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The software industry is panicking as bears latch onto the theme of AI disrupting the software industry, assuming that AI will be able to develop custom code that is superior or lower cost. Investors are clearly spooked, the flight from software equities has been bloody as we illustrate in Figure 1 below. We agree that AI will be good at writing code and customizing workflows, no question. However, it feels like the baby is being thrown out with the bathwater in the equity markets, as we see AI boosting the prospects of many market-leading Software-as-a-Service (SaaS) companies, though it is also threatening others. In this article, we apply an executive-level lens to defining the disruption concerns, assessing practical realities to this disruption risk, and prognosticating on market impacts. Market Fears Let’s first examine the market’s reaction to the threat to software from AI. Figure 1 illustrates a sample of share price movements across the software industry (we bucket B2B software companies as either enterprise or SMB focused for later discussion). These software indices are now trading down –43% (enterprise) and –59% (SMB) from valuation peaks. The SMB cohort is more negatively impacted than enterprise, a result which we will question shortly. Figure 1: SaaS Stock Price Performance (select player only; stock price % change as compared to January 2, 2024; base 100) AI disrupters, on the other hand, are skyrocketing in value; OpenAI, Anthropic, and Palantir are now approaching a combined market capitalization of $1.5 trillion, dwarfing most of the market-leading software companies. AI has this capital backing despite not yet establishing many of the revenue streams that will justify these valuations. Clearly, the market is spooked in part from the raw tonnage of possibilities that the rush of capital into AI portends. How can a small-cap or even micro-cap software company compete with these giants who will grow hungry for new revenue models? Figure 2: GenAI Companies: Funding, Market Valuation, and Key Model Launch Milestones How Could Disruption Play Out, What Has Investors Spooked? Investors have grown increasingly worried about AI’s ability to build custom (human guided) or even self-generated (no human instruction) software. That AI can custom develop software that is more agile and uniquely suited to that business’s specific functional requirements. B2B SaaS is a massive category of spend for businesses globally (c. $1.4 trillion in 2025) and corporations spend another $1-2 trillion on employees and consultants to customize, deploy, and manage this software. There is obvious financial motivation for businesses to find more economical outcomes. We see three distinct potential AI disruption to SaaS vectors (see Figure 3): Figure 3: AI Disruption Vectors to SaaS I think we can all agree that disruption vector #1 applies mostly (not entirely) to the enterprise segment. It is hard for us to imagine small and medium-sized businesses en masse investing the effort required to build custom software. SMBs are resources and time constrained with owners that have a low tolerance for nuisance and generally a low appetite for self-disruption. Flagship is a SMB company. We use 27 different software products. We have a lot of smart, young, innovative people in our company, so I do expect us to use some custom AI software in the coming years. But this custom software may not replace any of the 27 software products, possibly one or two on the margin. Of course, the next generation of business owners 10-20 years from now will be more tech savvy and could behave differently. Disruption vector #2 (AI platforms competing directly as providers of vertical and horizontal SaaS) is mostly theoretical at this point, although there are glimpses that have already fueled part of the market’s panic. Claude, for example, introduced a legal plugin last month designed to assist in tasks such as document review and related workflows. Claude’s legal plugin is a limited purpose tool, nothing akin to broadly functional vertical SaaS such as Clio. It is not obvious to us that AI platforms will want to build and compete across hundreds of specialized software categories. This did not happen on the back of prior innovation/disruption (PCs, internet, mobile apps, cloud computing, etc.). Microsoft did extend its software reach out from Windows and Office but stopped short of attacking verticalized software (it does compete in accounting and ERP). Google similarly does not compete in verticalized software. The precedent suggests that platforms will grow faster by not competing along the tentacles of their ecosystem but rather to continue to expand and monetize the ecosystem core. This leads us to be somewhat skeptical on AI platforms branching that deeply. But on the other hand, these platforms need to justify their $1.5 trillion and growing valuations and business subscriptions are part of that formula. Disruption vector #3 (AI gives rise to a new class of software innovators) surely will happen, AI disrupters will emerge to eat the lunch of incumbents that do not innovate to AI. Here is where ‘ability to respond’ comes into play for incumbent SaaS companies. It is easy for us to envision disrupters building better legacy forms of niche vertical software that persist (i.e., on-prem windows applications). This is exactly what happened with prior generations of software (first to market disrupted by first to mobile, etc.). We think the long-tail of small, traditional ISVs are in trouble if they are unable to self-disrupt to AI. On the other hand, we struggle to see AI disrupters outflanking many of the market leading SaaS companies who have defensive moats and are already reacting to AI upsides. What Forms of Software are Most Vulnerable to AI Disruption? In assessing the reality of this threat, let’s first examine the nature SaaS, the strengths and weaknesses of AI (as it currently exists), and therefore where we can logically expect disruption. AI is proving to be highly effective at certain functional domains, but less proven in others, which sets the scene for where it is most likely to disrupt software. AI is, or will be good at writing code, automating servicing, manipulating and reconciling data, research, and certain forms of content creation (among others). But AI is not good at strategy formulation, governance, negotiations, relationship building, and people empowerment (among others). AI will certainly keep learning and eventually be good at a broader set of functional tasks, but for now, we can focus the software disruption risk on those areas where it will clearly be effective. And yes, the overlap of what B2B software delivers today and AI’s strengths are clear. In Figure 4 below, we lay out a basic framework for overlaying AI’s functional strengths and weaknesses onto the functional orientation of different forms of B2B software. Figure 4: AI vs. B2B Software, Functional Disruption Heatmap Beyond the risk of functional replacement, a software company’s risk of AI disruption is the function of its defensive moats and ability to react. Defensive moats include, most notably: The existence of a complex ecosystem in and around the software (e.g. software clients using a software product plus five additional integrated SaaS services, The degree and complexity of the software customization in driving the business, and Unique data possessed by software provider on which the business relies. All of these are barriers to switching and replacement by AI-generated software. The ability to react to AI as an opportunity for positive disruption is then primarily a function of 1) scale and investment capacity, and 2) cultural agility and willingness to ‘self-disrupt’. Scale by itself is not a strong defense from AI disruption, but scale does translate into capacity to invest, and AI innovation will become increasingly expensive. On the other hand, we’ve seen many scaled technology companies unwilling to disrupt themselves. In Figure 5, we illustrate this basic framework of defensive moats and ability to ‘self-disrupt’ with AI. Figure 5: AI Disruption Defensibility What Do We Expect to Happen? OK, let’s move on from consulting frameworks and talk more specifics … where do we see SaaS disruption risk? Firstly, we see the AI threat as more concentrated in the enterprise segment, where much of the spend (>$2 trillion) sits not only in software licenses but in customization, deployment, integration, and maintenance. Enterprises spend more than $1 trillion annually beyond baseline software licenses, on middleware, parameterization, configuration, and related services. We see much of this enterprise software ecosystem (software platforms, integrators, consultants, etc.) as broadly vulnerable to AI disruption. We see the enterprise software industry as more vulnerable because they are more susceptible to disruption vector #1 (companies using AI to build their own software). Enterprises will increasingly test the tension between modernizing their software stacks with custom code vs. the pain of transition. Yes, enterprise software benefit from highly customized deployments. This has tended to make technical disruption frustrating slow to materialize in this segment. But enterprises spend a lot on software and related services to maintain and upgrade. We expect a growing percentage of enterprises to make this leap of faith to embrace the disruption of casting aside some of this legacy. However, ERP, CRM, and other broadly functional enterprise systems benefit from decades of business requirements, regulatory logic, and ecosystem integrations, which are compelling defensive moats. AI platforms are artificially underpriced as they focus on growth, making the business case for AI disruption more compelling for an enterprise, but also riskier. Enterprises are already asking themselves, “do I really want to rip and replace with an AI core given the uncertainty of the cost of that core years from now?”. Will enterprise SRP and CRM platform’s defensive moats be enough to defend their role? This is the trillion-dollar question. We do expect AI disruption across enterprise software, but it will not be wholesale. Secondly, we believe that vertical software is less likely to be disrupted than forms of horizontal software, at least among market leaders. Market leading vertical SaaS have been winning share from horizontal software applications for years now, building more robust ecosystems, vertically customized experiences, and customized (often proprietary) data intelligence. Noting that the principles of reaction and survival still apply and that even scaled vertical Saas than fails to embrace AI will face risk of disruption. Note that vertical vs. horizontal is not a binary conclusion. There are forms of horizontal software that have stronger defensive moats, natural functional defense (e.g., accounting), and who will react to maintain their position. Thirdly, we see market leading SMB software (mostly vertical) as defensible for several reasons: SMBs are less likely to build custom software Market leading SMB SaaS have already built powerful ecosystems that create tremendous customer stickiness The value proposition for SMB software is often strong, creating another defensive moat (i.e., the cost is small relative to the business value of these platforms) Ability to react is good among SMB SaaS market leaders Below we examine each of 2 and 3 above explaining why we see strong defensive moats for leading SMB vertical SaaS. Robust Ecosystems, Including Embedded Finance, are a Powerful Moat SMB SaaS (market leading) increasingly deliver a robust ecosystem of functionality, with SMB clients using 10 or more services beyond the core software. SMB users prefer simplicity, which SaaS companies have embraced with robust service bundles, curated extensions, and then a broader marketplace of apps with varying degrees of trust and easy of use via the core. Figure 6 illustrates the depth of these ecosystems. Shopify merchants have access to approximately 15,000 apps within its marketplace globally. WooCommerce supports over 1,200 extensions in the U.S. alone. Xero and QuickBooks each offer roughly 1,000 and 800 integrations, respectively. But there is also a longer list of SaaS companies such as Clio, Lightspeed, Toast, and Jobber that each maintain, test, and review hundreds of ecosystem integrations. Figure 6: Integration Ecosystem Strength & Platform Defensibility (select players only; U.S. integrations/app ecosystems unless stated differently) For two decades, API, internet, and mobile technologies have enabled software providers to construct robust integration ecosystems. These ecosystems embed payments, accounting, payroll, marketing, reporting, and third-party applications into a unified operating environment. It is difficult to envision AI effectively replacing the thousands, in some cases tens of thousands, of real-world integrations that underpin these platforms. Among the most powerful SaaS ecosystem developments is the rise of embedded payments and broader embedded finance. Embedded financial services provide tremendous convenience to SMBs and generate tremendous customer retention. Switching rates for SMBs using core software + embedded payments are exceptionally low (low single digits for top SaaS excluding uncontrollable attrition). Embedded finance is also lucrative, generating tremendous cashflow for leading SMB SaaS to invest in core product and AI innovation. It is important to note that it’s not quantity, but also quality of service extensions that lead us to believe that leading SMB Saas platforms have strong defensibility. AI platforms will also nurture app ecosystems that foster thousands of plugins. What differentiates leading SaaS is the curation of the most important service extensions. For example, Shopify provides more than 90 native feature sets that tend to extend functionality and usability beyond what open third-party development can achieve. SMB users do not want a multitude of choices; they want a recommended path that is both easy and robust. This takes curation. We believe that AI platforms or innovators acting on those platforms will struggle to replicate this curation achieved by market leading SaaS across decade of learning and development. SMB SaaS is Good Value SMB SaaS is often great value, because the software subscription fees are modest relative to the business value delivered. As illustrated in Figure 7, it is common for small businesses to pay only c. $1,000 per year (or $50-100 per month), and for larger SMBs to pay c. $5,000 annually (or $250-400 per month) for SMB SaaS. For a business generating $1 million in revenue, paying $5,000-10,000 for the technology core of the business is tremendous value. Figure 7: Annual Software Pricing for Micro and SMB Merchants (select players and verticals/horizontals, U.S. pricing) Most small businesses spend less than 5% of total opex on software, which does not make for a compelling AI disruption business case. Figure 8 illustrates typical software spend for SMBs. It is worth noting our own software profile as a case in point. We are a SMB with 50 employees, we subscribe to 27 SaaS products and spend $3,000 per employee on software. As a consulting firm, we use more SaaS on average than other SMBs, but we do not rely on commerce core software (i.e., we are not transacting in real time or at quantity). Figure 8: Relative Vertical / Horizontal SaaS as a Share of Total Software Spend by Region and Size Embedded finance is a major reason why SaaS cost is reasonably low in commerce-oriented verticals. SaaS companies that successfully attach payments and other embedded finance services can increasingly offer their software at compelling prices, even free in some cases. Leading SMB SaaS often generate greater-than 50% of gross profit from payments and embedded finance. Ultimately, we struggle to see AI platforms replicating ecosystem-based SMB SaaS proposition and commercial models quickly or winning share rapidly via switching. AI as an Upside for Leading SaaS (Particularly SMB) Beyond the defensive moats we see at leading SMB SaaS, we also see AI as a compelling upside. We see AI driving both revenue and cost benefits for leading SMB SaaS platforms. Firstly, AI will lead to major expense efficiencies for leading SMB SaaS, who spend on average 20-35% of all opex and capex on product and technology development on people and a further c.15% on people-based servicing and operations. AI-assisted product development, automated sales workflows, customer support automation, and infrastructure optimization can materially improve operating leverage for market leaders allowing them to invest more into growth innovations or returns to shareholders. Figure 9: AI Cost Efficiencies for Leading SMB SaaS (select examples; non-exhaustive) As shown in figure 10, AI also creates incremental revenue opportunities for leading SMB SaaS across marketing optimization, business management insights, ecosystem monetization, and embedded finance. We are still in the early days of monetization potential of leading SMB vertical platforms, whose revenue is most concentrated in core software and embedded payments. There are many new revenue sources that AI will unveil. Beyond new revenue sources, AI will also unlock a more personalized and better customer experience and operational optimization: AI-driven recommendations, pricing optimization, underwriting, compliance, etc. Figure 10: AI Revenue Uplift for Leading SMB SaaS (select examples; non-exhaustive) Conclusions AI will disrupt the software industry, but the equity market’s rush out of SaaS stocks feels oversold as we see many leading SaaS companies net-benefitting from AI given their strong defensive moats and ability to react, using AI to create efficiencies and new products. There will be AI disruption more broadly in the software industry. Some software companies will be cannibalized, including enterprise software that do not embrace AI and particularly the long-tail of tens of thousands of ISVs that are poorly positioned to react. Please do not hesitate to contact Joel Van Arsdale at Joel@Flagshipap.com and Charlotte Al Usta Charlotte@flagshipap.com with comments or questions.

A panel discussion on the stablecoin landscape with Ben Brown (Partner, Flagship Advisory Partners), Nabil Manji (SVP, Head of Fintech Growth & Financial Partnerships, WorldPay), Ali Heiring (Director of Corporate Strategy, MoneyGram), and Ben Reynolds (SVP, Head of Big Business Banking, SoFi). Together, we explored how stablecoins are being applied across consumer and B2B payments, what it takes to integrate them into existing payment stacks, and how incumbents and innovators are navigating regulatory, operational, and risk considerations. We'll also dig into where stablecoins deliver real advantages over traditional rails, as well as where hype still exceeds reality. The presentation is available for download by clicking the PDF button in the right hand side panel (desktop view) or below the post (mobile view). Please don't hesitate to contact Ben Brown at Ben@Flagshipap.com with your comments or questions. Transcript: Joseph Kraut | 00:00 Thank you all so much for joining us for this webinar and discussion panel on stablecoins and their role in the global payments ecosystem. This webinar will be recorded and shared by Flagship. We will share the link to view the recording with each of you after this webinar via email. During the last five to 10 minutes of this webinar, we will have a Q&A portion. Feel free to drop questions in the chat during the webinar, and we will select questions for the panelists to answer towards the end if time allows. I want to thank our panelists for joining us today. Thank you so much. For today's webinar, our panelists include Nabeel Manji, SVP of Enterprise Growth and Partnerships at WorldPay, Ali Herring, Director of Corporate Strategy at MoneyGram. Ben Reynolds, head of big business banking at SoFi, and your host and first speaker, Ben Brown, a partner at Flagship Advisory Partners. Ben will open with a brief presentation of Flagship's perspective on the stablecoin payments landscape. Without further ado, I will pass it off to Ben. Ben Brown | 01:04 Thanks, Joseph. Really appreciate that and appreciate the time that our panelists are giving us today, as well as all of you out in the audience joining us early morning for those in California, middle of the workday for those of you in the East Coast or in Europe. So we're really excited about today's discussion. Stablecoins are a super interesting topic that are moving from many years of technology development and sort of conceptual formation to really being a new technology that's in many ways ready for prime time to rewire the global payments and banking ecosystem. And so we're excited to talk about that with several companies that are actually putting this technology into use. And we're going to hear about how they've thought about the application of their business how they've gone through the process of building new solutions and the kind of experiences that they've had as they've done that. Before we get into a joint discussion, we wanted to just take a few minutes to level set on the topic of stablecoins. It's an emerging topic for many in the industry. A lot of people have heard the term but might not know exactly what stablecoins are. And so we wanted to start by just describing what is this technology relative to some other types of digital assets that you may have heard of. And how is it growing? And so with that, Joseph, let's go to page three there and Start with what do people mean when they say stablecoins? So when people use this term, they often mean very different things. So we just wanted to lay out a few of the similar technologies that people might see. First is cryptocurrencies, something that people have heard about for a decade plus. Bitcoin is the, most widely known version of this. And Bitcoin and other cryptocurrencies are decentralized digital assets that have a lot of volatility to them. So they're not really payments grade, we've come to learn. Stablecoins are Still digital assets like cryptocurrencies, but they're often fiat pegged or value stabilized in some other way. So they're more appropriate for those payments use case. And that's the focus of what we're going to talk about today. There's other versions of technology like stablecoins, including tokenized deposits where banks are issuing representations of bank money on distributed ledgers that are viewed legally as deposits and central bank digital currencies, which are state issued versions of similar assets that hold the legal value of money. But those initiatives are moving a little bit slower than stable coins are, whereas stable coins are really entering production grade use cases around the world. So stablecoins are really interesting right now because they sit right at the intersection in many ways of a few different things of speed, programmability and global reach without necessarily waiting for some of the politics around central bank digital currencies to come together. And so we wanted to think a little bit next about what do stablecoins actually do better than traditional payments rails? And so if we move on to the next page, Part of the reason that companies and innovators are so interested in stablecoins is their value. So we view four key benefits around stablecoins. First is that they're accessible. They're usable 24/7. Across borders, around the world, with no dependency on local bank business hours or operating restrictions. So their accessibility is key. The speed at which stablecoins can affect payment transactions is really differentiating. Stablecoin transactions can happen in seconds or minutes rather than days or sometimes even weeks for cross-border payments that get caught up in multiple steps of the correspondent banking system. Stablecoin transactions can be cheap. They're not always cheaper. We'll talk about that today, but they have the promise of being cheaper than traditional interbank payments. Due to having fewer intermediaries in the middle, more of true sort of peer to peer payments when you're talking about on-chain transactions, rather than correspondent banking payments that can take five banks to make money move from one country and one currency to another country and another currency. One of the really interesting things about stablecoins is that they're programmable. So they can affect smart contracts, they can affect through smart contracts, they can affect logic on transactions and on the ownership of those funds, which enables Completely new concepts around how we can manage money and the financial products that we can build on top of it. So... Given those benefits, we've seen a huge rise in the volume and the usage of stablecoins over the past few years. Which really show this is moving out of science fiction and moving into real world practical use cases within payments and banking. So the supply of stable coins, the value of stable coins in existence has really grown dramatically over the past few years, doubled in the last 18 months or so. Even as the market's gone up and down, you know, we've still seen a lot of growth. Both as stable coins are used for things within the cryptocurrency and digital asset ecosystem, but as they're starting to be used outside of that ecosystem for real world business uses. And that volume has grown. The usage of stable coins has grown in parallel. So we see that in 2025, there was probably a, $250 billion of real world payments that were transacted using stable coins. The run rate at the end of 2025 was more like $400 billion. And that's, an impressive number. It's a big growth, maybe 100% year-over-year growth. And the forecasts are that the volume of stablecoins in existence and their usage is going to continue to grow at that breakneck pace over the next few years, reach it going from $300 billion or so of stablecoins in existence to $2 trillion by 2028, just a few years into the future. So continuing to compound year-over-year doubling in volume, So it's a really exciting time for these where we're seeing some of the first use cases come into production. But it's quite early stage for this technology because in the next few years, you'll see volumes continue to grow. And to put the volumes here in context, right, that $300 billion of global payments, that's a very small piece of the $2 quadrillion of fiat money payments that happen around the world. If you consider all the wholesale payments that happen between financial institutions, the business-to-business payments, the consumer payments that all of us make every day, there's a huge ocean of electronic payments that happen out there. And stablecoins are just starting to eke out a tiny bit of them, but in really interesting ways that we think are very relevant for companies looking at how to do things in a more efficient and more controllable way. So going on to the next page, as we said, about $250 billion, $300 billion of payments in 2025. And the use cases that stable coins are being used for run across the spectrum. But B2B payments where you're having especially cross-border B2B from a retailer in the US to a supplier overseas, or really between any country pair, that's one of the most common use cases people talk about. We think that's about half of the overall volume of stablecoin payments. And then you see things like person to person transfers, whether those are domestic or remittances, payments to businesses do occur. They're less common in our research than some people talk about, but they absolutely do occur. And disbursements from businesses to customers where you might be doing an insurance payout or a rewards payout or things like that. So really stable coins are useful across a wide range of use cases. And we'll talk today about the merits and alignment with some of these and some of the challenges that you might see in different use cases. When we look at survey data on the future interest in continuing to use stablecoins, there's some really interesting signs. So there's actually a surprisingly large percentage of both consumers and businesses that use stablecoins today. You may not have used them out in the audience, though you probably have if you're listening to this podcast. But there's actually double digit percentages of people that say that they've used these. So, 13% of corporates and banks say they've used stablecoins. And something like, 58% say they're considering using them, which is a really dramatic exploration of this new technology. But something that we're seeing across areas as technology innovation continues to accelerate across areas like AI, new distributed ledger technology, all kinds of different innovations that are going on these days. And on the consumer side, we see that about a fifth of people say that they've used it. And worldwide, one really interesting stat is that about a fifth as well of people who hold U.S. Dollars that don't live in the United States are hold stable coins. And that's one of the really key use cases for them because they're value stabilized. They can be a way to hold wealth in US dollars, in euros, in those currencies if you don't live in those places and the currency in your home market might be more volatile than you're comfortable with. And so Today, hundreds of millions of people around the world using these things, and we're seeing That's translating into a lot of momentum and activity within the industry. As it seemed like in 2025, there was an announcement every single week of one company or another doing things related to stable coins, including Visa and MasterCard supporting stable coin settlement natively within their card rails. Things like new regulation that came out. Even events recently, which might not even be on the page here because they happened so recently, two weeks ago, Fidelity announced that it will launch its own stablecoin, the Fidelity Digital Dollar, that they'll use for security settlement and other use cases like on-chain retail payments or future financial products that they'll build using that technology. So very real initiatives happening in the industry. And so Fidelity If you're a business out there looking at this, you may ask yourself, sounds like there's a lot of interest in it. Sounds like there's a lot of activity. So what does getting started actually require? And when we work with our clients on the topic, we see a few questions. Often it's, What can I use stable coins for? If we go to the next page, Joseph. But we really think the right place to start is, you know, what is the customer problem that we're trying to solve? And then bounding that by, you know, how bold are we ready to be at this point? What barriers might exist within our own organization and within the country that we sit? And then making sure that you have a way to measure the success of those initiatives. So as you define your stablecoin strategy, all of those things are really important to consider. But starting with finding a real customer need to apply the technology to is key. And then we see companies working through a whole range of issues across their sort of cross-functional back office as they look to bring these into production. And that's maybe where it'd be really interesting to shift into discussion with our panelists who've been through these experiences. They've brought some of these products to life within their organizations, which are some of the leading organizations out there in the world. And, Let's hear from the people who are actually out there building and operating stablecoin-based solutions. So I think we can probably bring the presentation down and let the audience see our panelists here. And, Yeah. We'll work on the view mode there. It looks like Joseph, we've got your screen kind of penned, but we can go ahead and let's jump into conversation. I think that'd be really interesting. So probably the first place to start is All of you have launched real stablecoin products in the last year. It'd be really interesting to talk about those use cases and why you think right now is the time to be doing that. And so, you know, Ali, I thought it'd be really interesting to start with you. MoneyGram launched a new app enabling cross-border remittances between the US and Colombia. Using stablecoin technology as the foundation for that new system. With Stablecoin kind of in the middle of fiat on both ends. So it'd be great if you could walk us through that decision, that experience. How did you pick that corridor? How'd you figure out what the strategic and financial value of using Stablecoins was? And just what are the experiences you've had since it's gone live? Ali Heiring | 15:54 I'll be too. Thanks, Ben. As you mentioned, for those that don't know MoneyGram, you know, we're, we have about an 80 year history. We focus primarily on the remittance use case for C2C cross border payments. And these are pretty essential. We're helping millions of people send money across borders, helping their families with essential expenses like food, housing, and education. But there's a lot of friction still in cross-border payments today. So these can be slow, expensive. The process can be confusing and require a lot of back and forth between senders and receivers. And there's depending on where your receivers are, there's the risk of holding money in a more volatile local currency compared to potentially a more stable currency abroad. And We saw stablecoins as a tool to build better money transfer primarily. So we weren't looking for a way to use stable coin just for the sake of it, but really identifying a customer problem that we were facing and realizing stable coin was a really interesting tool to help us solve it. So... The reason we were interested in Stablecoin is they offer instant 24/7 money transfer. Whereas today, a lot of times our receivers are at the whims of local bank hours and holiday weekends, and there can be frictions and delays caused by that. They're able to hold their value in a more stable USC pegged form. So this gives a receiver of a remittance the ability to hold the entire original value of that remittance amount and then convert to local fiat how and when they want. So we're very interested in us like creating a better money transfer experience. That didn't actually require our customer to be familiar with crypto or to be seeking out stablecoin intentionally, but really building something that met more of their needs. So that's why we launched our app in Colombia. It basically allows a recipient of a remittance to hold their funds in a USD peg stable coin balance, giving them protection from local currency volatility. And then from there, they have flexible ways to use their money. They can control how they hold and manage their funds, and then they can cash out whatever amount that they received when they want to at any of our retail locations. And throughout this, we've been able to build a direct relationship with our receivers. So. Formerly, you know, MoneyGram was very focused on senders as our customer. This is really the first time we've launched a receiver focused technology, which gives us a platform to expand these features and deepen our use cases with our receiver. So as we're thinking about This use case, I mean, we didn't. As I said, we were really viewing Stablecoin as the tool to help us meet that customer need. And we viewed stablecoin as very complementary to our traditional rails that we use for money transfer. So, yeah. Given that you know, we're operating in the space of cross border, like the on and off ramp becomes a really essential part of that journey. And so, Sablecoin is a way for us to offer stored value. To our customers. And access to USD-pegged currency. Ben Brown | 19:10 It's so accessible to end users without them having to really worry about what stable coins are or the infrastructure behind the scenes is a big advancement. Because actually, it's amazing to think it's been more than 10 years since the start of the Russia-Ukraine war. But when that happened, the consulting firm that I was at the time decided to close our business in those two places. And we wanted to offer...Sort of rescue payments or travel subsidies to people who were working for us in those regions to move to other places and continue working for the company. And we actually worked with the treasury group of this multinational consulting firm and thought about could we use stablecoins for this purpose back in 2014, 2015 and talk to some of the largest stablecoin issuers today? And the response was, absolutely you can. They just have to sign up for this wallet and that wallet and know this address and everything. So my team here at Flagship thinks it's kind of funny when I ask, is it babushka friendly? But that's really a key thing is like, you know, would your grandmother understand how to use this without having to be a fintech nerd? And so I think it's really interesting what you guys have done there by taking a trusted financial services brand and putting a really familiar customer interface over, you know, some really interesting next generation technology. How did you guys pick the US Columbia Corridor as the right place to start? Ali Heiring | 20:43 Yeah, Colombia was a very intentional choice for us. So it's one of the largest remittance destinations in Latin America. It has significant inbound flows from the U.S. And it's a market where some of the challenges I was discussing are especially relevant. The Colombian peso has seen meaningful volatility in recent years. There's a lot of domestic interest in holding funds in a USD-pegged form. So it ended up being a corridor where the technology could solve a real everyday problem and not just be a tech experiment for us. Ben Brown | 21:14 That's interesting. And when you thought about using stable coins for that, I mean, was it? We want to find a corridor to experiment with this technology or was it You know, we're actually seeing a big cost difference between using traditional correspondent banking rails versus this new technology? Ali Heiring | 21:37 Yeah, so for us, because right now the way we've designed this product is it actually sits in the middle of our existing product. Transfer flow. So you have the sender sending a payment to a recipient in Columbia and that recipient has to use that those funds, usually in the near term. So this isn't they're able to hold funds as long as they'd like, but typically shorter duration than you would think in a traditional savings product and Yeah, I mean, I think... It was... From a cost perspective, interesting. We still have the same on and off ramps largely on both ends of that transaction. So for us, it was really about delivering a better and differentiated customer value. And building a foundation on which we could build new revenue streams. And we think that, you know, the cost advantage really comes when you're able to build end to end stable coin. So that's where looking at it both from the consumer facing end, but in our back office, like how we settle with our partners locally. As that shifts to stable coin, you start to see more of that cost advantage emerge. Ben Brown | 22:45 Yeah, that's interesting. It's kind of like the remittance space historically is a lot of the cost is in the agents at the end of the ecosystem, right? The compliance work and then the agent network are where a lot of the costs reside. But thanks for sharing the story about building that app. I mean, what kind of usage have you seen since it's come out? Are people... You using it in ways that it may be different patterns from what you'd seen with the traditional solution? Ali Heiring | 23:12 Yeah, so as I mentioned, this is one of the first products we've launched specifically focused at our receivers. And we've been really impressed with the level of engagement we've been seeing. So a lot of interest from our receivers in the stablecoin offerings and just engaging directly with MoneyGram. But what's been most surprising has actually been the organic interest in the market of people participating. That maybe aren't already a MoneyGram receiver looking for ways to leverage this product. So gives us a lot of excitement about our product market fit. Ben Brown | 23:46 Awesome. Like I said, thanks for sharing that story. I'd love to. Maybe Nabil, I'll call on you because you guys are building something really interesting. You're piloting a solution at WorldPay right now that will enable stablecoin payouts for clients in the US and Europe, businesses that want to pay out to consumers or other businesses. Instantly without having to really hold stable coins themselves. So I'd love to hear a little bit about that. I mean, what use cases are you guys expecting to see when that goes live? Nabil Manji | 24:21 Sure, yeah. So we are launching, as you said, a what we call stablecoin payouts product. And for those of you that are on the call and know WorldPay, you'll know that we're primarily a payment acceptance company. But we have a suite of payout products that allow our clients to disperse funds to a number of beneficiaries around the world in different currencies and payment rails. And so I would say our customers on this largely fall into the category of what I would call big B to little B or big B to C type payments. So slightly different from MoneyGram in the sense that we're not playing in the C to C or P2P market. And so some of the examples of the clients that use our platform for this and some of the interest we're seeing fall into the categories of things like marketplaces or creator platforms wanting to pay out their sellers or creators in stablecoins. So when those providers or participants on their platform want to withdraw their earnings, rather than just having local currencies as an option, they can choose to receive in stablecoins. We're seeing some interest for that. Just more generally, I would say in the gig economy space and what people call the... I think it's employer of record type companies where they're paying out contractors around the world or other types of service providers having interest in having stablecoins as an option. One actually that has come to light that I did not expect at all when we first started marketing this and building it was... Airlines wanting to pay out passengers for delayed or disrupted flights or lost or damaged baggage. It was totally surprising to me, but actually it kind of makes sense. If you're an international airline, you've got passengers from almost every country in the world that have bank accounts in almost every currency in the world. Having a network to pay out funds to passengers all around the world and those local currencies and maintaining that network would be quite expensive. And If people are happy to receive stable coins, obviously, it can be cheaper and quicker to disperse in that way. And then finally, I would say is social gaming, sports betting, iGaming, video gaming. Any sort of business where users are very quickly depositing and withdrawing funds, often multiple times per day or multiple times per week, depending on what they want to use that money for. So just when you've got that frequency of money movement, obviously you want to reduce the cost of taking your money in and out. And what we've actually seen with some of those platforms is the quicker the customers can get the money out, actually, the more quickly they want to put it back in. So you might ask yourself, why don't they just leave it on the platform? But sometimes, hey, they want to take it out for a day, maybe go buy something, spend it, whatever, and then put whatever's left back in the next day. And so the more quickly they can turn the funds actually is synergistic from a revenue perspective for some of the clients in that space. And then in terms of what people are excited about, I think the you know, payouts as we've just spoken about is definitely one. But the thing I'm hearing more and more about actually, I would say is in the treasury management space and using stable coins for kind of internal money movement or, you know, what you, I think refer to earlier to some degree as wholesale payments. So if you're any sort of multinational company, particularly in the payment space where you've got to move a lot of money around a lot of different legal entities and a lot of geographies and a lot of different currencies, you know, Even if you've got the best rates with your banks from a price per transaction and FX spread perspective, it's still expensive. No matter how well architected your system today is, You can never match perfectly bank holidays, public holidays, weekends, banking hours, and things like that across different jurisdictions. And so having a 24-7, 365, always available, intra-company liquidity movement rail to bridge that and reduce your...You know, duration exposure to things like FX currencies is actually something we're starting to see a lot of interest in. And then on a related topic, you know, as we've moved out of a zero interest rate environment since COVID, treasurers around the world have been very focused on maximizing the return and the yield on corporate cash and other cash. And as the rate environment trends downwards, I think any opportunity to buffer that with higher yielding instruments, potentially like a stable coin, is definitely interesting from a value maximization on cash holding perspective. Ben Brown | 28:55 It's fascinating the range of use cases. What we see in sort of legacy payments world, the digital payments world is a verticalization of payment solutions and just hearing the wide range of the things that you described being served by, you know, what are really early stage solutions, right? We'll look back in, you know, 10 years and, you know, this will be the sort of beginning of, you know, when stable coins became widely used. But you're still getting take up of all of these interesting niche solutions. And as the technology continues to evolve and the things built on stable coins continue to evolve into the vertical SaaS solution for airline payments, you'll probably see stable coins becoming even more deeply penetrated in some of those things. But that's definitely a fascinating use case I would not have imagined. Thought about and it's one where the systems behind some of these airlines are really archaic. And that just goes to show that maybe you can use really modern technology with really old systems that a lot of companies have. By having the right partners or technology in the middle. And we've done projects in the past taking a look for major FIs at what is the impact on our systems and our processes and our policies of digital assets. And, you know, it sounds like increasingly there are ways to engage in like the digital asset economy without, you know, having to reinvent, you know, the entire back office stack. So, you know, Ben, you're at SoFi now. You were at Silvergate in the past, which is a bank right at the heart of the digital asset economy. So as you think of, so you've been an insider in this space for a long time. I mean, as you think about the killer use cases for FIs. I mean, why are you guys at SoFi building in this space? 'cause it seems like there's a lot of excitement among the FIs we talked to about the technology, but oftentimes maybe more often than not, FIs haven't really picked out like the practical use cases that they want to apply it to. But I think you've got some advanced thoughts there. Ben Reynolds | 31:13 Yeah. Yeah. Thanks, Ben. So I think there was kind of two questions there. One is kind of why do FIs care about stable coins in general? I think, you know, when you think about what banks do well. A lot of it is around deposits and payments. And so, you know, as we've been talking about, you know, store of value use cases and remittance use cases, those kind of fall squarely, in the business that the banks are in. And so I think that's part of the reason why just FIs in general are interested in this space because those are businesses that we, you know, historically have done well. In terms of SoFi, the calculus, was a little bit, complicated in a sense. So just because of who SoFi is. So SoFi at its core is an OCC regulated insured depository institution with about 35 billion of customer deposits. We have about 14 million retail members who use our services and we're focused on helping them get their money right, whether that's through savings or through investing or through crypto or through a loan. And so similar to the use case that Ali was describing, oftentimes our members want to send money overseas and they want to do that within a unified experience, right? And within the SoFi app. So there's definitely one aspect of our strategy that's focused on that. The other is that SoFi is a card issuer, right? And a card processor. And so there we're working with, with hundreds of institutions to help them issue their cards. And one of the things that we've kind of come out and seen as a use case is that, you know, people want to you know, oftentimes in emerging markets, they'll have a wallet, could be a non-custodial wallet, and they'll want the ability to pay with their credit card, right? Either they want a MasterCard or a Visa on top of that wallet that they can then spend their stable card holdings. And so that's sort of the second piece of that. And then the third piece is we think that it's still really early days for businesses that wanna go between, that are still working on their strategy as you highlighted Ben and are gonna do something in the space, but aren't sure what to do and aren't sure like, for a long time, I think we're gonna see this need to go between fiat currencies and digital currencies. And so I think a bank with its regulators is in a good place to be able to help other businesses kind of navigate this, you know, this transition that we're going to see between fiat and digital currency. So those were sort of the three legs of the strategy for us at SoFi. And then that just sort of led us to, okay, well, if we're going to do all of those things, we might as well issue our own stablecoin, SoFi USD. And so we did that. In December. It's on the Ethereum network today. It's still early days for us, but we think every stable coin that's out there requires network effects in order to be successful. And so you really, I think, as you think about stable coins and you think about issuing it, you have to start to ask the questions of, do we think that we can get sort of both sides of the network, right? And like in the simplest terms, you can think of that as kind of the consumer use case or the consumer usage, as well as businesses using it for, you know, either payments or settlement or whatever that might look like. And so in that regard, I think that SoFi is uniquely positioned to do that. Ben Brown | 35:05 Yeah, we were workshopping with a client recently on what's the right use case for stablecoins and the conversation quickly. I won't say devolved, but it quickly focused on what are the mechanics of issuing a stablecoin and realized that's not necessarily a must do. It's not about always issuing your own stablecoin. That can be an option. And it's interesting how you point out you've got to find a use case or have some confidence you're going to achieve those network effects to make that worthwhile. But you can use stable coins that already exist like USDC or Tether or other things that are out there. Yeah, so it's interesting that think about the decision tree of choices that companies have to make as they look to implement this technology, which can be implemented in so many different ways. Including in like, in collaboration with or as part of existing financial systems. Which makes it so much more like real to me. Maybe I'm a traditionalist or something. But when I went to, you know, Bitcoin conferences in 2012, 13, 14, the whole ethos was all the banks are going to disappear and this is going to be the new financial system. And that seemed a little far-fetched to me. But now we're at a point where it's more like, hey, here's this new technology and we can actually, you know, the companies that exist and the banks that exist around the world can make use of it. To do better things for customers, which seems really practical and realistic. So it's exciting to see some new use cases come to life. Ben Reynolds | 36:47 Yeah, Ben, I think that's a really good point. You know, there's just under 5,000 banks in the United States and banks work together all the time and banks are customers of other banks. And I think I see this playing out the same way. You know, obviously we launched a stable coin, but we're not SoFi USD agnostic. Like we think that there will be a number of different stable coins that are out there. And, you know, having the capability to go in and out of the different stable coins is meaningful. You know, I don't think that some people think it's sort of like a winner take all. I don't think that that's the case. And so within our operation, we're certainly prepared to work with all of the regulated stable coins that are out there. Ben Brown | 37:35 Interesting. Yeah, I mean, it's... It seems like - 0.01% of global payments. Though Nabil, I read one of your LinkedIn posts recently and I think the thing that stuck out to me was you said, this will be the year stable coins go mainstream. So, you know, what does that mean to you? And like, why do you think like it's 2026 that'll be the year and not, you know, 2028, 2030, you know, sometime in the future? Nabil Manji | 38:15 I hope it comes true because if it doesn't, then everyone next year is going to be like, Nabil, you were so wrong. But anyways, I will explain my thinking. Nabil Manji | 38:26 I'm not a lawyer, so I always forget my caveats. So the reason I said that and the reason I believe it is if you think about general cross-border payment flows in most segments, whether it's P2P, B2B, etc., and foreign exchange the big player in the room is the US with the US dollar, right? And if you look at stablecoins, something like 99% plus of stablecoin value in circulation is USD denominated. Whether or not stable coins quote-unquote become mainstream is largely dependent on what happens with them as it relates to the US dollars and as it relates to flows coming in and out of the US or to and from US people and companies. And I think if you look at 2024, we were in a different regulatory environment as it relates to stablecoin and digital assets that made it quite difficult for many companies to engage seriously on the topic. We then entered 2025 and of course the regulatory environment around the topic changed pretty quickly. That manifested itself through the Genius Act and now another piece of legislation called the Clarity Act, which will hopefully make its way through the Congress at some point soon. And so we kind of went to the in very quick in a very quick time period, probably more quick than any other change in regulatory environment on a specific topic that I've witnessed in my career. We went from this place where in 2024, It was a topic that many people didn't want to touch. To a topic that had regulatory clarity. And people were starting to investigate and explore. To now we start 2026, there's a clear regulatory framework in place. A lot of companies have gone through a decent portion of that "explore and learn" phase. And many companies are hiring teams and professionals and setting aside budgets to actually go invest in things here. And so for me, this is the first kind of full year where you've got the foundational building pieces of regulation, investment budgets at a number of large companies. And talent at those companies or soon to be at those companies that can go execute and make use of those investment budgets. And so that's why I think this is the year where we're going to see quite a bit of activity. Ben Brown | 40:47 Yeah, and you see investment of all kinds, right? I mean, you see people building up teams in-house, but you see M&A events happening, you know, billion-dollar transactions where companies are, you know, buying capabilities in the ecosystem. Yeah. So I think that's a super interesting trend as well. Between you guys over at WorldPay and I think you chose to partner mainly to enable the stablecoin payout initiative. And Ben and his team over at SoFi, I think you guys are building a lot of what you had. I mean, Ali too, you guys chose a lot of partners to enable the Columbia app. I mean, maybe I'd love to just hear the pros and cons that you all think on that choice to partner versus build. And is that a choice you make? At an atomic level, like are there certain capabilities that are important to own certain things that are easier to hand off to partners, but you know, maybe Nabil, you can kind of start the conversation there and I'd love to sort of hear your different experiences. Nabil Manji | 41:51 Sure, yeah. So I think whenever we're trying to launch a new product or a new payment method or whatever it might be, there's always the buy versus build versus partner question, right? And I think from a buy perspective... This didn't quite make sense for us when we embarked on this journey on the payout solution last year. I think two main reasons for that. One is, at the time, we were owned by a private equity firm. And this space, I think, was more from an investment standpoint in that venture growth class. And if you think about the risk reward profile and return on capital for an acquisition in this segment a year and a half ago, it was more aligned with that VC or growth return profile, not quite aligned with you know, the risk reward from an M&A perspective that we would look to do. So I think from a financial profile fit, it just didn't make sense. And then the second is, you know, from a technology standpoint, a regulatory standpoint, even 18 months ago, it was still quite dynamic and changing. And so there was a lot of moving pieces and particularly on the regulatory front. And so we thought, you know, given the stage of the market, the risk reward, the moving pieces, being able to partner with, you know, what we at the time, selected as a leading player made a bit more sense. And then with any product or service where we partner, of course, we evaluate that over time. If things scale in a couple of years, we may look at and say, okay, do we need additional partners for resiliency purposes or coverage purposes or asset availability purchases or whatever? Or has this product become large enough that we do want to insource or build certain bits and pieces of it or maybe the entire thing? So it's not a decision that's made and then is static for 10 years. It's something that's evaluated based on the trajectory of the product and the business. But I think for now and for the foreseeable future, partnering makes sense. We're very happy with the partners that we've chosen in this endeavor. And we'll keep an eye on the space. And if and when we need to change something, we'll evaluate that. Ben Brown | 43:51 I mean, Ali, you guys chose to partner at MoneyGram and you're private equity owned right now. Do you think that Factored into that, was it ever a discussion of let's go buy capabilities in the space or let's do this as a pilot, let's learn how it goes, and then let's see if deeper investment is warranted? Ali Heiring | 44:11 Yeah, I mean, we've actually been building in crypto and stablecoin for the last five years, and a big part of that has been kind of curating partners that are very purpose-built to help us, you know, deepen our capability. In that space. So for us, you know, as we were looking for something that would be really kind of consumer facing, we wanted to make sure from a stable coin perspective, we had something that was trusted, very regulated that if consumers were curious, they could really understand more. And so partnering with Circle and USDC made a lot of sense there. And then Stellar has built a blockchain network that's really designed for this use case at its core. And so that has been a great partnership helping us bring this to market and you know, as we were thinking about our wallet and user experience layer, we partnered with CrossMint because they have sort of a very innovative leading technology in the space and our focus is really owning and differentiating on that on and off ramp and then the localization. So the idea, can we build with partners technology that's global by design but then really focus on knowing our customer and their use case and the localization to make it really successful. Ben Brown | 45:24 Makes sense. And Ben, how's it going at SoFi? Are you guys finding partners for certain capabilities or is it mostly an effort of, you know, let's build this in-house? I mean, what capabilities are you seeing as like must own to be part of this, the future ecosystem? Ben Reynolds | 45:39 Yeah. Yeah. It's, The short answer is that it's a mix. There's certain technology that we're building and there's certain technology that we're buying and certain technology that we're partnering with folks with. I think it's sort of a kind of a classical, a classic, you know, business question in terms of what are you trying to optimize? You know, are you trying to optimize like speed to market? Are you trying to optimize for, you know, being able to control the product roadmap down the future? Are you trying to, you know, what is it that you're trying to achieve. And then, you know, finding the right strategy here in order to accomplish that. So like, as an example, or maybe a parallel, if you were launching a bank, or if you're launching a neobank, you sort of have the same question of like, okay, well, do we want to build our banking core system from scratch? Or do we want to go out and use a FISERV or an FIS or someone like that so that we can kind of, you know, get to market quickly? There's pros and cons of both. But banks do this all the time, right? I mean, banks have, you know, third party risk management processes that they go through in order to evaluate, you know, things like custodians and other vendors that are in the space. And so I think it's the same type of issue. I think that what's most important for, you know, folks that are trying to figure out like, what do we do? How do we get started is to just start. You know, there's a whole sort of organizational education process that needs to happen here from the people that are doing the work to the executives, to the board and the regulators. And so, you know, my advice to folks that are trying to, you know, that aren't sure really where to start is just do something so that you can kind of start that educational process because, you know, I don't think that you know, I think that the share of payments and the share of store value that are going to be in stable coins are only going up. And so you have to kind of start somewhere and that can be really intimidating. And so just, you know, even if you were to just Do some treasury movements of stablecoin between entities that you owned yourself. At least there you're building some institutional muscle and knowledge that you can then later figure out like, okay, well, what are the more interesting use cases that are out there? And kind of de-risk the whole thing. The whole project and the whole initiative by just starting somewhere. Ben Brown | 48:06 There's so many facets to how this is and can be complicated. As you use the core banking example, I almost wonder how much do companies really need to know about the tech stack underneath stablecoins? Like when you're picking a core banking platform, I mean, You don't really need to know what programming language it's built in. You need to know what it can do and what the perimeter, the interfaces that you have to integrate with, how those work. But is it the same thing in stable coins? I mean, does everybody need to be complete technology expert or is it okay to know nothing about how the blockchain is underpinning this work or is it somewhere in the middle? Ben Reynolds | 48:50 Maybe I'll start. So, I think it's probably somewhere in the middle there because There are It would be a little scary from my perspective to just kind of outsource that to someone and just say like, okay, you know, do you know, to a particular vendor or whatnot, that's obviously selling their own solution because there are real trade-offs, right? Like, and I'll use a really simple example. You know, if let's say you were going to work with a particular blockchain, like, are you going to work with Ethereum or Solana or some other change? Like the gas fees and the cost or the cost to send value over chains is different, right? And so kind of like understanding like what those economics look like is really important. One of the use cases that stable coins enable is the ability to make micropayments or smaller payments that just wouldn't make sense in a traditional context, right? So like, let's say you wanted to support some cause in a foreign country and you only had three bucks to support the cause, but you get enough people contributing three bucks each you know, it adds up. Well, there's, you know, the existing financial system isn't really in a good place to do that because of all of the intermediaries and the charges that happen along the way. But depending on, you know, there's blockchains out there where you could, you know, you could send three bucks and the cost to send that would be, you know, a penny. And I think that those costs will just continue to come down. So that's just one example. So I think you don't need to be an expert on the, on, you know, like how to build a layer one blockchain. But you need to sort of understand, I think, like, what are the trade-offs between the different chains? And then you can go through like the, you know, the entire stack in the same way. Ben Brown | 50:37 Because I guess it does have an implication on what use cases you can support. And that micropayments use case is a really interesting one. A lot of the work we are doing is related to agentic commerce. And part of agentic commerce is that there's this rise of good bots, right? And most web volumes, Cloudflare is reporting most of the growth in web traffic is actually from bots. And so you start to see these initiatives to like charge tolls almost for the LLM bots as they go crawl the web. It's a penny to load walmart.com or something. And that's a pretty hard toll to extract with traditional payment methods. Or even if you think about the future of agentic commerce, we talk about with some clients is like a bunch of specialized agents collaborating. And if you have like one $5 affiliate marketing commission for a purchase, and then it has to be distributed down to a dozen different agents that did one part of that journey, that's where... Those micropayments could be a growing use case, but... - I mean, for Ali and Nabil, How about you guys? Did you feel like there was a certain level of technical competency that was required within your organizations to even start thinking about doing something with stable coins? Or was it okay to... Focus on the use case and the right partner. Nabil Manji | 52:06 Be there. Start on that. I think yes and no. I think, of course, you need a couple people that can talk the talk, so to speak, from a technical perspective, particularly the people working on the product and engineering side and potentially operations. I do think, though, and people who have heard me speak before will hear me say this multiple times is, I think one of the challenges or disservices this space has done itself is they focus too much on the technology. Like they make it about the technology over everything else where to your point, The vast majority of the users don't care about the underlying technology or the coding language or whatever. Like, you know, card payments on Visa run on base two. I bet nobody can like explain that to me. And that doesn't matter, right? It's the backend infrastructure. And I don't think many people could tell you how ACH payments work, even though they use them every day. I don't think many people can tell you how wires work, even though they use them every day. So it's that fine balance where yes, a couple people need to know it so you can build it and make sure it works. But everybody else should just see it as utility and understand how they can use it, not how it's working in the background. And then as far as like your original question around you know, what people should be doing this year to get ready for it. I think Just make it someone's full-time job. I really find it funny when these large, complex organizations say, " hey, we want to do something in stablecoins." And then hey you. Who knows nothing about it. Why don't you spend 20% of your time on this for three months and then present something really great to me?" And then they get surprised when it goes nowhere. So my biggest advice is hire someone or hire a few people who are passionate about it, who understand it, give them a little bit of leeway, a little budget, and... Let them explore that. 'Cause I think if you just have a couple people Am I interested in spending a small amount of time on it? You're probably not going to get much done. Ben Brown | 54:05 It's just potentially the future of the entire financial structure, right? So 20% of one person's time is enough. Yeah. But I think that's an interesting, we always go into the sort of Q&A period for the audience with these because they're such interesting discussions. But maybe as we wrap up in the last couple of minutes here, where you just open the discussion, like what's the one thing to do this year? I mean, maybe Ali and Ben, I'd love to hear your As people who've been there and done this or are doing it right now, what's the one recommendation that you have for people out in the audience, whether they are thinking about implementing this within their bank or company, whether they are investors looking at the space or... You know, users of the tech, builders of the tech, you know, within the sort of digital asset industry. I mean, what's the one thing that you'd recommend companies like yours out there do this year? Al, you want to go first? Ali Heiring | 55:06 Yeah, happy to jump in here. I mean, I think the biggest recommendation at Coating to Veal is to get started and just start building somewhere, right? So understanding, I think, stablecoin as a tool and the way that you can rethink the business model or the funds flow that you have today and really understand what it can unlock. And just start small. We picked a very specific customer use case in a very specific market and view that as like a great place to test new technology and build a lot of the organizational. Knowledge around stablecoin and its applications and to help us figure out how to really find product market fit and scale. So thank you. Don't be intimidated by the stablecoin or crypto industry and just find a path to start working with it. Ben Reynolds | 55:56 Yeah, I totally agree. It's not enough to just. Start doing a bunch of research projects. You've got to actually do something tangible because otherwise you're not going to approach it with the same rigor that you need to. The other thing is like, there's a lot of good talent out there. Ben Brown is always so modest, but like, you know, he was working with, you know, with Facebook on Libra and DM, you know, back in the day, what was that like eight years ago or something. And so there are experts out there that, you know, that understand these things and can really help you get up the learning curve, like a lot more quickly than if you just do it on your own. And so, you know, find someone to partner with, or, you know, that you can learn from, and just start somewhere. Ben Brown | 56:49 Maybe to help the audience with that, as we send out the slides and a link to the recording for today's webinar, maybe we'll send everybody a dollar through a Stablecoin app, and then everybody will have a trigger to get started on playing with it in 2026. But with that, you know, I think we're at time. Everybody has a super busy schedule. I know that some of you out in the audience ask questions. We'll collect those questions. We'll follow up with you one-on-one by email, even if that means, you know, relaying the questions to our panelists. But I want to thank all the panelists for giving us some of your time and your insights today. And I thought it was a really interesting discussion and Nabil, I'll be calling you at the end of the year to say, was it the year they went mainstream or not? And we can see about that prediction. Awesome. Thanks, everybody.

