has not only benefitted from
increased adoption and accelerated net adds through the pandemic, but also better
retention. Most of Chime's net adds come from customer referrals, which is a high
quality channel that usually results in the adoption of direct deposit.
Differentiating them from bank competitors, Chime has a focus on low to middle-
income customers. Chime's typical customer is the everyday American with an
average income of ~$30-50k annually and most of the company's customers have
already previously had a bank account. Traditional banks were set up to cater to the
top ~10-20% of Americans who tend to get great relationship banking, while the
rest of the population is weighed down by fees, creating an opportunity for Chime's
transparent fee-free model. Chime leverages the following features to address this
consumer base: (i) Early access to money, with a quarter of Chime customers saying
they chose the app as it provides two-day early access to direct deposit paychecks.
This feature was particularly valuable through the pandemic as it gave customers
early access to stimulus checks. (ii) Spot Me, which is the overdraft protection
product, giving its direct deposit users $20-$200 in overdraft protection. (iii) Credit
Builder Credit Card, which is a way for customers to responsibly build credit for free,
and takes advantage of the company's paycheck relationship with customers,
which serves as a dynamic security deposit. Chime monetizes the Credit Builder
Card through spend, similar to a debit card, and the company benefits from higher
credit interchange rates for the product.
Chime operates a platform of bank partnerships and could potentially pursue a bank
charter in the future. Bank charters make the most sense for FinTechs focused on
lending as opposed to spending like Chime, as they allow the use of deposits as
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lending capital. Chime leverages higher interchange through the Durbin

amendment, which exempts banks under $10bn in assets, so the company has
plenty of room left to grow before reaching the interchange caps.
Chime generates strong revenue per user (RPU) given the company's fee-free
model driven by transaction volumes as the primary monetization lever. The
company has multiple products that add value and drive platform spend. Chime's
early paycheck capabilities take advantage of the multi-day ACH system, with the
company essentially underwriting the ACH system. Chime plans to continue
expanding its product suite, focusing on saving, investing, insuring, and spending-
based products, with the company having primarily built its products organically.
In addition, rewards and other incentives to transact could potentially be part of the
future playbook, along with international expansion in the longer term.
Klarna
Klarna, a Swedish POS financing provider, was founded in 2005 and maintains a
network of over 400,000 retail partners, over 5,000 employees and 147m global
active users across 20 countries, including the US, UK, and Germany. This global
reach has driven major volumes, totaling an average of 2m daily transactions.
Klarna entered the US in 2015, but its recent funding rounds could allow it to
replicate its international success in the market. Klarna's customer acquisition
strategy has been largely millennial-focused. Its solution is integrated into popular
retail stores like Zara, Ikea, and Asos; it hosts pop-up events; and it previously got
an investment from Snoop Dogg, in addition to having the rapper feature in
marketing campaigns. Furthermore, the company launched Mindful Money, a hub
for money management tailored to millennials. This offers a direct-to-consumer
app where consumers can shop, while increasing engagement through features
like price drop notifications and a wish list. The US is a key growth opportunity for
Klarna, with its growth in the country coinciding with the rise of BNPL. In February,
Klarna announced its FY21 results: GMV reached $80bn, with 147m consumers
using Klarna, and 46m added through acquisitions. In the US, Klarna is partnering
with 30 of the Top 100 US retail brands, with US merchandise volumes tripling in
2021, driven by 71% growth in US consumers, which rose to 25m in 2022. In its
latest June 2021 funding round, Klarna's valuation increased significantly to
$45.6bn, up from the March 2021 valuation of $31bn.
Revolut
Revolut, based in London, provides a super app featuring banking services such as
prepaid debit cards, currency exchange, debit cards, virtual cards, Apple Pay, stock
and crypto trading alongside other features. In its latest funding round in July 2021,
led by Softbank Vision Fund 2 and Tiger Global, Revolut raised $800m in funding at
a $33bn valuation, a sharp increase from the $5.5bn valuation the prior year, making
it one of the most valuable FinTechs. Revolut has 18m customers with 500k
business users, processes more than 150m transactions per month, and is looking
to develop a wider range of services to grow both the user base and transaction
volume. Areas of interest include insurance, further penetration into investing and
trading, and developing credit offerings, alongside growing its user base in the US
and India. Revolut looks to build on already existing banking and financial services
infrastructure, leveraging it through APIs and integrating it into its platform while
providing customers with a seamless and user-friendly interface and experience.
The focus on the user experience results in opportunities to improve personalization
while moving away from commoditized services into personalized tools such as
budgeting and financial management. The value proposition consequently appeals
to younger users who are both more digital-friendly and less experienced with
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financial matters. In March, Revolut expanded into a range of new countries,

