What comes next for payments in 2023?

Payment industry acquisitions last year amounted to a whimper, compared to the roars seen in recent years.

The value of payments deals plummeted to $27.2 billion, or about a third of the $76.7 billion in transactions in 2021, according to The Strawhecker Group, an Omaha-based industry consulting firm. The number of acquisitions last year also declined, by 14% to 113, from 132 in 2021, underscoring the smaller size of transactions in 2022.

Economic conditions were the culprit when it came to the blame game for why there wasn’t more merger and acquisition activity in the industry last year, said TSG’s Zach Spellman, who is a project manager at the firm. Higher interest rates threatened to increase debt burdens for companies in buyouts and a looming recession also raised the specter of increased difficulty in digesting deals, he noted.

Generally, companies and investment firms are also less interested in exchanging cash for more risk at the moment, given the economic conditions, Spellman explained. “I think it really just reflects in 2022 people taking less risks,” Spellman said in an interview this week.

The M&A slowdown in payments also echoed a broader downdraft for deals across business, particularly in the second half of the year. Overall, there were about 53,863 transactions worth $3.6 trillion in 2022, The New York Times reported, citing the research firm Refinitiv. While that value is far below the $5.7 trillion worth of deals in 2021, it’s not far off the annual totals in the prior six years, the newspaper reported, pointing to a “normalization” last year.

While the number of deals being done has been somewhat similarly steady in the payments realm, the value of those transactions has fluctuated significantly in recent years. In 2020, 125 payments deals totaled $99.5 billion, but in 2019 there were 113 purchases with a whopping value of $169 billion, largely due to three mega-mergers by Fidelity National Information Services, known as FIS, as well as Fiserv and Global Payments, according to TSG.

Big 2022 deals

In payments, the two biggest deals of the year were Thoma Bravo’s agreement last month to buy the privately held expense management player Coupa Software for $8 billion, and the earlier $4 billion Global Payments bid to purchase EVO Payments to expand in Europe and the business-to-business payments arena.

While Coupa largely relies on third-party payments partners, including digital payments mega-unicorn Stripe, it’s a major player in the business-to-business expense management arena that is often considered a part of payments.

Jack Henry & Associates CEO David Foss provided some insights on the merger and acquisition slowdown when he spoke at an investor conference last month. His company, which he refers to as a “serial acquirer,” had expected to get busy buying in the market early last year, but was surprised when prices for targeted acquisitions were not dropping as much as expected in the stressed economy. Venture investments kept flowing into companies and supporting their valuations, he explained.

He said he thought that “by October deals were going to be happening and valuations would kind of settle in and people would find religion as far as what they thought their company was really worth,” Foss said at the Dec. 6 Nasdaq conference. “None of that has happened. Everybody still has their expectations sky-high as far as valuation.”

Nonetheless, Foss said he’s now counting on 2023 to be the year that those opportunities emerge, as venture investments ebb. Last year, the payments technology provider acquired Payrailz, but Foss called that a “little” deal and noted it’s the only one Jack Henry has done in three years.

“Early next calendar year, mid next calendar year, we think there will be some opportunities for us to pursue and so we're anxious to try and find some deals,” he said last month. “We don't require acquisitions to fuel growth, but it would be nice, I think, to find a deal or two.”

Activist investor, private equity interest

At Jack Henry’s larger competitors, some M&A activity this year could be spurred by activist investors who have recently targeted FIS. That company said in December that it’s undertaking a “comprehensive” review of operations, after disclosing that it has entered conversations with the hedge fund D.E. Shaw and the investment firm JANA Partners. Their influence could lead to divestitures.

Still, FIS and its rival Fiserv, which have formerly been acquisitive, could revive their purchasing power, too, especially given rising competition. Those large payment processors will “become increasingly active” as they seek to compete with fintech upstarts Stripe and Adyen by snapping up more modern capabilities, predicts Jordan McKee, principal research analyst at S&P Global Market Intelligence’s 451 Research. The card networks, too, tend to be pretty consistent buyers, as they aim to diversify and move beyond the card arena, he added.

And with the stock prices of some companies down in recent years, including that of digital payments pioneer PayPal, targets can begin to look attractive to private equity firms carrying cash. Last year, private equity firms made significant acquisitions in the industry, including Madison Dearborn Partners agreeing to scoop up publicly-traded money transfer company MoneyGram for $1.8 billion in February. The Thoma Bravo deal to buy Coupa unfolded after reported talks with Vista Equity put the software company in play.