The recent replacement of PayPal’s CEO after only two years in the role has sparked passionate discussion on what caused the decline of the original fintech unicorn. While, in retrospect, there have been some real missteps, we believe the more interesting question is what PayPal could yet become. Despite a decade of strategic drift, the company retains unique assets that no competitor can replicate quickly: an identity graph of 430 million people, two-sided distribution including 35 million merchants, financial and compliance infrastructure across 200 markets, and early leadership in agentic commerce. Equity analysts are forecasting PayPal’s EBIT will shrink 23% over the next five years and public market investors seem to be pricing in a managed decline scenario at current share values. In the past few days, PayPal's depressed valuation has also reportedly attracted takeover interest. But 2026 doesn’t need to be the beginning of the end for what is arguably the original fintech unicorn. PayPal can commit to bold moves to evolve from being one of many digital wallet overlays to providing a programmable settlement and identity layer for the next era of commerce. The Original Fintech Unicorn PayPal is a fintech legend. Long before “fintech” was a sector, before Stripe, Square, or Apple Pay, PayPal was the easiest way to pay and be paid online. PayPal’s initial growth was driven by solving two critical problems for consumers: hesitation to share sensitive payment card details with unknown, untrusted merchants in the early days of e-commerce and simplifying clunky checkout experiences in an era when few merchants had card vaults. People today forget how common it was for online checkout forms to require 100+ keystrokes across 20 fields; PayPal condensed the experience to an email, a password, and a few clicks. PayPal was also enormously valuable for sellers too: for a decade before Square launched in 2009 or Stripe in 2011, PayPal was the main way for small sellers to accept online payments, first on eBay, then across the open web. And its bold acquisition of Bill Me Later (now PayPal Credit, effectively the original buy-now-pay-later provider), purchased for $1 billion in the midst of a banking crisis, showed a shrewd instinct for identifying adjacent markets before they matured. PayPal continued making bold bets in the early 2010s: it launched Mobile Express Checkout in 2010 when mobile devices accounted for just 2 percent of digital sales, acquired Braintree and Venmo for $800 million in 2013, and aggressively expanded internationally (international users grew from 28% of PayPal’s user base in 2005 to 60% by 2015). These moves enabled PayPal to grow its payment volume consistently at 20% annually for a decade. It’s fair to say that the first era of digital commerce required PayPal. However, the characteristics that once made PayPal indispensable - security, checkout simplification, and democratized acceptance - are now table stakes in digital payments. Figure 1: PayPal's Plateau (gross revenue by type, billions of $) A Decade of Strategic Drift The structural shifts that undermined PayPal’s original value propositions have been visible for years, but the company’s actions have compounded, rather than compensated for the damage. It’s no longer that hard to pay or be paid There was real friction in digital payments until the last ten or so years but today nearly every bank app in North America and Europe (PayPal’s core markets) has built-in person-to-person payment capabilities, responsive checkout forms and autofill (either via merchant card vaults or browser-based autofill) are effectively universal, and it’s not hard to go from sign-up to accepting payments in minutes by using a PSP like Square or capabilities built into your business software. On top of all that, card tokenization platforms launched by Visa and Mastercard in 2014 opened the door to digital wallets like Apple Pay that leveraged biometrics and device-led identity to turbocharge data fulfilment and payment verification in one click. Merchants no longer rely on PayPal to drive conversion through payments ease. The effect can be seen in PayPal’s performance; it was able to ride the wave of that core value proposition into new markets and greater volumes with 60%+ annual account and revenue growth into 2021, that momentum has now tapered as the likes of Square, Shopify, Stripe and Apple Pay’s penetration has gathered pace. M&A without follow-through Many of PayPal’s acquisitions over the last 10 years were in the right adjacent markets – markets that have proven to be unicorn-makers. The failure was not in the buying but in the building. Braintree, Venmo, Xoom, Paydiant, Hyperwallet, iZettle, Honey, and Bill Me Later have largely been operated as silos rather than integrated into a coherent product ecosystem or a single underlying platform (identity, risk, service, compliance, payments, customer data). On top of that, each company’s ability to innovate was hampered by PayPal’s corporate governance, leading to each business going from a leader within its market to losing ground relative to independent competitors. PayPal is a more complete company today with its acquisitions than it would have been without them, but arguably the company is also now less than the sum of its parts would have been if left to their own devices. Figure 2: Missed M&A Opportunities (PayPal M&A activity 2005-2025, total spend vs number of deals) Surrendered economic levers PayPal has grown dramatically (540%) since it was spun off from eBay in 2015, but it has also price-competed its way to that growth. The company’s take rate (excluding credit and value-added services) has gone from 2.9% in 2015 to 1.66% in 2025. This is partly due to adding new, lower-margin businesses around branded checkout but it’s not entirely a mix issue: equity analysts we follow estimate that PayPal’s take rate has declined for the past ten years across every business except P2P: branded checkout, merchant services, unbranded processing, eBay, Braintree, Venmo – every single business is earning less as a percent of volume in 2025 than it was ten years ago[1]. Exacerbating this trend somewhat is PayPal’s 2016 agreement to stop steering customers away from card-funded transactions as part of a deal with Visa and Mastercard. While this deal came with meaningful benefits (access to V/MC tokenization, defusing the threat of additional network fees and unlocking incentives, bank marketing) it also seriously handicapped the company’s most powerful economic lever – its ability to steer customers towards using lower-cost bank rails – and likely created complacency around leaning into stablecoins as a new settlement system. Figure 3: PayPal Transactional Economics Analysis (transaction revenues less transaction expense and transaction losses, as a % of TPV) A revolving door at the top PayPal has cycled through three CEOs in three years, alternating between “product” and “business” archetypes, and each transition has consumed 12-18 months of organizational energy. The pattern suggests less a talent problem than a governance one; repeated CEO transitions have reset priorities before strategic bets could compound. To transform the company, PayPal’s board must stand behind Lores, even if results take some time. He needs to bring back on leaders with payments knowledge and product vision, and those leaders need to empower their teams to think and act long-term. Figure 4: Signs Of Strategic Drift (PayPal number of accounts, net revenue & take rate) The Assets Most Critics Overlook The bearish commentary has focused almost entirely on what PayPal has lost, which is fair as far as it goes, but it understates the structural assets that the company still has and that no competitor can replicate quickly. These assets are underleveraged today but could be decisive in the next era of commerce. Identity graph PayPal has more than 430 million accounts with verified identity, cross-border transaction history and years of fraud and trust data. In a world moving toward agentic AI, where bot traffic has increased from one-third of web visits in 2019 to one-half in 2024, being able to sort out real users (and their delegated agents) from fraudsters will be a valuable resource. Two-sided distribution PayPal operates multiple consumer brands (PayPal, Venmo, Xoom, Paidy) and merchant processing platforms (Braintree, Zettle, PPCP). That two-sided network – branded and unbranded, consumer and merchant, pay now and pay later – creates a flywheel that is difficult to replicate even if individual components are under pressure. Recent data confirms it still works: full-stack PayPal deployments combining modern checkout, biometric enablement, BNPL messaging and co-marketing drove double-digit branded TPV growth at several merchants during Cyber 5 2025, according to UBS. Settlement control PayPal’s infrastructure includes direct bank rails (lower cost than cards), its PYUSD stablecoin (with programmability potential for micropayments and cross-border settlement), direct merchant contracts, and the ability to net FX flows across global entities. If merchants who receive PayPal payouts also use PayPal to make subsequent B2B purchases, that creates a closed-loop funding source with near-zero marginal cost. PayPal could leverage these capabilities not only for novel functionality but also to reverse the long-term status of its funding costs and resulting compression of its net spread. A head start in agentic commerce This is perhaps the most underappreciated asset. PayPal has established collaborations with OpenAI, Google Cloud, Microsoft, and Perplexity to integrate its checkout into AI-powered shopping surfaces. It has built an agent-ready transaction framework (“agent ready”) and “store sync” infrastructure that provides AI agents with the structured commerce data they need to operate effectively. Flagship estimates that by 2035, $3–5 trillion of US consumer payments will flow through AI agents. The infrastructure for those transactions is being built now, and PayPal is at the table. Reinventing PayPal For The Next 10 Years Over the last two years, under its last CEO, PayPal was making a lot of the right investments to transform and update its existing business: Fastlane, biometric authentication, platform integration, more pricing discipline on Braintree, and progress on monetizing Venmo. Those actions should continue and will result in a stronger PayPal, but not a fundamentally different or future-proof company. We believe PayPal can return to market leadership through bold investments across four fronts: 1. From wallet to network PayPal has some structural disadvantages relative to its competitors: Apple controls the device layer, banks control primary accounts, and Stripe is embedded across SaaS. Given those challenges, PayPal may not be able to be everyone's preferred wallet. If PayPal can't win every wallet, it should be the network that connects them. PayPal already enables consumers to use Apple Pay and Google Pay in its branded checkout and it enables merchants to accept Alipay and eight other APMs through its API. It should accelerate the PayPal World program it kicked off last year: provide interoperable rails for any wallet in the world to work wherever PayPal is accepted and vice versa. Alipay, Paytm, CashU, MercadoPago, GCash, Paze, Zelle, Wero, and others should all be able to transact at PayPal merchants seamlessly. Merchants should be able to think of PayPal not as one of many wallets on their checkout page, but instead as the portal to whatever payment method their global customers use. Figure 5: Digital Wallet Fragmentation (global digital wallet launches) Underneath this expansion, PayPal needs to get into the business of actual money movement, not just being a front end. Cards have grown from funding 60% of PayPal and Venmo (ex-Braintree) in 2014 to nearly 70% today. To reverse that trend, PayPal should use PYUSD to create instant, cheap, programmable money settlement infrastructure between its users, merchants, partners, and other payment methods. 2. Win daily commerce PayPal is broadly accepted online (84% of the top 100 US retailers offer it at checkout) but it barely exists in-store, where most spending still happens. Offline is still 80% of retail but only 2% of PayPal's volume. Previous attempts to close that gap, including phone-number-and-PIN at Home Depot in 2012 or QR codes during the pandemic, failed because they asked consumers to adopt a worse in-store experience than the card they already had in their pocket. PayPal might need to build its own settlement system online, but in the physical world it should just ride the card rails. They have had access to card network tokenization (VTS and MDES) since 2016 but haven’t done much with it. PayPal offers a debit card and it’s growing quickly, but every PayPal customer should be able to use PayPal (and PayPal Credit) in-store by tapping their phone wherever Visa or Mastercard are accepted. If the card networks’ staged wallet rules are a blocker, PayPal should think more creatively, such as putting a line of credit or PYUSD in between every card purchase and every funding event. There is clear evidence that in-store can be a huge growth vector for PayPal: Klarna and Affirm have signed up 5+ million people in the U.S. for cards and in-store is now more than 15% of their total spend, with 25% of card usage in categories those companies didn’t historically serve online. Venmo can be PayPal’s secret weapon in this battle. A debit card without a daily app relationship behind it is just another piece of plastic, but Venmo is the app 100 million younger people already use regularly. The product needs to lean into the things that keep younger consumers engaged daily — real-time spending control across every merchant relationship, flexible payments that let users change funding source or pay over time before, during, or after a transaction, and a social layer that reinforces the habit. 3. Own agentic commerce When an AI agent books a flight, reorders supplies, or comparison-shops across dozens of merchants in seconds, it needs three things: a verified identity to transact on someone's behalf, a set of rules governing what it can spend and where, and structured commerce data to act on. PayPal's identity graph solves the first and its digital wallet is a natural control center for the second. PayPal has already started building the infrastructure (store sync) for the third and its broad partnerships with AI companies give PayPal a shot at being the default payment layer inside AI-powered shopping surfaces. The competitive dynamics here are different from traditional e-commerce because agents don't see buttons, don't have brand loyalty, and don't care about checkout UX. Agents care about clear instructions, structured data, API reliability, efficient settlement, and strong post-purchase protections. That is a combination of needs that PayPal is uniquely positioned to support. Longer-term, PYUSD also gives PayPal a programmable settlement capability that can handle the micropayments, conditional logic, and machine-speed escrow that may become more common with agentic transactions. Figure 6: Agentic AI Adoption (US digital consumer payments channel mix, est.) 4. Become easier to work with and work at None of the above matters if the company cannot execute faster than it has in the last decade. PayPal operates at least seven distinct product surfaces each with its own onboarding, identity layer, and merchant integration. As we mentioned earlier, internally that fragmentation translates into duplicated systems, competing roadmaps, and a bureaucratic overhead that slows everything down. Externally, it means merchants and distribution partners face unnecessary friction. One telling example: unlike most alternative payment methods, PayPal requires every end-merchant to sign a direct contract rather than allowing distribution partners to act as aggregators. That single policy choice locks PayPal out of the long tail of merchants that other APMs can reach through aggregators like Stripe, Adyen, Nuvei, PPRO and others. Alex Chriss kicked off a technology transformation program to integrate PayPal into one platform, with one customer profile, and one product development process internally. Realizing that vision will be an expensive, multi-year effort but it must be done. This is unglamorous work but it is the difference between a company that articulates a compelling strategy and one that actually delivers it. This may only be possible as a private company It is worth asking whether the reinvention described above is achievable under public market scrutiny. PayPal trades at ~7.5x forward earnings with a market capitalization of roughly $39 billion, generating ~$6 billion in annual free cash flow. The market is pricing the company for slow, managed decline and quarterly earnings pressure reinforces the incentive to optimize for near-term transaction margin dollars rather than invest in platform transformation. Reinventing rails is a 3–5 year capital cycle. Public markets rarely tolerate visible earnings drag over that timeline. A take-private transaction would provide the capital, the refreshed governance, and most importantly the time horizon necessary to execute a genuine platform reinvention without quarterly margin scrutiny. However, any financial sponsor (or strategic buyer) would have to be prepared for substantial investment and a highly complex transformation program. The last 10 years don’t have to define the next 30 PayPal’s decline serves as a reminder to every fintech company that incumbency is not king. In an increasingly commoditized and crowded payments industry, it is essential to constantly refine and refresh customer relevance, even if that means making bold pivots into new markets. The PayPal story is not over. The company that solved online trust in 1998, acquired the first BNPL provider in 2008, and built a 430-million-account global network still has the raw materials to be relevant in 2035. The question is whether PayPal’s new leadership is willing to use them and what is the best ownership structure to enable bold reinvention. Please do not hesitate to contact Ben Brown at Ben@FlagshipAP.com and Will Hay at Will@FlagshipAP.com with comments or questions. [1] Unbranded processing excludes Braintree. Braintree excludes PayPal button and Gateway. Venmo excludes P2P and instant transfer revenue.

As part of our ongoing vertical series on vertical SaaS and embedded finance, we profile the accommodation property management segment, which is relatively mature in embedded payments acceptance but offers significant growth opportunities across broader embedded finance. Figure 1: Vertical Definition Figure 2: Vertical Spend Figure 3: Vertical Dynamics Figure 4: Leading Software Platform Figure 5: Embedded Fintech Maturity General Commentary & Highlights Hotels are the largest and highest-margin core segment, with standardized booking and revenue management processes that are already widely software-enabled. Overall vertical spend is robust, with modest growth (low single digits); STVR and outdoor stays are gaining popularity, driving demand for specialized property-management software. Common software in this vertical is property management software (PMS) and channel managers. Software penetration is very high among hotels and STVRs. Those that are unpenetrated are usually boutique hotels or property owners with less than five properties. Online payments and FX services are highly embedded in this vertical with emerging embedded fintech products such as gift card issuing, consumer financing, business lending, and insurance. Please do not hesitate to contact Peter Taylor at Peter@FlagshipAP.com with comments and questions.

Fintech in the Middle East is no longer emerging - it is scaling. Strong capital inflows, rising consolidation, and regulatory tailwinds are accelerating growth across payments, wallets, lending, and digital banking. We advise viewing the slides via the "PDF" icon button. Key Highlights: Fintech funding has accelerated and a new cohort of regional champions is scaling on the back of strong investor appetite Digital wallets are scaling across the Middle East, driven by digital commerce, changing consumer preferences, and new entrants Real-time payments are emerging at pace, with open banking regulations set to unlock A2A innovation in the region Remittance remains a defining corridor, with several digital native players now competing for share Neobanks are fast emerging, often as off-shoots of traditional banks to win into consumers and SMEs Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com or Pranav Kapoor at Pranav@FlagshipAP.com with comments or questions.

Visa and Mastercard delivered another strong year, with GDV up 7–9% and net revenue growing even faster (12–16%), increasingly driven by value-added services like tokenization. In our annual card scheme performance infographic, we highlight Visa and Mastercard's performance, including how cross-border growth is decelerating for a third straight year and how global card mix is shifting (Visa toward credit, Mastercard toward debit). Figure 1: Total Network Gross Dollar Volume (GDV) ($ trillions; YoY growth) Figure 2: Cross-Border Volume Development (YoY Growth) Figure 3: Card Counts (number of cards in force in billions; average $ spend per card from Sep ‘22 – Sep ’25) Figure 4: Net Revenue by Segment ($ billions; net revenue and CAGR by segment) Figure 5: KPIs (from FY ’22 – FY ‘25) General Commentary & Highlights Visa and Mastercard had another year of strong performance, growing GDV 7% and 9% while growing net revenue 12% and 16%, respectively Cross-border volumes experienced a 3rd consecutive year of growth deceleration for both companies, declining from 15% to 12% for Visa and 18% to 15% for Mastercard. This aligns with Visa’s international transaction revenue growth slowing year-over-year from 10.4% to 9.8% and Mastercard’s cross-border fees revenue growth declining year-over-year from 21.1% to 18.1% Visa grew card counts by 7% year-over-year driven by 13% growth in credit cards, with a decline in average spend per credit card. Mastercard grew card counts by 8% year-over-year driven by 11% growth in debit cards Visa and Mastercard’s revenue growth have been driven by value-added services and products in recent years. Tokenization remains a focus for both companies with Visa achieving >50% of transactions being tokenized and Mastercard achieving nearly 40% of transactions Visa’s client incentives as a share of GDV grew faster year-over-year than net revenue as a share of GDV growth (6% vs. 5%), while Mastercard’s grew 7% year-over-year, aligning with net revenue growth and matching the prior year’s growth Please do not hesitate to contact Rom Mascetti at Rom@FlagshipAP.com with comments and questions.

Introduction On January 22, 2026, Capital One (a top-10 U.S. bank) announced that it will acquire Brex, a corporate spend management and treasury platform, in a $5.15 billion 50/50 cash-and-stock transaction, expected to close by mid-2026. The deal is one of the largest ever fintech acquisitions by a bank and latest in an active B2B fintech deal environment. Many headlines focused on the purchase price and valuation of Brex (down from its $12B peak in 2022), but we see the transaction, most importantly, as further development in the convergence between “Office of the CFO” software and financial services. This article unpacks the deal rationale, execution risks, and broader impact on the B2B fintech ecosystem. Why Capital One Bought Brex Capital One’s acquisition of Brex reflects the bank’s ambitions to move beyond commoditized banking services (cards and deposits) towards being a platform at the center of a CFO’s operating stack. Brex’s proposition combines corporate cards, cash management, and spend controls into a single package that targets tech-forward SMBs and growth businesses. For Capital One, this provides a strong product for cross-sell to existing business banking customers and a new lead product for attracting tech-forward customers. In Figures 1 and 2, we highlight what Capital One is getting, including Brex’s product & platform capabilities, publicly disclosed financial performance, and specifics about the deal. Figure 1: Brex Overview (product & platform, non-exhaustive) Sources: Flagship Advisory Partners Market Research & Observations Figure 2: Brex Overview (based on public disclosures as of Feb. 2026) Source: Flagship Advisory Partners Market Research & Observations Brex brings a base of roughly 35,000 customers and modern, data-centric financial workflow solution that aligns with Capital One’s commercial banking ambitions. Capital One CEO Richard Fairbank stated, “Since our founding, we set out to build a payments company at the frontier of the technology revolution… Acquiring Brex accelerates this journey, especially in the business payments marketplace.” Brex’s API-driven, modular technology stack provides Capital One with software-native capabilities that would be difficult to develop organically within a traditional bank's operating environment. Combined with Capital One’s balance sheet strength, deposit funding, and underwriting scale, the acquisition (on paper) enables the company to support customers with credit and treasury solutions at a scale greater than any other B2B fintech. As we illustrate in Figure 3, Brex and its $20 billion in virtual and physical corporate T&E and purchasing cards would bring Capital One's commercial card spend well above $100 billion, making it a top-3 corporate card issuer in the U.S. Figure 3: Top U.S. Corporate Card Programs by Purchase Volume (directional purchase volume, in $ bil.) Note: Volume includes Corporate T&E, Fleet and Purchasing, Small Business Credit, Small Business Debit and Prepaid (Government Benefits, etc.) Source: Flagship Advisory Partners, Nilson Report Transaction Economics & Potential Capital One + Brex Upsides Brex’s revenue model is driven by card issuing economics where Capital One can introduce further synergies and optimization, for example: Interchange and interest income: U.S. issuers earn meaningful interchange revenue and interest on credit card balances. Routing transaction volume through an issuer that also owns the network (e.g., American Express) or has favorable network arrangements (e.g., JPMorgan Chase) can materially impact the net economics captured. Standard four-party card models distribute value across networks, issuers, acquirers, and merchants; controlling more of these layers structurally improves economics. Capital One will surely find ways to accelerate interest (float) and lending revenue from Brex customers. Discover network optionality: Capital One owns the Discover network, which allows Capital One to internally retain network fees that would otherwise flow to third parties. Routing Brex card volume onto the Discover network could boost card economics and enhance net take rates, contingent on merchant acceptance and routing strategy. Even if Brex’s issuing volumes remain on Mastercard, Capital One will surely extract leverage synergies on the network economics. Figure 4: Illustrative Card Transaction Waterfall (highlighting issuer economics & discover network fee retention) Source: Flagship Advisory Partners Market Research & Observations Bank-Owned Fintech Execution & Competitive Risks Banks have a spotty record for value-creation buying technology companies, although Capital One is considered more tech-forward than most of its large bank peers. Capital One’s large bet feels like an inflection point, but it also brings well-documented execution risks, as we describe in Figure 5. As an illustrative example of strategic misalignment, Brex’s planned international expansion announced in 2025 (via its Dutch Payment Institution license to support pan-EU operations) is now in question, as Brex’s EU footprint is likely less central to Capital One’s immediate commercial priorities absent any explicit post-close strategy announcements. Figure 5: Why Bank–Fintech Acquisitions Are Challenging (reoccurring risk/observations across prior deals) Source: Flagship Advisory Partners Market Research & Observations Integration execution and avoiding self-inflicted wounds will be critical for Capital One this year into next. But in the meantime, we expect to see Brex’s competitors lean into marketing the deal as weakening the innovation of the company. Two risks stand out: Brand and product loyalty: The announcement itself may prompt finance teams to reassess platform commitments if they worry about the bank slowing down the development roadmap. Competitive attacks: Independent fintechs (including Ramp) will emphasize agility and product autonomy as differentiators against bank-owned incumbents. Ramp (Brex’s closest competitor in spend and treasury workflows) released its own public reaction HERE, which explicitly frames the acquisition as introducing uncertainty about product direction, pricing, underwriting, and integration, language that serves competitive positioning but also highlights where market share battles can occur. While Brex represents Capital One’s largest fintech bet, the deal is consistent with Capital One’s ambitions to expand its positioning in business banking. Prior to Brex, Capital One acquired premium lifestyle and concierge platform Velocity Black in 2023 to accelerate its presence in high-end digital experiences. Going back further, Capital One acquired trade credit provider BlueTarp in 2019, which today operates as Capital One Trade Credit and, at the time, extended the bank’s footprint into SMB and B2B purchasing workflows. Figure 6 illustrates some of Capital One’s recent SMB banking-related partnerships, acquisitions, and venture investments. Figure 6: Capital One SMB Banking Product Domain (partner, acquisition, and venture logos non-exhaustive) Source: Flagship Advisory Partners Market Research & Observations Conclusion Capital One’s acquisition of Brex is a continuation of the convergence between Office of the CFO software and financial services.. Most of the deals in B2B fintechs over the last two years were non-bank fintechs buying smaller, capability-led technology companies to complement strategic partnerships and organic platform development investments. Banks have generally learned to been cautious buyers of fintechs at fintech valuations. However, the swoon in B2B fintech valuations made Brex a target for ambitious Capital One, who will now lean heavily on Brex as a growth engine for business banking. Please do not hesitate to contact Rom Mascetti at Rom@FlagshipAP.com with comments and questions.

Buy Now Pay Later has moved from being a checkout novelty to becoming one of the fastest-growing forms of consumer credit. In 2025, BNPL originations passed $60 billion in the U.S. and $500 billion globally – with sustained volume growth more than double the rate of credit cards. Retailers love the incremental sales, consumers love the simplicity, and providers love the growth. Credit card issuers and traditional sales financing providers can find lessons in BNPL’s success. Designed for Digital Customer experience has been an important and visible differentiator for BNPL lenders. Applying for a retail installment loan or credit card has gotten better over the years, but the best credit card issuers still require about twice as much information as BNPL lenders. Companies like Klarna and Affirm use probabilistic identity and third-party data (from data vendors, credit reporting agencies, merchants, and other financial institutions) to prefill forms. With your phone number and email, a BNPL lender has all the information they need to pre-fill your application and make a credit decision in seconds. Figure 1: Checkout Friction: BNPL vs. Credit Cards When necessary, BNPL lenders also do additional identity verification by validating applicants’ email and phone number, using open banking tools to log into bank accounts, and using the smartphone’s camera to capture a photo ID and video selfie (a liveness check). BNPL lenders have not just innovated by cutting data out of the process; they apply a dynamic approach to collect more information when they need to. Credit for All At the heart of BNPL is a fundamentally different approach to underwriting. Credit card issuers are underwriting a persistent, revolving line of credit that could be used for anything a customer wants. Issuers (and other types of consumer lenders) rely on complex models built on first-party (self-reported) and bureau data. BNPL lenders, by contrast, have the opportunity to make transaction-by-transaction decisions on identity, ability to pay, and intent to pay. This enables them to rely on different kinds of data and faster decisioning. These novel practices have enabled tremendous growth and provided BNPL lenders with confidence to lend across the credit spectrum, with good results (in 2023, BNPL charge-off rates were 1.83% in the U.S. vs. 3.49% for credit card issuers). Figure 2: Percentage who use BNPL by Age and Credit Score (as of December 2024) While the broad accessibility and growth of BNPL is impressive, the resilience of BNPL credit quality has not yet been fully tested. The entire sector has scaled during a benign credit environment with relatively low defaults and steady consumer demand. We have not yet seen how these portfolios perform when net credit losses spike, and that day will inevitably come. Figure 3: Providers & When They Launched BNPL (non-exhaustive, coded by BNPL first vs added on) It would be a mistake to assume BNPL is doomed to fail during a downturn. In fact, BNPL has some real structural advantages over credit cards or personal loans. A revolving card or installment loan balance can linger for years but most BNPL loans resolve in weeks or months. That short duration means providers can adjust exposure quickly when the macro picture changes. If delinquencies rise, approvals can be tightened almost overnight, with losses contained to a narrow window. By contrast, a bank sitting on a portfolio of three-year auto loans, ten-year personal loans, or card receivables with indeterminant duration, has no such agility. This ability to pivot is an underappreciated strength which could allow BNPL providers to ride the eventual tidal shift in credit quality more nimbly than many of their traditional counterparts. This agility could enable BNPL lenders to gain market share through the next cycle. Figure 4: Providers & BNPL Max Term (non-exhaustive, program max. term length) Product Convergence We are also witnessing the evolution of BNPL beyond its original form: BNPL lenders are providing longer-term loans that overlap with traditional sales financing plans, the largest BNPL lenders have all launched card products, card issuers (including debit card issuers in some cases) are embedding BNPL-like features directly into their products, and A2A schemes outside of North America are incorporating BNPL into their products. By adding installment plan functionality, issuers are giving consumers the choice of revolving a balance or breaking a transaction into fixed payments. For the consumer, it means flexibility; for the issuer, it means broadening the addressable market to include consumers who may prefer the clarity of installment plans or don’t have the credit quality for large revolving lines. By issuing cards, BNPL providers make their products easier to use across the 175 million merchant locations that accept Visa and Mastercard globally, especially in-store, where BNPL usage today is de minimis. They can also capture everyday spend that consumers don't want or need to finance. Visa and Mastercard have even rolled out new card product types (e.g., Visa Flexible Credential, Mastercard One) to support card programs where some purchases are paid up-front and some are financed over time. By supporting BNPL/installment credit, A2A schemes (such as Pix and UPI) provide additional purchasing power to consumers who don’t have or don’t want to use cards -- and create opportunities for banks and PSPs to generate meaningful revenue from payment rails that are otherwise much less attractive than cards. The competitive implication is that the line between BNPL and credit cards is blurring, and as established issuers incorporate these features into their already ubiquitous card products it may create headwinds for BNPL lenders to continue growing. Figure 5: Providers, Card/Wallet & Merchant BNPL Crossover (non-exhaustive, card/wallet initiated vs. merchant initiated BNPL) Unintended Consequences The mass-market adoption of BNPL also raises some challenges for traditional lenders. Underwriting models designed before BNPL assumed that bureau data provided a reasonably complete view of obligations. That assumption no longer holds. Most providers do not report repayment behavior to the credit bureaus, which results in BNPL borrowers appearing less leveraged than they truly are. As BNPL continues to grow, particularly among lower-credit-tier borrowers, these hidden liabilities may reduce the predictive power of bureau data. A consumer who looks stable under legacy models may, in reality, be servicing multiple installment loans simultaneously. This creates a more optimistic view of credit quality than reality warrants, leaving lenders exposed to higher losses than expected if the credit-loss environment continues trending upward. A growing number of providers are also beginning to report repayment activity to the credit bureaus, especially for their longer-duration installment plans, which helps close some of the transparency gap that early BNPL models created. FICO announced last year it would explicitly include BNPL data in its FICO Score 10, which it did starting in fall 2025. Figure 6: Providers & BNPL Credit Reporting (non-exhaustive, by credit reporting policy) Here to Stay Looking forward, BNPL is unlikely to reverse course and fade away. If anything, it's clear that BNPL is now a permanent fixture in the payments and lending landscape globally. BNPL seems widespread in the U.S., UK, and Western Europe, but it’s actually far more popular in the Nordics (Klarna’s home market), the Middle East, and Asia-Pacific. The penetration levels seen in those markets are evidence that there is a long runway for growth in credit-hungry markets like the U.S., which will be achieved through broader adoption, moderate share of wallet gains in e-commerce, and activating BNPL usage in-store for the first time. Figure 7: BNPL Usage Overview (positive response rate to “When buying goods and services, have you used a BNPL service?”) We do not believe BNPL will drive wholesale displacement of credit cards in the medium-term future, but issuers should not ignore these products. BNPL's rapid rise should serve as a call to action to credit card issuers to better learn their customer’s needs and preferences, reconsider the inherent value of cash flow underwriting to better meet the needs of thin-file customers, and reinvest in UX excellence. For the payments industry, the task is to recognize both sides of BNPL - its vulnerabilities and its strengths – to prepare for a future where installment lending is not a niche alternative to credit cards, but a standard feature of consumer finance. Please do not hesitate to contact Ryan McDonald at Ryan.McDonald@FlagshipAP.com or Ben Brown at Ben@FlagshipAP.com with comments and questions.

Flagship Advisory Partners’ Executive Interview Series provides readers with exclusive insights from thought leaders in the payments and fintech industry. This edition spotlights Vipps MobilePay, a leading payment method in Norway, Denmark, and Finland. Flagship Advisory Partners met with Rune Garborg, CEO of Vipps MobilePay, in Oslo to discuss the rollout of its NFC wallet, early adoption trends, and how the company positions itself within emerging pan-European payment collaborations, including the EuroPA alliance1. Photo credit: Ilja C. Hendel Introduction Can you tell us about your background and Vipps MobilePay’s journey so far? I’ve worked many years in banking. I started by building loyalty programs at DNB, then held marketing and product leadership roles. Vipps began as one of several new products in DNB’s 2015 plan, and I’ve served as the CEO since its early days. Vipps started with P2P as the growth engine and brand builder. P2P alone isn’t a viable end state—it’s costly and often free to users—so we expanded into e-commerce. Moving from a P2P brand to a P2B/e-commerce brand is harder than it looks, but it was a key step and an important part of the journey. Today we have become the number one preferred payment method online for users in Norway and Denmark, and soon also for in-store payments. Vipps MobilePay NFC Wallet You were the first in the world to launch a competing NFC wallet solution to ApplePay on iOS devices. What drove this shift to in-store payments and how important was access to Apple’s NFC? If you want to be a true wallet — present in every payment situation — you need in-store. Roughly 75% of transactions today happen in-store. We were talking about NFC as early as 2016–2017, but access took 8 years to materialize since we started talking about it. NFC access is perceived as foundational. Without it, it’s very hard to compete ’on level terms‘ with global wallets in the terminal environment. We made serious attempts with QR codes at the terminal. QR code technology works well in specific use cases like restaurants or clubs, but at the payment terminal it loses versus NFC by several seconds, which is enough to fail. We invested heavily, probably tens of millions, and ended with ~0.09%share in that approach when we ended that journey. It conflicted with a core principle for us: if it's not simple enough, we won’t do it. We were at the forefront of the legal battle against Apple and used our failed QR-code rollout as concrete evidence of why NFC access matters. That experience made one thing clear: without access to the device’s NFC chip, it is structurally impossible to deliver a user experience that is on par with native wallets. What are Vipps MobilePay’s ambitions for in-store payments? Firstly, in Norway, mobile payments are still approximately 25%of the market; many still use plastic cards. That will shift quickly, especially among younger users. Over the next couple of years, you’ll see who becomes the number one player as mobile grows from ~25% toward ~50%+. This is why it has been hugely important for us to enter the physical channel. In every payment situation we enter — P2P, online, or in-store— the ambition is to be number one. In-store is tougher as Apple already has a strong presence and nearly a decade’s head start. If we compare ApplePay and Vipps MobilePay’s NFC wallets, the UX is effectively the same — we talk about this as “water and water.” You need to add more when it comes to competitive edge. The main question for us now is how we can differentiate in-store against competitors like ApplePay. We need to add reasons to use Vipps MobilePay beyond payments — create real “FOMO” from not using it. Also, consumers value having all transaction history gathered in one place. And we have a very large user base in our core markets, which helps. What kinds of ‘beyond payments’ services will position Vipps MobilePay as more compelling than the global wallets, if they are considered like-for-like solutions today? Generally, we are extremely well-positioned when it comes to branding, we are at the forefront of trust and attractiveness. But this is not enough. We are currently working on solutions beyond payments that we believe will be compelling enough to make non-Vipps MobilePay wallet users switch. Loyalty is one possible lever, and many players already pursue it, but differentiation can also come from transaction-linked benefits that create value for users without necessarily relying on cashback. The goal is to make the proposition compelling enough that switching the default wallet feels worthwhile. We are also looking at things like ID solutions, spending overview, receipts—features that naturally belong in a wallet. Digital car keys specifically for example, aren’t a focus. Tickets (e.g. airline boarding passes, digital tickets for events, etc.) could be interesting, but those features exist on consumer devices regardless of which payment method you have as your default — so they aren’t the whole answer. We’ve considered financing too, but we chose to collaborate with Klarna for BNPL because they do it extremely well. For consumers, it’s less about revolving credit and more about flexibility (pay later) and smoother returns/customer experience. What can you say about Vipps MobilePay’s adoption so far, and what tactics have you used to sign up new wallet users? We now have more than one million cards added to the tap-to-pay solution in Norway. That does not equate to one million active users, but growth has been strong—particularly since October 2025. We expect that within 24 months, at least 50% of Norwegians will use Vipps MobilePay as their primary in-store payment method, with adoption accelerating further as we introduce services beyond payment. The key inflection point came in October 2025, when we added broader card compatibility with global card networks. That made the proposition materially more complete—it “works everywhere,” including outside the Nordics—and removed a major barrier to adoption. Adoption to date has been driven primarily through our own in-app channel, focused on educating users and making it as seamless as possible to switch the default wallet in device settings. We are now increasing external marketing, particularly to raise awareness that our wallet can be used globally and to support the rollout of value-added services beyond payments. We launched tap to pay in Denmark, Finland, and Sweden in November. It is currently available with selected Visa and Mastercard cards, depending on market and bank. In Denmark, tap to pay is available for cards issued by Danske Bank and SEB, while in Finland it initially includes Danske Bank customers. In Sweden, the first supported cards include the SAS EuroBonus Mastercard, Eurocard, and Strawberry Mastercard. We are working to onboard additional banks and cards across all three markets. As the rollout is still in an early phase, it is too early to say anything on adoption or usage levels. What is your view on the difference between converting existing wallet users vs. winning new mobile payment users? There is a big difference between convincing existing digital wallet users to switch, and nudging new users — those moving away from plastic, especially younger and first-time mobile payers — to choose Vipps MobilePay as their default from the outset. Convincing existing wallet users to change ingrained habits is difficult and one of the biggest questions we are working on today. We are competing against the strongest and most powerful brands in the world, which raises the bar significantly. To make users switch, the offer must be exceptionally compelling, which is where our ‘beyond payments’ value proposition will play an important role. For new wallet adopters, youth is critical. If you lose younger users, the brand is at risk. Vipps MobilePay was originally built on strong youth engagement, and we continue to have a strong position among younger users today. At the same time, younger users are more inclined to experiment and try alternatives. They expect faster renewal and greater excitement on top of simplicity. This reinforces the importance of our ‘beyond payments’ offering. Some may argue that the wallets race is structurally unwinnable given the dominance of platform owners like Apple and Google. How do you respond to that view? It’s an interesting perspective. Platform owners have built enormously powerful global brands and have succeeded in most markets they’ve entered, so it’s natural to assume they are unbeatable. But that’s not how we see it. We believe our position is extremely strong. Across Finland, Denmark, and Norway, we reach around 13 million users, and in Denmark and Norway our penetration is close to universal. That scale matters. Combined with strong brand trust and the ability to give users a single, simple overview of all their transactions in one place, it gives us a very solid starting point. Beyond scale, we already cover a wide range of everyday payment situations — P2P, e-commerce, and in-store — and we will continue to add new products and services to the wallet. From our point of view, this breadth, combined with ownership of the customer interface, puts us in a strong position relative to other players. We are now entering a new phase focused on completing the wallet experience. The first step is ensuring that everything people carry in their physical wallet is available digitally, at least at the same level. From there, the opportunity is to build additional value beyond that foundation—services and experiences that further strengthen user preference and engagement. Pan-European Interoperability We know that Vipps MobilePay is part of the EuroPa alliance. What are your near-term priorities around pan-European collaboration? At this stage, the primary focus is interoperability—making it as easy to send money across Europe as it is today within the Nordics. With the NFC solution, Vipps MobilePay already enables users to pay globally, but the next step is extending that same simplicity to cross-border P2P payments. The ambition is that sending money from Norway to Spain, Italy, or Portugal should feel no different than sending money to Denmark or Sweden today, ideally through collaboration with other European wallets and as early as this summer. In parallel, initiatives like Wero2 address a second dimension of European collaboration: more cost-effective payment rails. While we are actively exploring that as well, the immediate priority is to combine the strengths of local payment methods and enable seamless interoperability across countries. What do you see as being the end-state of these initiatives? We expect consolidation over time. The market will not support dozens of fragmented wallets. Instead, we’ll see the emergence of a small number of strong European players that can stand alongside global brands like Apple, Revolut, and PayPal. These European wallets will need to come together and offer a complete proposition — at least on par with the international players — to remain competitive in the long term. When looking at pan-European initiatives, many alliance members have a clear ambition to compete with the global card schemes. Vipps MobilePay still relies heavily on international rails today. Which side are you on and why? It is important for us to offer merchants low-cost payments. In Norway and Denmark, solutions like BankAxept and Dankort — both in e-commerce and in-store — are critical parts of the national infrastructure and are highly valued by merchants. At the same time, as a wallet, our most important strategic asset is the customer interface and the data that comes with it. Owning that interface is what determines end-user preference, which is why services likeP2P payments and cross-border interoperability are so important to us. Low-cost rails and efficient infrastructure can strengthen the merchant proposition and, in turn, improve the wallet experience — but the customer interface always comes first. Historically, we’ve been highly cost-sensitive, relying on account-to-account solutions wherever possible. At the same time, we need universal usability, which means supporting Visa and Mastercard. The strategy is to orchestrate both: combining low-cost schemes with global card networks to deliver a scalable, competitive wallet. The Future Fast forward to 2029, what will stand out about 2026–2028? The rise of products and services beyond payments. We’ll look back at a time when “payment” meant mainly the transaction and see how much value migrated into additional services and experiences. I believe that there are margins to win also outside of payments, not necessarily earning the majority of revenue from the payment transactions. What makes you most excited about the future? The competition—going up against some of the strongest brands in the world. Costs per transaction will keep falling, and differentiation will increasingly come from value beyond payment, while still keeping simplicity as the core identity. Please do not hesitate to contact Elisabeth Magnor at Elisabeth@FlagshipAP.com for any questions or comments. 1 EuroPA alliance: A European initiative launched by several domestic payment schemes to enable cross-border interoperability between local payment solutions. Participants include Vipps MobilePay(Nordics), Bizum (Spain), Bancomat (Italy), MB WAY/SIBS (Portugal), and Blik (Poland), among others. 2 Wero: Wero is a European digital wallet initiative designed to build a sovereign, pan-European payment solution based on account-to-account rails, rather than international card networks. Backed by major banks across the Benelux, France, and Germany, Wero is expected to incorporate domestic payment schemes such as iDEAL in the Netherlands as they transition under the Wero brand. Over time, Wero is anticipated to become interoperable with the EuroPA Alliance.