following six months of expansion in which it launched ten new currencies. Revolut
users in the UK, EU, Japan, and Australia can now move cash to bank accounts in
Colombia, Nepal, Peru, Bolivia, Guatemala, Egypt and Costa Rica. This remittance
feature allows users to send money to those countries within minutes.
Monzo
Monzo is a UK-based challenger bank that provides an app designed to manage the
user's entire financial life. It has more than 5m customers in the UK and has recently
come out of beta in the US. Users can spend, manage, and save money from their
phone while having visibility into where their money is going. Features include
notifications when funds are low and a real time balance and daily spend summary.
The app allows users to set budgets for activities such as groceries, entertainment,
utilities and subscriptions, with spending broken up among categories, making it
easier to track. It also allows users to save for goals by putting money into "Pots",
which are segments that allow the user to allocate to goals such as buying a car or
a house. Other saving features include rounding up, which rounds up payments to
the next full number, with the balance put into a Pot to encourage savings. In
February, Monzo announced it was ready in the US to open app-based accounts
and onboard eligible customers. This followed an 18-month beta launch in the US
where it signed up thousands of customers, processing millions of dollars of
transactions while gathering feedback. Monzo has not received a US banking
license and has dropped its bid to acquire one; as a result, deposits are held by
Sutton Bank. At the end of 2021, Monzo carried out a Series H funding round,
raising $600m and putting the company's valuation at $4.5bn; this included a
$100m top-up investment from Tencent Holdings.
Curve
Curve is a card FinTech based in the UK. It is building a super app that aims to be a
comprehensive financial app for consumers. The app allows customers to
consolidate various banking and credit cards into a single card and app. Curve has
built credit capabilities with Curve Credit, which extends credit on purchases made
with the Curve card, paid back over time in installments. Unlike other POS lenders,
the service does not partner directly with merchants at checkout, but extends credit
to customers when they use a Curve debit card at checkout. In January of last year,
Curve raised $95m in Series C funding led by IDC Ventures, Fuel Venture Capital,
and Vulcan Capital. In September, building on these capabilities, Curve launched
Curve Flex, a BNPL offering that allows customers to pay later for nearly all
purchases at any merchant and from any card. Significantly, the service allows the
user to convert into installments purchases made up to a year ago. Whenever a
customer wants to split a purchase – including retail, online orders, or household
bills – into installments, they swipe a transaction and select the number of
installments. This is then refunded in full nearly immediately, with the customers
now having improved control over their money. CurveFlex has been in testing since
September 2020, with 1,600 beta users having converted ~7,000 transactions into
installment loans of over GBP 1m.
Upgrade
Upgrade is a FinTech focused on helping users utilize their credit more responsibly.
It has issued ~$10bn in credit through credit cards and personal loans, and expects
to issue $8bn in credit in 2021. Founded in 2016, and led by former Lending Club
CEO Renaud Laplance, in November it raised a Series F round at a $6bn pre-money
valuation, up from its August Series E round at $3.325bn. Upgrade's key product is
a rewards credit card that offers 1.5% cash back on all purchases, in addition to
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another card that allows bitcoin rewards. However, if the consumer is unable to pay
the credit card balance, Upgrade will combine the charge into a monthly
installment plan to be paid back over 24-60 months at a fixed rate with equal
monthly payments. The firm has also launched checking accounts and debit cards
with no minimum balances and rewards on debit card purchases. Upgrade offers
personal loans with APRs of 5.94-35.97%, and management has previously noted
that its flagship credit card generates ~$1bn in credit lines per year. In March,
Upgrade launched a new solution to help consumers deal with inflation through its
Upgrade Shopping product, which gives users cashback rewards of up to ~10% at
more than 20,000 local and national merchants. Partners include H&M, which
offers 6% in-store and online, Shake Shack, which offers 10% online, and Adidas,
which offers 5%. This is combined with the fee-free Upgrade Card, which comes
with rewards and competitive rates.
DailyPay
DailyPay is a New York-based firm that provides payroll services including earned
wage access. The firm is responding to interest from users who are increasingly
looking for faster payments from their employers and are even willing to pay for
such payments. The company charges up to $2.99 for users to receive 100% of their
earned but still unpaid income in a model that has been compared to traditional
payday lending. The service allows users to decide when they want to be paid, and
can get instant, or next day access to income when choosing DailyPay. Every day
the employee works, they build a Pay Balance in their DailyPay account that they
can transfer into their bank account or debit card. The Pay balance is updated
whenever the user clocks out after each shift. Users can request money from the
balance whenever they want for a fee, with the remainder paid out on the next
payday as Remainder Pay. The firm has controls that prevent the user from
withdrawing more money than they have. In order to provide real-time payments to
employees, the company has partnered with PNC and The Clearing House to use its
RTP network, making it the first on-demand pay provider to use the service. The firm
has partnered with companies such as Dollar Tree, HCA Healthcare and Kroger,
offering its services to companies with more than 500 employees, with
concentrations in healthcare, retail, restaurants, hospitality, supermarkets and call
centers. In March, DailyPay launched a digital wallet solution, making it easier for
users to be paid in real time every week while working for a DailyPay partner. The
wallet refills every day the user works, and shows realtime balances. DailyPay has
secured significant funding from investors, most recently receiving a $300m credit
facility from Barclays, providing access to capital to fund its growth plans. This
followed a May 2021 capital raise of $500m, including a $175m Series D equity
raise.
B2B
Stampli
Founded in 2014, Stampli is an AP automation platform that connects AP
communications, documentation, and payments under a single platform. Stampli
works to turn each bill its customers see into a communications hub, connecting
finance departments to other stakeholders of the purchase, including the vendor
who needs to receive payments. Its system uses machine learning to recognize
patterns around how the organization allocates cost, manage approval workflows
and determine what data can be extracted from invoices. The company's service
offerings give AP teams full control over the life cycle of an invoice and help
companies automate their AP workflows for faster, more controlled invoice
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approvals. By providing an automated electronic intake process, the company

