Investment Tracker | December 11 – 17

Adyen And The Changing Face Of Cross-Border Payment

Christmas, it seems, has come early for global payments technology company Adyen this year. The Amsterdam-based business announced a $250 million funding round Tuesday (December 16), led by global growth equity investor General Atlantic, (with participation from Temasek, Index Ventures and Felicis Ventures). The new funding round pushes the start-up’s value up to a cool $1.5 billion and into the big leagues with incumbent processing players such as Chase Paymentech and First Data.

This isn’t the first big play in the cross-border space in 2014. Indeed, the space has been quite active. In September, the Ingenico Group finalized its billion-dollar plus acquisition of Global Collect. And about a month later, cross-border payment firm Digital River announced it was walking away from Wall Street in favor of being privately acquired by an investor group led by Siris Capital Group for $840 million.

The interest in cross border is simple. Enabling merchants to sell their goods to a rapidly globalizing consumer-base—a task made more accessible thanks to the rapid diffusion of mobile devices—is big business and getting bigger by the day. It’s also an area that Ayden’s lead investor, global growth equity investor General Atlantic, has been watching for quite some time. GA Principal Aaron Goldman stopped by to talk to MPD CEO Karen Webster about their big investment, what Ayden has to offer and the shape of things to come in the big wide world of cross-border trade.

So why GA’s big bet on Ayden?

“These guys seem to be doing it the very best,” Goldman told Webster.

He went on to clarify that though GA has been involved in the global payments space for many years, Ayden is unique in its approach to solving the cross-border conundrum for its clients.

“Many of their [competitor’s] solutions are much closer to legacy platforms, kluges of legacy platforms or built atop legacy technologies. The thing that impressed us about Adyen is that it is a built-from-the-ground-up single platform that can process multiple currencies, multiple payment types offline and online – and that they’re doing it for four of the five largest internet companies in the world.”

Some of those impressive clients includes Facebook, Airbnb, Spotify and about 3,500 others worldwide. Adyen allows merchants to accept payments from nearly every country in the world and in 187 currencies, as well as through payment services like Apple Pay and Alipay. The point, Goldman said, is to make the payment part of a transaction a background detail for the merchant that it doesn’t have to sweat over.

“At the end of the day, all merchants want to do is sell more of their products to more people,” Goldman told Webster. “Their business is not about figuring out a way for someone to pay them for something. Their business is about having better products, or having products at a lower price or having different products –whatever their business model is.”

Goldman went on to illustrate that point with an example–a hypothetical haberdasher with a global client base.

“Let’s say a merchant in the UK makes the most beautiful fur hats in the world,” Goldman said. “She doesn’t want to have to worry about what ‘iDEAL’ is in the Netherlands is – all she wants to be able to say is, ‘Gee, there seems to be a lot of people in the Netherlands coming to my site who want to buy my hats. I don’t want half of them not to be able to buy because I don’t accept their most preferred payments method.’”

And, as Goldman pointed out, providing that preferred payment method isn’t always easy or straightforward. Or at least it hasn’t been in the past–though he said that Adyen, with its unified platform, is making those payment choices a lot more seamless and, thus, more accessible to merchants.

“Adyen has really operated from the starting point that this should literally be like flipping a switch. Adding another payment type or adding additional geographies should be very, very simple to the merchant,” Goldman remarked.

But when asked by Webster why this is even a problem in the first place for merchants, Goldman suggested that the world went flat, commerce-wise, at a much faster rate than legacy technology has been able to keep pace.

“At the end of the day, many of the [processing] systems are old and they have quirks to them – figuring out those quirks can drive value for merchants.”

And, as it turns out, that’s a pretty big value proposition both for Adyen and for merchants because Ayden’s ability to leverage its single platform means that merchants get connected more easily, which means that more transactions are approved. And that means more sales for the merchant.

Adyen “is very focused on the optimization of transaction approval rates,” Goldman said. “And because they have a single, unified platform, I believe they have demonstrated they can optimize things other players cannot. Merchants have told us that switching to Ayden has helped them sell more.”