Europe’s e-commerce payments are at an inflection point. Card-based wallets are accelerating the fastest, while account-to-account (A2A) schemes are gaining traction in specific local markets. Buy now, pay later (BNPL) remains resilient, underscoring a broader shift toward frictionless, mobile-first payment experiences. Figure 1. e-Commerce Payment Method Mix Evolution in Europe (% total e-commerce payment volume; based on top 10 European markets) Note: Offline transfers include direct debit and offline credit and bank transfers Sources: Global Data, local e-commerce associations, Flagship Advisory Partners Key Market Highlights Card-based wallets (e.g., Apple Pay) are the primary growth engines in European e-commerce today, steadily capturing consumers’ share of wallet from traditional card rails as well as proprietary wallets (e.g., PayPal), driven by superior mobile-first frictionless checkout experiences. Local A2A payment schemes built on bank rails continue to grow rapidly in Europe, although momentum remains uneven across European markets. Solutions such as BLIK and Bizum show strong, sustained traction in their home markets, while others (e.g., Swish in Sweden) have experienced more mixed outcomes as competition has intensified. BNPL solutions (e.g., Klarna) also continue to demonstrate robust growth despite tightening regulatory frameworks in Europe, supported by ongoing merchant adoption and increasing demand for flexible payment options among European consumers. Please do not hesitate to contact Yuriy Kostenko at Yuriy@FlagshipAP.com with comments and questions.

Major corporations have quickly woven AI into every aspect of their business in the pursuit of cost savings and revenue growth. The digital commerce journey is no exception and effectively all large merchants in the US, UK and Europe have implemented generative AI in some part of their customer experience. LLMs and other AI tools are also growing as a traffic source for merchants: Adobe data shows that AI-driven traffic to retail and travel merchants has increased more than 10x over the last 15 months. Despite these signs of progress, LLMs and other AI tools remained less than 1% of total traffic for retail and travel merchants during the 2025 holiday season. And Flagship market research indicates that true agentic payments (where AI agent can initiate and complete checkout on the customer’s behalf using permissioned payment tokens, virtual cards, digital wallets, stablecoins or other rails) are at the very early stages of deployment. We will continue to track progress on agentic commerce and payments as this new space develops in 2026 and beyond. 1. Agentic Solutions Observed at Top US/EU Merchants (implemented solutions across US & EU top 10 companies ranked by revenue, n=80) Across the top 10 US and top 10 EU companies per vertical, customer-facing Generative AI is now widely deployed, most often in Q&A chatbots, image searches, and product support. The more differentiated story is the step-up into agentic commerce (multi-step journey orchestration) and the relative scarcity of agentic payments (checkout execution by an agent). Key observations: Most top US & EU merchants have deployed customer-facing GenAI for Q&A, guided discovery, and product support. Agentic commerce is still early-stage, deployments are concentrated in a smaller cohort where agents can plan and orchestrate multi-step journeys (discover → compare → assemble cart/itinerary) but still stop short of executing payment. Payments is the hard boundary to cross; the market is beginning to standardize on network tokenization and delegated authorization models (via emerging protocols such as UCP / AP2, ACP, and x402) to make agent-led checkout feasible. 2. AI-Driven Commerce: Traffic Signals AI-driven visits to merchants are up 10x over October 2024 but growth tapered or retreated during late 2025, which may be a sign that expansion beyond early adopters may require deeper integration with web browsers, search, social platforms, or other experiences beyond LLM chat. While data on agentic payments is not available, we believe they are still de minimis given Adobe’s data on AI-driven visits. New standards like Google’s Universal Commerce Protocol should help companies across the commerce value chain collaborate more effectively on monetizing agentic traffic. 3. OpenAI’s Largest Users by Vertical: Where Token Consumption Clusters (selected companies' logos) Flagship Commentary & Highlights Intelligent Copilots & Agents (29%) and Infrastructure & Enablement (26%) account for more than half of total token use, showing that most consumption supports the systems and tooling behind AI applications rather than end-user interfaces. Workflow & Orchestration (17%) forms the connective layer, driving automation and integration across agents, networks, and APIs. Digital Merchants (15%) are actively leveraging LLMs, introducing AI into the checkout page and assisting during the checkout flow. Research / Academia (8%) organizations are applying generative AI to technical exploration and innovation. Payments (3%) and Commerce Enablers (1%) are a small share of company count but play a key enabling role for others, especially platforms like Shopify and Mercado Libre which enable millions of SMBs. Conclusion: Near-term progress is likely to look like agent-assisted commerce at scale, with better discovery, planning, more automated cart/itinerary assembly, while agentic payments will rely on industry progress building solutions for trust, governance, and interoperability and finding the right use cases where buyers are eager to delegate shopping and payment to AI. Please do not hesitate to contact Ben Brown at Ben@FlagshipAP.com with comments and questions.

Flagship Advisory Partners is a payments and fintech advisory firm dedicated to helping fintechs succeed in an increasingly complex and rapidly evolving payments landscape. Throughout 2025, we published a wide range of insights exploring topics around challenger wallets, AI in payments, ledger-as-a-service (LaaS), and notable M&A activity across the ecosystem. Below are our five most-read insights of 2025: Links to our 5 most read insights here: Wero: The European Challenger Digital Wallet AI’s Impact on Payments & Fintech, Part 1: Introduction PSPs Buying Commerce Software Accelerating in Europe Ledger-as-a-Service: An Emerging Infrastructure Layer Powering Fintech Innovation Global Payments to Acquire Worldpay in Landmark $24 Billion Deal 1. Wero: The European Challenger Digital Wallet In our most-read insight, we examined Wero, an account-to-account (A2A) digital wallet developed by the European Payments Initiative (EPI). Wero aims to deliver a pan-European instant payments solution as a homegrown alternative to international card schemes. The article explores how Wero operates today, including its initial peer-to-peer (P2P) payment use cases, and outlines its planned expansion into additional consumer and merchant payment scenarios. It also examines Wero’s broader ambition to become a unified, digital wallet and what that could mean for the broader European payments landscape. Link: Wero: The European Challenger Digital Wallet 2. AI’s Impact on Payments & Fintech, Part 1: Introduction This article kicked off a multi-part series examining the impact of AI in payments and fintech and how the technology shapes the industry. The introductory piece establishes a foundational understanding of AI, reviews its historical adoption within financial services, and outlines the key ways AI is beginning to influence payments and fintech, including automation, fraud management, and customer experience. Link: AI’s Impact on Payments & Fintech, Part 1: Introduction 3. PSPs Buying Commerce Software Accelerating in Europe In this article we analyzed the trend of payment service providers (PSPs) buying software platforms (ISVs or SaaS or SW companies). Software platforms are rapidly expanding into payments and embedded finance, capturing more and more of the fintech value chain. In response, PSPs and fintechs are evolving their strategies, increasingly focused on acquiring commerce software to control the full SMB product bundle. In this article, we review M&A activity in the US and Europe, exploring the strategic rationale and challenges for PSPs acquiring software assets. Link: PSPs Buying Commerce Software Accelerating in Europe 4. Ledger-as-a-Service: An Emerging Infrastructure Layer Powering Fintech Innovation In this article, we unpack why application ledgers are essential for banks, fintechs, and any other company moving money, explore the growing ecosystem of Ledger-as-a-Service (“LaaS”) providers, and highlight how LaaS is emerging as a core infrastructure layer enabling the next wave of fintech innovation. Link: Ledger-as-a-Service: An Emerging Infrastructure Layer Powering Fintech Innovation 5. Global Payments to Acquire Worldpay in Landmark $24 Billion Deal Finally, a popular article analyzed one of the largest fintech acquisitions during the year: Global Payments acquisition of Worldpay. Global Payments announced its acquisition of a 100% ownership stake in Worldpay for $24.25 billion on April 17, 2025. As part of the transaction, FIS will receive Global Payments' Issuer Solutions business, allowing FIS to sharpen its focus on core banking and issuer services, while Global Payments deepens its commitment to merchant acquiring and payment acceptance. Investor reactions were mixed: Global Payments' stock fell 17% following the news, reflecting concerns over integration risks and the company’s already complex M&A track record — having completed more than 20 acquisitions across merchant, issuer, and ISV segments. In contrast, FIS shares rose by 9%, signaling investor confidence in its streamlined strategic direction. Link: Global Payments to Acquire Worldpay in Landmark $24 Billion Deal We look forward to delving into more diverse topics that generate debate and challenge perspectives in the coming year. Should you have any questions, please do not hesitate to contact Amilee Huang at Amilee@FlagshipAP.com or Abigail Karl at Abby@FlagshipAP.com with any comments or questions.

In collaboration with Flagship Advisory Partners, TreviPay has released a new report, “Opportunities to Digitize B2B Commerce with Pay by Invoice and the Automation Flywheel”. This report examines how B2B Pay by Invoice and the automation flywheel can streamline accounts receivable and accounts payable workflows, improve cash flow, and reduce friction in B2B commerce. The report also includes an analysis of the top 50 retailers in the US and Europe with a maturity assessment of their corporate buyer programs, providing benchmarks for businesses investing in digital payment transformation. From this report, you will learn about: Trends in 2026 and beyond Pain points across A/R and A/P Emerging expectations across industries Download the full report here: B2B Buyer Programs Benchmark Report | Flagship x TreviPay SELECT REPORT EXTRACTS The B2B (business-to-business) payments market represents a $135 trillion opportunity, more than 2.5x larger than consumer commerce. Yet the market is weighed down by manual processes, fragmented workflows and costly inefficiencies. 1. Global C2B and B2B Market Size (2023; est. in trillions of $; % of total) Source: Flagship Advisory Partners Fintechs are working to solve the many pain points of B2B commerce and the AR (accounts receivable, also referred to as order-to-cash) and AP (accounts payable, also referred to as source-to-settle, procure-to-pay) process, as discussed in our previous insight. However, we are still in the early days of adoption, with automation penetration still relatively low. As businesses look to streamline these interactions, B2B Pay by Invoice (i.e. also referred to as net terms, trade credit) is one such tool to simplify the process for buyers and suppliers. 2. B2B Workflow and B2B Pay by Invoice Source: Flagship Advisory Partners B2B Pay by Invoice (also known as net terms or trade credit) enables flexible financing between the buyer and supplier. This enables corporate buyers to have a line of credit for a certain number of days (most common is 30-day). 3. Illustrative Example of B2B Pay by Invoice (30 days) (net 30 days example) Source: Flagship Advisory Partners Observed Adoption of Corporate Buyer Programs in Global Retailers Flagship utilized public data to analyze the NRF Top-30 U.S. retailers and Top-20 E.U./ U.K. retailers and assess their current offerings for corporate buyers. Corporate buyer programs are becoming increasingly prevalent, though their maturity levels widely vary. Some retailers have developed sophisticated, tailored solutions for business customers, while others continue to treat corporate buyers much like consumers, overlooking the demand for AR/AP workflows and the nuances that they introduce. 4. Global Corporate Buyer Portal Capabilities Source: Flagship Advisory Partners Buyer and Seller Benefits of B2B Pay by Invoice ( and the Automation Flywheel) Across industries, the buyer value proposition is consistent: SMBs gain working capital flexibility by using net terms as a financing tool, while large enterprises consolidate many purchases into a single monthly payment, simplifying approvals and reconciliation. For sellers, credit-based purchasing lifts conversion and basket size while signaling trust that strengthens long-term relationships. Net-net: Pay by Invoice enables larger AOV, faster cash collection via lower DSO, less friction across the O2C (order-to-cash) cycle and tighter buyer–supplier bonds. Corporate Buyer Program Maturity Assessment Included in this report is a maturity assessment which breaks down how advanced each corporate buyer program is across onboarding, payment methods, procurement controls, reporting tools and integrations. It gives organizations a clear view of what it takes to build a strong B2B portal. Download the report here to see how these top 50 retailers are maturing their B2B capabilities, what those trends mean for your buyer program and how Pay by Invoice can support a stronger, more efficient payment strategy. Please do not hesitate to contact Rom Mascetti at Rom@Flagshipap.com with comments or questions.

This snapshot is the second in our Embedded Finance Vertical Snapshot series, focusing on the automotive dealership, repair, and car wash landscape. The automotive industry is highly complex with high software penetration (95% of companies use software to manage at least part of their business). However, embedded fintech adoption varies. While payment acceptance is relatively mature, we see substantial opportunity, especially in payouts and lending. 1. Vertical Definition 2. Vertical Spend General Commentary & Highlights High software usage: The automotive industry is very dependent on software. 95% of companies use software to manage at least one part of their business in US and EU. Consolidated list of providers: Most dealerships rely on dealer management systems (DMS) for end-to-end business management. Various point solutions also exist to service specific functions or business areas. Tender Mix: Vehicle financing is largely un-addressable by PSPs, but remaining serviceable payment opportunity, is large, and card-centric (credit + debit covers 75% or more in the US and EU). This pool of volume largely originates from the service lane. In-car payments: enable drivers to transact directly from their, are seeing increased adoption; however, usage remains largely confined to car washes and has not yet extended to repair services. 3. Vertical Dynamics 4. Leading Software Platforms 5. Embedded Fintech Maturity Embedded Fintech Highlights Vehicle financing generally not monetized by PSPs or SaaS: Roughly 85-90% of a dealer’s purchases involves financing, which resides on independent systems and lenders. Room for product expansion: Payment acceptance, consumer financing, and insurance are embedded by most platforms in the US and EU. Beyond these products, there are natural opportunities including payouts and lending. Please do not hesitate to contact Peter Taylor at Peter@FlagshipAP.com, or Sal LoBiondo at Sal@FlagshipAP.com with comments and questions.

SaaS and fintech share prices felt the broader tech headwinds in Q3, but company performance continued to demonstrate the power of the business model with 20%+ topline growth. Figure 1: Stock Price Performance (select payments equities; stock price % change to December 8, 2025) Tech share price headwinds: Only 2 of 13 companies in our SaaS+fintech sample outperformed the S&P 500 over the three months Fintech revenue growth accelerates: Fintech (transaction-based) revenue grew 20% YoY on average in Q3 ’25 vs. 19% in Q2 and 17% in Q1; this compares to 12% YoY growth in Q3 for other revenue lines (software, hardware, professional services, etc). Gross profit growth improving with sustained margin expansion: Gross profit grew 21% YoY on average in Q3 ’25 vs. 18% for the prior two quarters, the ninth consecutive quarter of gross profit outpacing total revenue growth. Figure 2: Valuation Metrics (select payments equities; as of December 8, 2025) Restaurant and Retail Shift4: GMV grew 32% YoY to $92B (30% YoY constant currency). Shop Pay GMV grew 67% YoY to $29B; international GMV grew 41% YoY, and offline GMV grew 31% YoY Toast: gross payment volume rose 24% YoY to $52B. New segments (international, food and beverage retail, and enterprise) reached $100M in ARR this year Lightspeed: payments penetration reached 46% (vs. 41% YoY). GTV grew 7% YoY, while GPV (captured by Lightspeed) grew 22% YoY Block: square GPV grew 12%, with sellers > $500K growing 20% YoY, and international growing 26% YoY E-commerce Shopify: GMV grew 32% YoY to $92B (30% YoY constant currency). Shop Pay GMV grew 67% YoY to $29B; international GMV grew 41% YoY, and offline GMV grew 31% YoY WIX: transaction revenue grew 20% YoY to $65M, outpacing gross payment volume growth of 13% YoY to $3.7B BigCommerce: seeing some success leaning into the enterprise segment, which now represents 76% of total ARR GoDaddy: launched Aero.ai in beta, with intentions to deploy five agents that handle tasks like website building, logo creation, domain acquisition, and compliance B2B BILL: moving upmarket with spend and expense management offering, resulting in record card spend per customer. Spend and expense card payment volume grew 21% YoY Intuit: online payment volume (including bill pay) grew 29% YoY. 2.8 million customers are now leveraging Intuit's AI agents for their work Other Verticals Tyler Technologies: transaction revenues grew 11.5% YoY to $201M. SaaS bookings reached a new quarterly high, up 5% sequentially ServiceTitan: gross transaction volume grew 19% YoY to $22.9B while usage revenue as a % of GTV remained stable at 0.25%. Blackbaud: organic revenue grew 7% YoY. Free cash flow margin expanded 690 basis points to 18.3%. Please do not hesitate to contact Peter Taylor at Peter@FlagshipAP.com or Tim Gallagher at Tim@FlagshipAP.com with comments and questions

Local card schemes like Girocard, Bancomat, Dankort, BankAxept, and Carte Bancaires are losing ground fast to Visa and Mastercard – but is that decline inevitable? In this episode, Elisabeth Magnor talks with Flagship partner Yuriy Kostenko about what the data really shows, why domestic schemes have fallen behind on innovation, how PSPs and merchants actually think about them, and what their future in Europe might look like. Do not hesitate to reach out to Yuriy Kostenko, Yuriy@Flagshipap.com, with any comments or questions. Listen to the latest episode on the following platforms: Youtube Spotify Transcript Elisabeth Magnor (00:08) Today we're jumping into a topic that keeps stirring up lot of noise in European payments, which is the decline of local card schemes. And to help unpacking what's going on and what's driving the shift, I'm excited to be joined by someone who knows this space inside and out, Yuriy Kostenko partner at Flagship's Amsterdam office. Welcome, Yuriy! Yuriy Kostenko (00:27) Thanks, Elisabeth. Thanks for having me. Elisabeth Magnor (00:29) And Yuriy before we dive into the topic, can you please give us a quick pitch about yourself and your experience in the field? Yuriy Kostenko (00:36) Yeah, yeah, happy to. I've been an advisor in payments and fintech space for over 20 years now, supporting my clients around the world through numerous consulting engagements and M&A projects, with a particular focus on the European payments landscape. So in my work, especially within payment acceptance, which is one of my areas of expertise, often encounter questions around local card schemes. It's a topic that consistently raises important strategic considerations for payment providers, for software vendors that are offering payments or merchants. So yeah, looking forward to sharing some of these insights today. Elisabeth Magnor (01:17) So Flagship publishes insights weekly with our own research and topics about payment methods and local card schemes always gain a lot of traction amongst our audiences. I mean, it always spurs a lot of debate and discussions and generally it's something that a lot of people care about and have opinions about. And since we're crowd pleasers, that's basically why we wanted to create this episode. But before handing over to you, to walk us through the study we did I wanted to give the audience a bit of background as to what we mean when we talk about local card schemes, cautious that the term local card schemes may not be immediately obvious for everyone. So a local card scheme is a homegrown card network that a country builds and runs for itself. So these are the likes of Carte Bancaires in France, Girocard in Germany, and the list goes on. And I personally, I'm a BankAxept user since I'm based out of Norway. And in Europe, these local card schemes are extremely common. So in a nutshell, the local schemes are competing solutions to Visa MasterCard and they largely compete on price being cheaper alternatives for merchants both networks want cardholders to use their respective rails and how that competition has evolved is something that we dug into. So, Yuriy it would be great to give you the floor to explain the research that we did and the key findings that came out of that research. Yuriy Kostenko (02:35) So at Flagship, our team tracks market intelligence across the payments landscape. So one of the recent deep dives that we did was focused on the performance of the local card schemes across Europe. And the trends we uncovered is strikingly consistent. Domestic schemes have been steadily losing share of their consumers' wallets to international brands, in particular Visa and MasterCard. So we did this assessment and examination across all major local card schemes across Europe, so from Carte Bancaires in France, Girocard in Germany, Bancomat in Italy, to name a few. And no matter which market we looked at, the pattern was quite consistent. Local card schemes continue to seed ground to the international networks, Visa and MasterCard, which are gaining share almost everywhere in the European payments arena. To put this in perspective, five years ago, Girocard in Germany, for example, represented over 75 % of total card payment value. Today, that number has dropped to just under 60%. In Norway, in your home market, Elisabeth BankAxept has seen even a sharper decline. So they started at 62 % of total card payment value five years ago. Today, it's already under 45%. So in many instances, these shifts are quite substantial. And this is what our analysis suggests. Elisabeth Magnor (04:09) Yeah, so it sounds like the data tells a pretty clear picture and the story is not super bright, to be frank, for these local card schemes. And the loss is really dramatic in countries like Norway and Germany. I guess it depends on the geo as well here, right? But this leads me to then the obvious next question, which is, can you explain what drives that shift? I mean, why are the local schemes losing to Visa and MasterCard? Yuriy Kostenko (04:33) Yeah, look, mean, the drivers behind this change with local card schemes losing their share of wallets are largely technical in nature. In simple terms, I mean, these local schemes, they haven't been able to keep pace with the level of product innovation by Visa and MasterCard. The innovation gap shows up in many ways. Sometimes it's as basic as the end user experience, so the interface, or even the integration of various value added services like loyalty programs or cash back programs. Visa and MasterCard, they continue to evolve in these areas quite rapidly, while the local card schemes simply can't keep up with that pace of innovation. One of the biggest ,probably, disadvantages the local schemes created for themselves really was their exceptionally slow adoption of digital wallets. So consumers embraced wallets like Apple Pay and Google Pay quite quickly. But many local schemes lagged behind that integration and that development, making their cards simply less convenient in the world that's become mobile first. Another major gap that we found was one that still persists today for many of these local schemes is e-commerce enablement. A payment channel that has been growing at roughly twice the rates of the physical or point of sale payments channel over the last decade. It's really a missed opportunity for the local card schemes. And of course, by their very nature, the local card schemes are typically confined to their domestic markets. That makes it difficult for them to compete in the environment where cross-border commerce is expanding quite rapidly. So as a result, more of these payments naturally flow to Visa and MasterCard. Elisabeth Magnor (06:22) Yeah, I actually had an interesting story that just highlights that innovation point, in the the point of sale centric environment where the local card schemes have traditionally thrived, right? They've lagged online, thrived in the point of sale/ physical channel. But this goes back from 2019 when I was in Oslo, I was going to the largest supermarket chain here. And at the time, pretty much 100 % of all the cards were contactless enabled and 100 % of all the card terminals were also contactless enabled. So, you know, the chicken and egg problem was solved for. And I tried to tap my card, but the person at the till said, no, you have to use the chip and pin. Which really surprised me. But you can probably guess why they had turned it off. It was exactly to the innovation point. It was because the local debit scheme was not enabled with contactless. And that meant that each contactless transaction that big merchants was transacting, all would be defaulted to Visa MasterCard. And if you're large enough, that transaction cost would be substantial enough for that merchant to actually turn off that functionality. And they didn't really turn that on until BankAxept had solved for conductless. So that's just an example of how that lag was so visible. And I mean, I didn't suffer from just dipping my card, but it was this, you know, it's worse than the consumer payment experience, which should be number one for merchants. Merchants just want people to pay just the easiest and most seamless way possible. And that's a bridge actually into my next question. So, there are clearly a lot of different stakeholders within the ecosystem and each have different levers to pull. So that merchant example that I just gave you. And in payments, it's typically referred to as the four party model. So on the payer side, you have the cardholders and you have the issuers that supply the card products to the cardholders. And on the acceptance side, you have the merchants. And then you have the acquirers and PSPs that enable merchants with card acceptance. So Yuriy, I've been interested to hear your views on these stakeholders. How do you see their needs and behavior impacting that broader adoption of local card schemes? Yuriy Kostenko (08:26) Yes, indeed, quite a few different stakeholder groups. And these stakeholder groups can see the role and value of local card schemes very differently. On one side, you have the traditional owners of these schemes, often banks, although not always the case, who tend to have very strong, almost political interest in preserving the existence of these local schemes. At the time when the European payments community is very much focused on the sovereignty of the payments infrastructure here in Europe, these stakeholders are highly motivated to defend these local schemes and continue to maintain a strong presence in their home markets. But outside of the legacy stakeholders fear, a very different perspective has emerged. And this has been the case for a few years now. And there's a growing group of newer players, Neobanks, FinTechs and international payment service providers. They approach local scheme needs and requirements with a healthy dose of skepticism, particularly when Local card schemes are co-badged with Visa MasterCard, like you mentioned earlier, Elisabeth, which would allow for that particular payment transaction to default to international networks. For these stakeholders, often much faster growing providers, local schemes often struggle to present a really compelling value proposition. So many local card schemes in return have not really built strong partnerships with these new stakeholders. And as a result, these providers often just default back to Visa MasterCard, which is simpler, faster, and more scaled. Integrating with a single local card scheme, can be quite complex, could be costly, and certainly time consuming, and requires additional security work, compliance, regulations, and naturally technical maintenance. So in the world where speed and scale matter, many of these newer players, they will simply opt out of using local card schemes. Elisabeth Magnor (10:28) yeah, so you're saying that some PSPs and acquirers don't really need to enable a local card scheme to thrive. And is that, can imagine that being true if you service the SMB segment, is that correct? Versus a large enterprise would probably have more focus on enabling that local card scheme. Yuriy Kostenko (10:45) That's right. mean, there are distinct views in the ways you approach the needs and requirements of the end merchant users that want to accept local card schemes. Elisabeth Magnor (10:53) I think from what I've seen, a company like iZettle, they don't really work with local schemes at all because they offer such a simple product that the SMB is willing to pay more slash paying for Visa, MasterCard transactions for that simplicity and that ease of use. And iZettle hasn't really been, I don't know, bothered to accept local use because I guess the demand hasn't really been there, right? It's nothing that SMBs find extremely important. Or is that the right interpretation? Yuriy Kostenko (11:26) There is a distinction in how different stakeholders, especially international payment service providers that have very global ambitions and do not want to be bogged down to integrating every single local card scheme across Europe. for them, especially those that are focused on the SMB market, it's not as critical to integrate and be hyper localized in their offering. And it is sufficient for the SMB community that is not as sensitive in their ability to accept local card schemes. Now that may be true for the SMB market. It is certainly far from reality for the enterprise segment, where for them, the element of cost is quite critical and where local schemes tend to have, for them, it's a differentiating factor because they just tend to be cheaper, in some cases significantly cheaper compared to the international card schemes in any given market. And that drives the need for the payment providers who serve these enterprise clients to have the right set of localized capabilities, which would include the local card scheme. Elisabeth Magnor (12:31) Yeah, examples of those would be, Adyen would be a perfect example of someone who really wants that localised payment method ⁓ offering, whereas an iZettle or a MyPOS may just go with a basic Visa MasterCard Yuriy Kostenko (12:43) That's right. I mean there also needs to be a business case for any vendor that enters any given market, let's say would be Germany, to really understand the cost dynamics behind integrating that payment method versus ultimately finding a partner that will give you access to that payment scheme. So Adyen is an excellent example in Germany where they went through the exercise of integrating the local scheme Girocard. I'm certain it was time consuming and probably expensive exercise in doing so. But now they can properly serve large enterprise clients that operate in German point of sale environment. Elisabeth Magnor (13:23) Yeah, perfect. And we have to keep in mind that this is always going to be that what we talk about is the chicken and egg situation. We talk about that a lot in payments, right? The chicken and egg, where you can't solve for the one side without the other. So it's not enough to just have the card holders with your local card scheme when you don't have the merchants and PSPs that enable those schemes. Circling back to the study and the results that you described earlier, has there been any changes in how rapid the local schemes are losing ground to Visa and MasterCard? Yuriy Kostenko (13:55) Look, mean, what our study and the results of the study suggest is that local card schemes across Europe are really starting to push back on that trajectory of them losing share of their consumers' wallets. They haven't exactly reversed that decline, but many are working quite hard in at least stabilizing that trend, if that makes sense. One of the key reasons behind this change is these local schemes are starting to close this innovation gap that I described earlier, which has become a priority, a top priority for many of them. We're now seeing local schemes expanding into e-commerce, rolling out stronger digital capabilities, and finally being enabled to be added to the popular ⁓ digital wallets like Apple Pay and Google Pay. These steps are essential in staying relevant with their end users and the cardholders in their home markets. The same local card schemes of course will continue to double down on one of their traditional strengths that we just discussed. It's the lower ⁓ acceptance cost, especially when compared to Visa and MasterCard. This is appealing to really large enterprises where even small cost differences can have a significant impact on that retailer or other types of merchant bottom line. But beyond pricing, local schemes are increasingly trying to also win back their consumers directly. So they're experimenting with integrated local popular loyalty programs, they're adding benefits to the card product itself, they're even running nationwide cash back programs. All of these are aimed at bringing those users back into their ecosystem. Elisabeth Magnor (15:41) Yeah, and an example of that from my home market is that you have this really huge coalition loyalty program. And the only way you can accumulate points and get bonuses and rewards is if you use the local debit scheme. So there's definitely some strong collaboration going on between the domestic scheme in this case and the largest supermarket group. Yeah, it's going to be interesting to see whether that will be enough to drive that shift. Yuriy Kostenko (16:07) Well, the data suggests so, so I hope so. It is at a minimum slowing down in that trend or the share of wallet shift that these local schemes have been experiencing in the past. Elisabeth Magnor (16:23) Yeah, and it's ultimately a function of just changing the consumer habits and nudging users to use your local networks and not the international ones. Which is not an easy task, right? And I can imagine that the willingness to switch is there if they get something in return, like perks or benefits. Yuriy Kostenko (16:39) Well, at the same time, local schemes, have established that brand that have been building for many years. So hopefully, as long as they provide the same set of capabilities that international networks can offer or the reasons behind those consumers leaving that local scheme in the first place, I think it will not be an extremely difficult exercise in for them luring them back into their orbit. Elisabeth Magnor (17:01) Okay, it's good to hear that you're optimistic and think that there is a future for these card schemes to thrive. if we look into the crystal ball and looking at the trend that we have explored, I'd be super interested in hearing what does the data show us in five years and 10 years? So looking ahead, how do you think these local schemes are performing given the trends that we're seeing today? Yuriy Kostenko (17:27) question to ask and certainly a critical one. it's a question that local schemes are asking themselves today. Local schemes in Europe really do find themselves at a crossroads. So for years, they've been steadily losing relevance and the share of consumers' wallets to international networks. But this isn't necessarily a story of inevitable decline. I think the next few years will be critical for these card schemes. Well, first, the consumer expectations have really changed, particularly the European very mobile friendly users. So people now expect seamless digital payments. They want their cards integrated into their mobile wallets. They want very smooth online checkout experience and ideally, some of the value added features that they use every day to be integrated into their card products. So historically, local schemes have really fallen behind here. But we are now finally seeing that momentum as they started to build out these digital capabilities and catch up with the international networks. The second is the cost, right? mean, the cost remains a very powerful differentiator for the local schemes. I mean, these local schemes, they still offer meaningfully lower fees compared to international networks. And that matters, especially for large retailers who are laser focused on their cost efficiencies. This gives local schemes a bit of an edge to remain competitive. And third, and arguably, the most relevant these days is the geopolitical landscape. Europe is placing growing emphasis on payment sovereignty and really reducing reliance on any networks that are not European, I mean, there obviously will be competing initiatives like EPI that will create a trend where local schemes will have to find the way to either coexist or compete with these networks. But at the same time, there are two key challenges that local card schemes will see ahead of them. So first is scale. That's a difficult one to address quickly. Local schemes, by definition, will operate within their national borders. The second one is the partner alignment, right? We're talking about those high growth fintechs and neobanks and other global payment service providers that are entering their markets. And today still continue to avoid integrating the local schemes because they find the exercise costly, time consuming and complex. So look, I mean, if you aggregate all these findings, I mean, what does that mean for these local schemes? It's unlikely that the local card schemes will regain the dominance they once held. But I think they will find a more balanced ecosystem where, you know, the local card schemes will stay relevant, they'll still competitive, and they will continue to be strategically important in their own home markets. And that's absolutely within reach for them. The decline of their market share has already slowed. And if the innovation that I described earlier continues, we may see a shift from pure survival mode to a more genuine reinvention of these local schemes. They won't disappear, but their future will depend on how quickly they will evolve and how well they will find ways to collaborate with the new providers that are entering their markets and how effective they will be in adapting to the world that is no longer domestic, no longer physical and no longer patient with outdated technology. Elisabeth Magnor (21:08) And I was wondering, you know, we had this shift from Magstripe to EMV, where the shift from EMV to contactless, from contactless to mobile wallets. And now what's coming after mobile wallets that they have to catch up with. That's going to be interesting for sure, right? What that next technology is going to be. Yuriy Kostenko (21:24) I'm curious myself, right? I mean, I'm sure we will be at the top of seeing that innovation ourselves and how we will impact the industry. But yes, curious to see what will happen. Elisabeth Magnor (21:35) Well, that brings us to the end of this episode. ⁓ A massive thanks to you, Yuriy for sharing your insights. Always sharp and data-driven. Yuriy Kostenko (21:45) I'm always happy join your podcast, Elisabeth, and certainly was happy to speak today. And look, if anyone out there in the audience wants to discuss this topic or argue some of the points that I've shared during our podcast today, then yes, please get in touch and I will be happy to ⁓ schedule a call. Elisabeth Magnor (22:03) Awesome. Well, the evolution of local card schemes is clearly a story still being written and the next few years will tell us a lot about whether these domestic networks can rebuild relevance in an environment that is increasingly competitive and more innovative. If you're interested in knowing more about the topic, feel free to reach out to Yuriy myself or anyone else at Flagship. And you can also visit our website to see the relevant content on the topic. Thank you for listening in.

Bank Card Programs Defy Expectations and Drive Stronger Profitability The second quarter of 2025 marked a significant rebound in bank credit card program NCL rates, reversing from what had been their highest levels in more than a decade. Coupled with near record-high loan balances and widening credit spreads, bank-managed credit card programs are outperforming expectations and delaying what many assumed would be an imminent profitability contraction. 1. Non-Credit Card Banks Vs Credit Card Banks Key Metric Comparison (Q1'25 vs. Q2'25 consumer receivables) Q2'25 Net Credit Losses Card losses are down across all banks from Q1'25 with CC focused banks slower to course-correct. This sharp downturn in credit losses could indicate that consumers financial status could be more resilient than market expectations. Q2'25 Card Portfolio Growth Card receivable growth rapidly transitioned from mid-single-digit contractions in Q1’25 to modest growth in Q2’25 Bringing total card receivables close to Q4’24’s historic high of $1,458B. Q2'25 Bank ROA Returns for card focused banks continue decline towards banks with diversified balance sheets due to the markedly higher credit losses degrading CC Bank economics. 2. Market Size and Credit Loss Performance (Q1'20 vs. Q2'25 consumer receivables) 3. Market Size and Credit Loss Performance (consumer receivables) General Commentary & Highlights The sharp decline in Net Credit Losses across both credit card banks (-10% QoQ) and other banks (-29%) signals that U.S. consumers are continuing to service record-high debt levels effectively. After several quarters of muted growth, card portfolio receivables grew +7% QoQ - back towards the historic $1.458T range. This could suggest renewed appetite for revolving credit as the economy stabilizes, and rate cuts begin to filter into consumer sentiment. Bank ROA declined modestly for credit card banks (-7% QoQ) compared to diversified peers (+6%), reflecting how a high credit loss environment and narrower spreads are degrading credit card–centric issuers. Even as the prime rate eased to 7.5% in Q4’25, average APRs currently remain near 24.5%, showing that issuers have been slow to reprice portfolios downward. This could indicate higher margins for issuers or could be caused by issuers retaining wider spreads to offset rising program costs. High spread environments create an opening for aggressive issuers or fintech challengers to win share through rate-led acquisition offers while incumbents lag in repricing. The largest and most highly credit focused banks are showing appetite for increasing scale through inorganic acquisition — with both Capital One and Merrick Bank acquiring card assets that doubled their scale in Q2’25. Please do not hesitate to contact Ryan McDonald at Ryan.McDonald@FlagshipAP.com with comments and questions.

European alternative payment methods (APMs) have a long history of failed attempts to succeed at the physical point of sale (POS). In contrast, Apple Pay has achieved tremendous success. Apple’s tight control over the iPhone’s NFC chip has fueled iOS’s dominance in contactless payments (see Figure 1) while blocking APMs from delivering a comparable user experience (UX). A regulatory push by the EU has now forced Apple to open NFC access, giving European APMs a new opportunity to compete in-store. However, NFC access alone is unlikely to guarantee success. Even if other wallets match Apple Pay’s UX, they still face major hurdles: achieving broad merchant acceptance and convincing users to switch their default mobile wallet. In this article, we review European APMs’ historical attempts to gain traction in-store and analyze early initiatives and adoption barriers they must overcome to succeed at the POS. 1. Apple OS vs Alternative European APMs' Past Struggles to Penetrate POS Many European APMs have been highly successful online, but their attempts to gain traction in physical stores have largely fallen short. As shown in Figure 2, most European APMs hold only negligible share at the POS. Prior efforts using QR codes and BLE-based payment flows failed because of clunky user experiences and low customer uptake. For example, Vipps MobilePay reported in 2023 that just 2 out of 1,000 transactions (0.2%) occurred via its QR payment flow at the payment terminal—leading the company to discontinue the service 2.5 years after launch. 2. Examples of Failed Attempts of APMs @ POS vs Apple Pay Apple's NFC Access - a Point of Inflection Apple’s mandated opening of the NFC chip could be an inflection point for APMs at the POS. As shown in Figure 3, Apple has unlocked core NFC features: third-party wallets can now be set as the default wallet on iOS devices and can access critical UX capabilities such as field detect (to prompt payment), “double click” (to confirm), and Face ID (to authenticate). 3. Select Key Unlocked iOS Features to 3rd Parties (select screenshot examples) Access to these features has triggered a wave of APM activity. Klarna announced the rollout of tap-to-pay across 14 European markets in December 2025. Vipps MobilePay launched its NFC solution in Norway and Denmark in December 2024. Bizum, Spain’s leading A2A payment scheme, has confirmed development of a wallet using card rails to enable NFC payments at the POS, targeted for Q4 2025 (still not in public promotion as of December 3, 2025). Examples of these launches appear in Figure 4. 4. APM Enablement at POS (select examples) Three Hurdles APMs Must Clear to Win In-Store In our view, to succeed at the POS, an APM must overcome three major hurdles: Offer a compelling transaction UX: The UX must be at least on par with market leaders such as Apple Pay. Ensure a broad acceptance network: The payment method must be supported by all merchant segments and PSPs. Change consumer behavior: APMs need tools that motivate users either to switch their default wallet away from Apple Pay or, for non-wallet users, to adopt their digital wallet in the first place. We assess these hurdles through the recent experiences of Vipps MobilePay and BLIK: Example 1) Vipps MobilePay, Norway Launched in December 2024, Vipps MobilePay in Denmark and Norway became the first European digital APM to introduce a ‘tap-to-pay’ solution on iOS devices. We assess Vipps MobilePay’s proposition in the context of the adoption hurdles outlined below: Easy and intuitive UX: As shown in Figure 5, Vipps offers a user experience on par with Apple Pay. From limited to international merchant acceptance: Vipps was initially set up using BankAxept (local debit card) tokens, limiting transactions to domestic debit cards. As of September 2025, Vipps expanded compatibility to Visa and Mastercard, enabling near-universal merchant acceptance in Norway and extending usability internationally. Consumer behavior hurdle remains: The biggest challenge yet, is convincing users to complete a multi-step setup process to make Vipps their default wallet, which can be a real hurdle—especially for those already using Apple Pay. Figure 6 illustrates the activation flow needed to set Vipps as the default wallet. 5. Apple Pay & Vipps Offer the Same User Experience 6. Setting up Vipps for NFC Example 2) BLIK, Poland BLIK launched its NFC POS proposition for Android in the first half of 2022, and at iOS devices in 2025 after the unlocking of Apples NFC. BLIK’s NFC transactions have grown substantially faster than its legacy non-NFC POS solution, which relied on a six-digit passcode (roughly 95% growth vs. 40% from 2022–2024). BLIK NFC now represents an estimated 2–3% of total POS payment value in Poland. Figure 7 illustrates the product. We examine the adoption hurdles in context of BLIK NFC below: Easy and intuitive UX: BLIK NFC offers a UX comparable to Apple Pay and is a major improvement over BLIK’s earlier POS flow, which required entering a 6-digit code at the terminal. Wide merchant acceptance: Unlike Vipps MobilePay, BLIK is a pure account-to-account payment method with no reliance on card schemes for POS acceptance—an approach that materially increases the complexity of building out merchant acceptance. BLIK solved this by investing in partnerships with several acquiring banks and PSPs to develop the POS acceptance network. As of today, 100% of all POS terminals that are compatible with Mastercard contactless technology accept BLIK NFC transactions. In a strategic partnership with BLIK, Mastercard powers the technology to tokenize NFC transactions from consumer bank accounts. Gaining consumer traction, though adoption hurdles remain: As of November 2025, BLIK’s NFC product is used by c.3.9 million consumers (c. 20% of BLIK users). BLIK NFC found early success due to relatively lower penetration of Apple iOS in Poland. Despite this, adoption hurdles remain: To enable BLIK NFC payments, a user is required to go into their bank’s mobile app, activate “BLIK contactless payments”, confirm activation (often with PIN or biometric), enable NFC on the phone, set a secure screen lock (PIN or biometrics), and (in many cases) make the banking app the default for contactless payments. 7. BLIK Success @ POS Although Vipps MobilePay and BLIK are still early in their POS lifecycles, the takeaway is clear: technology and UX are necessary, but the real test is whether they can get consumers to use their wallet at the POS. Conclusion Apple’s opening of the iOS NFC chip is not yet the game-changer many expected. The real hurdle for European APMs is no longer technological—it’s scale and habit. Early movers like Vipps and BLIK are only beginning to test what it takes to shift consumer behavior, and others such as Klarna, Bizum and PayPal will soon add more data points. The story about APM’s inroads at POS in Europe is still being written, and the winners will be those that persuade Apple Pay users to switch and convert non-wallet users into active users of their wallet and achieve a broader merchant acceptance network. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com, or Elisabeth Magnor at Elisabeth@FlagshipAP.com with comments or questions.