Private equity firms are likely to make a return to payments and fintech M&A, McKee said. “They had a seat at the table over the past few years in a lot of deals, but they were, quite simply, just priced out of those deals by companies that were willing to hand over significant multiples to make acquisitions,” he said. “Now that valuations have come back down to earth, I think you’ll see more private equity in the space.”

Spellman also expects there will be more payments interest in software deals this year, particularly in buying independent software vendors that cater to businesses in a particular industry vertical, such as education, salons or construction. 

Shift4, a payments player that specializes in restaurant, hospitality, sports stadium and casino industries, was particularly acquisitive in 2022 with several purchases during the year, including some that allowed it to expand internationally.

One instance where a deal fell apart last year, with buy now-pay later players Zip and Sezzle agreeing to drop their merger plan, Spellman said was more a sign of BNPL mania waning than anything in particular about the payments segment. 

Last year “was a little bit quiet,” but given funding challenges payments companies have faced, McKee expects there will be “a large number of fintechs that just don’t have the runway to make it through 2023.” M&A is a likely way “that we see those subscale fintechs exit the market, being on the block and having a larger player come and swallow them up,” McKee said.  

Innovation in payments will charge ahead in 2023, though not in the same way it has in the past few years. With venture capital firms tightening purse strings and startups floundering, legacy players are likely to pick off some industry small fry.

Meanwhile, other fintechs may close down amid challenging economic conditions, including rising borrowing costs and the threat of a recession.

One new payments area primed to advance in any case is embedded finance, and specifically embedded payments — the practice of bundling payments with a service or product in a seamless sort of way. Companies across the spectrum are considering ways they can employ such tools and they’re likely to move beyond consumer uses to corporate applications as well.

The arrival of FedNow, the Federal Reserve’s real-time payments system, is also expected to spur not only more efficient payments, but also new rails for developing services and inspiring more startups in the industry.

While buy now-pay later mania has cooled since the COVID-19 pandemic fueled online use, it will continue to be a hot theme in the industry as it adjusts to in-store use and new regulations in the offing for 2023.

Meanwhile, regulators won’t be the only ones keeping an eye on consumer safety. Lawmakers and payments companies alike will join in a campaign to beef up cybersecurity in the arena amid the rise of digital payments.

FedNow on the way

There are high expectations for FedNow’s launch, which could come as early as May, with industry participants wagering it will super-charge the use of faster payments in the U.S. and spur innovations.

The new national system allowing payments of up to $500,000 to be made in seconds on any day and at any time may also allow the U.S. to catch up with other countries already speeding ahead with the technology.

The system will build on an existing private sector real-time payments network, RTP, begun by bank-owned The Clearing House in 2017. While RTP roped its big bank owners into the real-time fold, FedNow is aimed at luring more small- and mid-sized banks.

“In 2023, in the U.S., real-time payments will start becoming real,” said Sanjay Gupta, who heads the biller segment at payments company ACI Worldwide. Instant payments have been transformational in other countries, he explained. Now, U.S. companies, including ACI, are ready to make use of real-time payments too, Gupta said in an interview last week. 

More banks using real-time systems will mean more U.S. businesses have access to those services through their financial institutions and can increase the efficiency of their payments. 

As more companies adopt real-time payments, it will allow them to upgrade other aspects of their payments and finance infrastructure, Modern Treasury CEO Dimitri Dadiomov said in an interview this week.

While the service might seem pricey relative to automated, or ACH, payments, it’s less expensive than wire transfers and more efficient than check-writing, Dadiomov noted. Plus, over time as FedNow, The Clearing House and banks compete for real-time customers, the prices will move lower.

“All in all, I think it's going to be a pretty significant, if not the dominant type [of payment], in a couple of years,” he said of real-time payments. “I don't really think of cost as a big obstacle.”

Eventually, digital requests for payment are likely be a bigger part of the real-time realm too, Dadiomov said. RTP has “been kind of like a send-only way of using it,” Dadiomov said.

Needless to say, the rise of digital payments is also likely to boost business-to-business payments as companies realize the benefits of faster payments, especially in a high-interest-rate environment that increases the importance of holding money, Dadiomov said. Instant payments can also increase cost savings.