Because, at the end of the day, “selling more products” is what it’s all about for merchants and the products for sale is changing by the minute. Services – like cab rides or “bnb stays” – used to be the archetypal “real world” transactions where one paid when they arrived. Now, with the dawn of internet-based players like Uber and Airbnb, those increasingly e-commerce transactions need to be handled accordingly.

“Part of what got us excited here is that the market overall is growing very, very quickly. The market for online payments and cross border payments is growing at speeds that continue to surprise people.”

And delight investors. At least that’s the hope.

Alternative Lending: A Closer Look

Last week we wrote about the banner year 2014 has been for deals in the banking sector, with $25B in activity (so far). However, for all the things banks have been doing this year, what banks are avoiding has also been apparent. In the wake of the 2008 financial crisis, banks started to sell their bad assets and to reduce their balance sheets. Many banks stopped lending to “riskier” prospects, which created a whole new alternative lending marketplace.

According to the Lending Club IPO prospectus that market is large, growing and unserved by the traditional banking sector. Companies looking for small loans are simply not attractive to traditional lenders, given the fixed costs associated with risk assessment and due diligence. While these businesses may be able to use credit cards as an alternate means of financing, it’s a solution that comes with high costs such as high interest, and may not always be practical.

However, where there is a problem in payments, there’s almost always a technolgoist wating in the wings with a better solution – in this case, connecting borrowers in need with willing lenders.

Particularly skilled at integrating into mainstream lending during the last couple of years have been the P2P lending operations and crowdfunding startups which allow the problem of finding funding to be aggregated across a large crowd of likeminded enthusiasts around the world.

PYMNTS took a look at the data regarding investments – VC funding, private placements, IPOs, M&As, etc. – in the alternative lending space (excluding banking). On one side, we followed trade finance companies, broadly defined as financial institutions which lend – or help in the business of lending – to firms. On the other, we gathered data on these nascent lenders: P2P and Alternative Finance players.

So far in 2014, new players in the alternative lending space has taken in just under $7 billion. Of that total, one deal – the acquisition of Lindorff by Nordic Capital – at around the halfway mark of 2014 accounted for 45 percent of the total and was the only deal to grab more than a billion dollars. Nine other companies received more than $100 million apiece, collectively making up about 38 percent of the total.

That said, not every lending outfit is necessarily looking for investors at this point. Lending Club went public early this month and brought in $870 million during its IPO. It aslo saw its shares skyrocket in the days that followed. Lending Club originated $2.1B in loans in 2013 and $3.0B in the first nine months of 2014. It currently holds a market cap of ~9B.

Besides doing well for itself, Lending Club’s stronger than expected IPO has also set the stage nicely for for the next hot IPO in the sector: OnDeck. The firm is expected to sell 10 M shares at $16-$18 per share. OnDeck specializes in the SMB space and also relies on technology to risk assess prospective borrowers. Sources of funding include traditional debt facilities but also a marketplace where institutional investors are able to buy small business loans. According to its IPO prospectus, OnDeck originated $459M in loans in 2013 and $788M in the first nine months of 2014.

Another deal worth mentioning last week was the $16M equity funding round for Insikt led by
Revolution Ventures, which adds to a $70 M debt funding. Insikt enables any organization to originate loans to its customers and also offers investors the opportunity to buy loan portfolios. The start-up aims to disintermediate traditional banks by offering better solutions to both depositors and borrowers.

Of the total $7B investment in the alternative lending sector, 69 percent was driven by strategic or venture –backed investments. Additionally, 14 percent was driven by three IPOs: Lending Club ($865 M), TPG Specialty Lending ($112 M) and Plaza Bank ($4.2 M).

Most active VCs/PEs were Index Ventures (4 deals) followed by Lightspeed with participation in 3 deals.

From a geographic perspective, Europe was the most active region with almost 54 percent of investments followed by the US with 39 percent and China with 6 percent.

The median amount received by each firm was $6.5 Million.