The number of POS terminals is shrinking across several mature markets, most notably the UK and the Nordics, signaling a sustained downward trajectory for traditional devices. This decline is being propelled by a mix of macro-economic pressures, accelerated retail digitalization, and the growing adoption of alternatives such as SoftPOS. If this trend marks the beginning of the end for traditional POS terminals and a preview of what may unfold in the rest of Europe, key stakeholders (e.g., OEMs, PSPs) must urgently begin adapting their propositions for the future. 1. Number of Traditional POS Terminals in Circulation (2024, in $ millions) 2. Key Drivers of the Decline of Traditional POS Terminals (select observations from Flagship Advisory Partners; non-exhaustive) Physical Retail Contraction: A steady reduction in brick-and-mortar locations continues to shrink the addressable base of traditional POS hardware. In the UK, retail outlet counts fell by 5% between 2022 and 2024 as labor, rent, and operating costs rose. Digitalization of Physical Retail: Retailers are accelerating in-store digitalization. Fixed checkout counters are giving way to mobile checkout flows via customers’ own devices. In Sweden, 24% of surveyed Nordic retailers now use mobile-app self-scanning, eliminating the need for a fixed POS terminal hardware. Growing Use of SoftPOS: SoftPOS or ‘tap-to-pay’ continues to see increasing adoption. Uptake is scaling not only in small merchant use cases, but in large retail with SoftPOS enabled via ISVs. In Denmark, for example, SoftPOS powers 60% of Coop’s (large Danish retailer) self-checkout transactions. Tech Lifecycle & Replacement: Device strategies are evolving toward BYOD and Mobile Device Management (MDM) fleets. This marks a break from traditional POS-terminal lifecycles, with their long, hardware-centric refresh cycles. Retailers increasingly prefer multifunctional mobile devices that can be redeployed flexibly. Implications for Industry Stakeholders POS Terminal OEMs: With demand for traditional POS terminals declining, OEMs must pivot from hardware-centric models to software-driven propositions, embrace SoftPOS, and invest in lifecycle management and DaaS propositions, while exploring adjacent segments (e.g., smart kiosks). Payment Providers: Payment providers with a POS-oriented proposition need to transition from a hardware-first strategy to a unified, software-led solutions with SoftPOS alongside hardware and offer vertically tailored unified commerce proposition that embeds digital-first forms (e.g., QR payments). Please do not hesitate to contact Yuriy Kostenko at Yuriy@FlagshipAP.com with comments and questions.

Launching a card program is an exciting opportunity, but navigating the ecosystem requires clarity, the right partners, and strong execution. In collaboration with Paymentology, we explore the key considerations, common pitfalls, and strategic decisions that shape a successful program launch. Read the full whitepaper on Paymentology's website via the link below. Link For any questions or comments, please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com.

This episode explores why embedded lending is emerging as the next big frontier after embedded payments in Europe and North America. Charlotte Al Usta (Flagship) and Luke Trayfoot (YouLend) discuss how lending delivered through platforms can finally fix SMBs’ chronic access-to-credit problem by leveraging real-time data instead of slow, paperwork-heavy bank processes. They dive into key use cases like revenue-based financing and working capital, the role of banks vs. fintechs, the complexity of scaling across European markets, and why most players will pursue embedded lending via partnerships rather than building in-house—plus how AI and better UX will shape the next five years. Do not hesitate to reach out to Charlotte al Usta, Charlotte@Flagshipap.com with any comments or questions. Listen to the latest episode on the following platforms: Youtube Spotify Transcript Embedded fintech has long been synonymous with payments acceptance, but with embedded payments now maturing across Europe and North America, the next major wave is already taking shape and we're only at the beginning. We're talking about embedded lending, delivering capital directly to SMBs through the platforms they rely on every single day. In this episode, Charlotte Al Usta from Flagship sits down with Luke Trayfoot from YouLend to break down why lending is a natural next frontier after embedded payments, how real-time data is transforming SMB credit access, and what platforms, PSPs, fintechs and even banks need to get right to win. Tune in if you want to understand where embedded finance is headed next. Charlotte Al Usta (00:56) Hi everyone and welcome my name is Charlotte Al Usta, principal at Flagship. And today I'm excited to welcome our ever first guest onto our podcast series, Luke Trayfoot Global Head of Strategic Partnerships at YouLend. Luke has spent the last 15 years in fintech and most notably in senior commercial roles at the likes of Hyperwallet, PayPal and Mangopay with a very strong focus on embedded payments and is now leading the embedded lending at YouLend. So Luke, welcome. And can you perhaps tell us a bit more about YouLend? Luke Trayfoot (01:29) Sure, thanks for having us Charlotte. Yeah, sure, so YouLend is an embedded lending provider. We operate 10 markets today and consistently growing in those markets. But fundamentally we're offering an embedded lending proposition which allows platforms, marketplaces, payments companies, fintechs, banks to offer lending to their SMB cohorts of businesses. Charlotte Al Usta (01:51) So perhaps just to set the scene very quickly. So today we'll be discussing obviously embedded lending. And so we'll be sharing our thoughts on why we see lending as a next big opportunity after payments and how it's effectively reshaping ⁓ access to finance for SMB specifically. And perhaps before we deep dive into the topic and also for the audience benefits, Luke, can you perhaps define how you think about embedded lending? Luke Trayfoot (02:16) I think fundamentally it's about how do we get capital or how does a platform, how does any business get capital to their customer base. so traditionally that was always a path for banks and banks would be the capital providers to those businesses, large, small, asset heavy, asset light. And so embedded lending has changed that landscape quite dramatically. And so we look at it in a couple of different proponents. One is that we have various different product sets that allow these platforms to incorporate this offering into their service. But then it goes far greater than that. The ability to provide liquidity for that capital is very, very important. We have a diversified portfolio of capital providers that allows us to do a couple of things, widen the eligibility, improve the offers that we can provide and the size of those offers, both on the smaller end and the larger end. But when you look at sort of the operational side of launching a lending or a capital program. it's significantly different to say payments and so embedded lending allows through partnership allows business to go and offer those services out so everything from how you handle an inquiry to how you make decisions and underwriting and then processing that servicing them and then the renewal. Lastly, would like to say, I think data is the collateral in this whole space for embedded lending. That's where it's fundamentally different that we're looking at a real-time view on businesses to be able to lend to those businesses, which is fundamentally different from years gone by. And so with the emergence of technology, internet, and what these businesses are using as their financial everyday tools, with the data enrichment that comes with it allows for a quicker decision; easier access, less paperwork, less friction, all at the point of need. Charlotte Al Usta (04:00) Yeah, absolutely. And I'm looking forward to double click into all of that. I mean, like the data point especially is like a really important one, right? I think just taking perhaps like, you know, a step back, I think what is really interesting is effectively when we look at the broad embedded finance opportunity, payments is obviously one of the most mature products, still a lot of opportunity to be captured specifically in Europe, UK, where it's like less mature. I think what we also have observed is effectively embedded lending accelerating across geos. And so that was effectively quite obvious in the survey that we conducted earlier this year, where we conducted around 100 platforms. so 36 of them were already, or had started offering embedded lending. 37 were planning to offer embedded lending in the next 12 months. And so that was really the use case after payments and before others such as, know, banking, payouts, insurance that really came out as a next big opportunity. Why do you think that is and what is effectively driving that shift or that acceleration? Luke Trayfoot (05:05) Yeah, I think it's a few things. Firstly, it does depend somewhat on the customer cohort that you might have as a platform. But when you look at what's the driving force, I think it's simply that a lot of these businesses do not have access to capital through any other means. Or if they do, it's a very slow and sort of incumbent type journey. And so your options are the bank, your options are to go through a panel of lenders where you're looking at lots of different offers and different pricing structures, different repayment terms. so lots of businesses have effectively the eyeballs of these customers and they're looking to utilize those in order to, yes, generate revenue, but also generate all the other net benefits that you can get from a lending program, such as higher NPS scores, longer... a lifetime value, an increase in average revenue per user, lower churn. So when you look at the opportunity, there's a big need. There isn't necessarily enough supply from the open market. And lastly, if you can go to market through a partnership, it is not. There's no requirement for capital, there's no requirement for much tech work depending on how embedded you want to go, but there's flexibility in that go to market which many other products and value added services require businesses, especially payments businesses, to have to go quite deep and own the value chain. With this you don't really need to and it's relatively revenue rich but also all those other benefits I mentioned. Charlotte Al Usta (06:34) Yeah, absolutely. And I think that's even more so, right? The smaller the average merchant is effectively on your platform or I mean, we had looked at a couple of numbers in terms of, you know, what is demand by SMB segments. And it's obviously very high. So for example, in the US, you know, 50 % in average SMBs are looking for financing. If you look at micro businesses, effectively only 30 % effectively get a credit, which, ultimately really shows that, the smaller you are, the harder it is to effectively get access to financing. And another point that, you know, we had done lots of research around comparing effectively what it would take to get a credit from a bank as a small business owner across geos. And it's incredibly hard, right? It's a lot of paperwork. You need to provide lots of history in terms of trading history to the bank, until you get the approval, it's very, very painful for an SMB and really hard to get. So do you think, so two questions So who are the ecosystem providers and enablers that will benefit from embedded lending? And do you think banks still have a right to win? Luke Trayfoot (07:43) Yeah, so we look at it in effectively an eight box quadrant and so we look at four different verticals. They're very broad but first is payments and originally that that sort of industry was pioneering this space because they had the card data, they had the user base and to some extent under some pressure for their price points and their net revenue and their margin. And so they looked at these options which they can go through. We then go down and look at software platforms. That's sort of a very large frontier of this right now. Marketplaces, we work with of global household brands in that space, which see ultimately the sellers get a lot of net uplift from getting easy access to capital. Classically a business would be in that bucket that you just mentioned, which, and all that stuff, couldn't go to a bank necessarily and get lending. And then lastly, we're seeing a lot of traction in fintechs, money movement, neo banks and banks and we bucket those together and we look at them in two lenses we've got for intents of purposes, specialist partners, these think of these as verticalised businesses or platforms that are looking at a very specific set of merchants serving them for their needs, be in the likes of hospitality, could be in the likes of… car parts, whatever it may be, there's a vertical approach to it. And then we also have a horizontal lens, which is more like a diversified pool of businesses that they serve. And so those platforms are serving everything from a mom and pops, single owner, single operator type business, all the way through to more established, even up to enterprise businesses. So all of those have a very good context today to be looking at lending if they're not already. But also looking perhaps they have a lending program and they're at new geographies, they're looking at wider eligibility, those are key things that these platforms are looking at. On your second question, yeah I totally think banks have a right to play and to some extent they still have very much a right to win. The rationale behind that is ultimately trust, security and there are many businesses that you know still feel relatively comfortable with their bank and they trust their bank and so it's different for the banks because it's actually about two things risk and operational execution, so we look at those two areas for banks and that's really the point in which we see a need for uplift, especially on the micro end of those businesses, they're effectively smaller ticket sizes, they're still relatively the same amount of operational uplift with paperwork and those sorts of things and in fact we're partnering and continuing to partner with lots of banks in the space that helps the banks serve those micro SMEs. SMEs and even slightly larger SMEs which are asset-like, the banks don't traditionally have a risk appetite to lend to nor do they see the value on a revenue basis for the operational uplift that it takes to serve them and so we can slot in really nicely there and help those banks serve those customers until they become their corporate, mid and enterprise customers. Charlotte Al Usta (10:47) Yeah, I mean, I do agree. think banks have this massive right to win as it comes to access of cost of capital rights in addition as well, in addition to trust. So these two levers really make sense. You mentioned a couple of things ⁓ in the beginning where you said, platforms, marketplaces, as well as, fintechs or PSPs that are starting to offer embedded lending to the end customer, really offer a better product, which ultimately comes with a higher NPS score, LTV, higher revenue, lower churn. What else is in there for them? How would you define that in terms of the key advantages for the end customer, but as well for the provider of embedded lending itself? Luke Trayfoot (11:27) Yeah, I think it's the compound parts of those that are really special. So we see a lot of platforms that are looking to increase revenue, which granted very important and it's not to be ignored. But ultimately, if you could find that right, what I call the sweet spot where the merchant gets a great price point. With a very good experience to be able to get access to that capital instantly or within the same day. Then you have a great experience, which means you are effectively building more of a motor and your core product set. And so there are many examples we can go into, but it's when you get the compound, sum of those parts that becomes really, really important. I do think it's in the detail. It's how do those customers view you, value you. Lending is slightly different in the sense that in payments, there's somewhat of the lifeblood of the system. And in many cases, I'm sure you've seen on platforms, make that mandatory, which could be a friction at entry point, but over time that really improves. That platforms economics but also the experience for the customer and many other platforms make it optional. With lending it's always going to be optional, it's an opt-in type product. And so you have to sort get that sweet spot of the widest eligibility for the best penetration regardless of how small those businesses are, supply them with capital, they can then utilize that capital to open a new office or a new location, hire staff, do better marketing. There's so many benefits that that business gets which then you as the platform get as a follow-on effect. Charlotte Al Usta (13:01) Yeah, no, absolutely. That makes sense. I think it applies also to a lot of different verticals and horizontals, right? You mentioned that at the beginning and I think that's super interesting. It can really be applied to e-com centric businesses, to point of sales centric businesses, to office of the CFO. And so ultimately I think solving just access to finance has been such a pain point not well served by banks in the past. And I think the demand is just very high for that. And it's been proven by a lot of the numbers, right, that we see in the markets. And I think that also comes to my second point. You know, increasingly we see financial services becoming equally an important customer segment for providers such as YouLend as the likes of marketplaces and software platforms. And we'd love to get your perspective why that is. Luke Trayfoot (13:49) I think a lot of these businesses are managing their day-to-days very differently to 5, 10, 15, 20 years ago. And so I would argue that many of these businesses may not even log into their bank more frequently than once a month, maybe once a week if we're being generous. so you look at the software platforms, whether that's an accounting platform that might be a day-to-day. entry point for a business which then is connected up with their POS system or their marketplace sales and it's generating the financial output in order to make a decision as a business owner. So for those platforms embedding financial services makes a lot of sense because the customer wants to ideally have as much as possible in one place. As long as it's the majority of either where they're selling or what they're doing, or it provides a service that allows them to aggregate all this information for them to make a decision rather than having to log into five separate systems, look at five separate sets of numbers they may not reconcile and then make a decision where you don't feel informed. A trust element is very important, but then that user experience and journey that these new digital platforms, whether they're software platforms, financial technology providers, PSPs, marketplaces, are, you know, they're second to none, they're digital first businesses and that's what, as every consumer you'll see today, expects the level of service that you'll get when you order something, it gets delivered next day, you can return it for free. Businesses are humans at the other end as well and they're looking for a similar experience. Charlotte Al Usta (15:21) Absolutely. That makes sense. I think another point that you already touched on that at the beginning, our survey also showed that the partnership route specifically on embedded lending is a preferred one. We'd love to get your perspective around why do you think partnership is so much more important within embedded lending versus other use cases within embedded finance? Luke Trayfoot (15:49) Coming from payments and moving into lending it's been quite high in terms of it just totally different ways of operating a business and I think when any platform is looking to go out there's the typical build, buy, partner type go to market. So perhaps we can look at it in that lens where if you're looking to build yourself firstly it's not always a core competency. Secondly it's quite capital intense so you've got to find that money to go out of the door and ultimately get the money back in the door. And so that takes people time. There's also a lot of data and underwriting that only comes with time and experience and number of merchants served. And so we see a lot of businesses and platforms that come to us looking to leverage that because that is something that builds organically over time through experience. So yeah, it's quite a large uplift and of course if you've got a big base of customers to serve that's the first thing that you need but there are still many other things under the hood that you need to go and be prepared to achieve. Having said that there are a number of successful platforms that have executed on the build model, probably three come to mind globally. So your next option is to buy and we see that quite often but that will typically mean that M&A is quite tricky to go and execute correctly especially if it's not a core competency of the business that's the acquirer of the business being bought. But also it's quite geographically restrained. And so lot of those businesses and payments can go international relatively quickly and lending is a bit different. So there's a different landscape of regulation, currencies, credit bureaus, many different things. And so I think coming to partner is a route that many platforms take to go to market because it reduces all of the nuances of that heavy lift in the build column. It removes the risk if you pick the right partner of the buy column where you can go into many more markets quite quickly. But ultimately you're leveraging someone else's expertise. You're testing and learning and piloting and launching. So through that process you can learn a lot. In which case in the future if the desire is to go to build it yourself, you're doing that with a lot more experience and lot more facts and intelligence and data models that you can then apply yourself. So as a route to market I think that's why it's fundamentally so much more popular. I think some of the stats we've seen is over 80 % of those platforms are looking to partner, which is quite different to say payments or issuing or accounts or insurance. Charlotte Al Usta (18:22) No, I agree. And I think you just mentioned a really good point around, access to data, which is just so fundamental within embedded lending, right. And that's particularly even more important as you think about, you know, Europe, which is very fragmented, where access to data, the more you go into continental Europe is very restricted, I would say, compared to more mature geos. And ultimately, that coupled with the cost of capital just makes it indeed very logical to go first down the partner route and also in the longer term to still just leverage the partner for that. Luke Trayfoot (18:55) Yeah, I think it comes with scale, right? And if you have some context for YouLend we've funded over 350,000 businesses, put offers out to millions of businesses, have our own UX UI that we A/B test on a daily basis, but we have a whole host of partners in that quadrant I mentioned. And so you can, if you're a partner, platform slotting into one of those you have a pre-baked ready-to-go set of data pricing and knowing what you want to get out of the program do you want to get you know as much penetration as possible to as wider cohort of merchants as possible or are you looking to you know just make make money effectively right and then there's somewhere in the middle I always argue you know depends on the strategy for that platform but that comes pre-built pre-boxed up so yeah, a lot of value from going to market through partnerships, of course. Charlotte Al Usta (19:50) And out of curiosity, have you ever had the case where, you know, PSP or FinTech started building that in-house and then went to YouLend to go down the partner route? Luke Trayfoot (20:00) Yeah we did, and actually several of our largest partners actually started to build themselves and typically would pick a market to do that and the interesting facts here were the eligibility was, on a few of these, average around 20 to 30 % of that addressable book of business that they could lend to. And so you create a dynamic where that 70, 80 % who weren't getting served with capital were getting actually quite negatively impacted, or as we call it internally, as some FOMO around not having access to capital. And so that's the first entry point for us where we allow for those businesses to be served and we allow for the platforms to do both. They can serve the cohorts that they're, they have a risk appetite too and they know really well, but widen the eligibility. The other use case is geographical expansion and you mentioned Europe earlier and we're live in eight different markets across Europe and it's a different landscape, both on regulation, datasets, credit bureaus and access and also scale. If you were to compare a single European market to the US, it's fundamentally very different in scale and so there's always these questions for these platforms of well we've done it here but if we do it again here is the juice worth the squeeze and so that's where we can slot in really nicely and service them in different languages, different cultural nuances, banks actually have a different approach to lending in some European markets than others and so having that local expertise and knowledge is really important and especially for these large global platforms that are quite distributed across the world taking that micro lens on a small country in Europe sometimes isn't something that happens quite easily, come into there and give that expertise we talked about but also help them launch quickly. Charlotte Al Usta (21:46) Yeah. And I think that, another point that is also worth mentioning, it's very similar for payments, right? A software platform that is embedding payments first actually needs to learn the product. How does it work? How I can cross sell and upsell that into my front book and my existing merchant base. And it's a real learning curve and learning journey. And so that's very similar with embedded lending as well. Right. Even if you launch that in your core geo in the U S right. I think it always comes with learning how to position the product, how does my customer behave? And obviously like your customer in the US is going to be completely different. Somewhat we have like, you know, a different behavior than in the UK or like in Germany or in France. So yeah, fully agree on that. Luke Trayfoot (22:25) One added thing on Europe, you mentioned Germany there, it fascinates me in that market because for the payments folks out there, they would know 50 %-ish, I know it's increasing slightly, but 50%, sometimes less, is card-based. And so what's the other 50 % of it? It's LPMs, APMs, cash, invoice. And so when you're looking at lending off the back of embedding payments, quite a lot of providers may not be able to lend against or have the ability to underwrite and consume the data outside of card payments, which is something that YouLend has achieved in Germany, which we've seen sort of great results from that. And I think that's one example of a very important nuance. If you're coming, say, from the US and going to France or Germany in this instance, not only is there regulation, then there's the, how do you provide a really strong offer to that merchant? On all of their revenue sources, consistent revenue sources, not just one payment method. Charlotte Al Usta (23:23) Yeah, I think it's a fair point, especially whenever we talk about merchant cash advance, we think about that as like an advance on your card receivables. But ultimately in some markets, if you're not going beyond cards, you're just missing out on a big pool. Right. And Germany is probably one of the best examples here. Luke Trayfoot (23:40) As I say, we've seen that in Germany, but also in every market because we have a solution which is total revenue that consumes all that data. so platforms in the accounting space, in money movement. NeoBanks as an example, there might be a business, a solo sort of entrepreneur owner operator business that might do half of their business from cash and invoice and or card. We also saw an interesting use case of this with the food delivery companies whereby there might be one food delivery company that applies for capital with you from a single partner, but then when you look at their revenue, it might only be 10 % of their revenue because they're going to have three other platforms that they're payments from or revenue from. They've also then got their walk-ins, they've got their dine-ins, they've got their cash, and so when you look at a business, you've got to look at all of those points of revenue sources and find a way in order to lend the right offer size for that business's needs. Charlotte Al Usta (24:39) I agree. And so we oftentimes would love to spend a little bit of time around the use cases within embedded lending. Merchant Cash Advance is one of the most advanced use case today. Where do you see the market going and what do you see as kind of the next large use case? Luke Trayfoot (24:57) Yeah, I think Merchant Cash Advance serves a great purpose. I think there's an element here of revenue-based finance. There's lots of different terms, but I think for clarity, it's really about a flexible repayment lending product because for businesses that are quite cash-constrained or cash-flow-constrained and have a very much look at their businesses on a day-to-day basis. The amount they have to repay is really important because if their business is doing well, they'll happily pay more of that in load back. And if they're not doing so well, if they're having to pay back a certain amount on a fixed element, that could be where they get into a bit of trouble. So I see this as a very sustainable product set for those types of businesses. Having said that, we have three other products alongside MCA, or revenue-based financing, and so a fixed repayment product might suit a business that is a little bit more consistent in terms of their cash flow, and they're looking at a position to pay back on a weekly basis, or in some cases, monthly basis. And so that leans towards the larger businesses who are in different types of industries. And then there's also a little line of credit, right? And so that can be framed in many different ways and lots of people have looked at that in different ways and you can even have a card attached to that whereby in theory a platform might say we offer payroll services and those payroll services, that business that's needed to make payroll at that point in time, instead of taking out a long-term fixed or flexible repayment loan can just draw down for the amount they need to make payroll happen. And that's one use case. There are many others. We're seeing quite a few emerge in the B2B buying space where you might be a small business buying on a large marketplace, a platform, and you're looking to actually utilize whether it be a line of credit or some type of lending in order to fulfill that purchase because you've got a very finite point in time to purchase those items, right, that good. Which is an offer that's time limited. So we see that is very popular in marketplaces and many others. Charlotte Al Usta (27:05) Yeah, I think probably that's like one of the area that I find the most interesting is I think about embedded lending is we only scratch the surface, right? So you have revenue based financing, made a head start. But then there's a broad opportunity of pretty much like anything around on security, I would say, right, whether it's term loans or working capital loans, credit cards in some specific markets or ⁓ overdrafts specifically relevant in Germany, example, instant settlement, buy now pay later. Factoring is actually one of the other use cases that has been around for quite some time obviously, but this is also being innovated again with FinTech enablers to make that way more agile, more relevant to B2B verticals and office of the CFO. But in most financing I think the kind of range of use cases and possibilities is just so vast. It makes it just super interesting, I think, and really excited to see what is going to come next. Luke Trayfoot (28:01) Yeah, it is really interesting and I think sometimes the privilege of this challenge is picking which ones are most important for A, the platform and the platform's constituents, so many of these things come to the fore and I think that's again the route to partnering and finding someone who really understands this space can really help because we see a lot of businesses in platforms where that may have an angle of something that they see as being a benefit off of a few businesses or merchants in their cohort that they want to serve, but actually you've got to take a bit of a step back and have a look at the different ways. And fundamentally it's about framing. If you look at it, all of this is a lending product. It's just how you frame it and what am I actually taking, if you're a business you're thinking, what am I taking here, right? What am I getting into? So it's fascinating how UX, UI can actually play into some of this, but also the underlying unit economics and the repayments. Charlotte Al Usta (28:56) When we look at, so at the very beginning I mentioned that, you know, when we look at embedded payments, obviously the US is a couple of years ahead of the UK and Europe. How do you see the state of maturity of embedded lending specifically if you were to compare both regions? Luke Trayfoot (29:12) Yeah, I think in the US it's fundamentally a larger TAM ⁓ serviceable addressable market as well so that helps with regards to the go-to-market motion. There's also a fragmentation of the bank industry for lending and so that helps for the thesis of what we talked about earlier of getting the right offer of the right size at the right time in front of those customers through this technology. It's also a single market the majority unregulated, at least from a revenue-based financing standpoint. So that helps with access and fintechs to come in and actually drive change. I when you look at the lens of the UK and Europe, I'd actually see UK and Europe relatively different in the sense that the UK is more similar to the US. It's a single currency, a pretty good regulatory framework. Revenue-based financing is fundamentally unregulated. In the UK outside of consumer and so that helps but there's a very large difference in the size of the addressable market in those two. When you look at Europe that's where it is fragmented it's different regulatory landscape and when you look at the approach to market it's cultural differences. We typically see in say Germany, they quite often want to speak to someone on the phone. They quite often want to speak their language and understand what they are signing up to, which would be say different to a market, another market in Europe. And then on top of that, you look at markets in, Italy's a really interesting case on sort of how the economics can work or can't work, depending on where you come from. And then markets like Spain, which are slightly different on repayments, and markets like Poland, where there's no national direct debit scheme, and so you have to have different methods for repayments. And the list goes on. France, where it's a nationally owned credit bureau, and so that makes it difficult to go and get third party public accessible data on those businesses. So yeah, you can continue on that journey and those are conversations you don't need to have about the UK or the US. Charlotte Al Usta (31:20) Absolutely. The kind of biggest differences between those countries, first probably like access to data. You mentioned France is one example, right? And I think these official bureaus are also not updating the data on a regular basis, right? So you have a completely different profile there. And then indeed, like, you know, Italy is heavily government subsidized, which just makes it really hard to actually make a proper case out of embedded lending specifically, although it's again, like not, not a closed market either, but yeah, I think you need to navigate through some of those differences there. When we look at difference in maturities between verticals and horizontals, which verticals or horizontals do you think are most advanced as it comes to embedded lending today? Luke Trayfoot (32:04) So I do think the payment space we talked about that and I think in terms of being most advantageous, if you look at the vertical payments businesses, I think they're typically getting the most penetration and the widest adoption because of the focus that they have on the types of businesses that they're working with today. So it might be a smaller pool of businesses or a smaller set of customers, but ultimately, the customers are all looking for the same thing so it makes the ability to go live with lending to those customers through that platform slightly less complicated and you can be more direct. At the same time we've seen a huge amount of success in the horizontal payments businesses whereby typically larger more global brands that are looking to keep up with market trend, market positioning, reducing churn, all those net benefits I talked about earlier and so there's an very interesting race to be watching on who's doing what and where. But we come back to the argument about eyeballs and so a lot of these vertical businesses, if you wanted to cut it, have typically higher engagement from their merchant base than the horizontal businesses. There are obviously some outliers in both, but that's the trend. And I think software is now becoming that frontier. The addressable market in the US for vertical software is extremely large, and that's where in Europe it's slightly less and interestingly we were pondering on this a bit around sort of embedded banking as a service, embedded payments in Europe and I think that's some of this is a follow-on where it's quite difficult for those platforms to go and find a really strong provider for every market in Europe, everything that they need and so that fragmentation is actually multi-layered. But on the horizontal side we do see some success in software so the likes of accounting platforms and others where they have a sway of businesses that need access to capital. But they need these other components in order to have a successful program. So it can't just be card-based, can't just be single market. They're very global, they have different payment needs, slightly lower penetration in terms of embedded payments. So then you have to pick up and look at that whole cohort. And then you come to the banks as well, which is really interesting. We're seeing a lot of success in the neo bank space across the UK and Europe and in the US, whereby it's relatively similar to these horizontal software platforms because the money is coming from many different sources. The one added thing to this is that a lot of these banks, neo banks, they could be secondary account holders. So they have a primary bank, traditional bank that they hold that account with and they're utilizing these neo banks or digital first banks because they find it sort of more flexible to use, easier to use, and so they're looking to get service through that. So, yeah, on that race, it's going to be really interesting where the horizontal businesses have a very large cohort of customers that they can work with, but it's harder to penetrate, whereas on the vertical side, you've got perhaps a slightly smaller cohort of customers, but they're getting higher penetration. So we're somewhat watching this happen in real time, which is fascinating. Charlotte Al Usta (35:11) I think probably the more KPIs that will be published in the public domain going forward will also help accelerate the shift, right? So the likes of Toast, Lightspeed, Shopify are also starting to publish a lot of KPIs in the markets. So for example, Toast published that they originated over a billion in 2024. And, that's very similar to Stripe Capital now starting to publish KPI, so like Mollie, Adyen. And so that is also going to give confidence and is somewhat shaping the way of others also following, their way into embedded lending. Do you have a couple of best practices for marketplaces, for platforms, but also for fintechs or PSP that are looking to embed lending? Luke Trayfoot (35:59) Yeah, I'd be remiss to say not to go to market through partnership, of course. I think when you're looking at setting up an embedded lending or capital programme, it's really important to take that step back, look at the wide lens, but also have your business, whether it's a two-year, three, five-year strategy, in mind. And I mean that in the sense of, you going to different segments of businesses, different sizes of businesses, how will that change? But also the geographical footprint. And the capital intensity of the balance sheet if you were going to build, that was a really important construct. And that's where lending is somewhat different to payments. In payments, you want to believe to get as much volume as possible to scale with the take rate. In lending, if you effectively go a lot higher on the amount that you originate, but the program isn't set up to scale, that's where it can be really difficult and you have to shut it off or really sort pare it back. So take that wide lens. I think the second thing is when you're going through looking at a partner or a vendor to look at, get a panel, understand what they lift the bonnet, really understand how do their models work, what's their underwriting processes, what's their servicing like, who are their current use cases in your same peer set and how have they served them with one of the success stories. That will bring a lot to life than just a percentage you can get as a commission, pricing that they apply because those two things are actually outputs rather than the inputs so you have to look at those those pieces and then lastly business, like where are they on a health, financial health, are they sustainable, can they be a long term partner for you, will they be around in five years, these are all really important things because once you go live with a partnership you really want a partner to scale with that you can spar with through this and not someone that's having to focus on detractor elements of staying alive or raising capital, those are all great things but... Raising capital is very important, but ultimately what is their capital market mandates? How satisfied are they? How successful have they been in adding more mandates or keeping those existing mandates from the capital market providers? So many, many things to unpack there. Take a broad view, find a long-term strategy, the bonnet to understand what are the inputs going into that business, not just the outputs of what you're going to get from a revenue share or a price mechanic. Charlotte Al Usta (38:26) The way that we think about it is effectively, find a strong enabler, right? A strong partner that can help you. You just mentioned my data model servicing, et cetera. And then I think in addition, it really comes down to the go to markets, how you define what is eligible, how you market into your merchant base. Is it directly on the merchant dashboard where the merchant gets notified, that it's eligible, can sign up here. Then a lot also comes down to the sign up flow, etc. whereby comes again back to, you know, the quality of the underlying partner that you're working with, etc. Luke Trayfoot (38:58) Yeah, that's a fascinating point, Charlotte. I think you touched on this in payments and how you do that. And I think in lending it's even more fascinating because you can have a really well-built integration, fully embedded, fully customized, pre-qualified or pre-approved offers, which are effectively serving a soft or a firm offer to those merchants to accept capital. And you can get access to that money. The merchant can get access to that money within one click and instantly, in some cases. That route to market is where we see a lot of platforms coming to us to really understand, well I've got it embedded into my dashboard and I send a regular email to let the merchants know that those funds are accessible but we seem to be struggling and so we look at all sorts of go-to-market motions around direct mail campaigns in some markets across Europe and especially in the horizontal space, how do we get access because they may not actually look at the emails and they may not log into the dashboard. Sales let go to market is a really large part of this too where if there are sales heavy, sales let growth organisation that have...inside sales, field sales, they want to have more in their bag to go and sell in which case lending can actually be a great thing to offer to those businesses. It's also an entry point for those platforms to be able to say, if you join us, you can get capital, which is maybe something they don't get with their provider today. So sales is really important. And then also there's a lot of other things around. You've seen the emergence of terminal messaging for the POS providers. How do you display that? So the route to market is really how you can drive penetration and drive that adoption and get the attachment rates high. Charlotte Al Usta (40:41) Yeah, no, absolutely. think like go to markets again, like once you have a good product, obviously, highly embedded, the more embedded, obviously the better it is. I think then it really comes down to go to markets and how do you drive the penetration? How do you think about the end target states as it comes to embedded finance and also embedded lending specifically? Luke Trayfoot (40:59) Yeah, think when you take the, who knows, I guess would be my first answer to that because there's so much that could happen. When you look at all of these embedded components or embedded financial products. They are starting to actually converge to some extent, where payments is leading to lending, but then you've also got accounts, and so you want to have a stored value component where that money can hold. and now I want a card attached to that, and, you know, and I need to ensure for this over here. So I think they're all starting to converge, but each one of those component parts is a business in itself and an industry in itself, and so bringing those together is a very fun and exciting challenge for many platforms. I think, you as you look at it in the end state, will be somewhat, you who can nail that? But I don't think it's a one-winner space. I don't think it's a one-size-fits-all because each of the businesses such as YouLend I mean, we're very much an inch wide and a mile deep on lending. And that's a really important part of what we do because we want to be the best in that space. I think with the emergence of AI of course, that's helping on the data models, the underwriting, the pricing, testing things. So that's really helping. The digital experiences are becoming easier to integrate. think access to partnering quickly with whether it's APIs, SDKs and embedded components really helps platforms especially in that vertical space to integrate and go heavier and go deeper. And then lastly it's the servicing element. This is somewhat the yin and the yang to the AI where we're still very strong in human servicing. We have a large proportion of our employee bases there to pick up the phone so that when a business needs to call us because they're about to take an offer but they've got a question, they don't really feel comfortable just reading about that online and they want to speak to someone, we're there to pick that up. so I think that's where we perform very well on conversion metrics for a lot of our partners because that's the point in which the human touch is needed and so that's servicing an operational element and having strong KPIs. I think a lot of businesses will be trying to build all of those areas up and across all of that you've got geographical expansion so there's a few players in South America that are doing exceptionally well and seeing a lot of demand there. There's obviously Asia so looking at this from a global lens it will really start to grow wider as well through many different markets where there's a need for lending. Charlotte Al Usta (43:38) I think we are only scratching the surface. So there's still lots ahead. And Luke, perhaps my last question for today's podcast would be, how do you see the next five years? Luke Trayfoot (43:48) Yeah, I think when you look at embedded lending in particular there seems to be more appetite by the day and the week that we see here at YouLend so it's a very exciting space to be in. More businesses are coming around to the idea that they need to incorporate merchant services, value added services for their customers, putting their customers first and so I see that just continuing to grow. I don't see that flatlining or doing anything other than just an exponential growth. When you look at the emergence of some technology in the market, making access to market expansion and speed of payments because ultimately embedded lending has a proponent where the expectations are for it to be quick and frictionless and so those technologies allowing money to move quicker allowing for checks whether that be fraud or KYC to all happen seamlessly in the background. Those things will just keep adding to the value of this growth journey that's happening. So I would make a call, I think, with that plus AI in five years. We're looking at a very different space that businesses will get the vast majority of their capital requirements from those platforms that they utilize today, or the providers that they have for payments and banking and software. Charlotte Al Usta (45:00) I think the AI point is also an interesting one and an important one to mention, particularly in embedded lending. I think probably to close off this podcast, what really gets us excited is that, you know, the majority of the TAM today is still owned by banks. However, fintechs are coming in huge disruption coming, and you will also see an expansion of the total addressable market, right? Because the value proposition is stronger than a bank effectively going to market that you will also be able to charge more for that. And then lastly, access to financing is a pain point for SMBs today. And there's a lot of demand that is not being served, which is why embedded lending is only at the beginning. And we'll see very strong acceleration happening over the next couple of years. Luke Trayfoot (45:48) Fully agree. This access is going to continue. it's some of ourselves and our peers in this space are continuing to see that growth. So very exciting times. Charlotte Al Usta (46:00) No, absolutely. Thank you so much, Luke, for joining today's podcast. It has been an honor having you here today. thanks a lot and have a good day. Luke Trayfoot (46:08) Excellent, thanks Charlotte, it's been great speaking with you today and we hope you and the audience find it very useful. Charlotte Al Usta (46:14) Thanks Luke.

The issuer processing market continues to show a clear divergence in performance between fintech-oriented and bank-oriented issuer processors. Fintech-focused processors are still achieving strong, double-digit revenue growth, while bank-oriented processors are experiencing more modest, low single-digit increases. However, growth across both segments has slowed compared to their five-year CAGRs, reflecting a broader normalization in the market. 1. Issuer Processing 2024 Revenue (2024, in $ millions) 2. 2023 - 2024 Revenue Growth 3. 2019 - 2024 Revenue CAGR General Commentary & Highlights Fintech-oriented issuer processors continue to report strong, double-digit growth, whereas bank-oriented processors posted low single-digit growth rates. 2023 – 2024 growth rates down across the board vs. 5-year CAGR. 4. Issuer Processors 2024 EBIT Margin (% of 2024 revenue) 4. Issuer Processors Revenue vs. Profitability Growth (2023-2024) General Commentary & Highlights Bank-oriented issuer processors exhibit attractive, double-digit EBIT margins. Many Fintech-oriented issuer processors are loss-making, illustrating the challenges of scaling in the fintech segment of the market, which is small relative to the bank market. Thredd and Marqeta made significant strides to improve profitability, with EBIT growth significantly exceeding revenue growth. Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com with comments and questions.

A $170M Revenue Opportunity for Banks Only licensed U.S. banks can provide acquiring BIN sponsorship, and while there are thousands of U.S. banks, only a handful operate acquiring BIN sponsorship businesses. The scarcity of acquiring BIN sponsors is primarily due to banks’ concerns with compliance / risks and a lack of BIN sponsorship experience. Recently, we also witnessed a pullback from some acquiring BIN sponsors. In contrast to the small population of acquiring BIN sponsors, there are almost 1,300 non-bank acquirers and PSPs needing sponsorship from banks1. The large demand pool and small supply of sponsors has created new (and renewed) interest among banks in acquiring BIN sponsorship programs. At the same time, the acquiring BIN sponsorship market is evolving. Several large non-bank acquirers – notably Fiserv and Stripe – have pursued special purpose bank charters to bring sponsorship in-house. Banks looking to enter the market or expand their business must differentiate by focusing on specific verticals, targeting high-risk or underserved segments, or bundling sponsorship with other value-added services. This article addresses a few of the most common acquiring BIN sponsorship questions asked by our bank clients. More specifically: 1. BIN Sponsorship Frequently Asked Questions What is Required to Establish and Manage a BIN Sponsorship Program? While sponsored parties (e.g., non-bank acquirers, PSPs, ISOs, etc.) perform virtually all the acquiring functions, as shown in figure 2, the sponsor bank is ultimately responsible in the eyes of the card networks for ensuring appropriate activity and compliance. In this sense, the sponsor bank effectively acts as a guarantor for sponsored parties. 2. Merchant Acquiring Value Chain Acquiring BIN sponsors primarily perform these functions: implementing settlement and funding procedures, overseeing the ongoing activities of partners and ensuring compliance, liaising with the card networks, and establishing oversight policies / processes (e.g., merchant application guidelines, partners’ merchant underwriting approaches, fraud monitoring, etc.). Many of the roles and responsibilities of an acquiring BIN sponsor are similar to existing functions at most banks. At the highest level, establishing and managing a sponsorship program requires: Investment in Time and Resources: Acquiring BIN sponsorship requires commitments. The direct costs for establishing and running a program can vary significantly, but overall monetary costs are not prohibitive. The time and resource requirements include: Establishing the foundation of a program (policies, procedures, reporting capabilities, risk management functions, technical integrations with networks, underwriting guidelines, governance approach guidelines, etc.) Staffing of appropriate resources to operate the program Recruiting and performing diligence on sponsored partners and Overseeing the performance and compliance of your sponsored partners and the program Comfort with Heightened Regulatory and Card Network Scrutiny: Sponsoring third parties will result in additional scrutiny from both bank regulators and card networks. This only becomes an issue if the program is performing poorly or out of compliance, but the bank needs to be comfortable with accepting additional scrutiny. Industry Knowledge and Expertise: Selecting the right partners, setting up the optimal infrastructure, and managing the program requires specialized skills. Absent scale, meaning a portfolio of numerous sponsored third parties or massive amounts of card volume, banks primarily utilize existing resources (fractional employees) to manage acquiring BIN sponsorship programs. Banks may only need one or two additional FTEs for oversight, compliance, business development, and liaising with the card networks. How can a BIN Sponsorship Program Benefit a Bank? The greatest benefit of being an acquiring BIN sponsor is the ability to generate fee income. More than $6 trillion of card payments are managed by non-bank merchant acquirers, ISOs, and ISVs today. All of this volume must be cleared by a member bank of Visa and Mastercard, though the (potential) impending exit of Fiserv and Stripe could remove approximately $2 trillion from the sponsored volume pool. Acquiring BIN sponsorship generates more than $200 million in revenue for U.S. banks per year. (In some cases, these fees are folded into the overall economics of bank/acquirer strategic partnerships and joint ventures.) This will likely reduce to $150-175 million in revenue if Fiserv and Stripe start to clear all of their volume in-house, though we expect that transition will take several years. 3. U.S. Acquiring BIN Sponsorship Market Opportunity Acquiring BIN sponsors can also earn interest on the float of settlement and reserve accounts, and/or the solution can be used as a wedge for other services, such as bank payments (ACH, wire, RTP) and deposit management. These related services often generate revenue equal to or larger than the direct BIN sponsorship fees. 4. US BIN Sponsorship Financial Illustration Are There Benefits to Sponsoring Your Own Bank’s Merchant Business? If a bank has a merchant services business enabled by a partner, it can often choose to let that volume flow through the partner’s existing sponsors or its own BINs with Visa and Mastercard. The latter approach does create some operational overhead but there are several benefits to clearing your own volume, including: 5. Benefits of Sponsoring Your Own Merchant Business (non-exhaustive) As stated earlier, recent years have seen certain large non-bank acquirers apply or become approved for special purpose bank charters, mainly the Georgia Merchant Acquiring Limited Purpose Bank (MALPB) charter. After receiving approval in September 2024, Fiserv became the first MALPB to process transactions in April of this year. Stripe was similarly approved for the special charter in July of this year. And more recently, Checkout.com completed its application for the designation. Other large acquirers are reportedly considering or pursuing a similar path. While in-housing sponsorship can be attractive on paper, many companies find it a challenge to fully realize the expected benefits. Cost savings can take more time to materialize due to oversight and compliance requirements, which are often more easily absorbed by banks. And while enhanced data visibility is an attractive proposition in theory, transforming data into a business asset is often a more daunting task. That said, this strategy is clearly in vogue at the moment. Special purpose charters and the current U.S. regulatory environment may make this a uniquely attractive time for fintech companies to become banks. What are the Risks Associated with Being a BIN Sponsor? Becoming an acquiring BIN sponsor does not come without tradeoffs, including additional regulatory scrutiny and more risk. The key risks of acquiring BIN sponsors include: Credit, Fraud, and Counterparty Risk: Each processed transaction creates potential credit risk. The bank will have chargeback exposure, but only to the extent that partners or their merchants are unable to pay (due to bankruptcy, fraud, etc.). Compliance Risks: The bank will face stringent compliance demands and oversight requirements. The bank will need to also adhere to the regulatory guidance of non-traditional bank regulators, such as the FTC and CFPB, which are active in monitoring payment processors. Legal, Contractual, and Reputational Risk: The bank risks inadvertent violations of new or updated regulations or rules, which could lead to compliance issues, penalties, or reputational damage. Regulations include network merchant agreement standards, consumer protection laws, and truth-in-advertising standards. The bank also ultimately has liability in disputes with or against partners or its merchants, unless contractually protected. This exposes the bank to reputational risks, as the bank’s partners are representatives of the sponsor bank, and negative actions could reflect poorly on the sponsor bank. Operational Risk: The bank faces heightened operational risks. The bank risks monetary losses from inadequate or failed internal processes, people, and/or systems or from external events (e.g., fraud, business disruption, poor execution of process management activities, etc.). Additionally, when sponsoring your own portfolio, costs are moved from variable to fixed, which brings advantages but also the risk of negative operating leverage from declining volumes. However, there are numerous risk mitigation techniques that a sponsor bank can deploy to minimize risks, including contractual terms (e.g., reserves, punitive pricing for increased chargebacks, indemnity for losses), strict oversight policies, and careful partner diligence efforts (initial and ongoing). Bottom Line: BIN sponsorship can be lucrative for banks, but sponsors must build a business case that incorporates a complete understanding of not only the potential revenue upside but also day-to-day costs and risks. As the BIN sponsorship undergoes a significant evolution, banks must focus on differentiating their proposition to non-bank acquirers through vertical specialization, systems that make a bank particularly easy to work with (or allow it to offer unique capabilities and data), strong related banking and value-added services, or a tolerance for verticals that others perceive as high-risk. Flagship has substantial experience helping banks to evaluate, plan, and execute acquiring BIN programs. Given the current market conditions of short supply but significant demand for acquiring BIN sponsorship, now may be the optimal time for your bank to become a sponsor. Please do not hesitate to contact Scott DeHaven at Scott@FlagshipAP.com, or Ben Brown at Ben@FlagshipAP.com with comments or questions. 1 Source: VISA