“Given the market environment, the main priority for people is efficiency,” Dadiomov said. Payments and operations in the office of the chief financial officer are key places where they can increase those efficiencies, he explained. 

Eventually, real-time payments will also improve cross-border payments, but that won’t happen this year, according to Dadiomov. 

Funding challenges won’t slow competition

Startup competition is unlikely to let up, even as funding becomes harder to secure. It will favor some areas over others though, with more interest in business-to-business (B2B) or infrastructure concepts, and less in consumer or cryptocurrency, payments players said.

Fintech infrastructure companies “will be in vogue,” said Sunil Singh, CEO and founder of card issuance fintech Tallied. “There’s still a lot of different parts of the economy that can benefit from, sort of, a technology upgrade.” 

Embedded finance and cross-border e-commerce hold promise this year, said Rob Anderson, a partner with San Francisco-based venture firm FTV Capital.

Startups have become more accepting of current valuations and a tougher economic climate, he said. “I think you’re starting to see that now flow through in people’s mindsets for 2023,” he said. 

Money is still there for early-stage fintechs, said Jordan McKee, a principal research analyst with 451 Research, part of S&P Global Market Intelligence. “The challenge is for those fintechs that are more mature,” and looking for significant funding, around $100 million-plus, McKee said. That’s where investors have become more skeptical, in terms of plans for profitability and scale.

Given venture capitalists’ pullback, collaboration between fintech startups and larger companies may accelerate in 2023, said Tom Zschach, the chief innovation officer at international financial message firm Swift.

After a period of so much capital and too many competing ideas, some startups will drop off too, he said. “But it also makes the survivors a lot stronger, and more focused, and they're going to have to create value faster,” he added.

Embedded payments on the rise

Consulting firm Bain & Company has projected the transaction value of embedded finance will reach $7 trillion by 2026. “We are seeing a big focus on embedded finance” this year, said Jodie Kelley, CEO of trade group the Electronic Transactions Association, in an email.  

A host of fintechs are pouncing on the opportunity to sell embedded financial services to software companies that haven’t monetized payments, said Maast CEO Tom Bell. Maast is a subsidiary of Synovus Bank, which sells banking and payments services to software providers. 

Investors have been attracted to embedded finance even as capital has become less plentiful. That’s because such businesses are able to scale without the capital a consumer-focused fintech might need, McKee said. 

“It's not about acquiring users one by one by one,” McKee said. “It's about selling into a large platform or a large technology company in accessing all of their customers through one relationship.”

Increasingly, the business-to-business realm is being drawn into the trend. Embedded payments has focused mainly on bundling products and services with payments for consumer use, but will move into a 2.0 stage where it picks up speed with respect to back-office business payments, said Extend CEO Andrew Jamison.

The next iteration of embedded payments is going to start to permeate business use of software like Intuit's Quickbooks and German software provider SAP payments, Jamison predicted.

BNPL matures under new pressures

Buy now-pay later will experience growing pains this year, as the industry faces shopping shifts, debt-saddled consumers and potential regulation. 

The installment payment providers, such as San Francisco-based Affirm, Sweden’s Klarna, Block-owned Afterpay, Australian Zip and Minneapolis-based Sezzle, are tightening underwriting as inflation bears down on consumers. 

They’re also grappling with investors pressing for profits over growth, and bracing for regulation following last year’s Consumer Financial Protection Bureau report on the industry.

Regulators are “behind the eight ball” when it comes to BNPL, said Capco Managing Principal Daniela Hawkins, but it’s under scrutiny now, as they realize consumers who struggle with debt management may overextend themselves.

Hawkins said she’s watching to see when interest rates and rising debt levels prompt consumers to cut spending, and how that will affect products like BNPL. “Will they fall out of favor, because the amount of consumer debt has become challenging?” she said.

Additionally, BNPL companies that benefited from the e-commerce surge are scrambling to beef up their brick-and-mortar usability with the return to in-person shopping.

“These players are going to have to figure out how to be easy to use in physical locations, otherwise they’ll find themselves stuck in digital channels,” said Jason Barro, founder of Bain & Company’s NPS Prism, a customer experience benchmarking service.  

BNPL’s quick maturity suggests it filled a need in the marketplace, but Aite-Novarica strategic adviser Thad Peterson and other payments consultants expect 2023 will bring attrition among BNPL providers. That’s likely to lead to consolidation in the industry, with some companies bought by others.