lowers the risk of user data entry errors and exposure to fraud. The company's AI
tool (named Billy) guides customers through the workflow automation process and
provides a hub for collaboration, helping invoices get approved in a timely fashion.
Stampli has announced a $50m Series C financing round, led by Insight Partners
with participation from Signalfire and Nextworld Capital. The company processes
over $13bn worth of invoices each year and in early 2020 it launched Direct Pay, its
own payments product that enables customers to pay invoices from inside the
Stampli platform via ACH or check from their own bank accounts.
Figure 135: Stampli AP automation capabilities
Tipalti
Tipalti, a private company founded in 2010, offers end-to-end AP software to
automate the entire supplier payments operation, helping reduce friction in global
B2B payments. Tipalti's aim, according to founder and CEO Chen Amit, is to provide
easy-to-integrate accounts payable services to a base of fast-scaling businesses,
which need AP services to function well but would never consider them core
functions of their businesses in themselves. The company raised $150m last year
in a Series E, led by Durable Capital Partners with participation from Greenoaks
Capital and 01 Advisors, at a valuation of over $2bn. Tipalti's payable automation
solution streamlines all phases of the AP and payment management workflow in
one holistic cloud platform. The company offers top accounts payable automation
software features, including self-service supplier onboarding, invoice automation,
automated invoice approval workflows, multiple payment methods in hundreds of
currencies for global mass vendor payments and bill pay, tax compliance, and fraud
reduction. Tipalti's customer portfolio includes Amazon Twitch, Roku, Zumba,
Medium, Seeking Alpha, Twitter, Toast, GoDaddy, Zola, and Foursquare, among
others.
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Figure 136: Tipalti feature set
HighRadius
HighRadius is an enterprise SaaS company that uses proprietary AI-based systems
to help automate AR and treasury processes on behalf of its more than 600 clients,
including more than 200 of the Forbes Global 2000. HighRadius states that its AR
solution is the first fully AI-powered platform to automate the end-to-end order to
cash process. HighRadius' AR solutions work to unify credit management, billing
& payments, cash application, deductions management, and collections
management into a single business process, allowing finance and AR leaders to
preserve cash and reduce DSO and bad debt. HighRadius also offers treasury
management solutions that help companies achieve streamlined cash
management and accurate cash forecasting. HighRadius AI-powered treasury
solutions enable teams to leverage machine learning to better predict future
outcomes and automate routine, labor-intensive tasks. Furthermore, HighRadius
operates a collaborative B2B network that allows suppliers to digitally connect with
buyers and close the loop from supplier AR processes to buyer AP processes.
HighRadius solutions deliver increased operational efficiency through automation,
accurate cash flow forecasting, optimized cash management, lower DSO, and bad
debt, to help companies achieve strong ROI in a short payback period. Last year,
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HighRadius raised $300m in a Series C funding round led by D1 Capital and Tiger
Global that valued the company at ~$3.1bn, triple the company's valuation in
January 2020.
Figure 137: HighRadius integrated AR benefits
Airbase
Airbase offers three primary software products (bill payments, corporate cards, and
expense reimbursement) designed to replace disparate and complicated legacy
workflows with a single automated spend management platform. Airbase services
provide visibility and control to ensure that company spending is safe, easy, and
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efficient while freeing up time for finance and accounting teams to move away from
rote, administrative work to focus on more value-added work. Airbase's corporate
card offerings (both physical and virtual) help improve client spend controls and
manage spend budgets through a seamless user interface. Airbase's bill payment
services offer a single platform for all payment types and leverage approval routing
and automation rules to process increased transactions without the need for
increased headcount. Airbase also offers employee reimbursement services that
allow employees to take a picture of any out-of-pocket expense receipt, and
automatically scan and populate the expense details in seconds, with funds