A panel discussion on the future of agentic commerce with Ben Brown (Partner, Flagship Advisory Partners), Craig DeWitt (Chief Product Officer, Skyfire), Robin Gandhi (Chief Product Officer, Lithic), and Colin Luce (Chief Executive Officer, Basis Theory). Together, we explored how agentic commerce could transform payments, digital identity, and risk, and discuss the opportunities and challenges ahead as this emerging landscape takes shape. This podcast episode is based on a webinar Flagship hosted on 14 October 2025: https://insights.flagshipadvisorypartners.com/webinar-the-rise-of-agentic-commerce . Do not hesitate to reach out to Ben Brown, Ben@Flagshipap.com with any comments or questions. Listen to the latest episode on the following platforms: Youtube Spotify Transcript Elisabeth Magnor This is Fintech Conversations with Flagship, a podcast production by Flagship Advisory Partners. In this podcast, we discuss the big topics shaping the world of payments and fintech, and each episode will bring you sharp insights and fresh perspectives from the industry. Whether you're building, investing, or simply curious about fintech, you're in the right place. And welcome to this episode of Fintech Conversations with Flagship. In this episode, we'll dive into one of the biggest buzzwords in fintech and payments: agentic commerce—the new world where AI agents act and transact on behalf of consumers and businesses. Over the past months, we've seen exploding interest in the field, and everybody's wondering: will agentic commerce change the game of payments like the internet did, or is it simply hype? In this episode, you'll first hear Ben Brown, Partner at Flagship, sharing an overview of what agentic commerce is and how it works for around 15 minutes. Then, for the rest of the episode, you'll hear a discussion panel with industry leaders from Basis Theory, Lithic, and Skyfire. This episode is based on a webinar we hosted, and if you'd like to watch the full video recording and presentation, this is available on Flagship’s website. Let's get started. Ben Brown Thanks, everybody, for joining. We'll kick off today's call with a short overview of what agentic commerce actually means, how it works, and the impacts on the payments ecosystem. Once I've set the context, we'll spend most of the time on a discussion with three innovators who are on the front lines of building new payments and infrastructure for agentic commerce: we’ve got Craig DeWitt at Skyfire, Colin Luce at Basis Theory, and Robin Gandhi at Lithic. It’s a cross-section of companies building infrastructure for the agentic commerce economy across things like end-to-end payments platforms for agentic commerce, digital identity for agents, virtual cards, and supporting some of the cutting-edge evolution of network tokenization we see. I really appreciate all the panelists for joining us today. I'll try to keep the Flagship part of the discussion as brief as possible because we want to set good context for the discussion to come. One place we wanted to start is: does this matter, and is this a real thing? We hear from clients a variety of perspectives all the time. There aren't many forecasts out on agentic commerce yet, and the ones that do exist vary widely. Some say as high as 40% of all global transactions by 2030—five years from now—will be agentic-influenced. Our point of view isn't that aggressive, but, like Bill Gates said, people tend to overestimate what will happen in a year and underestimate what will happen in 10. To that end, we do think agents are likely to be meaningful and perhaps influence ~20% of digital payments in the U.S., ~30% of total payments in the U.S., in 10 years. That means we're at the early stage of a once-in-a-generation emergence of a new form of commerce and payments. It’s exciting to be here at the ground floor—for everyone in payments, and broader merchants, online advertising, and AI builders as well. While we're early, we're also seeing a parade of announcements across the industry, from many different players. Merchants like Amazon and Walmart have rolled out conversational shopping assistants inside their apps. Walmart has even rolled that out on the seller side with its “Marty” agent for marketplace seller onboarding. That isn't something we talk about a lot, but a big potential impact of agentic AI is expanding participation in the digital economy—smaller businesses, more custom goods, the circular economy—all the things that can be hard to put online. Agentic AI can really help. We're also seeing CDNs like Cloudflare and Akamai partnering with companies like Tollbit—and even Skyfire, who’s with us today—so publishers can authenticate and monetize AI bot traffic, which is increasing at an enormous rate. Today, roughly half of all web traffic is bots and half humans. And of those bots, it's almost 50–50 between good bots and bad bots. One big impact: if your fraud models assume all bots are bad, you're going to have a lot of false positives as agentic traffic takes off. We see big tech companies like Google announcing protocols for agentic-led payments with long lists of merchants, FIs, and payment networks participating. Visa and Mastercard have both announced solutions to evolve tokenization for an agentic world. Even today—six hours ago—Visa announced its latest proposal around agentic identity and trusted agent identities. And these early announcements are quickly turning into live experiences, such as shopping on Perplexity or buying from Etsy sellers natively within ChatGPT, which you can see here as an example on the page. As this all comes together, across the customer journey AI promises to impact everyone: the search engines and social platforms that drive digital advertising, merchants, payment processors, card issuers. Some impacts are obvious—zero-click search and embedded buying diverting consumers from visiting merchant sites, or agents confusing fraud tools tuned to recognize bot traffic. Some are less obvious—explicit agentic consent trails could reduce certain dispute types if we can verify who authorized what, especially at SKU level. At the same time, issuer costs for card benefits (extended warranties, price protection, etc.) could change if agents systematically trigger claims at dollar amounts none of us would manually monitor. Every company in payments—and the broader digital commerce ecosystem (merchants, ad tech, commerce platforms)—should think about second-order effects, not just the obvious headlines. There are multiple ways agentic commerce can happen in retail. It won’t all be shopping within a conversational interface of an LLM. A few models: Large merchants are evolving onsite search into more conversational experiences. Platforms like Shopify are building ways for customers to create carts and buy across different sellers in the Shopify ecosystem, not just within one seller. In some cases, agents help you find the item, then link you to the merchant site (no new infrastructure needed), monetizing via existing affiliate platforms. Where it gets interesting is when agents act as facilitators or aggregators—either initiating payments through the merchant’s commerce/payments stack, or acting as the marketplace themselves and owning the full customer relationship. Beyond these, we may see specialized agents for parts of the journey. For example, agents that take care of the checkout form for you—even if the rest of the shopping journey is normal. That could make every product page a checkout page and give every merchant one-click checkout, without reconfirming shipping info and CVV codes. We’re payments people at Flagship, so: how are payments working in these scenarios? We see four primary models: Autofill checkout forms. Works, but brittle—and it hides that an agentic experience is happening. Collect-from-user, pay via virtual cards to merchant. Similar to how platforms like DoorDash work today. Early agentic commerce is digitizing human “agentic” relationships we already use (Uber Eats, DoorDash), including B2B analogs. Tokens with richer identity/authority data. More digital identity, delegated authority, and limited-use credentials—the direction networks are steering. Machine-native settlement rails. E.g., the Cloudflare–Coinbase work and the X402 Foundation repurposing HTTP 402 for on-chain stablecoin micropayments—relevant for monetizing API calls, content access, and pay-per-use bot traffic. Cloudflare has said they send out huge volumes of HTTP 402 “Payment Required” responses daily, largely ignored today for lack of infrastructure—agentic AI may change that. Networks are steering toward an agentic token model. There’s a range of protocols and frameworks already announced. Common theme: evolve the tokenization infrastructure (billions of tokens over the past decade underpinning digital wallets) for an agentic world, with more data. Differences remain in digital identity and intent signals. And these aren’t the only solutions; for example, Worldpay announced a partnership with Trulioo on a “Know Your Agent” framework. Panelists here have also built solutions in this space. Lots of proposals and early work—unclear exactly what “wins.” Double-clicking one example—the Google AP2 agentic payments protocol—you’ll hear terms like intent mandates, cart mandates, and payment mandates that aren’t familiar today. Think of them as notarized breadcrumbs of who asked for what, what items and price were approved, whether a human was present, and what payment method to use. That breadcrumb trail will be gold for issuers, acquirers, and merchants to tune fraud models and adjudicate disputes. Those signals will create impacts for every player. Three takeaways: Don’t fight good agents—authenticate and embrace them. Expect changes in digital identity, consent, and SKU-level data; start tinkering now so you’re ready when volumes scale. It’s a good time to pilot while volumes are low. With that, let’s shift to our panel—people hands-on, building the future. I’d love to bring in Colin from Basis Theory, Robin from Lithic, and Craig from Skyfire. It’d be great if each of you could quickly introduce yourself, what your company is doing in agentic commerce, and what makes you most excited about the space. Robin Gandhi (Lithic): My name’s Robin. I run Product at Lithic. Lithic is a next-generation modern issuer processor—similar vein as the Marketas of the world. We issue cards. We’ve been around in many iterations for the last 10–12 years; in this iteration—selling infrastructure—for the last four. For agentic commerce, we’ve been experimenting, especially with folks here on this call. Where we as an issuer really play is around virtual cards. We’ve been exploring how to generate highly controlled virtual cards and give them to an agent to make purchases. It’s early days, but we’re pushing hard because we believe virtual cards are one way to solve this. There are other mechanisms, and we’ll get into those, but virtual cards are the obvious step one. Colin Luce (Basis Theory): Colin Luce, co-founder and CEO at Basis Theory. Our platform puts merchants and platforms back in control—with vaulting and tokenization as the underpinnings—so you can imagine how that maps to agentic commerce. Many use cases we’ve enabled over the past 3–4 years are distributed, embedded shopping experiences; agentic shopping is the next evolution. Social shopping has grown (TikTok Shop, Instagram links); ChatGPT is just the next medium where attention lives. We focus on enabling commerce where attention lives. Most in-production use cases today are non-AI “agentic” commerce experiences; we’re at the precipice of the agentic-AI phase. Craig DeWitt (Skyfire): I’m Craig DeWitt, co-founder of Skyfire—an agentic commerce platform. We serve AI platforms/agents and merchants who want to accept them. On the AI side, we provide identity and the ability to use payments to buy what’s needed—both stablecoins and, now with what card networks are bringing, tokenized cards. On the merchant side, we let merchants identify bots, identify not just the agents but the principals behind them (the user or business), and accept them as paying customers—through the website (most volume today) and headless via a variety of API approaches and protocols. That’s Skyfire. Ben Brown Awesome—thanks to all three. Great complementary panel: Craig is all-in on agentic AI end-to-end, Colin enabling tokenization that underpins a lot of this (and evolving into broader solutions), and Robin/Lithic from the cloud-based issuer-processor perspective. These components come together to make the future happen. Let’s jump in. Colin, you said we’re not seeing a lot of truly agentic experiences yet. What are the most mature ones today—verticals, apps, merchants? Colin Luce I like your friend’s take that we should celebrate building blocks, although it can sound like a participation trophy. The most mature “agentic commerce” today is non-AI agentic. Example: Roku’s shoppable ads platform (we helped enable ~3.5 years ago): one-click buy from the Roku device. That relies on tokenization, checkout APIs—the same backend ideas we’re contemplating, just without AI. Important nuance: agentic commerce vs agentic payments. ChatGPT Commerce and Perplexity are agentic commerce (efficiency in discovery/comparison). The payment flows are existing infrastructure. So when people say “what about risk/fraud?”, if payment flows mirror today’s, existing tools should apply. Transaction volumes on AI platforms are very early (think tens/hundreds per month at some), so we’re at day one. On disputes/chargebacks and legal frameworks—it’s like self-driving cars. Who’s responsible in a crash? We’re years into autonomy; accidents didn’t stop adoption, but adoption is still not universal. It’s amazing we can autonomously drive across San Francisco, but we can’t autonomously book an airline ticket reliably. “Atoms vs bits.” Robin Gandhi Colin and Craig probably see more consumer examples. I think B2B use cases will be more interesting. People like buying fun stuff; removing the person from that experience is less compelling. The transformative impact is on things people hate buying—marketing spend allocation (“here’s 100k, spread across platforms”), supplier payments, low-consideration replenishment. Smaller ecosystems where trust can be built. That’s where we’ll see traction first. Craig DeWitt On the e-commerce use case people imagine—new interface where an agent purchase happens—the coolest I’ve seen is Consumer Reports: they already have millions of users who read reviews; add a “Buy it” button. Want a toaster? Click buy. They spin up a headless browser, navigate to the merchant, find the right SKU, autofill card details, and buy on behalf of the user. That uses card tokenization, etc. The hard part so far is access: how does the agent get access to the site? HTTP 403 errors are going through the roof as sites block programmatic access due to AI traffic. A big part of our business is helping agents identify themselves to get access. We’re seeing many B2B use cases here, because the way the internet worked (open crawling) is changing as bots flood it. It’s much harder to get access than two years ago. Ben Brown I see Cloudflare “are you human?” a lot—false positives are up. That’s a fundamental change and creates opportunities. Let’s talk where this moves faster/slower. a16z wrote that AI plays different roles by purchase type (impulse, essentials, lifestyle). Some will be algorithmic impulse nudging (TikTok); others price trackers; others interactive AI coaches (mortgages, autos). Some sectors move faster. If we’re here in 1–2 years, what moves the fastest? Colin Luce It depends on context. The value of AI is proportional to the context it can access. Procurement has written rules—high context. Consumer Reports—very acute context. Social platforms have massive data about us. ChatGPT/Perplexity are well-positioned: they have conversational context (are you value-seeking, loyalty-driven, etc.). Payment transaction descriptions are still messy (15 years on). Networks saying they’ll provide context—maybe—but “$3,000 at United” doesn’t tell you if I bought one business-class seat or seven economy seats. Or “book me a flight to Miami under $X over the next two months”—what if my plans change? Without calendar/travel context, it breaks. So it’s not B2B vs B2C; it’s wherever the agent can get the most context. Ben Brown What’s the single biggest blocker today—payment plumbing, digital identity, data quality, consumer trust, or something else? Craig DeWitt Procurement: we automated buying a specific resin for a large OEM partner. Identity and payments worked; internal processes were the hurdle—ERP, wires, CSVs, manual steps. For e-commerce, the blocker is user adoption—is it 10x better? For B2B content publishers, the blocker is acceptance: ad models are breaking, but they need to understand protocols/services to allow agents and accept programmatic payments. Net: “agentic commerce” is a huge umbrella; each use case has its own hurdles. Some will react by turning things off (banks, publishers, merchants). Others will endure a painful transition while putting new infrastructure in place. If everyone “turns it off until infra is ready,” we get a chicken-and-egg problem. Robin Gandhi Merchant acceptance is the biggest piece. We’re building enablement, but the merchant needs a clear signal: “this is good traffic, we captured intent, and we know the agent.” Once we agree on a protocol and acquirers support it, we can solve it. We tried a simple experiment—making a donation to the San Mateo Library—and it got rejected as fraud. That shows how broad the “block bots” posture is. We need acquirers/PSPs to enable the right protocol end-to-end. Ben Brown We’ve seen a flurry of frameworks—Visa, Mastercard, Google (AP2), Stripe (ACP), etc. Are they fundamentally different or flavors of the same thing? Colin Luce My biggest concern is competitive dynamics and incentives. Collaboration is needed among natural competitors. AP2 is pushed by Google; ChatGPT is well-positioned—are they going to play nicely? On PSP/acquirer side, Stripe is behind ACP; will Adyen or Checkout be comfortable supporting a rival’s protocol? Specs might be open, but decisions aren’t always purely technical. If merchants have to integrate 12 protocols, adoption stalls. Even within the networks’ offerings (e.g., VIC/AgentPay), issuer support is limited. You can’t ask consumers to pick their issuer behind the scenes. We need convergence. Craig DeWitt Common threads: identity exchange and a payment construct. But many specs try to position who holds power. AP2 (Google) wants to collect mandates; networks say “we carry chargeback risk, we hold mandates”; ACP says “just integrate OpenAI and we’ll handle it.” That’s not great for industry simplicity; it is an opportunity for startups to “future-proof” merchants. On SKU-level data: ACP/OpenAI asks for full product catalog/pricing APIs. Big brand merchants say no way—they won’t become a pure fulfillment back-end. They want a direct relationship with the end user and visibility into what the agent is accessing. Some will turn it off and lose sales; others won’t give it all away. Etsy/Shopify are more likely to lean in, given their merchant base. A Home Depot-type merchant wants the contractor’s agent to buy 10 feet of pipe—but they need identity exchange to preserve the relationship and history. Colin Luce Merchants are asking: what’s the tax? Everyone pays a tax today (ads CAC, take rate). Is the agentic platform tax 2% or 20%? If the tax is zero and traffic is free, merchants might share SKU data. That decision hinges on the economic model. Ben Brown We’re close to time. One piece of advice for the ecosystem—what should they do tomorrow? Robin (issuers), Colin (PSPs/acquirers), Craig (merchants). Robin Gandhi (Issuers) Be in the conversation on protocols. Work with the card brands to support emerging token frameworks. Most modern issuers can spin up highly controlled virtual cards already—connect the dots and be ready. Colin Luce (PSPs/Acquirers) You’re the gatekeepers to merchants. Do the work to make adoption feel like adding Apple Pay/Google Pay—as close to a flip-a-switch as possible. Your one-to-many leverage is key. Craig DeWitt (Merchants) (Easy answer: reach out to Skyfire! And call Flagship for strategy.) Practically: start authenticating good agents, run controlled pilots, and choose a partner that abstracts protocol complexity so you’re future-proof. Ben Brown Thank you to the panelists and to everyone in the audience for joining us. Elisabeth Magnor That’s it for now. Thanks for listening to Flagship. We’re always happy to chat. Stay tuned for more exciting fintech conversations.

In the last 12 months, a first wave of corporates and financial institutions began using fiat-backed stablecoins to cut cross-border settlement times from days to minutes and reduce costs without taking the price risk inherent in established cryptocurrencies like Bitcoin and Ethereum. Those early adopters will drive stablecoin payment volumes to hit $140-195B this year, effectively doubling the real-world use of stablecoins over last year. Now, encouraged by these early case studies, more than half of financial institutions and large corporates globally say they plan to adopt stablecoin technology. Stablecoins are likely to reshape global payments and unlock new value in today’s complex, fragmented banking and payment ecosystems. Their value proposition is compelling: stablecoins offer instant settlement, 24/7 availability, low transaction costs, programmability, and an increasingly clear regulatory framework in the U.S. and European Union (two markets that represent 43% of global GDP and 30% of global cross-border trade1). However, it is still very early days for this technology. Readers should keep in mind that the total value of stablecoins in existence is equal to about 1.4%2 of the U.S. money supply (M23) and stablecoin transactions are equal to about 0.3% of global payments. In this first article of a series on stablecoins, we take an introductory look at stablecoins, the recent market interest in this space, early adopter use cases, and potential mainstream adoption hurdles. Defining Stablecoins Stablecoins are a type of cryptocurrency designed to maintain stable value relative to a fiat currency (usually the U.S. dollar), commodity, or other cryptocurrencies. Stablecoin issuers either maintain a 1:1 reserve of the pegged asset or the system uses an algorithm that adjusts the supply of coins based on market demand to maintain price. As shown in figure 1, fiat-backed stablecoins account for around 90% of stablecoins in existence (and 99% of those are denominated in USD). Fiat-backed coins offer the most potential for payments, especially since recent regulations in the U.S. and EU have effectively banned so-called algorithmic stablecoins. 1. Types and Prevalence of Stablecoins (non-exhaustive) Uptick in Interest Stablecoins appeared about a decade ago as a way to provide a stable, digital alternative to volatile crypto assets. They have grown dramatically since 2020, as depicted in figure 2. This growth was initially driven by the explosion of crypto trading in 2020-2021, for which stablecoins enabled digital asset settlement and on-chain liquidity management. They are now going through a second growth sprint driven in part by their role enabling practical use cases like ETFs, remittances, cross-border B2B payments, and merchant payments. 2. Crypto Industry History & Stablecoin Supply (as of 30st September 2025, selected events, non-exhaustive) There are now more than $300B of stablecoins in existence, a 135% increase from 2024. The largest stablecoin issuers are Tether (USDT) and Circle (USDC), which together account for 84% of the total supply.4 Payments companies have been increasingly active in this space over the last 24 months, as we depict in figure 3. Visa and Mastercard have been experimenting with stablecoins since 2021 and now support multiple stablecoins (USDC, EURC, USDG, PYUSD) as settlement currencies. Worldpay and Nuvei were the first PSPs to support Visa stablecoin settlement in 2023 and, today, other PSPs such as Stripe, Checkout.com, and Shift4 do as well. PayPal and Fiserv have gone a step further and issued their own stablecoins (PYUSD and FIUSD, respectively) in partnership with Paxos. Stripe’s acquisition of Bridge in October 2024 for $1.1 billion was a landmark deal for the stablecoin industry. That transaction caused financial sponsors and operating companies to both take a more active interest in this space. Since then, M&A bridging the fiat and crypto worlds has increased notably with transactions such as Modern Treasury acquiring Beam, Stripe acquiring Privy, and rumors now that Coinbase and Mastercard are competing to acquire BVNK. Crypto-native firms have also been active: MoonPay has made a string of acquisitions (Iron, Meso, Helio) and Ripple recently purchased the stablecoin-powered B2B payment platform Rail.io. 3. Stablecoins' Timeline of Key Events (non-exhaustive) Current Adoption and Use Cases We mentioned earlier that stablecoin payment volumes to hit $140-195B this year. The total volume of stablecoin transactions is actually far larger: Andreesen Horowitz recently estimated stablecoin transactions will reach $46T in 2025. However, 80% of these volumes are considered non-organic5 and 98% of the remaining amount are not “payments” as conventionally defined.6 The remaining volume of $140-195B includes P2P, B2B, B2C, and C2B flows, as shown in figure 4, though P2P and B2B flows drive 80% of stablecoin payments today. 4. Stablecoin Transaction Volume1 We outline key use cases where stablecoins have emerged across payments and fintech: B2B payments: B2B use cases are the top use case for stablecoins with 77% of corporates interested in payment suppliers cross-border and 49% interested in accepting cross-border business payments7, according to a recent survey of large enterprises around the world. Stablecoin payments are emerging across cross-border B2B payments, for example, making cross-border vendor payments or inter-company transfers. Stablecoins provide a real-time, point-to-point alternative to wire transfers, which still flow through complex chains of correspondent banks. Fintech companies such as Terrapay are using stablecoins to drive efficiency in cross-border treasury settlement and Wise is reportedly hiring a product leader to explore that same model. Readers should keep in mind that B2B payments via stablecoins are still de minimis in the context of global B2B flows today (accounting for <0.5% of the flows) and meaningful transition will take many years in the complex and conservative corporate payments market. P2P payments: P2P stablecoin payments currently account for 3-4% of global remittance volumes and are growing rapidly. Stablecoins provide a cost-effective alternative to traditional remittances, especially for people that can avoid off-ramping (converting) coins into local fiat currency. Cost aside, stablecoins are particularly attractive for consumers living in countries that have high inflation, volatile fiat currencies, and restrictions on owning hard currencies like the U.S. dollar or Euro. Among established players in the remittance space, MoneyGram is notably forward-thinking on stablecoins: they have partnered with Stellar since 2021 and are now planning to let Colombian consumers send and receive funds in US dollar stablecoins. And Zelle, which is owned by the largest U.S. banks, recently announced to launch a new initiative to use stablecoins to enable cross-border payments for the first time. B2C payments: Stablecoins are being used for cross-border payroll, including employee and ad hoc (contractor / gig worker) payments. Remote and Deel, two of the leading employee of record (EOR) platforms, both launched solutions last year for companies to pay their global distributed workforce in stablecoins. EOR platforms now reportedly pay hundreds of millions of dollars in payroll through USDC. C2B payments: The use of stablecoins in C2B commerce is nascent and, in our view, not really the core use case for stablecoins. We are skeptical that anyone in advanced economies will be paying for their coffee, gas, or groceries with stablecoins in the foreseeable future – payments cards and wallets funded by hard currencies simply work too well. But there may be niches where it takes hold: 1.6% of Shopify sellers reportedly now accept USDC and Flagship research has found merchants in luxury (e.g., jewelry), travel, and high-risk (e.g., gaming, crypto, adult entertainment) verticals accepting stablecoins. In summary, stablecoins have the highest potential to disrupt B2B payments, B2C payouts and cross-border remittances – all of the use cases where stablecoin payments are growing the fastest today. The Stablecoin Ecosystem A whole ecosystem of new fintech companies has appeared to power the stablecoin economy. Figure 5 identifies a sample of notable players that provide the necessary infrastructure to create and use stablecoins across various use cases. For investors, this sector represents a target-rich environment, though still high beta while it remains unclear who the winners will be. For financial institutions and corporates, navigating vendor and partner options will be one of the key challenges to doing something with stablecoins, especially in a regulatory environment that is increasingly focused on managing counterparty risk. 5. Stablecoin Payments Market Landscape (non-exhaustive) Key Risks and Adoption Hurdles Despite early promise, several hurdles remain before mainstream adoption. Figure 6 summarizes the most material risks. 6. Main Risks Associated with Stablecoins (non-exhaustive) Regulatory clarity remains uneven across markets. Some countries lack formal frameworks for how to categorize and regulate stablecoins and many central banks worry about the destabilizing implications of stablecoins (and cryptocurrencies more broadly) on fiscal and monetary policies. That said, clarity is improving in major markets. In the U.S., the GENIUS Act passed in July 2025 provides a comprehensive regulatory framework for stablecoin issuance. In the EU, the Markets in Crypto-Assets Regulation (MiCA) in Dec 2024 laid out clear regulatory requirements for issuing crypto assets, including stablecoins. In both cases, fiat-backed stablecoins are preferred, issuers of fiat-backed stablecoins are required to maintain 1:1 reserves in off-chain accounts, and issuers must undergo periodic audits to ensure regulatory compliance. Even with clear regulation, financial institutions and corporates still have concerns over stablecoin issuers and networks meeting their licensing, KYC, and AML obligations. Managing these requirements in a cryptocurrency context is complex and may require more stringent monitoring. In practice, operators address these risks with standard controls (screening thresholds, custody policies, issuer diligence, and periodic redemption tests) but it will take time and consistency for trust to build between the fiat world and the stablecoin one. As stablecoins continue to scale, some of these risks will likely be addressed through collaborative efforts between market participants and regulators. Conclusion We are in the first wave of stablecoin payment adoption. Early examples of real-world applications in cross-border payments flows, where stablecoins have a clear value proposition compared to correspondent banking, are certainly exciting. And more use cases are likely to develop in the months and years to come, some of which we can’t easily foresee today. Issues around risk, regulation, infrastructure, and customer adoption still need to be worked out more fully but progress is trending in the right direction. Eight months ago, Patrick Collison, the CEO of Stripe, famously said everyone should have a stablecoin strategy. If you do not have one yet, it is certainly not too late, but payments and fintech market leaders should be investing now to evaluate how stablecoins might impact their business in the future and develop a game plan for how to respond to – or drive – this important new technology. At a macro level, that will likely create a tailwind of demand for stablecoin enablers, which will create investment opportunities for investors in financial services. This is the first article in a series that will explore the stablecoin opportunity across specific use cases. Our next article will focus on cross-border payments. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com, William Hay at Will@FlagshipAP.com, and Alessandro Mighetto at Alessandro@FlagshipAP.com with comments or questions. 1 European Council 2 Fred 3 M2 money supply is Federal Reserve's estimate of the total money supply, including cash, checking and savings accounts, and short-term savings like certificates of deposit 4 DefiLlama 5 Non-organic transactions consist primarily of automated smart contract transactions, trading bot activity, and internal transfers between centralized exchanges for wallet rebalancing 6 Flagship estimates based on several public sources; Stablecoin Payments from the Ground Up, Visa on-chain Analytics, and Orbital 7 EY Parthenon

Flagship Advisory Partners’ Executive Interview Series provides readers with exclusive insights from thought leaders in the payments and fintech industry. This edition spotlights the European Payment Council (EPC) which is responsible for developing and managing payment schemes that facilitate a harmonized European payments landscape. Flagship Advisory Partners met with Giorgio Andreoli, Director General of the EPC, to learn about the EPC, the SCT Inst instant payment scheme and the new instant payment regulation. The views expressed by Mr. Andreoli in this article are personal and do not necessarily reflect the EPC positions. Image: Giorgio Andreoli, Director General, EPC How would you assess the performance and success of the SCT Inst scheme since its launch in 2017? The SCT Inst scheme has seen remarkable market adoption, especially considering that participation has been voluntary until 2025. The numbers speak for themselves: 35 out of 41 SEPA countries have at least one PSP supporting the scheme. SCT Inst Scheme penetration among PSPs stands at 79% across SEPA and 90% within the Euro area. By the end of 2024, 21% of total SEPA credit transfers at the SEPA level were instant; by Q1 2025, we had already reached 26.4%. With the new instant payment regulation [regulation EU 2024/886] coming into effect starting 9 January 2025, instant credit transfers will become the norm. How did banks approach the adoption of SCT Inst? Was there concern about cannibalizing traditional SEPA transactions? Anyone who has been in the payments industry long enough knows that every new payment method raises concerns about cannibalizing existing solutions. However, in practice, this rarely happens. Instead, new payment methods typically enable additional use cases, expanding the overall volume of electronic payments rather than replacing existing ones. From my perspective, when comparing traditional payment methods like cash and checks to electronic payments, there may be some level of cannibalization, as physical payments are being partially dematerialized in favor of digital alternatives, such as SCT Inst. However, when comparing SCT Inst with other electronic payment methods, including cards, the cannibalization is more limited. Although the EPC did not make any forecasts, based on the experience of countries that introduced instant payments earlier than SEPA, I would personally expect that in 5 years' time, the total volume of credit transfers in Euros will be roughly 80% instant and 20% non-instant. Traditional SCT payments, though, will likely remain a relevant choice in areas such as G2B/B2G, B2B, and B2E payments, as well as for High-Value Payments (HVP). SCT Inst has modernized the back-end payment rails, but front-end innovation is still essential. What front-end innovations have you observed in the market? I often say that the EPC built the rails, but the market needs to build the trains that run on top of them. We're seeing significant innovation in this area, with many exciting developments emerging. One notable example is the development of A2A instant retail payments, both in-store and online. In several countries, particularly in northern and western Europe, A2A instant payment transactions combined with mobile wallets have proven to be very effective. For this use case, there are some key advantages: Instant A2A payments are seamlessly integrated with the current account services offered by PSPs, securing real-time update of consumer and business accounts and the option to natively use banks’ financial services, e.g., overdraft facilities or customer financing. Instant payouts for merchants with native and real-time reconciliation. Native integration with banks and PSPs’ front-ends, as well as the possibility for PSP consortia to launch ad hoc mobile wallets (e.g., Swish in Sweden, and Bizum in Spain) Another essential aspect of SCT Inst is its irrevocability, which is both an interesting and new feature (making instant payments similar, e.g., to cash) but also presents new challenges for consumers and merchants, marking a significant difference vs. card payments. This feature could also breathe new life into payee-initiated payment methods, such as request-to-pay, and will also trigger a ripple effect in open banking applications, especially under the SEPA Payment Account Access (SPAA) scheme. Do you think open banking has lived up to its potential and the hype? What needs to happen to make those expectations a reality? The growth of open finance didn’t fulfill market expectations, clearly. There are a few reasons for this, the most prominent being the obligation for banks to offer the service for free, as required by PSD2, which hindered the development of a healthy ecosystem. With “healthy,” I intend a business ecosystem where value and risk are fairly distributed across the value chain, and where both supply and demand sides may invest to innovate and improve services with the reasonable expectation of a return. In its current form, the supply side is asked to invest in meeting regulatory compliance, but isn’t incentivized to offer a competitive service. This is one of the goals of the upcoming SEPA Payment Account Access (SPAA) initiative: to ensure a fair distribution of value and risk across the entire value chain. I believe we are now aligning the correct elements: a scheme, a fair value chain, and universal instant payments. What remains is to place all these building blocks correctly and allow some years for healthy growth. What is your view on instant payments in the context of B2B transactions? Instant payments in B2B are already a reality but there are still reasons why they are not widely adopted. One barrier was the credit limit of €100,000, which often posed challenges for businesses. With this limit now removed by the new instant payment regulation, I expect B2B instant payments to see significant growth. The EPC is also promoting a new scheme called One-leg Out Instant Credit Transfer (OCT Inst), designed for international instant credit transfers with transactions also in currencies other than the Euro. We believe B2B payments will be one of the primary use cases for this scheme, while remittances could be an additional use case of interest, in the future. While it differs from SCT Inst, it can be seen as an extension that leverages the existing SCT Inst infrastructure and rails as much as possible. This area is particularly interesting, as it is under significant political and regulatory pressure due to the G20 objectives and the updated FATF recommendations. At the same time, there is also growing interest from PSPs. If executed successfully, the OCT Inst scheme has the potential to address several of the G20’s goals and could be the next revolution in B2B payments. When we look at other instant payment schemes like India’s UPI and Brazil’s PIX, we see they have leapfrogged SCT Inst to achieve massive success overnight. What needs to happen for SCT Inst to reach similar success? UPI and PIX have a significant advantage because they were developed and deployed under one central bank and within a single jurisdiction. The situation in Europe is far more complex, with 41 countries needing to align within a single scheme. Each of these countries has its own legislative systems (significantly aligned within the EEA), customer and business priorities, and legacy services and infrastructures, all of which influence adoption and implementation. As an example, in Europe, we have more than 30 Automated Clearing Houses (ACHs) active in Clearing and Settlement for the EPC payment schemes. In contrast, other large jurisdictions have only one or a few, and all this leads to a high fragmentation and deployment complexity. Another key difference is that SCT Inst only specifies the business, functional, and technical rules of payment rails, while the definition of services is left to the competitive space – in agreement with relevant EU competition law provisions. However, for a fully functional A2A retail payment system, more is needed beyond those rails to thrive and serve customers. PIX and UPI have gone beyond just the infrastructure; they also defined – at least partly - service brand, marketing and communication, pricing, acceptance model, customer experience, and customer service. By covering all these aspects, they are more than just a payment rail - they defined a complete payment solution and ecosystem. Furthermore, the way users' and payments’ data are handled in PIX and UPI made it possible to rapidly develop use cases attractive for both consumers and merchants, but the same approach can’t be replicated “as is” in Europe, due to data privacy concerns. The key takeaway from UPI and PIX experiences is clear, in my opinion: Instant Payments has the potential to empower highly innovative and competitive payments products and customer experiences, creating more choice for consumers, merchants, and enterprises - once all the pieces are aligned and in the right position. Taking the UK as an example, Faster Payments (FPS) has been around for a long time, but hasn’t achieved the same success as PIX or UPI. What needs to happen at the country level to make schemes like FPS and SCT Inst more successful? I remember the launch of FPS very vividly; it was the pioneer of instant payments for many years, launching nine years before SCT Inst. However, being a pioneer has both advantages and disadvantages. One challenge is that FPS was built on older technical standards. If I recall correctly, it operates on ISO 8583, whereas SCT Inst was able to leapfrog to the more modern ISO 20022. This creates a disadvantage today for FPS, as SWIFT is also migrating to ISO 20022, making integration easier for SCT Inst but more challenging for FPS. What are some of the short-term implications of the instant payment regulation? There are many implications, enough to fill another two or more interviews so that I will limit myself to the most important ones. The most significant aspect is that any PSP in the euro area that supports credit transfers must now also support instant credit transfers. As mentioned earlier, 90% of PSPs and banks in the Eurozone already support SCT Inst. Within the remaining 10%, we understand PSPs may fall under different categories: PSPs that are not obligated by the amended SEPA regulation because they do not offer payment accounts in accordance with PSD2. Institutions with low credit transfer volumes, such as wealth management firms, where payments are not a core business offering to customers. In many of these cases, we see this type of PSPs withdrawing from SCT altogether, so as not to be obliged to offer also SCT Inst. PSPs that still lack real-time ledger systems, make the support of instant payment technically challenging. This is often the case for institutions in smaller countries or rural areas. This group may constitute a “long tail” of laggards, which may be expected to catch up within about a year. Of course, all PSPs that are eligible and fail to comply with the amended SEPA regulation, risk facing regulatory sanctions. How will the modernization of European payment rails through SCT Inst impact retail payments? Today, we see many initiatives in Europe related to A2A payments, with some achieving encouraging growth in retail payments. A native European payment infrastructure supporting A2A retail payments is becoming a concrete possibility for the future, enhancing resilience and sovereignty of European payments, and bringing more choice to consumers, merchants, and enterprises. That is reassuring for the EPC and for me as a European citizen. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com with comments or questions.

The UK has long been at the forefront of open banking adoption, serving as a global benchmark for innovation in real-time payments and financial data sharing. A strong regulatory framework, widespread bank connectivity, and a vibrant fintech ecosystem have made the UK one of the most advanced and mature open banking markets in the world. While payment volumes continue to rise and consumer engagement deepens, recent data points to a slight easing in the pace of growth which we explore in this infographic. 1. UK Open Banking Payment Transactions (in mil. transactions; % year-on-year change; January 2021 to August 2025) 2. Reaction from Merchant Users: Benefits & Drawbacks (select key observations and merchant interview quotes) Select Key Observations Open banking payments in the UK have recently entered a period of slowing growth, with transaction volumes plateauing for four consecutive months between March and June, an early sign that mainstream adoption may be slowing. This slower pace of growth may spur innovation in value-added services with one of the key drivers of future momentum potentially being recurring payments or VRP initiative that is expected to expand open banking use cases and merchant acceptance. Looking ahead, open banking payments have the potential to become a meaningful share of merchant payment acceptance. To achieve this, the ecosystem will need clearer commercial incentives, continued improvements in reliability and consumer UX and trust, and successful scaling of VRP solutions and other value-added use cases. Please do not hesitate to contact Yuriy Kostenko at Yuriy@FlagshipAP.com with comments and questions.