Deal-making revs up

Acquisitions are widely expected to increase in the payments industry this year as difficult economic conditions and less available venture capital lead to lower, more attractive price tags for businesses. 

In the first 10 days of 2023, one acquisition has already been announced with the Canadian company Nuvei saying it will purchase Atlanta-based payments integrator Paya for $1.3 billion. 

Also, Florida-based payments software company ACI Worldwide is reportedly considering a sale, according to news outlet Bloomberg.

Deals are likely to crop up across the payments landscape, among big and small players alike, and won’t necessarily lead to consolidation because some large companies may be on the cusp of divestitures too.

Investors owning shares in the mega payments processors Fidelity National Information Services and Fiserv are pressuring those companies to consider divestitures that could lead them to break off chunks of their businesses. The companies have declined to comment on those possibilities.

Large incumbents and private equity firms still have plenty of capital for acquisitions, even if smaller fintechs don’t, and that will drive an increase in deal-making this year, said Jamison, whose company sells virtual card and expense management software services. 

“Opportunities will arise for M&A to actually accelerate because there's still plenty of money out there in the ecosystem,” Jamison said. ”There's going to be some good technology out there available to purchase because a lot of fintechs will start to run out of capital,”

Young fintechs that find it difficult to raise their next round of capital may suddenly find themselves thinking about a sale, with larger peers waiting in the wings to snap up talent, technology and intellectual property. 

Jack Henry & Associates CEO David Foss has said his company is eager to make acquisitions once prices come down. Digital payments behemoth PayPal may also become acquisitive as activist investors push the company to jump-start financial results, Truist Securities analysts suggested in a report last week.

Beating back bad actors

With digital payments on the rise across all sorts of rails, from real-time to B2B to peer-to-peer, fraudsters and other criminals follow the money trail.

That’s why cybersecurity is likely to be an important trend this year too, as payments companies seek to prevent fraud and protect their customers. It’s not just companies taking up defenses. Regulators and lawmakers are seeking to increase safeguards too, especially in light of the FTX crypto exchange collapse.

“Cybersecurity is the area where people are going to continue to double down,” Jamison said.

There has been a proliferation of companies selling software and services for payments protection, from digital identity verification companies, such as Socure, and chargeback fraud prevention firms, including Chargebacks911.

The industry’s efforts to combat fraud have paid off, with card fraud declining for instance, but cybercriminals are evolving too.

“The people who are nefarious actors are becoming more and more sophisticated, using phishing, social phishing, a variety of things, taking over accounts,” Gupta said. “The area of security is an important theme, but I think it's becoming even more important this year.” 

Some payments players and software companies, including tech giant Google, have been advocating a move away from passwords to biometrics for years as a way to fight back. Nonetheless, biometrics as a payments method appears to be one would-be trend that won’t take off this year.

Rapid changes in the payments space have given regulators and legislators plenty to focus on, and this year, that’s likely to include buy now, pay later, peer-to-peer payment fraud and swipe fees.

“There’s just much more activity and concern about these payments issues than has been true maybe at any other time,” said Doug Kantor, general counsel for the National Association of Convenience Stores.

Recent actions, including the Federal Reserve’s debit rule clarification and the Federal Trade Commission ordering Mastercard to stop blocking merchants’ use of competing debit networks, suggest the payments industry faces more regulatory scrutiny than ever before. Kantor noted it’s rare that such industry events involving different federal entities would occur within months of each other.

Issues such as open banking, privacy and data issues and cryptocurrency also are expected to draw regulatory attention in the coming months. That’s against a backdrop in which Consumer Financial Protection Bureau Director Rohit Chopra has taken an interest in payments; the Biden administration is pursuing antitrust concerns; and a new chairman of the House Financial Services Committee, Patrick McHenry, (R-NC), has taken control of a powerful committee overseeing fintech and payments issues. The Senate remains under Democratic control.

Buy now, pay later

The CFPB’s inquiry with respect to the five biggest BNPL players and its subsequent report in September 2022 showed the agency is considering new rules directed at the installment trend, to ensure BNPL providers are adhering to laws that apply to credit card companies.

“The CFPB certainly seems motivated to bring BNPL under the regulatory umbrella that currently exists for similar products,” said Ed deHaan, professor at the University of Washington’s Foster School of Business.

Potential new BNPL guidelines could include disclosure requirements on the transactions, in an effort to increase transparency for consumers, attorneys and academics said. 