deposited directly to a bank account upon approval. In June 2021, Airbase
announced that it had closed a $60m Series B led by Menlo Ventures valuing the
company at over $600m.
Brex
Brex is a FinTech company that offers a corporate credit card to start-ups. Brex
specifically targets early-stage tech companies that need quick and reliable access
to capital while also offering cards to life science, e-commerce, and late-stage and
enterprise companies. Brex generates revenue through a monthly account
subscription, interchange fees, a cashback program, as well as interest on cash
held in its customer accounts. Furthermore, Brex offers bank accounts for business
owners (called Brex Cash) that allow clients to utilize Brex's various expense
management tools for their business. Brex offers a set of features, including
expense management, fraud protection, and instant money transfer, that can be
accessed through web-portals or the company's mobile apps. In April 2021, Brex
disclosed a $425m Series D led by Tiger Global valuing the company at just over
$3bn.
Figure 138: Select Brex customers
Ramp
Ramp, a FinTech start-up, offers a rewards-earning corporate credit card with
expense management and tops it off with spending insights designed to save
customers money. Ramp's basic membership offers a wide suite of features for
small and mid-size companies, including unlimited 1.5% cash back, built-in spend
control and access to more than $175k in partner rewards. Ramp's no-annual-fee
Visa commercial card has no late fees, fx transaction fees or card replacement fees.
Since the start of 2021, Ramp has seen the number of cardholders on its platform
increase by 5x, and >2,000 businesses currently use Ramp as their primary spend
management solution. Ramp's transaction volumes have tripled since April and the
company has seen transaction volume grow ~1,000% Y/Y with revenues growing
a similar amount. In March 2022, Ramp announced a $750m funding round that
now values the company at ~$8.1bn, more than double the company's ~$3.9bn
valuation from this past August. Ramp also recently announced the company's first
acquisition to purchase Buyer, a "negotiation-as-a-service" platform that states it
saves clients an average of ~27% on big-ticket purchases (e.g., annual software
contracts).
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Crypto
BlockFi
BlockfFi was founded by Zac Prince and Flori Marquez in 2017 in order to provide
credit to markets with limited access to financial services. BlockFi attempts to
differentiate itself from other providers by providing competitive rates alongside
the stability of being backed by large institutions. BlockFi is backed by investors
including Coinbase Ventures, SoFi, Fidelity, and Galaxy Digital among others.
BlockFi's latest funding round was a Series D round in March 2021, raising $350m
at a $3bn valuation. The company offers crypto wallets, credit cards with crypto
rewards, crypto trading, loans backed by the borrower's crypto assets and options
to lend cryptocurrencies at high rates. The crypto lending products have brought
BlockFi regulatory scrutiny as the SEC considers them to be securities. In February,
it reached a settlement with the SEC where it paid $100m in penalties for violating
the registration provisions of the Investment Company Act of 1940 regarding the
offers and sales of its retail crypto lending product. BlockFi will bring its business
into compliance with the Investment Company Act and register under the
Securities Act of 1933 the offering and sale of a new lending product. The
company's interest accounts allowed consumers to earn interest payments of up to
9.25%. Under the SEC's ruling, however, they are considered securities as users are
lending currency to the firm. This is part of the SEC's growing interest in
cryptocurrencies, which has seen it extend its enforcement powers to crypto yield
products. There is debate in the industry about which digital assets are to be
considered securities and thus require SEC registration and which are exempt, and
this will require further clarity from regulators.
Chainalysis
Chainalysis is a blockchain data platform company that is most known for helping
governments track crypto crime and fraud. Chainalysis provides data, software and
services to governments, exchanges, FIs, and cybersecurity companies in more
than 60 countries. Its data is used in investigation, compliance and market
intelligence software, with all these capabilities used to help improve the safe
adoption of cryptocurrency. In June, Chainalysis raised $100m in a Series E round,
at a valuation of $4.2bn. The company expects to use the funds to cover more