A panel discussion on the future of agentic commerce with Ben Brown (Partner, Flagship Advisory Partners), Craig DeWitt (Chief Product Officer, Skyfire), Robin Gandhi (Chief Product Officer, Lithic), and Colin Luce (Chief Executive Officer, Basis Theory). Together, we explored how agentic commerce could transform payments, digital identity, and risk, and discuss the opportunities and challenges ahead as this emerging landscape takes shape. The presentation is available for download by clicking the PDF button in the right hand side panel (desktop view) or below the post (mobile view). Please don't hesitate to contact Ben Brown at Ben@Flagshipap.com with your comments or questions. Transcript: Amilee Huang | 00:06 Okay! We have around 70 people right now in the attendee room. We'll go ahead and kick it off and let people join as people come in. Thank you, everyone, for coming. Today's event is a webinar and discussion panel on the rise of agentic commerce. Attendees, you guys are invited to submit questions through Zoom. We have enabled the chat function, so feel free. We are always good for engagement. We love to answer questions, of course, after giving our own opinions. Now we are recording this webinar, just to let everyone know. We will send around the recording afterwards, and it will be available on the Flagship website. Amilee Huang | 00:44 Your host and first speaker will be Ben Brown. He is one of the partners at Flagship so I'll pass it over to him. Ben Brown | 00:48 Amilee. Really appreciate the introduction and everybody for sharing their time today. One note. I don't know if everybody's Zoom looks the same as mine, but I see at the top there's a button for a webinar, and then Amilee's screen. On Amilee's screen... You'll be able to see the slides that we're going to present, but that might be easier for those of you in the audience. So, I think we can go to the first slide. Thanks everybody for joining. We'll kick off today's call with a short overview of what Agentic commerce actually means and how it works and the impacts on the payments ecosystem. Then, once I've set the context, we'll spend most of the time on a really good discussion with three innovators who are on the front lines of building new payments and structure infrastructure for Agentic commerce. On the title page, we have got Craig DeWitt at Skyfire, Colin Luce of Basis Theory, and Robin Gandhi at Lithic. A cross-section of companies that are building infrastructure for the Agentic commerce economy across things like... At the end of payments platforms for Agentic commerce, and digital identity for agents to virtual cards to supporting some of the cutting-edge evolution of network tokenization that we see. So, really appreciative for all the panelists for joining us today. I'll try to keep the flagship part of the discussion here as brief as possible because we just want to set some really good context for the discussion to come so that we can move forward. So, what place did you want to start? Thinking about does this matter and is this a real thing? Because we hear from our clients a variety of perspectives all the time. There aren't a lot of forecasts out on Agentic commerce at this point. The ones that do exist, though, very widely. Some say as high as 40% of all global transactions by 2030 in five years will be Agent influenced. Our point of view isn't that aggressive, but it's kind of like Bill Gates said: people tend to overestimate what will happen in a year and underestimate what will happen in ten years. To that end, we do think agents are likely to be meaningful and perhaps influence 20% of digital payments in the US, 30% of total payments in the US in 10 years. That means we're at the early stage of a once-in-a-generation emergence of a new form of commerce and payments. So, certainly, it's exciting to be here at the ground floor of this, and I think it should be exciting for everyone in the payments industry, even broader merchants and participants in the online advertising ecosystem, and companies building the AI future as well. So, moving on to the next slide, you know, while we're really early, we're seeing a constant parade of announcements from across the industry, and those announcements are coming from all kinds of different players. You've got merchants like Amazon and Walmart who have rolled out conversational shopping assistants inside their apps. Walmart has even rolled out that on the seller side with its Marty agent for marketplace seller onboarding, which isn't something we talk about a lot, but that's certainly a big potential impact of agentic AI, as it could expand the size of the pie in terms of who can participate in the digital economy. Smaller businesses, more custom goods, the circular economy. All these kinds of things that can be hard to put online agentic AI can help with that as well. We're seeing content delivery networks like Cloudflare and Akamai partner with companies like Tolbit or even Skyfire on who's with us today? So, publishers can authenticate and monetize that AI bot traffic, which is just increasing at an enormous rate. So, today, something like half of all web traffic is bots, half as humans. Of those bots, it's almost 50/50 between good bots and bad bots, which is one of the big impacts that we see affecting the industry. If you've had fraud models, for example, tuned to assume all bots or bad bots, then you're going to have a lot of false positives in the future as Agentic takes off. We see big tech companies like Google announcing protocols for agent-led payments with a long list of merchants and FIS and payment networks participating in that. Visa and Mastercard have both announced solutions to evolve tokenization for an agentic world. Even today, six hours ago, Visa announced its latest proposal for this space around agent identity, trusted agent identities. These early announcements are quickly turning into live experiences, such as shopping on Perplexity or buying from Etsy sellers natively within ChatGPT, which you can see as an example on the page. So moving forward, as this all comes together across the customer journey, AI promises to impact everybody. The search engines and social media platforms that drive digital advertising today, merchants, payment processors, and card issuers. Some of the impacts will be obvious, such as zero-click search and embedded buying, diverting some consumers from actually visiting merchant sites. Agents could confuse fraud tools that are tuned to recognize bot traffic, as we just mentioned. But some impacts are not so obvious, such as explicit agent consent trails could actually reduce certain dispute types if we can verify who authorized what, especially at the SKU level. At the same time, issuer costs for things like card benefits, extended warranties, price protection, and all the benefits that are bundled into most of the rewards credit cards we all carry in our pockets but rarely use could really change if you have agents who are systematically triggering things like price protection claims for dollar amounts that any of us wouldn't spend the time to really monitor. So, every company in the payments ecosystem, but really in the broader digital commerce ecosystem, whether that's a merchant or an online advertising commerce platform provider, et cetera, should think about second-order effects as well, not just those obvious ones that dominate some of the headlines. Moving forward, there are multiple ways that agentic commerce can happen in a retail context. And it won't all be shopping within the conversational interface of LLM. So, a few of these models are large merchants who are already actively evolving their on-site search into a more conversational experience, and platforms like Shopify are building ways that customers can create carts and buy goods across different sellers across the whole Shopify ecosystem rather than just staying within one seller's environment. In some cases, agents will help you find the item that you should buy, but then link you out to the merchant site, which doesn't really require any new infrastructure. They can monetize their role through preexisting affiliate commission platforms already exist out there, kind of a road to the personal shopper road. But where it starts to get interesting is when agents act as facilitators or aggregators, either initiating payments through the merchant's commerce and payments infrastructure or acting as the marketplace themselves and really owning that full customer relationship. Beyond these three models, we might see some more really interesting innovation in the future. Just a few early ideas in the bottom row there. But one example is you can see specialized agents that just take care of one part of the journey. So, for example, agents that take care of the checkout form for you, even if the rest of the shopping journey looks completely normal. This could be a solution so that every product page is a checkout page, and every merchant has one-click checkout. Even if you're not really known to that merchant yet, or even if you are and you just want to breeze through the checkout experience and not reconfirm shipping information, CVV codes, and everything, you just want to click a button and have it be magical checkout. There are ways that agentic AI can help with that too. It doesn't have to be just this experience of everything happening within the chat bot interface that we talk about a lot today, which is moving forward. We're payments people here at Flagship, and so we think about things through that payments lens. So we ask ourselves, how are payments working in these scenarios? We see four primary models. First, agents might simply auto-fill checkout forms, which can work but is brittle and hides that an agent-based experience is happening. It looks like a normal e-commerce experience from the perspective of everybody sitting behind that merchant and maybe the merchant themselves. The second column... Agents might collect funds from the end user and use virtual cards to make the payment to the merchant. That's pretty similar, actually, to how platforms like DoorDash work today. That's one way to think about the early days of agentic commerce: it's really just digitizing the human agent relationships that we already use and already trust. When you use platforms like Uber, Etsy, or DoorDash, you're asking somebody to place that order and pick up that food or pick up that item and bring it to you. Agentic AI is really digitizing some of those relations that exist, which exists in the B2B space as well. We'll talk about that a little bit later. The third column... Agents might use tokens that carry more information on digital identity, delegated authority. You know what you're able to, what they're allowed to buy, and limited use credentials. This is the way the networks are really steering things into the future, which we'll talk about soon. Then the last one we see emerging in some cases live, in some cases still experimental is machine-native settlement rails. So, examples are the Cloudflare-Coinbase partnership around the X42 foundation repurposing HTTP402 calls for on-chain stablecoin micropayments, which is relevant as a way to monetize things like API calls and content access and potentially even pay-per-use bot traffic between agents and publishers. I think I saw a stat that Cloudflare says they send out a billion HTTP402 payment-required responses every day, and those are largely ignored today because there isn't really the infrastructure to pay for those things. But in the future, as that infrastructure starts to become available and it starts to become even more important with the rise of Gen-Z, we may actually see that new form of monetization happen on the web. So, moving forward, we said that the networks are trying to steer things towards this agent token model. And you know, we do see a range of protocols and frameworks that have already been announced. So across all of these, we don't have the time to go into the details, but I think across all of these, a point of commonality is that they are focused on how do we use that tokenization infrastructure that's been used for billions of tokens so far in the last ten years or so and really underpins a lot of the digital wallet solutions that we use today? How do we evolve that token infrastructure for an agentic world and add more data to those things? While there are commonalities, there are some differences, especially in how those digital identity and intent signals will work. These aren't the only solutions either. This is just a sample of them from some of the biggest companies. But just as an example, Worldpay recently announced a partnership with Trulioo on a Know Your Agent framework. Then, some of the panelists I'll introduce in a moment have built solutions in this very space. So I think a lot of proposals and a lot of early-stage work is going on to build the future, but it's not certain exactly what that will look like. But if we want to double-click and just look at one of those examples to go past the press releases on the next page, taking a look at the Google API 2 agent payments protocol, you'll hear terms like intent mandates, cart mandates, and payment mandates that are not familiar in the payments world today. The way to think of those is that they're almost like notarized breadcrumbs of who asked for what, what items and prices were approved, whether a human was present or not, and what payment method is supposed to be used. That trail of breadcrumbs will be a goal for the future for issuers, acquirers, and merchants as they look at how to tune fraud models and how to adjudicate disputes that might pop up. Those things will create impacts for every player in the ecosystem. Four merchants, four payment processors four issuers if they really want to make use of those signals. So, with that, you're just seeking to give a foundational understanding of the space so that everybody is on the same page. But, you know, would love to do two things: one, just summarize the implications of what I just said there. So, I think there are three takeaways for those of you in the audience. One is to figure out ways to not fight good agents but actually authenticate them and embrace them. The second is that there's going to be a lot of changes around digital identity, consent, and skill-level data that might happen in the industry. So, starting to tinker with that stuff and learn about that stuff now is going to be useful in the future when you need to move those things into production or you see volumes start to scale up, already have those capabilities in production, and then you know it's a good time to pilot the stuff while volumes are low. With that, I'd like to shift gears and move into our discussion panel with people who are not necessarily prognosticating on the industry from an arm's-length perspective but instead, hands-on, out there, building the future. So, with that, I'd love to bring in Colin from Basis Theory, Robin from Lithic, and Craig from Skyfire. You guys are all on the chat already. I think we could take down the slides, and I'll come on video. It'd be awesome to just have each of you introduce yourselves, what your company is doing in the agentic commerce space, and what makes you most excited about this space? Robin Gandhi | 17:01 You gonna popcorn this or are you gonna just go for it. Ben Brown | 17:03 Yeah, you should go for it, Robin. Last to join first to speak, there you go. Robin Gandhi | 17:08 You know, I get it, but the garbage goes out first. All right, so yeah, my name's Robin. I run product at Lithic. Lithic is a next-generation, modern processor, similar in vein to your Marqetas of the world. We issue cards. We've been around for, well, in many iterations for the last 10-12 years, but in this last iteration, selling infrastructure for the last four. I would say, when it comes to agentic commerce, we've been dabbling in a whole bunch of stuff to try to make it work, especially with the folks that are here on this call. Where we as an issuer really play is in the, what Ben talked about, around virtual cards. So, where we've experimented so far, really is how can you take what we think are very controlled virtual cards that we can generate and then how can you give them to an agent to be able to actually buy them? I think we're in early days of experimenting on this, and I think we've started. We're pushing hard because we do believe that cards, virtual cards, is the way that we can solve this in one way. I think, as we go through this discussion, we'll talk about other payment mechanisms that can help, but virtual cards are really easy. I think, to your point, Ben, this is probably step one. Anyway, right, I'll save it for the discussion, but hopefully, that's helpful to give some background. Yeah, I'll call you and take the next one, maybe. Colin Luce | 18:56 Sure, thanks. So, I'm sure I know a bunch of you, but Colin, this cofounder and CEO of a Basis, our core platform is all centered around putting merchants and platforms back in control with the underpinning technologies being vaulting and tokenization. So, I'm sure you can imagine how that translates into our foray into agentic commerce. I think a lot of the use cases we've enabled over the past three or four years have been around these distributed, embedded, shopping experiences. Agentic shopping or commerce is just the next evolution of that. We've been in the midst of this shift towards more social shopping over the past five years, right? You look at TikTok Shop, Instagram Links, and all of that. ChatGPT is just the next medium by which that's going to occur. Or maybe put it another way, shopping is moving closer to where attention lives. I think that's the angle we come at this from: what are the dynamics at play to facilitate or enable commerce and transactions where attention lives today? So, I think Ben will get into some of the big use cases today. But I think the reality is that a lot of the in-production use cases today are non-AI agentic commerce experiences, and we're just at the precipice of moving into the agent-based AI stuff, but we can get into that more. So, last but not least, Craig. Craig DeWitt | 20:39 Thank you. My name is Craig DeWitt. I'm the co-founder of Skyfire. So, Skyfire is an agentic commerce platform. We serve both the AI platforms, AI agents, as well as merchants to accept them. On the AI platform side, really, what we provide is identity and the capability of using payments to go out and buy the things that are necessary for both stablecoins and now, with the advent of what the card networks are bringing to market, tokenized cards for purchase. On the merchant side, we allow merchants to identify bots, to identify not just the agents themselves but the principal behind that, the agent that's the user or business, and then to actually accept them as paying customers. Both through the website today, which is where we see the primary amount of our volume, but helping merchants with this explosion of protocols to be ready to accept agents in a headless fashion via a variety of API approaches and protocols we'll talk about. That's Skyfire. Ben Brown | 21:39 Awesome. Thank you all three for taking the time out of your busy schedules. I love that we have this really complementary panel. So, I've got this cross-sectional view of the industry. We're talking to big merchants. We're talking to the networks. We're talking to acquirers and issuers and wallets. But you guys are going deep on Craig, all in on the agent tech AI world with the end of platform, helping to enable the tokenization that underpins a lot of this, and I know it's evolving, Basis theory into broader solutions as well. Then Robin and the Lithic team from the cloud-based issue processor perspective. Those are all components that come together to make this future happen. So, I think this will be fun. So, let's jump into it with that. I think the first place, Colin, you said, we're not really seeing a lot of agent experiences out there quite yet, but what are the most mature agent-based commerce experiences out there today? There are certain verticals or apps or merchants, and I asked this question to a friend at one of the big tech companies the other day, and they said it's the wrong question for this point in time right, because we're still building the infrastructure for the future. What we should all take celebrate the winds around is putting in place the building blocks of how this works and the components of that infrastructure for the future. It's not about whether Walmart has gone live, but at that said, it seems like Shopify, Walmart, and Amazon all have gone live in some ways with some version of this. So, yeah, I'd love to just hear from you guys in terms of spending all this time, all your time in the space, what do you think are some of the most interesting experiences out there? Colin Luce | 23:35 Well, I'll start by saying I love that take by your friend. I'll admit, it sounds a little bit like a participation trophy award, though. I don't know if we should pat ourselves on the back for just putting building blocks in place, but I hear that point. Look. Ben Brown | 23:49 I do think it's the startup world, right? Colin? We just... Revenue will come later. Let's Like. Colin Luce | 23:55 I can play the game. I know. Ben Brown | 23:57 The game well. Right. Colin Luce | 23:58 Yeah, no, look, I do think it is these non-AI-agentic commerce experiences, right? For example, one of the first use cases we enabled three and a half years ago was Roku's Choppable ads platform. If you think about what that is, it's enabling a one-click buy experience directly from your Roku device. That's exactly what I was talking about in terms of delivering a seamless commerce experience where attention lives. A lot of that is predicated on the backend around tokenization, checkout APIs, a lot of the stuff we're contemplating here, there's just no AI involved in it. I think there's an important nuance for us to separate here between agentic commerce and agentic payments. I think a lot of the use cases, even the ones that are super early, whether it's the chat GPT ones or the Perplexity ones, I'm comfortable saying they're agentic commerce. I'm not necessarily comfortable saying they're agentic payments because the value that AI is providing in those is the accelerated efficiency. The discovery, the comparison aspect again, the payment aspect is all existing infrastructure and flows that we've had in place for a long time. I think there's another aspect to that, which is this carte blanche statement by people like, "What about the risk? What about the fraud?" It's like, "Whoa!" But the payment flows are identical or exactly what we have in place today. So if we have tools to mitigate risk and fraud in those scenarios, shouldn't those apply here? I think so. So that's what I'd say. Look, I think what ChatGPT is doing with ChatGPT Commerce and what Perplexity is doing, it's super interesting, but it's super early. I mean, I don't know any of the specific numbers. But I've heard Perplexity is in the... Ten of transactions a month or maybe hundreds or something, but we're talking about very early in terms of true agentic AI commerce. Ben Brown | 26:09 At least we'll talk about the dispute and chargeback impact of agentic AI, and how do we know the legal frameworks around that? It reminds me of what people said about self-driving cars, right? Who's responsible when a self-driving car gets into an accident? We're five years, ten years, and having self-driving cars in some form, and self-driving cars have had accidents, but people haven't stopped using them. It hasn't been super widespread. So these things will matter, but they'll matter maybe over the long arc of time right? Colin Luce | 26:42 And its kind of amazing that we can take a fully autonomous self-driving car from one end of San Francisco to the other, but we can't autonomously book an airline ticket today, right? So there's always this debate and tech about atoms versus bits, and it feels like atoms are ahead of bits in a lot of ways when it comes to this stuff, which is interesting. Ben Brown | 27:07 Robin, what do you think? Robin Gandhi | 27:09 What I was going to say is that I think Colin and Craig have probably seen more real-world examples. I think we can see it with a lot of the consumer use cases. I think in the grand scheme of things, the B2B use cases are going to be the more interesting ones. Again, we're early days, so it's hard to say, but if you think about it, people like buying stuff. So like removing the person from the buying experience. I think it's sexy to talk about. I'm going on a trip to Bali. What if somebody could just book the whole damn thing for me? But you kind of want to see the hotel. You kind of want to see all this stuff. But I think it's easy for us to grasp it's the stuff that people hate buying that is going to really be transformative from agentic perspective, right? So I mean, a lot of people talk about the marketing example: I need to have a budget of ten grand or a hundred grand, and I want to spend it across these platforms. This is what I'm looking to do. But that's stuff like that or a lot of the supplier payments that we're talking about. I think that's where we're going to see the most traction. So I think you're going to start getting... If we start talking about trust, that's where there is a small enough ecosystem that you can build trust, and you can essentially just have these buying decisions made because you just don't care. It doesn't really matter. When you need to get an extra few yards of pipe or pencils or whatever it might be, that's the kind of stuff that we're going to really see enable through agentic. So for me, I think that would be the really interesting piece of it. But again, it's early days, we have to figure out a lot of this other stuff. Craig DeWitt | 29:02 Yeah. So what we see at Skyfire, at least on the thing that people think about when they think of agentic commerce, is really e-commerce use cases where there's this new third party, a different interface of people interfacing with that to make a purchase. The closest case I've been closest to is what Consumer Reports is working on. They already have millions of users, they already get reviews of products within their interface, just have a button to go and buy it. So it's like, "Okay, do you want a toaster?" Like, "Unlike your Bali hotel room for your honeymoon." It's like, "This is the highest-rated toaster. Do I really want to find the right merchant and make sure the SKUs match? Just click by it." What Consumer Reports do is they'll spin up this browser, they'll navigate to that site, they'll find the right product, and then they'll put the credit card details in the checkout UI and then click "buy" on behalf of the user using the card tokenization stuff. But I think what we found is that the hard part of that, so far, is how does the agent get access to the site in the first place? When you talk about those four or two errors that are getting thrown out, four or three errors are going through the roof as well. Four or three errors just... "Hey, I identify programmatic access. I don't want bots on my site, and a big part of our business." This ties into what Robin was talking about on the B2B use cases. A lot of what powers commerce in general are these programmatic accesses to websites. Those drawbridges are getting put up right now because of the increase in AI traffic. A big part of our business is yes, these payments, but the other big part is agents just needing to identify themselves to get access to a website in the first place. We've seen a ton of B2B-type use cases explode there. Because the way the Internet has historically worked is changing as the bots have flooded the Internet, to where now it's a lot harder to get access to these sites and services than you could have even two years ago. Ben Brown | 30:58 That's interesting. Sometimes I'll get Cloudflare, making sure you're human, and sometimes a lot. I get that. So maybe I'm not using the internet the way normal people do. I'm your agentic AI here at Flagship. Craig DeWitt | 31:11 Yeah, those are the false positives, through the roof, by the way. That's a big fundamental change in terms of how these bot blockers and agent detection services are protecting traffic. So, you're going to see a lot more of those. Ben Brown | 31:24 I think that's a really interesting use case, right? Access. We've talked about digital identity access for the payments moment, but we have to remember we're part of a much bigger journey, right? There are all the ways that people figure out what they want to buy, where they want to buy it from, making sure they have the right prices, but even getting the web pages to load right, there's things that happen there. There are fraud detection services that look kind of similar to the ones in principle that we're using at the payment moment, but they're far upstream. That probably creates other opportunities. As you talked about micropayments that might go around, paying tolls for access is an interesting area to watch for sure, but let's talk a little bit about where this might move faster or slower. I think the folks over at Andreessen Horowitz recently wrote about agentic commerce, and they talked about how it could play different roles for different kinds of transactions, like impulse buys, routine essentials, lifestyle purchases, things like that. For them, it was less about which of these is a better fit and more about how will AI play different roles? In some cases, it might be built into the algorithm on TikTok, just steering impulse purchases and putting it in front of our face so we click that button. In other cases, it might be price trackers. I imagine in the future, I could probably walk around to Best Buy and say, "I'd like to buy that TV." But me again, I don't know, maybe I'm a normal person, but I'm not just going to buy the TV. I'm going to Google: "Where can I find prices? Is this a good price? What are some reviews?" In the future, you could just take a picture of that and all of that price comparison, all that assurance of, "Yeah, go ahead and buy it here. This is a good model, and it's a good price." All that could happen right there automatically or to more interactive AI coaches, right? If you're getting a mortgage or buying a car or something like that. Again, maybe it's not the checkout or the payment experience that they're part of that made it a lot more upstream, but it does. Even though there are different ways AI could be used in those different use cases, it seems inevitable that some sectors will move faster than others. So, we're sitting here in a year or in two years. What do you think will move the fastest? I know, Robin, you said that B2B might be one of those places that moves faster. I tend to agree with that. I think companies have long been comfortable getting comfortable with outsourcing their procurement operations. They do that with really big BPO systems integrators, and they've written down all the rules that go into what they'll buy, who their vendors are, and what the processes are. Then, they have people offshore in India, the Philippines, or other markets taking care of that. Same way, we trust doordash couriers here to pick up food or iPhones or whatever for us. Big corporations are trusting people offshore to run their B2B procurement operations. I think that's something that could probably be either pretty easily lifted and shifted into an agency model or what we see is that human plus machine pairing is always really powerful. So maybe it's not about getting rid of the outsourcing but it's about radically shrinking the headcount of that and using AI tools as your first line so that every human is the manager of something, right? The AI agent. But outside of B2B or specific places in B2B other sectors. Where do you guys think that in a year or two we'll see the fastest traction. Colin Luce | 35:11 So I think the procurement one is a good example. The way I think about it is I think it depends on who can get the most context right. Ultimately, the value of the AI here is how much data it can consume to facilitate this. I think that boils down to context, right? So, to your point about procurement, they've written down all these rules, they know what they want. There's context, right? Craig's example about consumer reports, there's very acute context. I'm looking for this microwave. Tell me the best ones, et cetera. It's why, again, I think this shift towards social shopping has occurred. These big tech companies have so much data on us, right? Which we've willingly given them. But it's why I think ChatGPT and Perplexity are so well-positioned, right? They have context around the conversation. Your objectives are you, a value buyer? Are you searching for discounts? Are you looking for loyalty? What is the context around the transaction? I think, look, having started my career at Yodle back in the day, I can tell you, the Transaction Description Data side of all of this is still a very much an unsolved problem, right? It was a problem 15 years ago and it's a problem today. So, when I hear people talk about the networks being able to provide this context, I say, maybe. But just because you see that I spent $3000 at United Airlines, that doesn't tell you whether I'm just super bougie and like to buy business class or I have a family of seven and we fly in the very last row of economy. It just happened to cost $3000, right? Those are two very different contexts about me that I think could be interpreted very differently, right? Or the... Hey, book me a flight to Miami sometime in the next two months. What if my plans change? What if the flight price dips below this price? Right. So if you don't have the context of my calendar and my travel schedule, that's a pretty moot use case in my mind. So I don't know whether it's B2B, B2C, or even if that's the right binary question. There are probably use cases within both of them, but I think it's wherever the agent or agentic experience can get the most context. Ben Brown | 37:40 Yeah, I mean, it seems like it could take hold in various different places, but maybe the really interesting question for our audience is how it's working and how it's going to work and how it will impact each of their businesses. If you're in the audience and you work at Best Buy, you're not going to change the business. Best Buy is then you just have to prepare for when it comes to your sector. So maybe we talk a little bit about that. I thought calling your point on data was really interesting. The metadata around all of that. So what do you think the single biggest blocker is today for agentic commerce to happen? Do you think it's the payment plumbing or digital identity for agents or data quality, like you just said? Consumer trust, merchant willingness to engage, or something else? Craig DeWitt | 38:37 Yeah. So maybe going across those three at least what we've seen. The procurement use case is actually one of the first things we did with a large partner, OEM stuff for auto manufacturing. It was a really simple use case. They had to go out and buy a specific type of resin and they wanted to automate that process. So the identity and the payments aspect worked great for it. It was all the other stuff internal to both the businesses that really made that use case super difficult. Like a lot of the internal use cases and procurement require human beings sending wire transfers, and that connects into how they're doing their ERP systems. There's a guy who manages the CDS, that CSV file. You know, it's like all those other things have to change for the procurement you use case. So I think there's internal holdbacks on procurement. I think the biggest blocker to e-commerce right now is customer adoption of it, user adoption and user experience. I think that'll come. But right now, for a lot of merchants, they're figuring out how big of a risk this is. Is it a vitamin versus an aspirin to allow this on B2B? Interestingly enough, I think the biggest blocker now is really just on the acceptance side. When we see B2B, you look at the places where there's the most pain right now, and the most pain is in content publishing. Those folks are getting hammered because the search aspect has changed so much that the ads model is breaking. You have well-known publications whose ad numbers are down 70% this year, right? So the big hurdle there is them understanding the protocols that they can use or the services they can use to start agents' access and accepting payments programmatically. So I guess to sum that up, Agentic Commerce is this massive umbrella of things. I think there are individual stop GAAPs or individual hurdles across each of the use cases that aren't specific to all of Agentic Commerce. Ben Brown | 40:48 And you're getting that kind of negative impact, it'll be natural to react and just say, "You know, shut it down." You can see some banks doing that, you can see content publishers doing that, you can see merchants doing that. Right now, I think large merchants are generally like, if you want to send me free traffic, whatever. But if you start to put in place monetization frameworks and open AI and Perplexity and all these guys start to try to create the next Google, you'll see enterprise merchants really react to that. I think one of the interesting things to watch for will be, do you just see this big reaction, or is there going to be this willingness to endure some transitionary phase that's painful while you put in place the new infrastructure? Because if it is a turn it off and then what will turn it back on once we have all the right infrastructure? That could create this sort of chicken-and-egg scenario: "Well, do we build the infrastructure? Because the volume's not there, but the volume is not there because you don't have the Right? Robin Gandhi | 41:58 No, I think... Look, merchant acceptance is at least in my mind the biggest piece of the whole puzzle. I think that a lot of us here on the panel are building things that can enable everything. In general, we're trying to build everything that can get up to the merchant. I think the merchant being okay with the transaction is where things are falling apart. I think that has to do with B2B and it has to do with B2C. In general, across the board, we just haven't... There's no mechanism, and this is what we're working on. I think this is... There's no clear mechanism to tell the merchant or whoever's accepting the payment that it's a good transaction. We've captured intent, and we know the agent. I think everyone's trying to put those pieces together, but the biggest piece is going to be great. Now what do I do with it? As a merchant, how do I get that? So I think once we've established some level of protocol that everyone is generally comfortable with, I think you're going to have to get the acquirers in and be like, "All right, this is what we're enabling." I don't know if I was telling you this story, but... As we were experimenting with how we could get an agent to buy something using one of our cards, we thought, "Okay, great. Let's go find an easy merchant that we can go to." We even thought, "Let's try to see if we can make a donation at the San Mateo Library." Even the San Mateo Library rejected the transaction because it thought it was fraudulent. So, I mean, it just means that there's this level... There's this level that we've already just need to get past where there's this surface level of, "Hey, we're protecting all traffic against bots." The fact that the San Mateo Library can't take it to me that that's a pretty overarching thing. That just means that if we can get into acquirer PSPs, once we have the right protocol, I think you can solve it. So, it's not that hard, but I think we just need to agree on something to begin with. Ben Brown | 44:19 I mean, there's a lot of frameworks and protocols that have been proposed over the last few weeks, and it seems like these things are being built in real time, which is fascinating, right? You can look at the GitHub for AP2, and you can see three weeks ago, somebody on their team said, "We don't have a model for human-not-present transactions. We should build one." There we go, we built it, and we announced it a week later. So, that's the kind of stuff that's fascinating to see it come together. We've seen proposals from Visa, Mastercard, Google, Stripe, et cetera. Is there anything fundamentally different between all these standards? Are they really all anchoring to the same core concepts, but just with slightly different flavors? You guys have surely gone deep on some of these standards. You're members of some of these networks. So, what are you seeing as you unpack these different standards? Is there a choice to be made there by the merchant ecosystem or by acquirers on what they'll support? Or is it really different flavors of vanilla that are all going to converge together into one approach Forward. Colin Luce | 45:33 Yes, I was going to bring this up as probably one of my biggest concerns or risks in all of this, right? I mean, I think there are inherently technological problems to solve around authentication and identity and all the stuff we talked about. But the other aspect here is just the competitive dynamics and the age-old thing of incentives. I think what worries me about this proliferation of protocols is that it is going to require collaboration amongst natural enemies in the market, and I don't know how that'll play out. I mean, if you look at AP2 being pushed by Google, you compare that with who arguably has the biggest advantage or the leader is positioned best here, being Chat PT. Who's their biggest competitor? Google probably, right? So, is OpenAI going to play nicely with AP2 given those competitive dynamics? I don't know. To Robin's point, I think it's going to be critically important that the PSP and acquirers get involved here. Well, what's the leading protocol being pushed on that side? Well, it's ACP with Stripe behind it. So, the question is, will Audion check out be comfortable supporting that with arguably their biggest competitor in the market being behind this? I don't know. If you look at the details of the specs, yes, it's open, right? And so in theory, they should be able to. But it's not always a rational decision based on the tech, the intricacies of the spec. There's this other dynamic at a more corporate level that I think is what worries me. So to answer your question, yeah, I think there are different flavors of vanilla. Yes, there are nuances around exactly what some of these different protocols do. But ultimately, again, as a merchant or platform, unless everyone converges around one, you're going to have to think about how I integrate into twelve different protocols, right? That alone is just going to stop any sort of adoption out of the gate, right? I think we're seeing this even more acutely within the network-specific offerings, right? If you look at Visa and agent pay, the issuer adoption or support just isn't there yet. Right? Mastercard, as of right now, I think has two issuing banks that are supported. So what is a platform supposed to do? Build some sort of UI orchestration layer upfront that asks the consumer, "Hey, who's the issuing bank behind your credit card?" Before you proceed, get out of here. Right? They asked my mom who the issuer behind her card is. She'd say, "United." No, it's not United, it's JPMorgan. She doesn't know that stuff. So I think we see this inside of each of these. But then I think if you upgrade it, we're going to need collaboration amongst all these, and that's going to be tough. Craig DeWitt | 48:36 Yeah, I'd say what these things have in common is they have in common there has to be a way of exchanging identity between the parties, and there's some concept of payment there beyond that, like the Colin’s Point. I think a lot of this, a lot of these have been written, in terms of who actually gets power in this new scenario, just look at AA and AP2 from Google. Like Google wants to collect the mandates there, right? The whole concept of the sharing of mandates. If you look at what the card networks have put forward, it's like, no. We're on the hook for chargeback risk. We get the mandates. And if you look at ACP, it's like, "Hey, don't worry about that. You just integrate into OpenAI." We'll take care of all these things. So I think at the core, there's an identity issue, there's a payment issue, but you have these big folks coming out and trying to put themselves in a position, of course, where they can control it and monetize it. So I agree with Colin. It's not great for the industry. It has been helpful, at least to Skyfire, just because you have a lot of confusion with merchants. It's like, "Hey, I don't want to pick, just give me a platform where I can be future-proof for these things." That's why I think there's a startup opportunity to come and hate you. Don't worry about it. We're on top of this at all times. We have a solution that will get you future-proof for all these things. Ben Brown | 49:52 And of the things that I think is interesting in some of the specs is that they ask for item-level data. That has been a really strategic thing. Merchants have been unwilling to share for a long time. So I'm interested in whether you guys are hearing merchants out there saying, "Hey, to enable Agentic, I'm willing to populate that SKU-level data into a message." Or is it that I get it that's big, but over my dead body? Will anybody ever get my item-level details? What are you seeing out there? Craig DeWitt | 50:28 So response that I've seen to ACP or essentially OpenAI integration, which essentially is asking the agents, "Hey, give me an API to your entire product catalog and pricing at the SKU level data." The answer there from big merchants that have actual brands is no way. I cannot just become a fulfillment center for e-commerce. What we have seen is that, "Hey, I am interested in accepting agentic commerce, but I still have to have a direct relationship with the end user, and I want to know exactly what that end user is looking at when their agent is accessing my site or accessing my APIs." So, I think there are two sides to this. One is just turning it off, which I think some folks will do, but you're going to lose sales on that. The other is just completely giving it away to the LMS, which I don't see happening. I don't think it's a surprise that... It's... Etsy and Shopify, I think, are good examples of companies that would lean into that just because of the nature of the merchants that are behind those. When I look at something like, I don't know, as an example, as an example, Home Depot, they do want that contractor agent to come in and buy those ten feet of pipe to Robin's Point earlier. But they don't just want to see the agent platforms crawling that site and then facilitate a checkout. They need to know who that contractor is. So, they have a relationship there and they're able to track history. That's again, Ben, I don't want to beat this point to death, but a big blocking piece is that identity exchange is so critical because it's what solves this problem that scares a lot of folks about risk maintaining a brand and a relationship with the principal who that agent is working on behalf of. Ben Brown | 52:03 It makes sense. Colin Luce | 52:05 I think we're seeing them ask the question that you alluded to earlier, Ben, which is what's the tax right? What's the business model here? So, inherently, all merchants and platforms face some sort of tax today, whether it be advertising, the cost to acquire traffic via advertising being the tax or the take rate from the e-commerce platform or the marketplace or whoever. Right. And so is that tax from these agent-based shopping platforms, LMP providers going to be 2% or 20%? And you said something earlier about free traffic, and I draw the analogy to us in the social world. We were very willing to give up all of our data and information for a free service. So maybe the merchants will be willing to provide skew and item-level details if the tax is zero, and they get free traffic, right? Maybe that's the trade-off. But the merchants we talk to, they're asking that question before deciding whether they want to participate or not. What's the tax. Ben Brown | 53:18 And that value doesn't have to be really complicated. We've worked with big tech companies in the past. You know what some of them say? What's the little blue dot? Because the little blue dot in your map application unlocks a whole bunch of data for the companies that are behind those apps. It's not a complicated idea. I want to know where I am, and I want to have directions to places, and there's a value exchange there that maybe some people don't appreciate the full value exchange going on, but I see we're pretty close to time. Maybe one thing. Just with a couple of minutes left, what's one piece of advice that you give to companies out there in the ecosystem on what they should do tomorrow on this topic? Maybe I can ask each of you to talk to a certain part of our audience. We have merchants out there, we have acquirers, we have issuers, and we have investors, for sure. So, Robin, why don't you? What do you have in your mind in terms of what issuers should do since you guys are spending all your time in the issuer space? Colin, what's something that you'd encourage PSPs and acquirers to do since you're sitting right adjacent to them? Craig, what should merchants out there in the audience think about doing tomorrow? Robin Gandhi | 54:44 Easy enough. I think on the issuer side, there's less that we play in general, right? I think the reality is what I would encourage most issuers to do is figure out how you're going to contribute to some of the things that we're talking about in terms of protocols and where issuers play in that, working with the card brands and figuring out how you can support some of the token framework that they're talking about. I think most modern issuers already have the ability to spin out virtual cards that are reasonably highly controlled, so I think we just... From an issuer perspective, where I think others should be is really just being in the conversation. I mean, I think we know that this is where things are going. We don't know exactly where it's going to go, but the reality is makes a ton of sense that you would connect the dots and issuing a payment mechanism is the way to go. So yeah, that's kind of where I think. Ben Brown | 55:52 Colin. What should acquirers and PSPS do tomorrow? What's the kind of first step for them? Colin Luce | 55:58 Yeah. look, I think in a lot of ways, they're the gatekeepers to all the merchants they have behind them. So, I think they sit in a unique part of the stack whereby the more work they can do to make this as seamless to adopt on the merchant side, the better. So, I would say if they could start to think about this as the new Google Pay or Apple Pay, and all merchants have to do is flip a switch or as close to flip a switch as possible to participate, the better. So, I would say, PSPs and acquirers should just think about how they can, given their mini nature, take on the initial lift or work here and then enable all the merchants behind them. Ben Brown | 56:49 Yeah, sometimes acquirers and PSPs are frustrated by rising complexity in the industry, but actually, complexity is good for them because they can help simplify it for their clients. Craig, why don't you wrap us up with thoughts on what merchants out there in the audience should think about doing in the near term? Craig DeWitt | 57:05 Yes, super easy. Just reach out to Skyfire and we'll take care of all this. Thank you. Yeah, I'm glad I got merchants. Thank you, Ben. Ben Brown | 57:14 I think it's called Flagship for figuring out your strategy. But with that, thank you to everybody in the panel for joining us. I know you're all super busy. Thank you to all in the audience for joining. I know we didn't have time to go live through some of the audience questions, but we've collated those and we'll follow up directly with some of you that asked questions out there and we'll put the recording up on our website if anybody wants to replay, as well as distributing some of the slides. So thanks again, everybody, for joining today. Craig DeWitt | 57:45 Awesome. Thanks, everyone. Thanks, everybody.

Joel van Arsdale, Managing Partner, and Rom Mascetti, Principal at Flagship Advisory Partners, sat down with Elisabeth Magnor, Senior Manager, at Flagship Advisory Partners to unpack the real story behind public fintech growth and to reveal new research across 50 listed fintechs. From revenue efficiency to the rise of SaaS-with-payments, cash flow health, and what AI and IPOs mean next, this episode is your data-driven guide to how fintechs are really performing. The episode focuses on the financial health of public fintech companies. Topics covered include: The shift from rapid, cost-heavy growth to disciplined, efficient operations What exactly lies behind the growth Why SaaS-based fintechs like Shopify and Toast outperform through embedded payments The growing impact of AI and IPO momentum on fintech performance and investor sentiment Listen to the latest episode on the following platforms: Youtube Spotify Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com or Rom Mascetti at Rom@FlagshipAP.com with comments or questions. Transcript (00:01) Elisabeth Magnor This is FinTech Conversations with Flagship, a podcast production by Flagship Advisory Partners. In this podcast, we discuss the big topics shaping the world of payments and FinTech and each episode will bring you sharp insights and fresh perspectives from the industry. So whether you're building, investing or simply just curious about FinTech, you're in the right place. (00:18) Elisabeth Magnor Hello and welcome to the very first episode of Fintech Conversations with Flagship. My name is Elisabeth Magnor and I'm the host of this episode. We are Flagship Advisory Partners a consultancy that specialises in strategy and M&A in the payments and fintech space. Today we're diving into a very interesting topic which is the financial health of public fintech companies. Over the past years, fintech has been on a rocket ship. Growth everywhere, funding pouring in and headlines full of big promises. But here's the question we wanted to answer: What exactly lies behind the growth? Is growth powered by efficiency? So are fintechs finding smarter and more automated ways of generating revenues or are costs secretly piling up in the background with ballooning operating expenses? That's exactly the analysis our team has been working on. And without giving away too much just yet, I can tell you this: the way fintechs manage their financials has shifted dramatically over the past three years. So in this episode, we're going to unpack what's really going on under the hood. But first, I'm happy to introduce the guests of this episode. First up, have Joel Van Arsdale a truly impressive person. He's the managing partner and founder of Flagship. He has supported hundreds of deals across his career and Joel's financial sponsor clients are among the world's most successful investors in fintech. Welcome Joel. (01:35) Joel Van Arsdale Thank you, Elizabeth. Thanks for hosting the discussion. And we're excited to discuss this topic, which I think is a very interesting one. I mean, I think what the audience will hear is really dramatic shifts in how fintechs are managed as seen in the public markets over the last five years. And so we're excited to get into the details of that. (01:51) Elisabeth Magnor And in addition to Joel, we also have Rom joining this episode. Rom Masetti is a principal flagship and he brings more than 10 years of experience in FinTech and is considered a trusted advisor in domains such as CFO SaaS, B2B payments and payments orchestration. Welcome Rom. (02:06) Rom Mascetti Thanks Elisabeth, looking forward to exploring some of the key drivers behind the fundamental shifts and discussing how we see the market developing along some of these themes. (02:18) Elisabeth Magnor In this episode, we are discussing the financial health of publicly listed fintechs. The background is an interesting analysis we did now in 2025, which was a refresh of an analysis we did back in 2023. And the topic gained a lot of attention in our network. So Joel, before we dive into the data and specifics, appreciate that not everyone listening are familiar with our research. Could you please share some background on why we conducted the analysis at the time and what metrics we looked at? (02:43) Joel Van Arsdale Yeah, so firstly, flagship publishes, you know, 100 insights a year and one of the advantages of the fintech industry is that there are a lot of publicly listed companies, you know, dozens of listed companies around the world and across different subsectors within fintech. This analysis specifically focused on 50 publicly listed fintechs. It was an analysis first conducted in 2023 using 2022 data. The reason why we conducted the analysis then is because we were essentially emerging from a valuation and exuberance bubble in the public markets and fintech equities. And so, we essentially wanted to test sort of what was the management philosophy of fintechs coming out of that bubble or as existed during that bubble. And so we ⁓ prepared a data set using really two basic KPIs, which we converged into one measure of performance index. So we essentially looked looked at gross profit growth and 2022 in the original analysis that we published in 2023. And then more recently between 2023 and 2024, the analysis that we just published, we essentially measured gross profit growth over each of those time periods and then OPEX growth over each of those time periods. And then we created a simple metric that we call revenue efficiency, which is the gross profit growth divided by the OPEX growth. The reason why we picked this KPI is that FinTech is an industry that should be delivering very significant scale efficiencies. And one way to measure scale efficiencies is just by measuring your top line versus OPEX growth or top line versus bottom line effectively. And for you to be generating efficiencies, that number has to be above 1.0 And for you to be generating significant scale efficiencies, that number really has to be above 2.0 And so that's simply how we went about the analysis. We also took those 50 companies and we bucketed them by business model. So we define them as either diversified processors, as merchant PSPs, as payment schemes or networks, as B2B fintechs, as SaaS fintechs, or as product specialists or other types of fintechs. And we did that just to understand if there were categorical trends within business models that were impacting the overall performance KPIs that we were measuring. So that's the basis of the analysis. I mean, we're using a good deal of public equity data, but actually measuring efficiency performance or scale economy performance using one simple metric. Gross profit growth over OPEX growth, 1.0 being a baseline for your effectively generating no scale efficiencies, 2.0 being a baseline for generating significant scale efficiencies. (05:25) Elisabeth Magnor So to put it simply, you're comparing how fast revenue is growing versus how fast operating expenses are growing. And obviously for an ideal fintechs, revenue growth should outpace expenses if you do it in an efficient way. And when you think about it, it's such a straightforward but really clever way to look at things. So Joel, in our research from 2025, this is an update of your 2023 analysis, which we rightfully gave the title, "Higher Growth Fintechs Must Now Learn efficiency". So if we go back two and a half years from today reviewing that 2022 Fintech performance, what were some of the key observations you made back then? (05:58) Joel Van Arsdale So 2022 was really the high watermark of exuberance in FinTech valuations. And so this is one of the reasons why we went looking for these insights is that we suspected that the industry had really lost track of focusing on scale economies and efficient operations. And that in fact is exactly what we saw when we went looking, which I'll explain in a minute. essentially FinTech went through an exuberance bubble COVID really focused attention on the industry as the entire world sort of transitioned towards digital transacting and digital commerce as opposed to physical commerce. so Fintechs, by and large benefited significantly from a focus on digital commerce. And so all Fintechs essentially achieved peak valuations in 2021, 2022. And so 2022 being the baseline of our analysis, we were essentially capturing the end of that exuberance bubble. so what we saw was correspondingly not surprising. really told us, in fact, that that's exactly where we were in the cycle. Because when we looked at the data, what we saw was that over half of the companies had a revenue efficiency index of less than 1.0 meaning their OPEX growth, in fact, was exceeding their gross profit growth. less than or only 15 % of the companies had a revenue efficiency index of greater than 2.0. And so those were dramatically poor results, quite frankly, because it meant on average, entire industry was failing to deliver on scale economies. What's really impressive, though, is that the most recent analysis is really the flip side of that storyline, which is there's been a dramatic reversal or dramatic improvement rather, in how fintechs are managed financially. In the most recent sample, in fact, the majority of companies were well above 1 in their revenue efficiency index, greater than only 21 % of the sample of 50 companies was below 1.0 in their revenue efficiency index and fully 50%, half of the sample was above 2.0 in their revenue efficiency index. And so the entire industry rather dramatically shifted from failing to deliver scale economies to delivering scale economies on a relatively broad base. And we think this is exactly what the industry should be doing when capital is properly deployed. The reality is that in the course of the bubble, capital was being misallocated, valuations were too high, capital was chasing growth without really having recognition of underlying earnings fundamentals. And that has now corrected itself. rather quickly, that correction happened over the period of two years, which is probably faster than I would have expected. But it's a testament to the CFOs in the fintech industry being adapted and reacting well to changing market conditions. (08:49) Elisabeth Magnor So if we take a step back, what Joel just described sounds like the story of an industry going through full cycles. So first the exuberance and inflated valuations, then what sounds like a painful realization that operating costs were outpacing growth. And then you mentioned Joel, a pretty remarkable turnaround. So that's actually a nice bridge into my next question. And over to you, Rom. I mean, you did the work updating this analysis with more refreshed data now looking at 2024 annual reports. Could you please elaborate a bit more on what Joel mentioned about the market correcting itself? what are the top line findings from that updated report? (09:25) Rom Mascetti Yeah, so Joel definitely hit on one of the biggest ones, right, which is this flip in operating efficiency. And I think as we go through the conversation here today, we'll get into some more of the details just naturally throughout the conversation. But the big picture is this: the operating expense growth is slowed across every cohort, which is obviously a sharp turn away from the kind of concept of growth at all costs, the playbook that we saw running only three years ago as Joel was alluding to earlier. What's interesting is that many of the high growth fintechs that we looked at, so the likes of the Affirms, the Toast, the Shopify's of the world, they're actually proving that hyper growth is still possible and that efficiency can go alongside that hyper growth. By that I mean they're all growing gross profit by more than 30 % while still keeping their operating expenses under control. All three of those being part of that cohort that Joel described the 2.0 index. Even the most recent quarter backs up these findings. So the trend is holding that capital efficiency is certainly a focus. Though there is a twist. I would say that some of the largest global fintechs, so Visa, Corpay, Global Payments as examples, just to name a few. are seeing expenses start to increase, at least at pace relative to gross profit. But these more mature players that we observe are certainly adjusting their models as they face pressure from smaller, more agile, fintech challengers. And I think that's something that we're gonna poke on and discuss more as we continue the conversation. (10:59) Elisabeth Magnor So you mentioned a couple of interesting names there, Rom. And I think, Joel, you also mentioned earlier that the report clusters or buckets different fintechs into different categories. And not to spill the beans, but one category that stood out in the research were the SaaS, 'Software -as-a-Service' of companies that have software DNA having expanded into fintech , so the likes of a Shopify and a Toast. So Joel, could you please elaborate on what stood out to you in the research looking at these categories and how they perform in terms of efficiency? (11:25) Joel Van Arsdale Yeah, I mean, first of all, we recognize that, you know, being categorical and putting all these 50 fintechs into buckets is an imperfect exercise, right? You know, within any one bucket, you'll have a fair amount of variability, but we're consultants, and so we like to draw boxes around things so that we can reach categorical conclusions. And so we we do think that there is some validity in the sort of broader categorical trend lines that you see in our analysis. I think, you know, quite frankly, almost effectively, all of the categories improved on the revenue efficiency index. And so, I think that's the key conclusion is really broad based, dramatic change in the way that fintechs are managed financially. But I think, you know, the category that jumps out, I think most dramatically is just the SaaS fintech cohort, as we're calling them that went from kind of the far right of our index, meaning well below 1.0 to the far left of our index, meaning approaching 2.0 or higher for a lot of those companies. That's incredible shift in underlying bottom line performance. And I think it's a testament to the profitability and the scalability of the SaaS FinTech model. The reason why SaaS plus FinTech is so powerful as a business model and also an investment vehicles because SaaS FinTechs benefit from huge economic advantages in their financial performance. They're very low CAC ratios, very low customer acquisition costs relative to standalone companies. And they have much greater abilities to cross sell and upsell and benefit from price insensitivity within their product bundles. So for like Toast or Shopify is effectively attaching their payment service with zero customer acquisition costs, whereas an independent payment service provider is actually paying quite a lot of customer acquisition costs to sign up that customer. Or similarly, Toast or Shopify can cross-sell a loan at little to no acquisition costs, whereas a lender independently selling that same loan would have a high customer acquisition cost. And so you just see these efficiencies now translating into the bottom line performance of that category. I will note that SaaS tends to account for their revenue somewhat differently than FinTechs. And so the way in which they treat COGS tends to be a little bit different and therefore gross profit tends to be a little bit different. But the underlying conclusions of the analysis are still very much valid and dramatic shift in bottom line delivery from that category of companies, which we think is a trend that will continue based on the power of the business model. (13:53) Elisabeth Magnor Yeah, that's interesting. And if you think about acquisition cost of, for example, a small to medium merchant, I recall from research we've done in the past that those can range widely from a couple of hundred euros to up to several thousand euros or dollars. And obviously a reasonable acquisition cost needs to add up in terms of the revenue that that merchant will generate over its lifetime. So, so, automation and quick seamless sales and onboarding process are really key in something that these SaaS companies, do really, really well. and speaking of a couple of other KPIs I think Rom in your updated analysis you did mention a couple of other interesting KPIs such as profit margins, cash flow coverage and leverage. Could you please tell us a bit more about what these KPIs tell us about FinTechs today? (14:34) Rom Mascetti Yeah, sure. So at the risk of burying the lead, I think overall we're looking at a financially healthy cohort overall. And so I think there's exceptions to every rule, of course. Some of those have been all over the news and we won't dive into them here. But I would say based on the data, broadly speaking, tells a pretty positive story. And I would say the three stats that you called out in your question or the three that we looked at, the three that we chose, we looked at several when sort of developing our insight. But I'll touch on those three quickly. So first, from a net profit margin perspective, overall, these seem to be stabilizing for many of the market leaders that we've mentioned throughout the conversation. It's just proof that fintechs can reach sustainable profits when applying real operating discipline. So for all the reasons that we've discussed, whether it be the stronger model that embedded SaaS with payments can offer, whether it's just overall focused by CFOs on better bottom line discipline, all of that can be applied and still seeing meaningful outcomes, meaningful positive ⁓ performance as a result. Second is cash flow coverage. So for most companies, it's in pretty good shape. They're generating more than enough operating cash flow to cover, for example, their capex. That said, there are some firms showing strain in the most know, latest fiscal quarter, again, some of those we've seen in the news, but overall the cohort very healthy from a cashflow position perspective. Then finally, leverage. And this one probably varies the most. ⁓ And it's not a surprise given the, ⁓ M&A that we've seen in the industry where debt or leverage can oftentimes be a catalyst for some of those M&A decisions. When we dive into the cohorts a bit more, diversified processors and SaaS providers with embedded payments tend to run with relatively low debt. unsurprising there. But, know, acquisitive players like a CorPay, who we've seen many times in the news making relatively large acquisitions in the last, two quarters, tend to lean more into that heavy borrowing. So to circle back, I would say that the ratio analysis really informs the same message that I said, you know, a couple... couple questions ago, which is the sector is really moving away from that growth at all costs mantra and towards a more balanced model and one that's better equipped to handle some of the macro volatility that we see today and some investor scrutiny. So overall, just a much healthier place than we were at, you know, call it two and a half years ago. (16:54) Elisabeth Magnor So really what I'm hearing is that fintechs today are in a much healthier and maybe more disciplined place than just a couple of years back. And those are some really great findings. That makes a good bridge into the future. So Joel and Rom, as we are about to wrap up, let's look into the crystal ball. What predictions or expectations do you have for these public fintechs moving forward? Maybe starting with you Joel. (17:19) Joel Van Arsdale Well, I think the most dramatic force of of influence on revenue efficiency, the coming five years, for example, will be AI because AI has such amazing potential to generate operating efficiencies in areas like technology development, customer servicing and many others. And, you know, AI is inevitably one of those things that you tend to underestimate in the longer term and overestimate the near term. But we're already seeing evidence of impact on areas like technology development and service automation among many others, by the way, and we'll cover that in a separate podcast. But we do expect to start seeing the impacts of AI over the next two to three years. Klarna's IPO underscores that they already see impacts. think part of that was kind of good preparation and dressing of their IPO. But there's also legitimacy underpinning that, right, that we're seeing in other parts of the industry. And so I think FinTech just has incredible potential to yield high gains in productivity because what of the key constraint really in the industry today is people productivity, because almost all fintechs still have challenges with the growing costs of people, whereas the revenue productivity of people are more disappointing relative to the cost. so not that, you know, certainly I'm advocating a downsizing of the industry from a people standpoint, but we can get a lot more out of the people that are in the industry with the help of the right AI tools. So I do think we're going to start to see that impact more significantly in the data over the next two to three years. (18:46) Rom Mascetti Yeah, so we've seen a lot of public activity this year, including several public to private deals in the first half. But that phase seems to be winding down and more fintechs are now heading down the IPO path. So of course we have the Klarna IPO that just happened not too long ago and we have Chimes IPO from Q2. I think we'll see more fintechs that had been sitting on the sidelines start to go public as the market is continuing to stabilize. You know, just recently we learned that T &E platform, the travel and payments FinTech Navan filed for its IPO. Sum Up also rumored to be exploring one. Of course, Stripe remains to be the big one that's still primed for its long anticipated IPO. So I think in the public markets, we'll continue to see a lot of investor enthusiasm, whether that's, IPO driven or even some interesting valuations on the public to private side, which still seem to be happening. ⁓ throughout the course of year. (19:40) Joel Van Arsdale One of the advantages of companies IPOing now, some of which were slated to IPO during the bubble, is that those companies are now IPOing in a healthier state of revenue efficiencies. And so, you know, those same companies had they IPOed in early 2022, probably would have been punished by the markets as they figured out how to be more efficient with their bottom lines and with their revenue. But now they've had the benefit of prepping those activities and getting healthier before they enter the public markets. And so it's actually kind of a healthy outcome in hindsight for those companies now that are prepared to IPO over the next year or two. (20:18) Rom Mascetti And I also find it interesting back to your AI point. I mean, I think even in the public markets, right, investors are starting to reward the AI shift. And so if you take Dave, who's been public now for a few years, I mean, they recently repositioned as an AI first public fintech. And it's a great example of how AI can help turnarounds in the public market. I mean, think their stock is up something like 180 % year to date and something like 500 % over the last several years. So just showing how AI, as a continued improver of performance, whether on the revenue side or on the cost side, really does categorically change both the performance of a company as well as investor sentiment on the company as well. (21:00) Elisabeth Magnor With that, Joel and Rom, thank you so much for sharing your insights. I certainly look forward to checking back in when you update the analysis with the 2025 data. (21:10) Joel Van Arsdale Yeah, excited to publish an update to the analysis. We hope that you all take a moment just to look at the figures and data because we think it is really compelling and interesting. we'll be excited to revisit this analysis in the coming couple of years to see if this trend continues or even accelerates on the back of innovations like AI. (21:27) Rom Mascetti And of course, if anybody does have a chance to go through the images and the analysis and you have any questions or comments, you know never hesitate to reach out to Joel, myself, Elisabeth, or anybody else at Flagship. (21:43) Elisabeth Magnor That was it for now. One thing is clear, there is no doubt that the rules of the game have changed and top line growth alone is not enough to make investors happy. Growth must include the bottom line, including a story on growing in an efficient way. You have listened to a podcast by Flagship Advisory Partners. Stay tuned for more exciting FinTech topics and conversations.

