How our Investment in Fintecture Reflects our Thesis on Payments

Setting the Scene

Understanding the differences between the different payment methods, their associated fees and who ends up paying/earning them can be an overwhelming exercise for a business whose primary concern is making sales — not trying to understand the distinction between a payment processor and payment gateway.

In the US, the late 60’s saw the inception of two different payment rails (any form of digital infrastructure that transfers funds from one individual or business to another): the ACH and credit card schemes. Enabled by the Federal Reserve, ACH allowed for the digital transfer of funds between bank accounts, which made getting paid your salary a whole lot easier. Plastic credit cards represented a physical conduit for bank account to bank account transfers, except that it was done over private credit card rails (e.g. Mastercard), requiring a novel infrastructure to accommodate it, involving several parties:

1. The consumer making the purchase;
2. The card issuer (the consumer’s bank for example);
3. A payment gateway (e.g. a Square PoS terminal or online integration);
4. A payment processor (e.g. Worldpay);
5. The card scheme (the rails along which the funds are digitally transferred e.g. Visa);
6. The merchant acquirer (e.g. the merchant’s bank) and finally;
7. The merchant making the sale

While in some cases you can combine parties, this is the traditional value chain. Ultimately, a purchase made for €100 would result in a merchant receiving €97.50 (illustrative figure) after each intermediary takes their cut (interchange, processing, and acquiring fees). A merchant would be willing to forego that €2.50 because a credit card allows customers to make larger purchases (and faster), eliminates the risk of fraudulent checks, and offers protection from data breach and identity theft amongst other things. With the introduction of open banking and PSD2, licensed PISPs (payment initiation service providers), such as Fintecture, are now allowed to initiate payments on behalf of account holders directly from their bank accounts to merchants’ bank accounts — a new set of payment rails that completely replaces the scenario described above.

Ok, thanks for the walk down memory lane, but how does Fintecture fit into this?

Global Fintech continues to attract large sums of venture capital ($42bln in 2020, KPMG), resulting in some very high valuations for VC-backed businesses in 2021, especially those addressing payments: Stripe ($95bln), Klarna ($31bln), Plaid ($13.4bln), and Rapyd ($2.5bln). As you’ll hear us often say here at Target Global, we like infrastructure plays in Fintech, especially those that seek to reduce friction, allow businesses to scale, and that address hurdles inherent in outdated legacy processes. Of all the verticals that Fintech addresses, payments remains particularly ripe for disruption.

Fintecture is a French licensed (across 30 EEA countries) payment infrastructure Fintech that facilitates direct A2A (account-to-account) payments between buyers and merchants, addressing a global market size of roughly €120bln, of which the EU market translates to €26bln based on payment volumes.

They address real pain points for merchants (especially B2B): (i) expensive payment processing fees for cards (up to 3%!), (ii) abandoned baskets due to card ceilings (€2,300/month in France); (iii) illegitimate declines (up to 20% of online card payments), and (iv) lack of speed in receiving funds — all contributing to eroding margins.

Fintecture dashboard

Fintecture also makes life easier for buyers (both consumers and businesses) by reducing payment friction at checkout, increasing spending limits, enabling identity authentication, and facilitating speed/ease of conducting transactions. The end result is a transaction that costs the merchant less, that bypasses card ceilings, limits chargebacks, and that is instantaneous as opposed to needing 2–3 business days. Identity asymmetry between buyer and merchant is also reduced as buyers can authenticate themselves via Strong Customer Authentication (SCA, PSD2 two factor authentication).

With the rise of instant transfer schemes (e.g. SEPA SCT Inst) and the commoditization of open-banking gateways, Fintecture realized that to remain competitive and continue to add value to its clients, they would need to provide adjacent services to payments. As part of their payments vertical, they offer clients collection services such as transfer of funds between multiple beneficiaries (practical for marketplaces who need to split one payment between multiple parties), the ability to request payment by email, and pay by PoS/in store by QR code. On the disbursement side, they facilitate instant mass refunds (something that’s fundamental for large retailers), while also enabling B2B payment wallets. It’s easy to envision that once Fintecture begins to offer such services, it can take its relationship with its clients and their payment journeys to the next level, by offering a Fintecture current account replete with IBAN (in the future, local acquiring with EU IBAN’s), thereby greatly increasing transparency for payments reconciliations. These core tenets of payments processing will further allow Fintecture to forge long-lasting relationships with its customers and offer financial services down the line such as B2B credit scoring and insurance, BNPL and other merchant financing, as well as KYC and KYB.

Fintecture has already signed over 500 merchants in under a year and has developed proprietary API integrations with most banks in Europe. Their home market of France has proven to be a great launchpad given that they are successfully targeting a customer segment (±1% of online merchants) that represents ±75% of payment volumes. While traditionally payments has been considered a cost center, Fintecture’s solution has helped their clients to increase their volumes by 15% and save 40% on transaction costs, on average. The team is relentless in their pursuit of fully rendering payments into an enabler of merchants’ growth rather than a drag on it. This is why we firmly believe that Fintecture is well poised to become a global leader in the new-age payments landscape and are excited to share the ride.

Written by Khalil Hefaf, Investment Team Target Global Early Stage Fund II