cryptocurrencies, develop collaborative tools and give direct access to Chainalysis
tools through APIs, allowing government agencies to merge the company-
provided data with others to improve decision making. In March, Cross River
announced it will expand crypto services through partnership with Chainalysis. The
partnership adds Chainalysis' technology to Cross River's infrastructure to help
crypto companies build and grow offerings, leveraging the two companies'
regulatory and compliance expertise. Chainalysis' transaction monitoring tool,
investigation and risk management software will be used in tandem with Cross
River's own technology to help client acquisition.
Kraken
Kraken is a US-based firm founded by Jesse Powell that operates a cryptocurrency
exchange as well as a bank, with the exchange providing trading between crypto
and fiat. Kraken is available in 48 states and 176 countries with 95 cryptocurrencies
available for trading. Founded as a cryptocurrency exchange after Mt. Gox's 2011
security breach, Kraken launched its exchange in 2013, many years before
cryptocurrencies came to wider public attention. In 2017, Kraken acquired
Cryptowatch, a website that charted cryptocurrencies in real time. Today, Kraken is
a crypto exchange that matches orders from crypto buyers with sellers. Offerings
include cryptocurrency futures trading, cryptocurrency indices, margin trading,
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and crypto staking. Kraken has announced it will launch a crypto-focused bank
called Kraken Bank through a Wyoming Special Purpose Depository Institution
(SPDI) charter, allowing it to offer deposits, custody, and fiduciary services for
digital assets. The SPDI charter, according to the company, allows clients to bank
between digital assets and fiat currencies. In March, the American Bankers
Association granted Kraken Bank a routing number, bringing it one step closer to
potentially getting a Federal Reserve Master Account, and full access to US and
global payment rails. However, getting a Fed master account is not guaranteed,
particularly if the Fed deems the business model too risky.
Payments infrastructure
Plaid
Plaid was founded in 2013 and is a financial data network based in San Francisco.
The company focuses specifically on enabling consumers to securely and
conveniently share their financial account information with thousands of apps and
services (e.g., Acorns, Chime, Transferwise, and Venmo). Given that they link bank
accounts with financial and nonfinancial applications, Plaid's tools form an
important part of the promise of Open Banking and Embedded Finance. Plaid has
several products in the market and in the pipeline. The company generates revenue
from FinTechs, leveraging a transaction-based model where it charges a per-click
transaction fee that varies depending on the product. In addition, the company's
revenue model has a multiplier effect, with users connecting to multiple FinTechs
and FinTechs using multiple products. Plaid provides secure connections for ~80%
of the largest US FinTech apps. The company has ~12k bank and financial service
companies across the US, the UK, Canada and Europe, with ~5.5k financial
services built on its platform.
Early in 2020, V agreed to acquire Plaid for $5.3bn, more than double the company's
previous valuation. Following a suit from the Department of Justice alleging that the
proposed merger would limit competition in the payments industry, the two
companies mutually agreed to scrap the deal. Plaid was most recently valued at
$13.4bn as part of its latest $425m funding round, which compares favorably to the
$5.3bn price of the planned sale to Visa that fell through. Plaid grew rapidly through
the pandemic as company service players like Robinhood, COIN, Chime, and AFRM
contributed to strong growth rates. Plaid reached annual revenue of ~$170m in
2020 as the company continues to benefit from being the infrastructure for
FinTechs. Despite the failure of the V deal, and although FinTechs have grown
rapidly in the past few years, the opportunities facing Plaid remain highly
underpenetrated, in our opinion, as the company is attempting to revolutionize
industries and take share from traditional financial institutions. In January 2020,
when the V merger was announced, Plaid held only a single-digit market share in
each of its target verticals, representing ~3.5% of the TAM in North America.
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Figure 139: Plaid growth opportunities in key North American FinTech verticals
Source : Visa/Plaid presentation
Plaid earlier announced a new partnership with SQ to provide streamlined ACH