Flagship Advisory Partners’ Executive Interview Series provides readers with exclusive insights from thought leaders in the payments and fintech industry. This edition spotlights Unit, an embedded finance platform that enables software companies to launch banking, payments, cards, and capital directly within their products. Flagship's Ben Brown, spoke with Itai Damti, Co-founder & CEO of Unit, about the company’s founding vision, the evolution of embedded finance, and how Unit is redefining financial infrastructure for the next generation of SaaS platforms. Image: Itai Damti, Co-Founder & CEO, Unit What was the founding insight behind Unit? And how has your vision evolved since launch? Unit is the second company I co-founded with my co-founder & CTO, Doron Somech. We’ve been close friends for 21 years. In 2019, we noticed that more software companies were starting to offer financial services to their customers: Gusto launched wallets for employees; Uber and Lyft paid drivers instantly into cards they issued; Toast was starting to roll out its capital product. These companies had the right to win thanks to their powerful flywheel: distribution, trust, data, and existing money flows. We could clearly see a world where 1,000 more software companies would offer financial services. But it was hard to build these embedded financial services, so we launched Unit to solve this. Today we process more than $50 billion annually for 2 million end-customers through more than 100 companies including Wix, Honeybook, Invoice2Go (part of Bill.com), and more. We still believe that the merging of software and financial services will be the most important shift in the next few decades. But the new (and future) buyers are seeking more plug-and-play solutions, so this year we started offering a second implementation path: ready-to-launch. Companies can offer capital, banking, and bill pay - in one line of code. This path helps them launch embedded finance without less build, support, fraud, or economic risk. Those statistics you shared (100 SaaS companies, 2 million end-users, $50 billion of money movement) are very impressive. Unit has clearly been successful. At the same time, other embedded finance platforms have shut down or been acquired. What have been the main drivers of your success in this market? When we started Unit, we were experienced fintech founders, but we were complete outsiders to the complexity of building accounts, cards, money movement or lending in the US. This “industry ignorance” allowed us to think about our product from first principles, not within old boxes or definitions. It also gave us the confidence to build Unit as an irrationally “wide” system, a little like what Rippling did in HR software. We wanted to help tech companies and their bank partners with all elements of launching programs together: identity, security, payments, ledgering, card issuing, reconciliation, fraud, and more. We were of course fortunate to have key people on our early team from compliance and regulatory circles, like Amanda Swoverland (Chief Compliance Officer) and Alex Acree (Chief Legal Officer). They helped us instill a culture of building things in the right way. When we scaled, we thought again from first principles, and decided to make Unit a “deep” system - getting close to the metal. We developed our payment systems and certified them to interface with the Federal Reserve and card networks directly, on behalf of 6 bank customers. Today, 100% of the payments we process run on these rails. We also developed end-user interfaces, so you can think of Unit as a native core system for banks - one system from the end-user interface to the Federal Reserve. This stack isn’t something we’ve seen others building in financial infrastructure. We can’t ignore that we got lucky with the funding market we had access to. We capitalized the company with more than $150 million raised between 2019-2022, which was a very favorable VC funding environment. Today, Unit has tens of millions in revenue, we’re growing our revenue at a very healthy clip, and we’re tracking to profitability on a very large cash balance. The only thing we can claim credit for is adopting a “PE mindset” after raising funds: we insisted on staying a very lean team, knowing that we’re building something that will compound over many years. We insisted on what we called “an irrationally long runway.” I’m now glad we made that choice, even though the constraints we imposed on ourselves were — and still are — uncomfortable. How have platforms like Unit made it easier for SaaS companies to embed financial services? How much easier is it today than it was five or ten years ago? Before we started, launching any embedded finance capability required a budget of $1-2 million, 10-20 team members, 1-2 years, and 20 vendors. The first version of Unit, in 2020, improved all these numbers by 80-90%. Today, Unit only requires a single line of code, so I’d call this “extremely simple”. This new reality lets software companies be much more ambitious about becoming the all-in-one financial hub for their customers. Anyone can match the broad product suite of companies like Shopify, and they can do it quickly. By simplifying the technical and operational issues, companies can now focus on the strategic questions that matter most: What solution do I launch first - capital, banking, or bill pay? How do I really get user adoption for my first solution? How can I layer more solutions over time? If it’s so easy for me, it must be easy for my competitors. How can I differentiate? In any industry there are natural trade-offs in relying on a partner vs. building things in-house. I'm sure you see your clients work through this decision all the time when they think about working with Unit. What should SaaS companies consider when choosing between partnerships vs. owning the full stack in areas like fraud, onboarding, ledgering, funding, etc.? I think that there’s a false dichotomy between building and buying. Every financial application I’ve seen in my career is a combination of the two. So, we should reframe the question to: what specific capabilities does it make sense to buy? What does it make sense to build? I think about this in a 2x2 matrix: Easy-to-build vs hard-to-build Differentiator vs non-differentiator: does it make your product better than the competition, and deliver Companies should avoid building elements in one quadrant: hard-to-build + non-differentiator. Not just in embedded finance, but in software more broadly. Let’s take an example: a company provides point-of-sale solutions to 25,000 restaurants and wants to launch a money hub that includes capital and banking. They should not build ledgers, statement generation, or audit logs. They should build a special feature to disburse tips to staff. You can call it easy + differentiator. They should maybe build a capital underwriting engine that is built specifically to maximize approval rates and loan amounts for restaurants. You can call it hard + differentiator, so maybe they should do it later in their journey, not right away. This point about building a loan underwriting engine, but only later, is important. We believe that companies will build these things over time, because they care about maximizing their success. But we designed our platform to give them access to loan underwriting engines right away, because early on they care about accelerating time-to-market. They can decide when they might want to own more. As SaaS companies add more products to their financial services suite, do you think they will look for one partner to enable everything or will they work with specialists for each product? We have a strong view that companies will favor one partner in the long term. It’s not obvious yet: not many companies have made multiple buying decisions (3-4 embedded finance solutions). But we believe that most software companies will have a full roadmap of embedded financial services. We’ve seen our early customers expanding their use of Unit over time in order to build richer products. For example, most of our top-10 customers now use credit accounts and wallet accounts (FBOs) to offer charge cards and bill pay functionality. When you use multiple partners to enable embedded finance, how do you create a user experience that feels cohesive and rewarding? How do you avoid annoyances like multiple sign-ups, account linking and data entry? What embedded finance solution is the “source of truth” for authorized users? These are hard problems, and companies won’t want to navigate them if someone can make it easy for them. Today, Unit is the only all-in-one embedded finance solution of this kind. It's clear embedded finance platforms have made it much simpler to embed financial services. There seems to be just as much promise for artificial intelligence to change the way payments and fintech companies run. Where are you seeing AI make an impact within Unit or your clients? I admit that my first reaction to AI hype was to be suspicious. I could see how it could help financial institutions cut costs, but it will also open a huge surface area for fraud. I didn’t see much impact beyond that. I’m starting to change my mind. In the last 6 months, I’ve started noticing two big trends at the intersection of money and AI. One trend is companies exposing intuitive interfaces for insights and money questions. For example, Highbeam has built an incredibly valuable layer of reporting that gives meaning to money. Sellers can see their income from Amazon, Shopify and Etsy - all organized clearly. AI enables sellers to ask free-form questions like: how much money have I spent on inventory recently? Do I need to take a loan to make it to the next payroll cycle? Should I invest more in marketing campaigns? I’ve seen the product in action and was amazed at the power it brings to users. The other trend is more groundbreaking, but earlier. Today, AI agents don’t have the ability to manage budgets and move money but, in 3-4 years, they will. Once that happens, AI agents will move billions of dollars on behalf of the companies and people they serve. The use cases will start revealing themselves with the availability of infrastructure that handles identity, security, payment mechanisms and more. I’m curious to see where agentic transactions are in 5-10 years. What do your most forward-looking customers want today that they didn’t ask for 2–3 years ago? Are there new use cases gaining traction? Our most forward-looking customers are asking to start with ready-to-launch solutions and quickly make API calls to interact with them: pull and push information. Companies like getting started with one line of code, but the magic happens when an embedded finance suite isn’t just a black box. It gives meaning to the specific vertical software that it lives within. For example, a company that serves property managers recently worked with us to launch bill pay. There are many ways to pay bills but since this company already has knowledge of the payables of the property managers, they can automatically populate the payable invoices by simply making an API call to Unit. It just makes the property manager’s life easier. We’ve also enabled an accounting software company to launch banking. By embedding that in their software, the data makes it possible for customers to reconcile their books automatically. Improvements like that give business owners more time to focus on things that matter, like growing their business. The political and regulatory environment has clearly changed in 2025 under the new administration. What will the next few years look like for embedded finance platforms? Are we entering a consolidation phase, a moment for really creative innovation, or just time to go heads-down and execute on growth? I’d like to believe that my thinking doesn’t change with the weather. The long-term market is as big as financial services themselves, if not bigger - in the same way that Uber changed the size of the transportation market, not just addressed it. I tell our team: “when the fintech market is hot, cool yourself down. When it's down, realize that we’re building within one of the largest industries on earth.” Embedded finance is still at 1% of the ultimate size it could achieve. People need better money solutions. If we build them, and do it sustainably, we’ll get rewarded long term. Please do not hesitate to contact Ben Brown at Ben@FlagshipAP.com with comments or questions.

The fintech sector is undergoing a clear shift from hypergrowth at all costs to disciplined, sustainable expansion. Recent results from Q2 ’25 show that while global leaders like Visa and Global Payments are seeing expense growth outpace gross profit, firms such as Affirm and Toast prove that high growth can still be achieved with operating discipline. Net profit margins, capital efficiency, and leverage profiles vary widely across the peer set, underscoring the different strategies shaping today’s fintech landscape. Investors continue to reward those delivering both consistent growth and meaningful operating leverage. 1. Fintech Cohort Gross Profit vs. OpEx Growth (2021 - 2022 and 2023 - 2024; bubble size representative of cohort avg. market cap) 2. Gross Profit vs. OpEx Growth for Select Fintechs (Q2 2024 - Q2 2025) 3. Fintech Cohort Gross Profit vs. OpEx Growth (Q2 2024 - Q2 2025) 4. Valuation & Financial Health Metrics (valuation and financial metrics for 2024 and Q2 2025) 5. Efficiency Index (2022 vs. 2024 data; index = gross profit growth divided by opex growth; n = 34) What the Data Suggests Gross Profit Vs. Opex Growth Public fintechs have made meaningful strides towards overall operating expense discipline in 2024, a notable development from the “growth-at-all-costs” attitude prevalent pre-2022. The most recent quarterly data suggests this trend is persisting, though some of the largest global fintechs with the most mature margin structures (e.g., Visa, Corpay, and Global Payments) are seeing expense growth outpace gross profit growth. Fintechs such as Affirm and Toast demonstrate that hypergrowth (30%+ gross profit growth) can still be achieved with a measured focus on expense discipline. Net Profit Margins & Other Financial Health Characteristics Five companies in the fintech peer set (Figure 4) saw net profit margins eclipse FY’24 benchmarks in the most recent quarter (Q2 ’25, Fiserv, Global Payments, Shopify, Toast, and Affirm) while six have seen net profit margins contract (Paysafe, Worldline, Block, Visa, Payoneer, and Marqeta). Including this most recent quarter, SaaS + embedded payments providers like Shopify, Block, and Toast demonstrate strong capital efficiency despite ongoing global expansion efforts (capex less than 2% of revenues). Across the cohort, cash flow from operations adequately covers capex requirements, though we observe some instances of operating cash flow coverage being strained in the most recent fiscal year (e.g., Worldline and Fiserv with 48% and 35% of operating cash flow devoted to capex in the most recent quarter). Leverage (the use of debt versus equity) varies widely among fintechs, with Diversified Processors and SaaS + Payments providers having the lowest relative leverage. Highly acquisitive companies such as Corpay tend to use debt more to fund acquisitions. Valuation Multiples The market continues to favor companies demonstrating consistent growth and meaningful operating leverage. SaaS + Payments businesses also generally benefit from higher valuations, with Shopify and Toast bearing the highest forward valuation multiples. Source: Public Company Filings, Press Releases, Flagship analysis Please do not hesitate to contact Rom Mascetti at Rom@FlagshipAP.com with comments and questions.

Agentic commerce has shown a rapid uptick in interest recently. In this infographic, we pose a few strategic questions for the payments industry and map the broad ecosystem emerging to enable agentic commerce. General Commentary and Highlights ARK Invest forecasted that AI agents could facilitate nearly $9 trillion in payments by the end of the decade (25% of ecommerce), growing from basically zero today. However, for agentic commerce to achieve that level of success, it must be trusted by customers and supported by merchants, which will require robust and accessible technology, fair and sustainable economics, and updates to the fundamental rules that govern digital payments today. If agentic commerce scales, it will fundamentally alter behavior across the customer journey: how people search for products, make purchasing decisions, pay for goods, and interact with loyalty programs. It is far more than an evolution of the checkout experience. It's still a fair question to ask, at this early stage, will agentic commerce turn out like Mobile (transformative) or the Metaverse (mostly hype)? 1. Agentic Commerce at a Glance (illustrative; simplified e-commerce journey) 2. Recent Developments (non-exhaustive; select key events) 3. Agentic Commerce Market Map (non-exhaustive; logos are indicative) 4. Proposed Agentic Payment Frameworks (select details; non-exhaustive list of frameworks) (Sources: Flagship Advisory Partners, Company Websites, Press Releases & Product Demos) A. Visa Intelligent Commerce1 Two net-new capabilities (payment instructions and signals) supported by three pre-existing capabilities (authentication, tokenization, and personalization (data tokens)) Authenticated users can create agent-specific tokens, which are locked until users describe payment instructions At point of purchase, agent shares purchase characteristics with Visa, which validates those signals against the instructions and unlocks the token With user opt-in, buyer insights can be shared with agents’ context window for personalization B. Mastercard Agent Pay Adapts traditional tokenization into Agentic Tokens, explicitly for registering and governing AI agent activity Specifies data exchange standards for personalizing agentic shopping results Verifies user intent and matches it to transaction results Users can opt-in to personalization via biometric authentication By Q4 2025, all U.S. Mastercard cardholders will be enabled for the Mastercard Agent Pay program, with global rollout to follow C. Google Agent Payments Protocol Open protocol for agent-led payments Payment-agnostic; works for cards, bank transfers, and stablecoins Can be used as an extension of the Agent2Agent (A2A) protocol and Model Context Protocol (MCP) Addresses simple use cases and enables new, complex commercial exchanges through digital contracts (“mandates”) that memorialize user instructions and limits, basket contents and prices Mandates address “human present” and “human not present” scenarios D. PayPal Agent Toolkit & MCP Server API library for commerce capabilities (payments, orders, invoices, subscriptions, disputes, reporting, etc.) MCP server helps agents call PayPal’s APIs via structured interfaces, supporting faster deployment of agentic Integrates with agent frameworks such as OpenAI’s Agents SDK, LangChain, Vercel AI SDK Showcased demo with Gemini Shopping Assistant using agent-to-agent protocol Please do not hesitate to contact Ben Brown at Ben@FlagshipAP.com with comments and questions. 1 Currently in development; availability may vary by market

Europe’s local card schemes are stepping up their digital game. From enabling online payments and mobile wallets to embedding loyalty and cashback programs, domestic networks are closing the gap with global schemes. Merchants are finding more value in these schemes as costs rise elsewhere, while sovereignty and resilience remain key themes. Innovation, cost efficiency, and independence are driving a stronger role for local payment systems across Europe. 1. Card Payment Mix by Card Scheme (% total card payment value; select EU markets) 2. Factors Supporting Stabilization of Local Schemes (select key observations from Flagship Advisory Partners) Digital innovation: by investing in innovation, local schemes are expanding into online payments and mobile wallets like Apple Pay and Google Pay (e.g. Dankort, BankAxept, PagoBancomat, Girocard), steadily closing the gap with international schemes. For example, BankAxept in Norway only enabled online transactions and digital wallet payments in 2024 and is now catching up (and has higher share loses). Political Support: Local actors are actively advocating reduced reliance on US-based international card networks, advocating the case for maintaining domestic payment infrastructure and sovereignty. Merchant Economics: Local card schemes across Europe consistently promote lower-cost economics for merchants, with the gap widening as international scheme costs rise. Merchant Steering: Merchants are increasingly steering consumer spending toward lower-cost local card schemes, for example by tying loyalty programs and benefits exclusively to domestic debit cards (e.g. coalition loyalty Trumf(Pay) and BankAxept in Norway, MB Way UP cashback campaigns with retail partners in Portugal, BANCOMAT Club in Italy, GiroCard and PAYBACK in Germany). Please do not hesitate to contact Yuriy Kostenko at Yuriy@FlagshipAP.com or Elisabeth Magnor at Elisabeth@Flagshipap.com with comments and questions.

Credit Card Landscape Credit card issuing programs have long followed two primary operating models: managing everything in-house or outsourced arrangements through agent banks or program managers. These models evolved as natural responses to the complexity of credit card issuing and the very different levels of scale, capital availability, risk tolerance, and operational capabilities that financial institutions have. Large FIs have typically decided to own and operate their credit card business in-house (usually with the help of a third-party processor) while smaller FIs have typically relied on program managers. Each approach offers a distinct set of trade-offs. In-house programs offer full control, better long-term economics, and ownership of the customer experience but they require significant capital, talent, and time. Outsourced models provide a straightforward way to offer customers a credit card product with less operational complexity, faster time to market, and reduced capital and compliance implications – but with limits on flexibility, profitability, customer experience, and program differentiation. Our analysis of the top 130 U.S. banks indicates that this natural alignment of operating models to scale continues to hold true. Only two banks with more than $100 billion in assets partner with an agent bank issuer but about half of banks with $10 billion to $100 billion in assets use this model (as do the vast majority of banks with less than $10 billion in assets). Over the last seven years, since just before the pandemic, the agent model has actually become much more popular among midsize banks. Figure 1: Est. Distribution of U.S. Banks by Credit Card Program Model (among top 130 U.S. banks by assets) Recent developments, however, are changing the calculus. A new ecosystem of cloud-based issuing enablers – modern processors and program managers, SaaS tools for operational automation, and sophisticated tools for credit risk assessment and fraud prevention – has lowered barriers to entry and reduced the need for extreme scale. On top of that, agentic AI promises to automate much of what used to require armies of specialists and years of integration work. The result? The traditional “lines in the sand” that dictated who should outsource vs. in-source have begun to blur. Today, any issuer, whether a regional bank or a hypergrowth fintech disruptor, should re-evaluate their issuing strategy in light of a rapidly evolving landscape. The Case for In-House Issuing: Control, Customization, and Scalable Economics At its core, in-house issuing is about control. It allows financial institutions to define their own roadmap rather than adapting to someone else’s. Issuers can shape credit policy to match their brand’s risk posture, design features that truly stand out in the market, and adjust pricing, rewards, or customer experience without being constrained by what their partners can and will do. For FIs that see credit cards as a strategic tool for customer engagement – not just a revenue stream – this level of autonomy is crucial. Ownership of the full credit card issuing P&L is another key advantage. Rather than splitting revenue with a partner or accepting pre-set fee structures, in-house issuers retain 100% of the interchange, interest income, and fees. They also gain full visibility into program costs and can manage them proactively – from servicing to fraud management to marketing. Critically, in-house programs integrate more naturally across a bank’s broader product set. The value proposition of the credit card, how it’s marketed, and the data generated through its use can be designed to complement the checking account (and debit card), enhance an FI’s enterprise-wide loyalty program, or support cross-sell efforts into lending or wealth. In the past, this level of integration helped enable more profitable and long-lasting relationships. In the future, with the rise of AI, this level of data integration may be table stakes to keep pace with the market. The next five years will be a time of rapid evolution in using data to understand the needs and mindset of each individual customer, providing real-time support and solutions, and personalizing product value propositions. That said, the in-house path isn’t for everyone. Success depends on having (or building) the right capabilities. Issuers must attract and retain specialized talent across credit, fraud, operations, and tech. They must be ready for the scrutiny that comes with full regulatory ownership. They must tolerate profitability that changes quarter over quarter, with ROAs fluctuating between 3-4% over the last 10 years but sometimes touching 1% or even going negative, as they did during the pandemic. And they must commit to continuously investing in products, marketing, and customer experience to remain competitive. Figure 2: ROA of Large Credit Card Focused U.S Banks (banks>$10B assests maintaining consumer CC balances >15% of assets since Q1 2020) Fortunately, some of these barriers are eroding. Today’s issuers can build atop modern, modular issuing platforms that reduce the burden of development and integration. Third-party fraud tools, underwriting engines, and servicing capabilities can be combined into tailored stacks. This enables smaller or mid-sized issuers to operate with the sophistication of a top-tier bank – without the legacy tech drag. The Case for Outsourced Issuing: Speed, Simplicity, and Leverage For many issuers – especially those testing new markets or operating under capital or regulatory constraints – outsourcing credit card issuance can offer an appealing fast track. Partnering with an agent bank or program manager allows institutions to launch and scale a card program without shouldering the full operational burden of this complex product. Much of the heavy lifting – technology integration, customer servicing, fraud management, regulatory compliance – is handled by the partner. This enables leaner teams to move quickly and focus on growth. Perhaps the most important benefit is risk transfer. In an agent bank model, regulatory compliance and credit risk often largely sit with the agent, easing the issuer’s exposure to audits, CECL requirements, and reputational risk. For organizations not equipped to own a card program under today’s regulatory microscope, this insulation can be the difference between “go” and “no-go.” Outsourcing is also more capital-efficient. In agent relationships, the agent typically owns the receivables, which means the partnering institution isn’t required to hold large capital buffers against expected losses. That frees up balance sheet flexibility for other initiatives. Today’s outsourced programs are evolving beyond the vanilla. Leading agent banks now offer modular integrations, digital wallet compatibility, highly customizable rewards engines, and BNPL/installment overlays – all features that just a few years ago were limited to in-house players. Creative contract structures can even allow for partial control or co-governance in some cases, and shared profitability in others, which helps issuers maintain strategic influence without full operational ownership. Most of the partner options in credit card outsourcing are obvious: Elan Financial Services and FNBO are the largest agent bank issuers (but certainly not the only ones); TSYS, Fiserv, and FIS are the largest credit card processors, all offering managed services in addition to third-party processing; and Velera dominates the group service provider market with more than 4,000 clients (though it’s not public how many of those use Velera’s managed services for credit card issuing). Figure 3: Credit Card Provider Market Share In the last few years, a new set of providers has entered the market: Galileo, CoreCard, Cardless, Tallied, Highnote, Zeta, Marqeta, i2c, Lithic, Thredd, Episode Six, Pismo, Vervent, and others. This is a harder option set to navigate because each player has slightly different capabilities (some are pure play processors, others offer managed services). But for financial institutions who want more flexibility and integration to real-time data feeds without the operational complexity of in-house issuing, these new processors and program managers present an exciting alternative. Conclusion: Rethinking the Issuing Strategy The old dividing lines between in-house and outsourced issuing are no longer fixed. With cloud-based platforms, AI-driven automation, and an expanded roster of partners, issuers now have the ability to rethink the trade-offs and design models that combine the best of both worlds. The right choice is no longer determined primarily by your scale, it can be based on your strategy. Issuers should start by defining what role credit cards play in their broader customer engagement and growth agenda. From there, they can evaluate whether control, speed, capital efficiency, or risk insulation matters most and build the appropriate operating model. With today’s rapid pace of innovation, the right decision five or ten years ago might not be the right decision today, so issuers should re-evaluate their strategy ahead of every key contract renewal date in order to stay competitive in an industry where the lines in the sand are shifting faster than ever. Please do not hesitate to contact Ben Brown at Ben@FlagshipAP.com or Ryan McDonald at Ryan.McDonald@FlagshipAP.com with comments and questions.

After a challenging quarter, the market is rebounding, with 9 of 14 tracked companies now posting positive 3-month returns. While growth continues, it has slowed modestly, suggesting a more measured expansion. Figure 1: Stock Price Performance (select payments equities; stock price % change to September 5, 2025) Balanced market reaction to recent results: 7 of the 14 companies selected have delivered a positive return over the last three months. Mixed long-term stock performance: only 5 of 13 have outperformed the S&P 500 over 3 years (ServiceTitan has been public for less than a year). Transaction revenue growth continues to outpace SW rev: transaction revenues in the group grew 17% on average last quarter while SW and other revenue lines grew 7% on average. This is the eighth consecutive quarter of this trend. Continued improvement in margins: gross profit grew 17% on average last quarter compared to 12% average total revenue growth. Figure 2: Valuation Metrics (select payments equities; as of September 5, 2025) Restaurant and Retail Shift4: payment volume grew 25% YoY to $50B. Closed Global Blue acquisition in July, marking step forward in luxury retail and international expansion. Announced pending Smartpay acquisition. Toast: payment volume rose 23% YoY to $49.9B. Launched in Australia, continuing global expansion (already in UK, Ireland, and Canada). Lightspeed: payments penetration reached 41% (vs. 36% YoY). Investment in direct sales is showing signs of success, with outbound bookings more than doubling YoY Block: delivered the highest quarter of new payment volume since Q3 2021. Re-accelerated gross profit growth to 14% (vs. 9% in Q1 ’25). E-commerce Shopify: demonstrating strong momentum in Europe, where payment volume grew 42% YoY (constant currency). 11th consecutive quarter of positive free cash flow. WIX: Wix Payments volume grew 11% YoY to $3.6B. Closed BASE44 acquisition in June, marking entrance into application development market. BigCommerce: announced parent company rebranding to Commerce.com. Average revenue per enterprise account grew 9% YoY. GoDaddy: customers spending over $500 annually grew to 9% of base, driving 10% YoY ARPU growth to $230. B2B AvidXchange: total payment volume grew 4% YoY to $21.5B. Gross profit growth accelerated to 7% (vs. 3% last quarter). BILL: total payment volume reached $86B, up 13% YoY across 33M transactions. Launched new advanced ACH and Procurement products. Intuit: introducing AI agents for customers across business lines. Total online payment volume grew 18% YoY, consistent with prior quarters. Other Verticals Tyler Technologies: 18th consecutive quarter of 20%+ SaaS growth. Acquired Emergency Networking, a cloud-based SaaS provider for fire departments and EMS agencies. ServiceTitan: gross transaction volume grew 19% YoY to $22.9B while usage revenue as a % of GTV remained stable at 0.25%. Blackbaud: organic revenue grew 7% YoY. Free cash flow margin expanded 690 basis points to 18.3%. Please do not hesitate to contact Peter Taylor at Peter@FlagshipAP.com or Tim Gallagher at Tim@FlagshipAP.com with comments and questions

Earlier this year, we completed a survey of 100 NA SaaS platforms on their embedded finance businesses. We are sharing key insights in a series of infographics. The third in this series focuses on embedded finance product advantages. Today 1. Current % of Company Profits Generated by Embedded Finance 2. Current Offering of Embedded Finance Products There is still significant embedded finance upside. Most respondents generate <41% of total gross profit from embedded finance. Leading platforms have demonstrated significantly greater profit generation potential in some verticals. Additionally, over half of respondents report that <60% of their clients use embedded finance products. Tomorrow 3. Expected Growth of Embedded Finance Profits in the Next 3 Years 4. Expected Roll-Out of Embedded Finance Products In the Next 3 Years Leaders are bullish on embedded finance. Nearly 90% of embedded finance leaders expect embedded finance revenues to increase as a % of total over the next three years. 35% of leaders expect embedded finance revenues to significantly outpace totals. Business lending, card issuing and consumer lending are the top 3 embedded finance products expected to launch in the next 3 years. Please do not hesitate to contact Peter Taylor at Peter@FlagshipAP.com with any comments or questions.

Klarna, the Buy Now, Pay Later fintech, has officially revived its plans to go public. After pausing its IPO plans in April amid market volatility, the company has now filed for IPO on the New York Stock Exchange under the ticker KLAR with plans to sell 34.3 million shares to raise $1.27B at a 14B valuation. This insight highlights Klarna’s journey, from its founding to its current state, covering valuation milestones, financial performance, and growth across customers and merchants. As Klarna takes this next step, its IPO will serve as both a test of investor confidence in BNPL and a signal for the broader future of fintech IPOs. 1. IPO Offering and Historic Valuation (in billions of $) Peak valuation reached in 2021 funding round led by SoftBank 2. Financial Performance (net profit in millions of $, revenue and expenses in billions of $) Klarna’s accelerated expansion into the U.S. in 2019 drove growth, but eroded profitability Expense discipline, particularly reduced U.S. credit losses, has helped cut losses since 2022 Klarna achieved net profitability in 2024 but reverted to a loss in H1 2025 3. GMV Breakdown by Payment Options (% of GMV, GMV in billions of $) Pay in Full: settles purchases at the time of transaction Pay Later: purchase goods at the time of transaction and pay the full amount later interest-free Fair Financing: purchase goods and pay over a longer duration (3-48 months), usually with interest 4. Network Growth 5. Geographic Presence (% of revenue 6 months ended June 30, 2025) 6. Klarna's Push for AI Automate customer support: 69% of chats resolved by AI in ~ 2 minutes Improves merchant conversion: AI-powered personalized shopping feeds Enhance credit underwriting: supplements underwriting models Increase productivity: used in engineering, operations and marketing teams 7. Credit Quality Indicators General Commentary & Highlights U.S. Listing: Klarna’s choice of New York underscores the U.S. as a destination for fintech IPOs (vs. current HQ in Stockholm) Fintech Signal: The deal will serve as a test case for investor appetite toward late-stage fintech listings and credit/lending businesses after a muted IPO cycle despite macroeconomic challenges AI Narrative: Klarna’s heavy emphasis on AI may appeal to tech-focused investors, though its durability as a competitive moat remains unproven with recent drawbacks (e.g., due to declining service quality and customer dissatisfaction, Klarna has started to rehire human agents again) Reduced Credit Risk: Overall delinquency rates have improved by about one-third since Q1 ‘22 Return to Profitability: Klarna narrowed losses through lower credit losses and efficiency, achieving a 2024 profit but returning to losses in H1 2025 BNPL Implications: Klarna’s IPO can be a strong indicator of market sentiment towards BNPL Please do not hesitate to contact Niko Beranek at Niko@FlagshipAP.com or Amilee Huang at Amilee@FlagshipAP.com with comments and questions.

Every morning, small business owners open their laptops to a familiar headache. Their sales data lives in one system, their customer lists in another, and their marketing campaigns scattered across multiple platforms. To launch even the simplest promotion, they must stitch together emails, social ads, and reports from tools that don’t talk to each other. This complexity doesn’t stop SMBs from investing in marketing – like payments, marketing is not really an optional activity for businesses that want to survive. 96% of SMBs advertise and 99% of them will maintain or increase their digital advertising spend this year. SMBs need to stand out in crowded markets and compete with much larger players. They are hungry for growth but trapped in fragmentation. There is a clear opportunity for PSPs and vertical SaaS providers to use sales and payments data to help their clients to run more sophisticated digital marketing campaigns without a Ph.D. in data science. Doing this can let PSPs and vertical SaaS providers tap into a market 10x the size of payments itself. Flagship Advisory Partners surveyed 137 SMBs across the US, UK, and Australia in late 2024 and 126 vertical SaaS platforms in the US in early 2025. This article dives into the mindset of SMBs around the world and describes why PSPs and vertical SaaS platforms are uniquely positioned to make marketing easier. SMBs Want Integrated Solutions For many SMBs, marketing remains one of the most complicated activities they do on a regular basis. Most SMBs today run marketing through a collection of separate tools — CRM systems, email platforms, social ad managers, analytics dashboards — none of which are integrated with their payments and commerce software. Our survey found that 82% of SMBs operate this way. However, this is not how they’d like to run their business: 85% of SMBs said a platform that let them set up and run digital advertising campaigns in ‘one click’ would be somewhat or very valuable. SMBs are overwhelmed with the complexity of running their business and hungry for integrated solutions that can make it easier. Figure 1: SMB Marketing Stats (geos include US, UK & Australia) From Software Providers to Data Powerhouses PSPs with integrated POS solutions and vertical SaaS platforms with embedded payments functionality are well-positioned to solve this problem for SMBs. They have the hard data on what people actually buy and they are involved in enabling key moments of the customer journey where decisions are being made. The convergence of business software and payments creates what is arguably the most valuable combination of assets in the commerce ecosystem: sales data from merchants, demographic data from buyers, and payments data from transactions. Together, this data paints a detailed picture of customer behavior and purchasing patterns — a picture that standalone marketing tools simply cannot match. It is precisely this combination of data that enables targeted, effective marketing at scale. Embedded payments are no longer a niche play for a handful of companies. Today, 90% of vertical SaaS platforms have embedded card payment acceptance into their software, and more than half of SMBs in sectors like travel, gig economy, food & beverage, and beauty & wellness actively use the embedded payment product offered by their SaaS platform, according to a January 2025 ISV survey by Flagship Advisory Partners. At the same time, payment providers serving in-person commerce have deployed more than four million smart and cloud POS systems to SMBs. The convergence of software and payments has already happened both online and in-person. Figure 2: Penetration of Embedded Card Acceptance by Vertical (% of SaaS clients using the embedded card payment acceptance product, select verticals) The “Secret Sauce” for Marketing Performance The integration of the complementary data elements mentioned above is the “secret sauce” for simplifying digital marketing and driving more effective marketing campaigns. Without it, marketing remains largely guesswork for SMBs, who must rely on generic audience targeting and incomplete insights. With it, campaigns can be triggered by actual purchase behavior, personalized offers can be delivered to the right customers at the right time, and advertising budgets can be directed toward audiences most likely to convert. This is before even factoring in the powerful network effects created by hosting thousands of SMBs on a single platform. We have already seen the value of this approach in the hundreds of commerce media networks launched by large retailers. In a commerce media network, advertisers can leverage a retailer’s proprietary data and channels (e.g., website, app, in-store displays) to better target ads. (A form of this concept exists in the payments world, too, through card-linked offers programs powered by vendors like Cardlytics and more sophisticated, recent initiatives like Chase Media Solutions and PayPal Ads.) More than $100 billion of ad spend is expected to flow through such networks by 2026. PSPs and vertical SaaS platforms can apply the same model to their SMB customers, unlocking profitable growth for merchants and new monetization streams for the platform. Figure 3: SaaS Data Ownership & Marketing Use Case Examples Closing the Gap in Marketing Capabilities Today, few PSPs or SaaS platforms offer truly sophisticated digital marketing capabilities. There are some that offer basic tools such as punch card-style loyalty programs, email templates, and simple reports; for more advanced needs, such as real targeting or performance analytics, SMBs still must turn to third-party solutions. But, as we mentioned earlier, 85% of SMBs said a platform that let them setup and run digital advertising campaigns in ‘one click’ would be somewhat or very valuable. 90% of SMBs said they would share their payments data to enable these services and 45% said they would pay for them. The gap between what is offered today and what SMBs want represents a substantial whitespace. PSPs and SaaS platforms that fill this gap are well placed to capture a share of the $455 billion SMBs already spend annually on digital marketing ($429B in the US1 , $21.5B in the UK2, $4.7 billion in Australia3), while strengthening merchant loyalty and retention in the process. Figure 4: Benchmarking of Marketing & Data Analytics Offerings (select SaaS/ PSP solutions, proprietary solutions) Bringing It All Together with AI Sales and payment data can help define the right audiences. Integrations between PSPs (or vertical SaaS platforms) and ad platforms like AdWords can make it easier to share that data. And campaign templates can make it easier to configure an ad campaign. But how do you truly make effective digital advertising a one-click experience? AI is the missing piece that can unlock the full potential of payments and sales data for SMB marketing. Generative AI can be used to automatically suggest the right audiences, generate personalized content, and even recommend the optimal budget allocation. AI can also close the loop on measurement and iteration by digesting performance data, highlighting what worked (or didn’t), and instantly suggesting refinements for the next campaign. All of this effectively democratizes access to the sophisticated marketing capabilities that only large companies could afford in the past. The most sophisticated platforms have already started to put AI to work in their SMB marketing solutions. Square Marketing built an OpenAI-assisted copy generator into Square Online in 2023. This tool can help write marketing emails for SMBs along with other creative capabilities (e.g., menu generation, photo enhancement, website copy generation, etc.). In early 2024, GoDaddy launched GoDaddy Airo, an AI-powered suite of tools designed to help small businesses establish and grow their online presence. Airo offers features like AI-assisted domain name search, logo generation, website creation, SEO optimization, and marketing assistance. In the US, Airo can even assist with automatically setting up a LLC through GoDaddy’s partnership with ZenBusiness. Shopify offers two tools, Magic and Sidekick, that bring the power of AI to SMB digital commerce. Sidekick is an AI digital assistant that can help with domain setup, business insights, and creative (copy and image creation). Magic can help SMBs create the copy and audiences for email marketing campaigns, then analyze performance and iterate on the campaign configuration. Figure 5: AI Marketing Tool Examples (select company and product observations) Conclusion PSPs with integrated POS solutions and vertical SaaS platforms with embedded payments functionality already sit at the heart of SMB operations. With embedded payments and access to unmatched data, they have the tools to transform marketing from a fragmented chore into a powerful growth engine. Those who act now, sequencing payments first and marketing next, will be best positioned to own the future of SMB growth. Please do not hesitate to reach out to Elisabeth Magnor at Elisabeth@FlagshipAP.com in Europe, Ben Brown at Ben@FlagshipAP.com in North America, or Abigail Karl at Abby@Flagshipap.com with any questions. [1] SMBs spend $620B on marketing services, according to Intuit, and 67% of SMB ad budgets are spent on digital channels, according to the Connected Commerce Council [2] SMBs accounted for 45% of the £35.5B in overall digital ad spend in the UK, according to IAB [3] SMBs accounted for 44% of the $16.4B (AUD) in overall digital ad spend in Australia, according to IAB Australia

Introduction Ramp’s rapid ascent to a $22.5 billion valuation in July 2025 — less than two months after being valued at $16 billion — signals high market expectations for the growth trajectory of B2B fintech platforms that combine product breadth, embedded financial services, and operational scale. Ramp’s evolution from a corporate card startup to a full-stack fintech provides a glimpse into the future of B2B SaaS and financial services, which we explore in this article. Ramp’s Growth Story Ramp’s valuation trajectory has followed a steep climb, supported by several funding rounds. Since its inception in 2019, Ramp has raised approximately $2.7 billion in combined equity and debt, with the latest $500 million Series E-2 round (July 2025) catapulting its valuation to $22.5 billion. Figure 1 illustrates Ramp’s fundraising rounds and subsequent valuation growth. Figure 1: Ramp Fundraising & Valuation Timeline (in $ billion) Ramp’s valuation is anchored in accelerating business fundamentals (see Figure 2 for reported metrics). Annualized payment volume has grown more than 10x over the last three years, and according to management, its latest product (Treasury) has amassed over $1B in assets under management (AUM) in less than six months. Revenue growth is supported by a profitable backdrop, with the company reportedly beginning to generate cash flow early in 2025. Ramp’s evolution is a demonstration of how spend management is not just a SaaS function; it can be a powerful base from which to digitize broader B2B financial flows. Figure 2: Ramp Financial Performance Ramp's Product Evolution Ramp began its B2B fintech journey in 2020 as a challenger corporate card issuer with native spend management controls and automated expense reporting. Viewed at the time as the “Entrepreneur’s card,” Ramp has since grown into a multi-product, workflow-driven platform supporting much of the financial back-office stack (see Figure 3 for the product launch timeline). Figure 3: Ramp Product Evolution (select key products; non-exhaustive) Ramp’s recent launches, such as Ramp Treasury and AI Agents, push the products deeper into the core of business operations, integrating closely with ERP systems. With each new product, coupled with its own deepening ERP integration coverage (e.g., NetSuite, Sage Intacct, Microsoft Dynamics, etc.), Ramp absorbs more financial workflows under a unified UX, reducing fragmentation and increasing the overall share of business spend going through its platform and, consequently, expands the number of revenue levers that it can pull. In Figure 4, we illustrate Ramp’s current solution suite, and the monetization levers available through them. Figure 4: Ramp Product & Platform Capabilities (non-exhaustive) Convergence of B2B Embedded Finance Domains Ramp’s trajectory reflects the broader convergence happening in B2B fintech, especially within the small and medium-sized business market (Flagship recently wrote about this “Office of the CFO” software trend in another article here). Spend management, payables, treasury, and other domains are no longer standalone categories, but are delivered as a single experience, resulting in numerous embedded payments and finance flows converging into a single platform. In Figure 5, we highlight select providers across the B2B SaaS and Fintech landscape and the embedded payments and finance products they enable today. Figure 5: B2B Fintech Use Case Heatmap (selected examples, non-exhaustive, as publicly marketed) Point solutions and niche specialists are increasingly concentrating on the upper end of the market. In contrast, providers serving SMBs are moving toward aggregated platform models. This shift mirrors developments in SMB C2B fintech and suggests that strategies to support a broader scope with the financial operating system will be equally relevant with the well-tested model of best-of-breed point solutions. Conclusion Ramp’s $22.5B valuation is surprising but speaks to the latest trends in B2B fintech. It highlights a broader increase in market interest in platforms that combine product breadth and embedded workflows (emblematic of Ramp) with deep vertical integration (or meaningful potential to go deeper in target verticals). Ramp’s trajectory reflects a growing market appetite for fintech-native operating systems that extend beyond just cards and standalone SaaS tools. Continued scale, product expansion, and vertical specialization will aid Ramp and peers’ bid to lead the next generation of “Office of the CFO” software. Please do not hesitate to contact Rom Mascetti at Rom@FlagshipAP.com or Tim Gallagher at Tim@FlagshipAP.com with comments and questions.

Pending Regulatory approval and closing in Q4'2025, Corpay expanded its cross-border capabilities with the acquisition of Alpha Group, enhancing its presence in Europe and reinforcing its position as a leader in B2B payments. 1. Transaction Overview Corpay's acquisition of Alpha, a x-border and FX specialist, fortifies Corpay’s x-border position and solidifies Corpay as a leader in B2B payments. The combined entity unlocks new geographic corridors and strengthens Corpay’s positioning in Europe. Alpha's global multi-currency accounts, FX features, and focus on institutional funds are complementary to Corpay’s B2B X-Border business. The acquisition is pending regulatory approvals and is anticipated to close in Q4 2025. 2. Stock Price Relative Performance (YTD through Jun 25, 2025; indexed to 100) 3. Corpay Revenue by Segment (in USD million) Corpay generates revenue across four segments, with corporate payments contributing the largest share. Vehicle Payments: solutions across use cases such as fuel, tolls, and parking Corporate Payments: includes AP automation, virtual cards, and x-border Lodging Payments: traveling accommodations for employees, airline crews, etc. Other: includes gift and payroll card operating segments Corpay's corporate payments segment has been a growth engine since ‘21. The entity offers B2B X-Border, Domestic payments & AP automation for enterprises globally. Corpay has a long M&A track record, including other B2B X-border payments deals: Cambridge Global Payments (2017) and AFEX (2021). Corpay completed 19 acquisitions between 2015 and 2025, during which their market cap grew from $13.5 billion to $22.3 billion. 4. Corpay M&A Timeline (select key examples) 5. Alpha Group Segment Overview 6. Alpha Group Revenue by Segment (in GBP billion) Alpha, a specialist B2B X-Border payments and FX fintech, serves institutional investors and corporates with global multi-currency accounts, FX, and treasury features. Alpha holds c.$2 billion in deposits across c.7000 client accounts globally, with strong revenue concentration in Europe and the UK. In late 2023, Alpha acquired the multi-bank treasury platform Cobase, which provides centralized treasury, cash management, and bank connectivity to corporate clients. 7. Timeline of M&A in X-Border Payments (select key events) M&A activity in B2B and x-border payments has been brisk. Large fintechs (e.g., Corpay, Payoneer, Visa Direct) are acquiring regional or specialized x-border fintechs to rapidly expand their scale and extend product capabilities. Buyers are using M&A to fill-in their geographic footprint and to expand vertical specializations across a range of use cases. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com or Rom Mascetti at Rom@FlagshipAP.com with comments and questions.

