{"id":13014,"date":"2024-03-01T16:03:01","date_gmt":"2024-03-01T16:03:01","guid":{"rendered":"https:\/\/fortispay.com\/payments-market-the-great-restoration\/"},"modified":"2024-03-01T16:03:01","modified_gmt":"2024-03-01T16:03:01","slug":"payments-market-the-great-restoration","status":"publish","type":"post","link":"https:\/\/fortispay.com\/payments-market-the-great-restoration\/","title":{"rendered":"Payments Market – The Great Restoration\u00a0"},"content":{"rendered":"\n

After decades of hypergrowth investment, payment and financial technology companies have entered a new era. Super-sized valuations, irrational business models, and free flowing investment funnels are in the rear-view mirror and\u202fnot all organizations are ready to pick up the pieces and build sustainable, profitable, growing businesses.\u202f In fact, some businesses may not have a real shot at success given their business models, management, or capitalization structures.<\/p>\n\n\n\n

The past two years have been devastating for valuations in the payments and financial technology market.\u202fEven the fastest growing, highly-coveted, disruptive organizations have seen their valuations drop 50% from their highs in the early part of this decade (Adyen:\u202f$1500, high $2500; Affirm: $50, high $150; Shopify: $80, high $150). Scaled incumbent payments businesses are experiencing valuations at multiple lows not seen since 2009:\u00a0 EV\/EBITDA: FISV – 12.0x, FOUR – 11.5x, GPN – 10.5x, Nuvei – 8.5x, RePay – 7.5x (multiples and valuations based on early 2024 reporting).<\/p>\n\n\n\n

Payments and fintech businesses are following general market trends that began a correction when interest rates started to rise in early 2022.\u202fLooking ahead to 2024, most experts believe we will not see further increases in interest rates. However, we may never return to the low interest rates of Q4 2021, and there is increased regulatory scrutiny on mergers (Adobe walking away from its $20 billion acquisition of startup Figma Inc. after clashing with regulators in Europe and the UK) and general investment sentiment in financial technology has soured. This means public multiples are unlikely to revert to 2021 levels anytime soon. What many don\u2019t understand is that private investors benchmark from public multiples, and market dynamics (interest rates, growth, access to credit, etc.) don\u2019t just affect public markets; they affect private markets as well.<\/p>\n\n\n\n

Private equity and venture funds have had massive fundraising challenges.\u202fAccording to the Wall Street Journal, private-equity firms are preparing for an extended period of lean fundraising, with little indication that 2024 will be better for raising money than in the past year.\u202fPrivate equity fundraising was down 57.4% during the first half of 2023 at the top publicly traded firms, according to PitchBook.\u202fThe toughest period for private equity fundraising since at least the 2007-09 financial crisis is likely to continue, as investors remain hesitant to invest more in the asset class. Those with capital are being very selective in their allocations. Venture equity isn\u2019t any better. According to Ernst & Young, venture capital fund formation is off significantly from a record year in 2022, dropping 62% in 2023.\u202f Furthermore, EY reports the 2023 venture capital market saw a 35% year-over-year decrease in investment dollars from 2022, the lowest level in four years.\u202fVenture capital backed startups raised just over $140 billion last year, and if not for several mega-deals fueled by artificial intelligence (AI), the venture capital market would have struggled to top $100 billion. This year may record a sub $100 billion year and deal with an overhang of more than 50,000 existing venture capital backed startups, which need to sort out high valuations and low liquidity.<\/p>\n\n\n\n

So what\u2019s next?<\/h2>\n\n\n\n

Just like the days, months and years after a hurricane \u2013 it\u2019s time for the great restoration period. The weaker homes and businesses are wiped away, structures with solid foundations clean their yards and mend their fences,\u202fand go forward with a renewed respect for their infrastructure. Replacement homes are built to new and updated codes, and fortified to withstand the demands of the new world.<\/p>\n\n\n\n

We have seen scaled incumbents shut down or shed non-core assets.\u202fIn the payments world, Chase has all but shut down WePay as reported by The Information on January 10 (\u201cJPMorgan’s WePay Abruptly Dumps Business Customers \u201c). Similarly, FIS divested WorldPay at a valuation of $17.5 billion, a far cry from the $35 billion it was valued at just four years earlier.\u202fWe have seen venture growth-backed future-stars literally dissolve, as TILL, once valued at $350M,\u202fsold to Nuvei for $30.5M after they were unable to keep the doors open. Similarly, Plastiq, after a failed attempt to go public via SPAC, filed bankruptcy and was picked up by Priority Payments. Many of the high-flying SPAC companies have reversed course and gone private at reduced valuations from their post-SPAC highs (e.g., BillTrust goes private at $9.50 per share; all time high of $19; Engage Smart goes private at $23 per share; all time high of $38). Even Stripe, after seeing their value drop by 50% (Stripe slashes valuation to $50 billion in new $6.5 billion funding round in 2023; Stripe had raised capital at $95B two years earlier), has changed its business and pricing models to expedite it\u2019s path to profitability (November 2022, manually entered transaction fees were increased by 50 basis points; October 2023, currency conversion fees are no longer reversed for refunds); and according to Alternative Payments Baxter Lanius\u2019 January LinkedIn post highlighting Stripe\u2019s business changes of:\u202f\u2018price increases, renegotiation of terms and a move upmarket\u2019.<\/p>\n\n\n\n

Similarly, on the back of higher costs of capital and increased regulatory scrutiny, San Francisco-based Affirm adjusted its own go-to-market plans, doing more interest-bearing, longer-term installment loan volume than shorter-term, fee-free lending. And its interest rate on the former could be as high as 36%. Pay-in-4 loans made up 19% of Affirm’s gross merchandise volume for the fiscal year that ended June 30, according to the company\u2019s annual filing with the Securities and Exchange Commission.<\/p>\n\n\n\n

We are only in the first period of this Great Restructuring, so what is in store for the next 12 \u2013 18 months:<\/p>\n\n\n\n