payment options for merchants, with payments directly debited from bank
accounts at a lower cost to merchants vis-à-vis credit cards (i.e., 1% with a
minimum transaction value of $1). Plaid can link bank accounts directly to payment
portals, allowing merchants to process ACH debits without SQ or the merchant
needing to hold personally sensitive customer data. For SQ, the partnership gives
the company the opportunity to target larger businesses, allowing it to grow above
the SMBs that have historically characterized its base of sellers. For Plaid, the move
represents a shift into creating new payment channels while meeting increased
demand for account-to-account transfers as customers increasingly look to avoid
steep card costs.
In October, Plaid announced an ecosystem of payments partners that intend to

deliver seamless A2A transactions. This is driven by increasing consumer interest
in digital wallets, which is resulting in higher balances held within FinTech apps.
Plaid noted that in 2020 the usage of mobile wallets exceeded cash for in-store
payments for the first time; by 2025, it expects the number of people using digital
wallets to reach 4.4bn, up from 2.6bn in 2020. Plaid's ecosystem includes nearly 50
partner firms in North America and Europe. In the US this includes Dwolla, Galileo,
Silicon Valley Bank, and Square, which integrate Plaid's connectivity technology
into their processing technology for faster and easier bank payments. In the UK and
Europe, Plaid has partnered with Railsbank and Currencycloud to embed Plaid's
Payment Initiation Services to allow companies to both offer and accept open
banking payments. Earlier this year, Plaid announced it will partner with card issuer
Marqeta, which will allow Marqeta's customers to more easily initiate ACH
transactions to send money between customer and external accounts. This
partnership will let MQ's customers verify and link external accounts faster,
simplifying both funding accounts as well as spending. MQ customers can also
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keep users up to date on transfer status with real-time notifications, and deal with
initiation, cancellation and returns better using MQ's APIs.
Finix
Finix provides the payments infrastructure that is powering the secular shift of
companies toward PayFacs and bringing the payments revenue stream in-house.
COVID-19 has served to accelerate the shift, with Finix growing processing
volumes by 450% during the pandemic from 2Q 2019 to 2Q 2020. In addition, the
company has raised ~$100m, the majority in 2020 and early 2021, including from
some of the top payment companies in the market, such as V. Finix is based in San
Francisco, with an office in Chicago and employees spread around the country.
Finix provides significant benefits to companies by allowing them to generate
additional revenue streams and take rates. For example, companies like Toast and
Mindbody make >50% of their revenue from payments, essentially doubling their
opportunity. Other companies have doubled their take rate per transaction from
~25bps to ~50bps by moving from an ISO referral partner to a PayFac. Finix shares
in the upside by charging a licensing fee for usage based on the number of
transactions and merchants brought onto the platform. In addition, the company
has an active inbound and outbound sales force. Finix partners with payment
processors, giving them the opportunity to capture additional volumes from fast-
growing companies. It has a mix of clients across digital online and physical
channels, with exposure to some of the fastest-growing FinTechs and software
companies in the market (e.g., LightSpeed). Finix has highlighted the strong
acceleration to digital payments that is occurring as a result of the pandemic, with
particular strength in e-commerce. We note that Finix expects many of the trends
from the past year to continue, even after the markets fully reopen. For example,
debit has seen significant strength over the past year, mainly due to the increased
shift to digital transactions vs. cash, given health concerns and a more convenient
transaction experience, namely contactless. Furthermore, Finix sees the potential
for a big boom on the horizon for anything related to travel and experience, which
could continue for a while given the significant pent-up demand.
Finix describes payments as the new cloud, believing that the company will see
growth at scale over time, similar to cloud providers like AWS and Azure. The
company has highlighted a ~$2trn payments opportunity that could be on its way
to ~$4trn over the next several years, with SaaS companies likely to make the