Michael Guerrero, a partner at law firm Ballard Spahr, also expects the CFPB might impose dispute protections for users, potentially looking at what’s provided to credit cardholders “as a guidepost,” as well as requirements for reviewing a borrower’s ability to pay and reasonable penalty fees.       

On that front, Affirm, the largest independent BNPL provider in the U.S., just this month gave the agency new reason to increase scrutiny. A “technical” snafu at Affirm last week led to erroneous, duplicative charges for some of the company’s customers on their installment loans, triggering overdraft fees in some cases from some banks.

Since the CFPB has expressed concern with loan stacking, deHaan said he expects the bureau to push BNPL providers to submit information to credit reporting agencies.

Although credit bureaus seem eager to take information from BNPL providers, few are reporting to the credit bureaus, said deHaan, who has conducted research on BNPL.

“That’s a major oversight in the industry,” he said. He expects that to be a significant regulatory shift this year. Spokespeople for credit reporting agencies Equifax, Experian and TransUnion didn’t immediately respond to requests for comment on the status of current BNPL loan reporting, but some have previously said they’re seeking to adapt their services to take the young industry into account. 

The regulatory response to BNPL could still be taking shape, as the CFPB keeps a close eye on consumers’ ability to repay loans. Some academics have warned that consumers could find themselves in a “debt spiral.”

“The size of the problem – which I think is very much undetermined – is going to drive the size of the regulatory reaction, and the form of the regulatory reaction,” said Jeff Naimon, partner at law firm Buckley.

Swipe fees

Although Sen. Dick Durbin (D-IL) has said he will reintroduce the Credit Card Competition Act of 2022 this year, some industry observers are skeptical it will pass, given Republicans taking control of the House this year.

“With the change in control of Congress, I don’t know if there’s going to be an appetite to reintroduce that bill," said Capco Managing Principal Daniela Hawkins.

The legislation, which seeks to inject more competition into an industry dominated by Visa and Mastercard, falls in line with the Biden administration’s focus of curbing market power in certain industries. 

Leaders of industry-friendly trade groups, including the Electronic Transactions Association and the Electronic Payments Coalition, expect the House of Representatives and its new Republican majority will be less receptive to the idea than the last Congress.

The legislation has spurred “grassroots” pushback due to the potential threat to credit card rewards, argued EPC Chairman Jeff Tassey. Once new members understand the legislation, which failed to gain traction in the last Congress, “we feel that the outcome will be the same,” Tassey said.

Backers of the bill contend it’s a bipartisan concern that Durbin and his cosponsor from last year, Sen. Roger Marshall (R-KS), will still be able to move forward. 

“It’s a new Congress where there’s a lot of potential avenues, legislatively,” said Kantor, who is also an executive committee member for the trade group Merchants Payments Coalition. Last year, “the menu of what was going to occur was much more limited.”

Questions remain around the technological aspect of what the legislation seeks to mandate, including for potential new entrants – like debit networks such as NYCE, Star, Accel, Pulse and Shazam – as they seek to become viable alternatives to Visa and Mastercard. If it passes, consultants said, it’s likely to have a major impact on credit card issuers, acquirers and the card network companies.

Peer-to-peer payment fraud 

Democratic Sen. Elizabeth Warren’s crusade against peer-to-peer payment fraud on Zelle has sparked debate about authorized and unauthorized transactions, and who is liable for fraud when users have been scammed. 

In October, Warren called on the CFPB to amend Regulation E of the Electronic Fund Transfer Act to enhance consumer protection as it relates to peer-to-peer payment platforms. A spokesperson for Warren’s office didn’t immediately respond to a request for comment.

The issue has clearly captured Chopra’s attention, payments players said. ETA CEO Jodie Kelley said her discussions with Chopra on the topic have focused on the degree to which liability can be imposed for authorized transactions that users say they were duped into making.

Payments attorneys expect the CFPB will issue guidance on that front later this year. The bureau seems to be focused on the types of services, such as Zelle, “that purport to not be subject to the Electronic Funds Transfer Act,” Guerrero said. 

The agency may expand on the definition of “unauthorized,” as it relates to electronic fund transfers, the attorney said. It may also revisit regulatory interpretations for the device through which fraud occurs, he added.

Ultimately, the CFPB’s moves could be inadequate though, and Congress may need to take up the P2P issues for a more thoughtful approach, Naimon argued.