biggest impact, representing an addressable market of ~$150bn alone. Software
companies want to own a full stack that is similar to the software they sell, and Finix
has built a solution that caters to their needs. Payment facilitation is a more mature
model in the US market, with many of the companies focused on owning their own
payments experience. Yet, international markets also represent a significant
opportunity, and Finix plans to follow its clients into international countries over
time. For example, Finix has an earlier-than-expected opportunity in Latam, and the
company continues to follow customers to show them where demand is
expanding. Finix typically serves companies that have hit +$100m of annual
volumes, but with the introduction of its Flex solutions, it has been pushing into
smaller companies. The Flex solutions allow merchants to join the platform and get
up and running quickly with less integration. Flex essentially allows merchants to
borrow the PayFac from Finix, and to migrate toward becoming their own PayFac
over time, with Finix managing the migration and data. Finix has leveraged this
model in the past for customers, and it has built a platform approach around the
solution. As a result of Flex, Finix believes it is able to serve smaller companies in the
$50-100m range.
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RailsBank
RailsBank is an open banking and BaaS firm that builds APIs for banking, payment
cards and lending products for a range of businesses. The London-based start-up
believes it is distinct from competitors as it has built much of its own infrastructure,
as implied by the "rails" in its name, while other players are built as software
products that run on the platforms of legacy providers. With RailsBank, non-
financial firms can offer embedded financial services, such as retailers offering
own-branded credit cards, or neobanks building front-end services without the
banking infrastructure. Additionally, unlike peers, RailsBank is a regulated FI and a
card issuing member of the V and MA networks, freeing users from the work of
engaging with legacy infrastructure, operations and risk policies. Earlier last year,
RailsBank raised $70m in a funding round led by Anthos Capital. The company
intends to use the funding to grow its embedded finance offerings in Europe, Asia-
Pacific and North America. Products include BaaS, Cards-as-a-service, and Credit-
as-a-Service. RailsBank sees itself as a platform with newly built infrastructure,
whereas it views competitors as software layers on top of legacy infrastructure.
RailsBank's APIs allow users to build their own-branded debit card rather than a
cobranded one, allowing many companies to offer financial services to their
customers.
TrueLayer
TrueLayer is a London-based start-up that provides payments, payouts, user
account information and verification to neobanks, crypto start-ups, wealth
management apps, e-commerce firms, and gaming platforms. TrueLayer provides
a gateway for applications to connect to FIs. Use cases include CreditLadder, which
uses TrueLayer to view rent payments directly from the bank, in order to create
reports for credit agencies. In e-commerce, firms can leverage TrueLayer to reduce
checkout friction, as shoppers can pay for their purchase in a few clicks with little
data entry, in the company's checkout flows, in addition to simplifying refunds,
boosting conversion rates, and reducing fraud and chargebacks. In September,
TrueLayer reached unicorn status with $130m funding at a $1bn valuation in a
round led by Tiger Management, and with the participation of Stripe. The company
intends to use the funds to scale its open banking technology to allow open
payments as well as instant and recurring direct-to-account payments globally.
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Appendix 1
Important Disclosures
*Other information available upon request
*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local
exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies,
and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary
subject of this research, please see the most recently published company report or visit our global disclosure look-up page on
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Investors are strongly encouraged to review this information before investing.
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject
issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any
compensation for providing a specific recommendation or view in this report. Bryan Keane.
Equity Rating Key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-holder

return (TSR = percentage change in share price from current
price to projected target price plus pro-jected dividend yield ) ,
we recommend that investors buy the stock.
Sell: Based on a current 12-month view of total share-holder
return, we recommend that investors sell the stock.
Hold: We take a neutral view on the stock 12-months out and,
based on this time horizon, do not recommend either a Buy or
Sell.
Newly issued research recommendations and target prices

supersede previously published research.
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FITT
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DeutscheBank FITTThePandemic'sLastingTrendsintheNewFinTechWorld Apr 21 2022

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Deutsche Bank

North America Industry Date

The Pandemic's Lasting Trends in the

Nate Svensson, CFA

Source : DB Image Gallery

F.I.T.T. for investors

Deutsche Bank Securities Inc.

Deutsche Bank Securities Inc. Page 1

North America Industry Date

The Pandemic's Lasting Trends in the

Embedded finance platform taking form Nate Svensson, CFA

Bringing the sale to the merchant and owning the network

Deutsche Bank Securities Inc.

Higher inflows drive cross-selling opportunity

Optimizing product pricing to accelerate ROI and RPU

Deutsche Bank Securities Inc. Page 3

Top 20 FinTech Trends Outlasting the Pandemic................7

Moving Beyond Payments into Embedded Finance ......... 14

RTP Use Cases Expanding Rapidly...................................27

Opportunities and Threats in Open Banking.....................57

Latest Developments in BNPL..........................................79

Page 4 Deutsche Bank Securities Inc.

Merchant Acquiring in the Spotlight ................................ 98

Leveraging Crypto Interest to Drive Engagement...........106

Survey Shows Increased Focus on Engagement............116

B2B Payments Accelerating Post Pandemic...................139

Evolving Regulatory Landscape ..................................... 181

Deutsche Bank Securities Inc. Page 5

Monitoring Cross-Border Travel......................................184

Tracking Trends in Retail Sales and eComm...................187

Monitoring Consumer Credit..........................................196

Keeping an Eye on Private FinTech Growth .................... 198

Page 6 Deutsche Bank Securities Inc.

Top 20 FinTech Trends

1) Embedded finance enabling consumer experiences

2) Focused on bringing the consumer to the merchant

Deutsche Bank Securities Inc. Page 7

3) Expanding ARPU by monetizing new products and inflows

4) Supplementing growth with M&A cross-selling opportunities

5) Brand recognition drives pricing power

Page 8 Deutsche Bank Securities Inc.

6) Focused on lowering CAC

7) Networks positioned in RTP to drive growth

8) Data services opening opportunities in open banking

9) BNPL adoption increasing rapidly

Deutsche Bank Securities Inc. Page 9

wallets, leveraging attractive pricing, which we estimate at a ~3.5-4% gross take

10) Hybrid solutions provide flexibility in payments

11) Differentiating between a FinTech and a financial

12) Monitoring credit risks and the impact of higher rates

Page 10 Deutsche Bank Securities Inc.

increasing interest rates in Brazil to combat inflation. On a positive note, PAGS is

13) Merchant acquiring growth remains steady

14) Crypto driving significant engagement benefits

15) Engaging consumers in new omni-channel experiences

16) Tap-to-pay driving incremental digital penetration

Deutsche Bank Securities Inc. Page 11

to the convenience provided by tap-to-pay (e.g., transit). Furthermore, FinTechs are

17) B2B payments seeing accelerating demand

18) B2B take rates to rise

19) Apple Pay expanding and bringing payments in-house

Page 12 Deutsche Bank Securities Inc.

20) Monitoring banks and Zelle plans