Joel van Arsdale, Managing Partner at Flagship Advisory Partners, recently sat down with Hemmo Bosscher, SVP, Global Head of Payments at Adyen and Vamshi Reddy, Head of Payments at Zenoti, to discuss how software platforms can effectively sell embedded payments and make them a key part of their growth strategy on Adyen's latest episode of Adyen Presents: Embedded Finance podcast. The episode focuses on how software platforms can succeed with embedded payments and use them as a key strategic advantage. Topics covered include: Why embedded payments should be a core business focus The need for active distribution strategies over passive outreach How the embedded finance opportunity differs across regions and industries Using embedded payments to solve challenges like cash flow Key metrics to track success and adoption Listen to the latest episode on the following platforms: Adyen media Youtube Apple Podcasts Spotify Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions. Transcript [00:00:01] Hemmo Bosscher: Welcome to Adyen Presents: Embedded Finance, real talk for SaaS leaders on embedding payments and financial products. Software platforms today are no longer just about software. Winning platforms embed payments and financial products like business loans, accounts, and cards to become full service operating systems for customers, building loyalty and new revenue streams. Now the opportunity is clear, and we've heard much about it, but tactics are largely undefined still. And that's why we're launching this podcast to hear from the platforms and experts shaping the strategies. This episode explores selling embedded payments. I'm joined by Vamsi Reddy, GM payments at Zenoti, the leading cloud software for beauty, wellness, and fitness trusted by over 30,000 businesses in 50 countries, and Joel Van Arsdale, managing partner at Flagship Advisory with over twenty years of experience helping businesses shape their fintech strategies. First up, we have Joel. [00:00:59] Hemmo Bosscher: Welcome back to Adyen Presents: Embedded Finance. Today, we're here with Joel Van Arsdale, managing director and I think founding partner of flagship advisory. Joel, can you please introduce yourself and your business and what you aim to do in the world? [00:01:12] Joel Van Arsdale: Yeah. Hemmo, Thanks for having me. Look forward to the discussion. So I'm indeed the managing partner of strategy boutique called Flagship Advisory Partners, and Flagship focuses purely on fintech. We have 40 professionals located across Europe and US advising a variety of clients on development of growth strategies within the fintech industry. And so a lot of our clients are providers of fintech services. Many of our clients are also platforms that embed financial services, which is what we'll talk about today. And lastly, we work with a lot of investors that are either buying software companies or other forms of platforms or buying fintech companies. And so we advise all of those actors, and so I think it gives us a well rounded perspective on the ecosystem. [00:01:53] Hemmo Bosscher: Thank you. Very happy to have you on. Could you maybe describe for our audience what a typical engagement looks like and then specifically as it pertains to embedded finance? [00:02:00] Joel Van Arsdale: Yeah. So when we're working for platforms that are ingesting financial services, embedding financial services, we're generally helping them with their strategy road maps. So, for example, which products should we be prioritizing? What are the feature sets should be underpinning those products? How do we go build the right operating models, meaning find the right partners to power those products? And then how do we go to market and commercialize those products. And oftentimes, we're helping them also then globalize that strategy on the back of the road map. [00:02:29] Hemmo Bosscher: Uh, thank you. That's very helpful. And for how long have you been doing this sort of work in a bit of finance? [00:02:34] Joel Van Arsdale: Yes. I mean, I've focused on embedded finance really since the early days. So I've been an advisor focused on payments and fintech for about twenty five years, and I would say embedded finance has been a predominant theme in the work that I personally do for the last decade or so. [00:02:49] Hemmo Bosscher: And how have you seen the space change? Have there been any accelerants? I think maybe for me personally, I saw COVID and sort of the low interest rates, we really took off there, but how have you sort of seen it develop? [00:02:59] Joel Van Arsdale: It's just very constant, attractive rates of growth for anyone that's thriving in embedded finance, whether that be platforms that are really great at embedding products or whether that be providers of financial services that are great at working with platforms. I mean, the reality is that there are certain pockets of maturity, like US payment acceptance as a form of embedded finance is relatively mature, meaning the predominant force changing the competitive landscape. And fintech providers that are good at working with embedded finance, embedded payments specifically are thriving, and those that are not good at embedded payments are oftentimes now shrinking. And so it's been a predominant force in the merchant payment industry in US for more than a decade. But when you look at the rest of the world and when you look at the rest of financial services as a product spectrum, you know, you just don't see maturity. You see really a lack of maturity and therefore high rates of growth. And so we estimate the embedded finance opportunity globally at something like $2,000,000,000,000 of revenue. And the reality is we're scratching the surface with a few 100,000,000,000 of that being realized today. So there's just the growth of embedded finance will continue well past my career. That's for sure. That's really a multi decade evolutionary curve, and we're just in the early days of that curve. [00:04:17] Hemmo Bosscher: And the sort of Darwinian mechanism in The US market you described, right, where it's survival of the fittest and those who better finance prosper and those that don't, do you expect that to happen, and do you see it happen also in other markets already? [00:04:29] Joel Van Arsdale: So, for example, in The US merchant payment acceptance revenue pool specifically, so just one product, just one side of the equation, platforms have effectively captured about 30% of the revenue pool already. And then providers that are powering those platforms have captured another 10 to 15% in addition to that. And so that's kinda giving you a relative sense of maturity. Now that will continue, of course. A decade from now, it'll be 50%, and a decade thereafter, it'll be even higher. And so many financial services will follow similar evolutionary paths, although it definitely varies by product, it varies by geography, it varies by vertical. And so it's a very complex footprint when you look globally in terms of what trends first, uh, relative to what trends more later in the evolutionary cycle. [00:05:15] Hemmo Bosscher: And is there for you in other geographies a reason to expect a different development, or would you expect to see the same just delayed? The same [00:05:23] Joel Van Arsdale: general trends are playing out all around the world, meaning everyone benefits when you can embed payments oftentimes being the lead financial services product. But when you can embed financial services generally, it makes the lives of businesses better. It makes the lives consumers better and easier. And so there's just such intrinsic value creation that there's no reason why many of these financial services won't be embedded regardless of the geography. Although the software maturity varies very much around the world. So in The US, it's more mature, and The Nordics, it's more mature, and Southern Europe, less mature, and certainly in Latin America, much less mature, and etcetera, around the world. And so the software industry has to or other forms of platforms. Could be gig platforms. There are lots of different forms of platforms, but, you know, that's a precursor to the broader embedded finance opportunity is getting people first using that technology and then getting them to expand their use cases on top of that platform, including financial services. And so the reality is that the software industry is relatively immature in large parts of the world. Any of the more developing macroeconomies, right, tend to have low software penetration. And so it'll be decades before they fully catch up in the opportunity. [00:06:37] Hemmo Bosscher: When you look at those really underdeveloped markets or margin pools, do you find it more plausible that, let's say, US logo or a more global player finds success locally, or is it usually a local hero that pops up and does some sort of copycat play and takes the market? [00:06:51] Joel Van Arsdale: Well, you have to keep in mind, right, globally, the software industry is exceptionally fragmented. There are tens of thousands of software companies just in The US and Europe, for example. And so you see some globalization. For example, webshop software where you see Shopify, WooCommerce, etcetera, that's a relatively global part of the software market. But other software verticals are much more localized. And so it tends to be the case that I would say software services tend to be even more localized than fintech services, but it varies again by geography and vertical. But you have markets like India or Brazil that have their own trajectories that are relatively uninfluenced by what's happening in The US, for example, or what's happening in Europe. And, actually, in some ways, it's even more exciting because sometimes see a leapfrog effect where you have commerce that's fully digitized via mobile phones that never went through a phase of more traditional software adoption, for example. [00:07:49] Hemmo Bosscher: Yeah. Yeah. What's the parallel with the something like Internet technology? Right? Like, skipping poles or landlines? I don't know. I've read it recently somewhere, but you can indeed sort of leapfrog the whole decades of innovation in The US and just go straight to what we have now. [00:08:02] Joel Van Arsdale: Yeah. So one of the things you see in more mature software markets like The US or Northern Europe, for example, is actually you have a lot of more traditional platforms, traditional, quote, unquote, ISVs that are still reliant largely in having locally deployed Windows applications, Windows software. And, actually, what you can do on that kind of tech stack is much more limiting than what you can do on a tech stack that's built around cloud based mobile operating system technologies. And so, actually, you see some slowness as a function of that software maturity rather than speed, although it's also the case that a lot of those older tech stacks, of course, are being modernized and disrupted. [00:08:38] Hemmo Bosscher: That's interesting. Oh, hey. On the topic of this episode today is selling embedded payments. I'm not asking you to give away the secret sauce, but, generically, what should a platform think about when going to market with embedded payments in what you've seen been successful in the past? [00:08:52] Joel Van Arsdale: Yeah. I mean, firstly, you've gotta be fully strategically committed to owning the product. You can't just think of it as something I'm gonna refer off to my payments partner [00:09:03] Hemmo Bosscher: to make a little bit of money on the side. [00:09:05] Joel Van Arsdale: They can't be a side job. It's gotta be part of your core strategy and part of your core products. And so that means having people properly focused and committed to that product, and it means having real distribution investments behind the product. And so we see a huge difference between platforms, especially generally smaller software companies that are very passive in their embedded finance strategy and those that are strategic around embedded finance. And if you're passive, your performance tends to be unimpressive. And if you're strategically committed and aggressive, your performance tends to be much better. So I think that's the first driver of success. Right? It's just having the right strategic focus on investment and people driving the execution of the strategy. And then secondly is just being more aggressive in your distribution mindset, which is especially if you're serving smaller, medium sized businesses, which represent a large part of the market opportunity. I'm a small and medium sized business owner, for example, and I'm not actively seeking out new financial services, generally speaking. Right? Like, by nature, SMBs are more reactive, and so you've gotta be front and center directly in front of them, and sometimes not even really necessarily giving them the option. Successful distribution strategies are it's intel. It's just in there, and you don't have any real choice. But by the way, most of these small businesses don't necessarily want a choice when it comes to who's processing their card transactions because it's a relatively commoditized service. [00:10:35] Hemmo Bosscher: Do you have any more thoughts on that? It's an interesting point you raised. And, I mean, I see both models. Some folks make it free and monetize elsewhere. Others leave it optional. At the end of spectrum, you can mandate it. You can also create fake optionality where you have it optional, but you so heavily penalize the other choice that you sort of mandate it. Like, what do you think is the most successful way to do it? [00:10:55] Joel Van Arsdale: So I think, firstly, one of the reasons why embedded finance is so commercially powerful is because small and medium sized businesses, especially, are not generally focused on the cost of the financial services. So they tend to be less price sensitive to those financial services than they were independently shopping for those services on a stand alone basis. The the small and medium sized businesses are actually more focused on, for example, what the devices costs, what my register costs, or what my printers costs, or what the monthly subscription fees costs. And so, actually, what we tend to see is rather to treat those products more as loss leaders and to make up margin on financial services. It tends to be the more effective go to market strategy, although this will vary depending again on the vertical that and the kinds of use cases you're talking about. But for example, the restaurant vertical or point other point of sale oriented verticals, we oftentimes see discounting of the core hardware software in order to capture the basis points that comes along with the payment processing. [00:11:54] Hemmo Bosscher: Right. And that's a good lead into another question I had for you, which is, let's stay with the restaurant space, for example. You also have, I think, for software platforms, this sort of thorn in their side is often these stand alone providers that can come in with really cheap pricing, really cheap devices. What would you say is for them the best way to sort of defend against that? [00:12:13] Joel Van Arsdale: Yeah. So what we observe in The US market, which again is just a more mature embedded finance market, is that oftentimes our vertical SaaS clients are winning market share versus forms of horizontal payments, for example, where as a vertical software, you're covering a whole range of use cases. You're providing accounting services, and you're providing people management, and you're providing CRM, and you're providing billing. And so because you are the operating system of the business, it means that you just have a very good right to win versus other more bespoke use of services. For example, I might be using a stand alone web payments platform or a stand alone e invoicing platform or stand alone point of sale of some kind. And so what we observe is that the vertical the broader, more diversified feature sets that are vertically specialized tend to have strong right to win and tend to be winning market share versus more standalone horizontal payments. And the guy the go to market motion for those vertical platforms is combination of carrot and stick. It's rare that you would come right out of the gate kind of forcing all your customers to make changes in their physical environment, sort of physically have to do a lot of work to adopt what you're trying to sell them. But we tend to start up with carrots, meaning, hey. Here's a series of feature advantages as to why using our payment service is better than using that horizontal solution. So easier reconciliation, you have faster money realization, better customer experience when it comes to billing and notifications, all of these kind of features. And then the stick is still there oftentimes when maybe you stop supporting a horizontal payment solution that is integrated into the ERP system. That would be more of a stick tactic. [00:13:52] Hemmo Bosscher: That's really interesting. Thank you for sharing that. I mean, you make a very eloquent argument for embedded payments, and, obviously, we can talk a lot about that on this podcast. Could you argue the other side? Is it sometimes strategic for a platform not to embed payments, or is this just such a prerequisite to success now We should stop having the conversation about it and just see it, hey. This is default, and let's talk about the stuff we build on top of payments. [00:14:15] Joel Van Arsdale: Yeah. So as platforms think about embedded finance product strategy, what's most important is that you really remember the mindset of the customer, and you think through use cases where you're creating real utility by embedding financial services. And so there are certain use cases for payments that just maybe aren't compelling, that where your software, for example, is not creating a better user experience. So one of the reasons why embedded finance is powerful is because the software itself makes everything easier. It makes it easier to pay, it makes it easier to collect, it makes it easier to borrow money, etcetera. And if you don't have those natural use case feature advantages from the software out, then the embedded finance opportunity is less compelling. In other words, when it's just a cross sell of banking or lending or something and not an embedded use case, then it becomes somewhat less powerful. And so for example, certain verticals lend themselves to certain forms of embedded finance use cases and others do not. So for example, if I'm a vertical platform that is driving and managing procurement for my software client, for my medium sized business. My software is already powering the interfaces into all my suppliers, already helping me with order management, already helping me with accounts payable automation, then embedding the payouts into that other broader feature set has great utility, then it really creates this end to end digitized outcome that makes the life of that business owner much better. But if you're not involved in procurement or not involved in employee expenses, if you're only a commerce platform, for example, then your right to win by attaching payout related services is less powerful. Same thing with payroll is powerful when you're already managing employees, or lending is already powerful if you're helping the business manage its finances or cash flows. But you wanna see that kind of overlapping fit with what the core software is doing. [00:16:16] Hemmo Bosscher: So what you're essentially saying is that perhaps I'm jumping to conclusions, but it sounds like maybe some founders or some operators assume too much, and they jump the gun and go, okay. We'll just solve everything for our customers, and we wanna do end payroll, end payouts, and this and that. And do you think that's premature where they should take a step back, focus first on their customers' needs, and then build towards that? That's a fair conclusion? [00:16:40] Joel Van Arsdale: Uh, generally speaking, although you also have to consider, like, segment driven behaviors. So at the low end of the market where you see a Square and a Clover, for example, operating in The US market, selling mostly to truly small businesses, single location, oftentimes founder run, your right to cross sell financial services into a simple segment like that is quite broad because they just tend to be sort of underbanked in many cases, for example. Whereas if you're serving a more sophisticated mid market business, you will have a right to attach payment acceptance, for example, but maybe not necessarily other financial services. It depends a little bit on the profile of the segment you're serving. And then generally speaking, if you're a technology platform serving enterprise clients, your right to attach payment services is just generally less because enterprise clients exhibit more unbundled buying behaviors. And so when you put this complex bundle of multiple services in front of them, they will oftentimes find that less appealing than if I'm a small business because they're not solving for ease and convenience and lack of time. They're solving for sort of best of breed individual services. And so the segment you're going after defines some way your right to win across the broader product set. [00:17:56] Hemmo Bosscher: Yeah. And then your customer portfolio also decides what products and features you bring to them and the sequencing of them. That's what I was trying to say, albeit inelegantly. So I I definitely got your point. When you think about all these meta financial products that are now flooding in the markets built on top of payments, is there any one of them that you feel is particularly suitable for this day and age and has a particularly large opportunity? Anything specific? [00:18:21] Joel Van Arsdale: One of the exciting things within our broader work and embedded finances, we've just seen a real acceleration beyond payments. And so even five years ago, it was really mostly about pay ins, you know, to a lesser extent, other forms of banking services. But now we're seeing actual real scale and real growth coming out of a broad range of financial services. So payouts being quite big and rapidly growing in a variety of verticals and different forms of platforms. For example, marketplaces, gig platforms, you know, anything again involving spend management or procurement. We're also seeing high growth in real scale in in various forms of lending. So merchants, working capital lending, merchant cash advance being a real scale product driving significant revenue for the squares or the clovers as I described earlier. But, also, instant settlement is a form of lending or, for example, factoring and supply chain financing where we think there's huge market opportunity but a lot less maturity relative to, for example, merchant cash advances of lending products. At forms of digital banking, we're seeing some exciting stuff. I mean, especially if you're working with gig platforms where these gig workers are oftentimes underbanked, and so the platform itself has a strong right to win because it's such an integral part of that micro business' life. And so you see that with various forms of kinda gig platforms, and you see fintechs that are really good at digital banking or cross border payments that are relevant to those gig platforms being seeing a lot of growth. Again, embedded payroll in certain contexts with it being somewhat more interesting and lucrative in a market like The US where you have, like, earned wage access. For example, a waiter, waitress at a restaurant being able to get their tips same day, for example, is kind of a cool use case. I think embedded insurance, we're seeing high rates of growth. I spend a little bit time personally less in insurance than other banking services. But, actually, insurance is a massive revenue pool with a strong right to attach because independent distribution of insurance has very high customer acquisition costs. So if you can embed that insurance distribution into more of an in line use case, right, you create a lot of value. So what I do think hey, Moe. So huge opportunity across lots of products. The individual opportunity is definitely a function of what country you're sitting in and what vertical you're acting in as a platform, and you wanna make sure that you have the right prioritization. One of the mistakes we see working with platforms is when you're going after five products simultaneously, you tend to miss step on all of them because you just need to focus on the first priority first. Second priority second tends to be they're just a more effective way to be executing. I think, though, it's important to keep in mind that the opportunity for embedded finance is not limitless. We don't all need financial services from everyone we're conducting commerce with and same as a business owner that there's some of my banking services are well supplied by my bank. And so there are some limits to the opportunity, but certainly not any lack of growth opportunities over the coming decade. [00:21:29] Hemmo Bosscher: And do you think that this hypothesis of software platform or your gig economy work, example, like an Uber completely disintermediating the traditional bank from that in over the next ten years? Do you think that's a feasible reality where you no longer need that banking relationship like you have now? [00:21:43] Joel Van Arsdale: I think banks will always serve their part. I mean, in terms of where I wanna keep my money, where I wanna get a mortgage, where I wanna get a loan to start a business, Banks are just very, very effective and introduce incredible scale economies on all those kinds of products. But certainly, in certain financial services like payment processing, banks are slowly being disintermediated. When you look at the winners of who's applying those embedded finance services, it's rarely banks. And it has to do with the fact that banks are more challenged when it comes to working with technology companies, meaning having great integration technology and a great automation of service, being easy to work with. These are generally things that banks struggle with. And so it's not that banks will disappear. They certainly won't. But we will see a loss of share in certain products. Payment acceptance has been one example, but card issuing or factoring or other products will follow. Thank you. [00:22:42] Hemmo Bosscher: I think we're on the same line of thinking. When going to market with embedded finance, Joel, are there any metrics that you think are particularly worth tracking that you would advise founders on? [00:22:51] Joel Van Arsdale: Yeah. So the first thing we tend to look at is just what is the percent of revenue coming from financial services versus, for example, the core ARR revenue. And if we're working with software companies, there's a very big range. They can be less than 10%. It could be more than 60%. Although, generally speaking, depending on the vertical, that opportunity tends to be thirty, forty, 50%. And so that's the first place to start. It's just how much money are you making from financial services, and then what's the relative growth rate of that financial services revenue relative to the core software ARR revenue, for example. It's not unusual for us to work with software companies where the financial services growth is two to three x the growth of the core software revenue because maybe the software vertical is is already relatively penetrated. Winning the next software client is actually quite hard work, whereas penetrating the back book with the nature services is just easier way to drive growth. We then tend to look at kind of a series of operating metrics. And if we focus just on payments for simplicity, those operating metrics tend to be, for example, attach rate. So how many what percent of your clients are using your payment service? And, oftentimes, we'll stratify that looking at the front book different from the back book because attaching any financial services product at the time of the core software sale tends to be easier than cross selling into the back book. That's a more discreet effort with higher acquisition cost, for example. The second thing we would tend to look at is the payment volume penetration rate. So you might have, for example, in a vertical like government, where you might have them attached using the product for one use case like tax collection, but maybe not using the product for other forms of use cases, for example, recreation fees or utility fees. And so you want to not only be attaching the service for one use case, but also broadening use cases that you're penetrating on the volume that's going through the platform itself. The next thing we look at is just, like, the revenue take rates, not take rate. Essentially, the revenue realization rate. So what revenue you're generating on the back of attaching and penetrating those volumes. And so, actually, it's a relatively simple set of PPIs, but that oftentimes tend to give you a good picture of higher performance. [00:25:02] Hemmo Bosscher: Oh, that's very helpful. Thank you for sharing that. I do have a follow-up, though. I think selling to what you call the back book or the sort of existing portfolio is a very common issue. Have you seen any successful tactics in in seizing that? [00:25:14] Joel Van Arsdale: The best tactics are just more aggressive outbound selling. What I mean by that is not assuming that the small business will click on a promotion on the portal, for example. [00:25:25] Hemmo Bosscher: No email campaigns. You just gotta call them or visit them. [00:25:28] Joel Van Arsdale: You need to call or visit them with a very dedicated Salesforce. So the other thing you can't generally do is rely on a software salesperson to be selling loans into the back book, for example, or payments into the back book. You really do need a dedicated inside team that's focused on only that one financial service, and you need compensation that's lucrative and attractive to them so that they're performance driven. These tend to be the best practices rather than being more passive about how you go about it. [00:25:58] Hemmo Bosscher: Thank you. We've talked a fair bit about vertical SaaS today. Are there any particular verticals you're seeing now spring up or accelerate far ahead of all the others that you're excited about? [00:26:07] Joel Van Arsdale: Yeah. So one of the things I love about embedded finance is that I'm personally just constantly learning new verticals. And so, again, in a more mature embedded finance market like The US, there are literally dozens of verticals, all of which are achieving really exciting results when it comes to embedded payments and then other forms of financial services thereafter. And so it's not vertical specific. It applies to just so many different verticals. I think in The US, where I get particularly excited about the growth opportunity is generally the nontraditional commerce verticals. In other words, again, we talk about web shop software, that being a more mature vertical, restaurant software, that being a more mature vertical in The US. And so that means it's really big and attractive, but it means the growth rates are gonna start to slow down as a function of just maturity and penetration. But in The US, for example, forms of, uh, nonrecurring bill payment, for example, to me tend to be very attractive growth tailwind. So for example, education or government or field services, boutique fitness, All of these verticals involve some form of sort of billing requests, payment requests, and those tend to be less mature. So oftentimes have lots of paper out there in the ecosystem, lots of checks still in the ecosystem in The US. And so the power of digitizing all of that is really compelling. Even when you have actually a very high cost of cards in The US, it can still be a compelling outcome for both the business and the consumer to digitize what used to be paper and checks because the business gets their money much faster. The customer can pay with much less friction. I don't need to go to the post office. And so there's lots of verticals that fit that kind of tailwind, but those are the verticals that, to me, are really interesting just given the ongoing prevalence of paper and check. It's also the case that in The US, we're seeing a lot of acceleration and high rates of growth in various forms of b to b particles or horizontals. And, actually, in b to b, it's oftentimes the horizontals like accounting software or various forms of CFO software that are capturing that opportunity, but we're also seeing vertical software accelerating in terms of their ability to capture. When you look around rest of world outside The US, US, it's somewhat of a different complexion. So for example, in Europe, we're really excited about point of sale software, which while being more mature in The US, is less mature in most of Europe. And so retail, restaurant, other forms of point of sale actually are very under embedded payments, and so high rates of growth. And, also, what's compelling about point of sale verticals in Europe is that the playbook is clear, and the precedent is clear. The monetization vehicles are clear. Now sometimes local debit and things like this is less lucrative than maybe credit cards, but still, all of that playbook is very clear if you're a software company. But for example, in forms of bill payment that I was describing that are really high rates of growth and monetization in The US may not be quite as easily captured in Europe because you've got better banking infrastructure, more traditional behaviors around web based payouts to those kinds of vendors. So we still think embedded finance will penetrate those verticals like field services, professional services, but the commercial models, the ways in which you make money by embedding finance are less mature in certain cases. [00:29:29] Hemmo Bosscher: Thank you for that. That's really enlightening. Better reflect on that a bit myself, actually. [00:29:33] Joel Van Arsdale: What's amazing to me when I work at all of these different verticals, though, is they're all somewhat unique. The use cases, the way in which you embed financial services, the way in which you apply convenience fees, or these kinds of things are all somewhat different. And so it means, for example, as a supplier of fintech services as Adyen is, you've got to adapt somewhat the feature set to those relevant verticals because the use cases just tend to be somewhat different. Absolutely. [00:30:00] Hemmo Bosscher: Thank you. My last question for you. You spoke earlier today about these platforms being the operating systems for small business owners. I think you're seeing in the market that both the vertical and the horizontal players are essentially trying to do the same thing in the long term where the idea is that the business owner runs their business entirely through their platform. And you're phrasing a right to win. Who do you think has a better right to win there? The vertical player or the horizontal one? [00:30:23] Joel Van Arsdale: Yeah. And, again, it's not an easy black and white answer. I would say, generally, vertical platforms are really well positioned. But, again, in certain verticals and segments, horizontal platforms are really well positioned as well. So if you look at Intuit in The US, incredible financial services business because they're just so ubiquitous across small businesses generally in The US. [00:30:44] Hemmo Bosscher: Let me ask my question differently. Would Intuit only win where there isn't a dominant vertical player, or will Intuit be win a customer that might also be addressed by a vertical player? [00:30:54] Joel Van Arsdale: Sometimes you see both winning. Although I would say it depends a little bit on which financial service you're also talking about. So I think in restaurants, for example, I don't think Intuit is well positioned to win payment acceptance because it's too associated with the physical hardware and software products, and it's relatively disassociated from accounting and financial management. On the other hand, something like a working capital loan or payroll services, I would argue into its very well position. And I think the vertical platform has more competition from the horizontal CFO software in that case. [00:31:29] Hemmo Bosscher: Interesting take. We love the diversity of opinions here on this podcast, Joel, so thank you for sharing that. [00:31:34] Joel Van Arsdale: And so looking at both forms of platforms have a strong right to win. It's just, again, being focused on where there's more naturally fit demand and potentially less competition on the supply side. [00:31:44] Hemmo Bosscher: Absolutely. Thank you very much for sharing all your wisdom. It's very much appreciated. [00:31:49] Joel Van Arsdale: Yeah. Pleasure to join the discussion, Hemmo, and thanks for inviting me. [00:31:52] Hemmo Bosscher: Thank you. [00:31:53] Hemmo Bosscher: With the big picture in mind, let's shift to the platform perspective. [00:31:59] Hemmo Bosscher: Hello, and welcome back to the podcast. We are here today with Vamshi Reddy from Zenoti. Vamshi, could you please introduce yourself for the audience and tell us a bit perhaps about what it is that Zenoti does and what it was built to do? [00:32:12] Vamshidhar Reddy: Sure. Thanks, Hemal. Glad to be on the call. So I actually run the payments business for Zenoti. It's a big part of our overall product to our customer base. Zenoti, as such, actually build software, an all in one software for salons and wellness businesses and health fitness spas. We play in a wide space. We are in multiple countries around the world. And financial services, when people do the services and they have to pay for it, That's what our product integrates into its whole suite of features and makes it easy for our customers to do our their business. [00:32:52] Hemmo Bosscher: Understood. So if we can double click on that a little bit, let's say I start my own barbershop, what type of problems does Zenoti solve for me? [00:32:59] Vamshidhar Reddy: Yeah. So everything that the business needs, like I said, we bill ourselves as all in one. So managing the incoming appointments, the bookings, managing the employees, the employee schedule, who does what services, what each employee has to receive as their commissions, paycheck. We keep track of all of that. We keep track of all of the accounting. We keep track of all of their inventory. We even keep track of their customer database and make sure the customers are coming back month after month, just basically the a to z of the business. We think that we should be the only software that they need. Our customer base is not tech savvy. They can pick best products, like the best inventory management, best marketing, best appointment book, and then bring them together. They rely on us to do that for them. And then they could just focus fully on their core business. You take care of the rest. That's right. They can focus on their customers. Like, we joke that we can pick up the scissors, but we can take care of everything else. [00:33:59] Hemmo Bosscher: That's a nice line. And then in that relationship over the years, how do you monetize that, and has that changed over the course of Zenoti's history? [00:34:07] Vamshidhar Reddy: Yeah. I think we've done a lot of things. When we first launched, we were doing the software bit, but did not intimately manage the communications. But these days, we actually manage their text communications, manage their phone communications. We've always done marketing. We've always done inventory. We are billing integrations with product vendors so that buying products is much easier, managing products is much easier. We've always done credit card processing. It's an optional thing where they can buy credit card integrated credit card processing through us or use an external. But over time, they all kind of see the benefits of having an integrated system and just use our system. [00:34:50] Hemmo Bosscher: So you got a transaction based next to the monthly SaaS fee? [00:34:53] Vamshidhar Reddy: That's right. And not everything we build is necessary for every business, so they pick and choose what they want from our product base. [00:35:01] Hemmo Bosscher: So, Vamsi, if you think about the needs of hairdressers or barbers, are they very similar to others in the beauty and wellness space, like a massage therapist or an acupuncturist? [00:35:09] Vamshidhar Reddy: Yeah. I think there's a huge set of needs that are all common. They all basically offer services for a particular period of time, and they charge for it. So in fact, it's actually that common attribute extends beyond just the health and wellness beauty of it. But if you think about it, even a plumber is giving you some time and charging you for it, except they are going from place to place. Whereas for a retail business that we address like a barber or health and beauty, people are coming to that place. But other than that, managing the customers, taking payment from them, marketing back to them, getting them to come back for more services later on, A lot of them have product inventory. All of those services are needs are pretty much the same. If they employ people, they all have to pay. So it's very, very similar. The nuance comes from the nail salons operating slightly differently from the barber salons. Right? Just in very, very small ways. And addressing those needs and differentiating for that is what sets us apart. Nail salons, for example, or hair salons, more importantly, a single provider can do or attend to multiple people. While somebody's hair is drying, they can go start cutting somebody's hair. That typically does not happen in other places. You know, if you're getting a massage, you're getting a massage for that entire time, and then you're done. So what we do is account for all the commonality and also the differences between each of these vertical businesses. [00:36:44] Hemmo Bosscher: Understood. And then looking at that, so there's some commonality in need. So, ostensibly, you could just expand to many more different verticals, but you're saying the limiting factor is there are some niches that you need to nail to really get that business. So how does the Notee look at that? Do you think anything adjacent to beauty and wellness is sort of fair play for you? [00:37:01] Vamshidhar Reddy: Yeah. Actually, anything adjacent is fair play. We actually started with spas, then we went to salons. Now med spas are pretty big. We're going after fitness business and gyms. But previously, we have looked at pet spas, car repair shops. These are all pretty adjacent. Most often, people will call us and say they've evaluated our software. It works perfectly, but it's not something that we sell to or focus on or service. And so we have to actually almost sometimes say that, no. We are not gonna sell to you. [00:37:34] Hemmo Bosscher: So, Vamsi, looking at your whole book of business, is it are there major differences in how consumers like to pay at all these locations or sort of similar for you? [00:37:42] Vamshidhar Reddy: Yeah. It's interesting. I think the consumer preferences are more differentiated by country and region more than by business. For example, in The US, we see 90% of the people paying with credit card, whereas in a place like India where we also operate, that's probably only around 60%. If you go to Canada, there are a lot more debit card transactions, 60% plus. So it kinda varies in places like Australia and so on. The pay later financing is great. There's a lot of businesses that make choices from the business side. They wanna take ACH debits. They don't wanna use credit card because it's more expensive as a percentage of the transaction that they're processing. So it's mostly based on the country and the business preference end customer preference. What we find with the end customers is [00:38:32] Joel Van Arsdale: they [00:38:33] Vamshidhar Reddy: just want it to be easy and fast. That's the one common thing everywhere. [00:38:38] Hemmo Bosscher: Understood. Do you take an active role in advising payment methods also to salon? So for example, let's say I'm a salon owner and say, uh, I don't really want credit cards because it's too expensive. Would you then say, well, that's gonna really cut into your addressable market customer wise because people do like to pay for things using credit cards? [00:38:53] Vamshidhar Reddy: Yes. We do advise them. We tend to provide all the payment methods. We make it easy for them to collect the payment. We make it easy for them to do various things with their credit card with their payments, especially doing monthly installments, taking tips on cards, supporting the latest payment methods like Tap to Pay or Apple Pay, Google Pay. What we tend to do is just have the full support. Let our customers pick and choose based on their business or locality. Lot of businesses, if they're just totally membership based businesses, they encourage their customers to put their card on file and almost 90% of their transactions are with the card on file. They just try to move along with the process. We have salons where they just don't wanna take a card on file. They just want everything to be swiped or tapped with the terminal upfront. So we have a gamut. We try to be flexible and the business picks. We've seen businesses do make changes where they say, oh, paying from their customer's own phone or going to the kiosk and paying is much easier, takes less of my guest service time, front desk time. So I'm just gonna do that, and we completely see them changing their business process to account for that. [00:40:10] Hemmo Bosscher: That's pretty cool to see so many differences. And Just a quick pivot. When you first launched Zenoti, so you would have just a software fee. Right? Payments came later. What was that journey like of starting to embed payments and go into your already existing customers who had payments providers themselves? You had your own offering. How did that go, that whole process? [00:40:28] Vamshidhar Reddy: That's a interesting journey we did. When we realized that everybody needed credit card processing, we looked at our customer base and saw who was servicing them. We tried to partner with them, and that kind of filled a hole. It was great for our customers. It was good for us. But as we started innovating, we realized that we wanted to do much more. When customers wanted to do refund or actually had a question about their daily payouts or monthly balancing, we realized we did not have all the data to give those answers. So then we started looking for solutions where we could tell them what they would have in their bank tomorrow because we know exactly how much business they did. And so we started looking for providers and we found, you know, Arjun where we could actually get all this data, you know, work to improve our system in a way. We also wanted to do things like if there are charge backs or disputes, our customers could look at it and respond right in our software and not have to go offline to do that. And so for various reasons including doing these monthly charges, keeping the cards on file consistent as cards are reissued. A lot of our customers turned out to be enterprise customers, so they have multiple locations. So if I, as a customer, go to one location and go to the second one, the business should be familiar. I've already put my card on file. I don't mind it being used at the second location. These days, it's kind of taken for granted, but when we started seven, eight years ago, it was unheard of. So as we looked in and start we had a vision of where we wanted to go, and then we partner with Arjun. And we slowly have been adding features, including doing things like pay later financing or adding more payment methods. We rely on our partners to kinda do that, but we have actually a very specific profile on how to go after it. And now we find that any business that does memberships, who charge their members on a monthly basis are the fastest growing businesses. So it's kind of changing the nature of business. I don't think there were many businesses even I didn't know of many salons that were doing memberships. It was common for massage businesses to do memberships, but now even salons have started to do memberships. [00:42:51] Hemmo Bosscher: Well, it's good that you're on very flexible infrastructure. You can account for that. Vamsi, if you had to do this embedded payments journey all over again, what would you do differently this time around? [00:43:00] Vamshidhar Reddy: I think we focused a lot on the technology of providing the features to do the payments, various payment methods, bringing it all into our system, but we never realized the key challenge our customers have. Cash flow management is the toughest part for a small business, and the beauty and wellness businesses are pretty complex. They are paying their employees every fourteen days, not even twice a month. They have their rents due. They have payments due for various vendors, various bills coming due at various times of the month. They make a different amount of money every day. Even during the week, the weekends are kind of a windfall compared to a Monday or a Tuesday. And everybody is paid different. They really don't know what they are netting on every transaction, so to speak. So just managing that flow is really hard. And when I think about a SaaS business, if we could do something to actually manage their cash flow, just tell them when their bills are due and how to manage their cash. And if we could loan them just enough to kind of make their payments and be whole, we would actually take a big burden out of their daily life. We have just started to roll out our payroll service. And what I heard when we rolled that out is that a lot of these small businesses on occasion, every few times they do a payroll, which happens every two weeks, they run out of money, and they're actually transferring money from their personal accounts. It could be anywhere from $300 to $3,000 to actually make that payroll. And in The US, at least, you never wanna miss a payroll. And so we never provided any help. We didn't have a full view of their financial picture. We just said, hey. We'll help you book these appointments and take payments for it. But I think if I had a choice, I would say, yes. I will manage your credit card payments. But not only that, I'm gonna actually eliminate that financial management from you. And I think if we did that, it would actually help us because it would give a whole three sixty picture of the business. It would actually tell us much more about what the business struggles with, what else we could add into our software, how else we could manage their business, and really fulfill our all in one promise much better than what we did. We ran after features. We said, okay. Well, let's do pay later financing. All of that helped. I mean, obviously, that brings in more revenue, but it doesn't ease the day to day management of the business, which is what we should be really doing focusing on. [00:45:36] Hemmo Bosscher: And that is what you're doing now, right, [00:45:38] Vamshidhar Reddy: for the record? That's what we're doing. [00:45:40] Hemmo Bosscher: You just wish you'd done it sooner? [00:45:41] Vamshidhar Reddy: Yeah. We should've done it sooner. We would have been much stickier. It was a huge value prop. As we built these features, all our competition caught up to us. And so now we are having to distinguish and differentiate ourselves. Whereas I think once somebody knows that we are managing their business, making their daily life, we just get sticky and it's hard to move away from us, which is what every SaaS business wants. [00:46:05] Hemmo Bosscher: If we consider then this box checked, what's the next big problem you wanna solve for your customers? Can you tell us anything about what's coming up? [00:46:11] Vamshidhar Reddy: We are kind of completing the picture in terms of doing vendor management and so on. It's some things that we have announced, but we have not really rolled out. When one of these health and wellness businesses buys product from other vendors, just managing that entire process, making the placing the order easy, receiving it, paying for it, figuring out what's selling well, and then reordering it, helping them find better selling products, cheaper products or products that are higher margin. All these are pretty big. It's a big part of the equation. It's a big part of the ecosystem where kind of the money flows, so to speak. [00:46:50] Hemmo Bosscher: Yeah. Thank you very much for your time with us today. Any last statements you'd wanna make? Questions I didn't ask? [00:46:55] Vamshidhar Reddy: No. This is great. Thank you for the opportunity, and it's been great to kinda share our journey. Some of the questions are actually interesting. You don't kinda think about it. You just live day to day. But I haven't had to reflect what happened from last nine years, but it's a good learning. [00:47:10] Hemmo Bosscher: Appreciate your time. Thank you. [00:47:13] Hemmo Bosscher: Thank you to our guests for sharing their insights. There's lots to digest from today's conversations, but if you take away one thing, let it be this. Tailor your products and your pitch to address customer pain points and emphasize the total value of your solution rather than competing on price. Thank you for listening.

Introduction The landscape of B2B financial software and services for small and medium-sized businesses is undergoing a transformation. As CFOs and finance teams increasingly seek integrated solutions that blend accounting and bookkeeping with payables, receivables, and spend management (among other domains), software providers and fintechs are racing to broaden their capabilities through strategic acquisitions and partnerships. The latest and most along this trend is Xero’s acquisition of Melio. This article explores the details of the Xero-Melio deal, the broader strategic shift reshaping the Office of the CFO, and insights into where this dynamic market is heading next. Defining Office of the CFO SaaS & Fintech The “Office of the CFO” refers to the suite of technologies that support core finance operations such as accounting, accounts payable (AP), accounts receivable (AR), payroll, expense management, cash flow forecasting, and financial reporting. Historically, these functions have been managed through disparate systems and vendors, often creating inefficiencies, data silos, and operational friction. The convergence of CFO SaaS and fintech reflects a growing demand for all-in-one platforms that allow finance teams to manage the entire financial stack—from invoicing to payments—within a single, integrated ecosystem. This shift is particularly pronounced among small and medium-sized firms, where resource constraints make simplicity and efficiency paramount. In Figure 1, we illustrate the SMB Office of the CFO SaaS & fintech landscape. Figure 1: B2B Office of the CFO Software & Fintech Landscape and Related Domains (not-exhaustive, logo placement is indicative and does not indicate relative strength/capabilities) Details of Xero's Acquisition of Melio Last month (June 2025), Xero, the New Zealand-based cloud accounting software giant, announced its acquisition of Melio, a fast-growing B2B AR/AP payments platform for SMBs. The deal, valued at approximately $3.1 billion (inclusive of $500 million in contingent consideration over a three-year period), underscores Xero’s ambition to embed more CFO software, payments, and broader fintech capabilities directly into its core accounting offering. In Figure 2, we summarize the acquisition announcement. Figure 2: Xero Acquires Melio (Xero and Melio's deal details and business functions) Melio has demonstrated impressive top-line growth since 2021, with over $150 million in revenue and 100% top-line CAGR. Melio’s business model is lucrative, generating 5x the average revenue per customer (ARPU) as Xero. This creates ample cross-sell synergies for Xero. We provide a financial snapshot of Xero and Melio in Figure 3. Figure 3: Financial Overview of Xero & Melio (key performance metrics for respective companies) Broader Convergence of CFO SaaS & Fintech The Xero-Melio transaction is part of a larger wave of fintech and CFO software convergence, where service providers are building or acquiring capabilities to offer full financial workflow solutions to small and medium-sized businesses. Figure 4 illustrates a recent timeline of M&A and product announcements involving the convergence of CFO software and payments domains. Figure 4: History of AP/AR Automation SaaS We observe two main driving factors behind this convergence: Finance teams are shifting away from fragmented systems toward unified platforms that manage AP, AR, spend, and analytics in one place (typically a company’s core ERP or accounting platform). Companies like Xero are pursuing acquisitions to gain better control over the customer experience, recognizing that loosely integrated partnerships cannot protect against the risk of platform partners internalizing key capabilities. B2B domain convergence and platform ownership reflect the broader strategic imperative for fintech and software providers to secure their customer relationships. Not all companies have successfully navigated this shift, with some still facing platform/partner dependency and risk (e.g., potential disintermediation with small and medium-sized businesses sourced through and owned by banks, accountants/CPAs, and vertical SaaS). Conclusion The integration of software and embedded fintech is reshaping the future of the Office of the CFO. Combining accounting and workflow software with embedded financial services (pay-ins, pay-outs, lending, issuing, etc.) creates a robust feature set for SMBs and lucrative lifetime values for the platforms and fintech providers (increasingly one-in-the same). Xero's acquisition of Melio is a bold, multi-billion-dollar leap into owning fintech as a core business. The move is also emblematic of a broader industry shift toward platform convergence. Please do not hesitate to contact Rom Mascetti at Rom@FlagshipAP.com with your comments or questions.

On July 1st, 2025, Flagship Advisory Partners co-hosted an event with UBS in London, where Anupam Majumdar, Partner at Flagship, presented on the rising wave of B2B and Office of the CFO SaaS innovation in Europe, highlighting its evolution in relation to the more mature US fintech landscape. We advise viewing the slides via the "PDF" icon button. Some Key Takeaways: B2B payments represent a substantial $135 trillion in volume as of 2023, which is 2.5x larger than the C2B segment. In contrast to C2B payments, where payments between consumers and merchants tend to be rather simple (often a click of a button or a tap of a phone), B2B payments between buyers and suppliers are significantly complex, often involving a series of workflows. Today, there are several pain-points in the buyer-seller transaction flows. However, these pain points offer opportunities for value creation through automation, digitization and embedded fintech, simplifying the naturally complex B2B transaction flows. B2B CFO workflow automation SaaS platforms continue to demonstrate strong linkages with payments and fintech, viewing embedded fintech as a strong driver of monetization and growth. The embedded finance maturity for B2B SaaS varies by region and functional orientation, yet overall, more mature in the US. In the U.S., companies such as BILL and AvidxChange offer successful examples of mature embedded finance strategies in B2B SaaS, having expanded their payments and fintech revenues from 2021 to 2024. B2B fintech and SaaS in Europe are still emerging relative to the more mature US market, with a fragmented ecosystem that continues to rely heavily on traditional bank transfers. However, market consolidation, and funding / M&A activity across the European of CFO Stack, as well as upcoming B2B e-Invoicing mandates will have an impact on B2B fintech and SaaS in Europe. Payments acceptance is only the starting point. Over time, successful platforms evolve to deliver new embedded finance use cases and products that go well beyond payments (e.g., into embedded lending, x-border payouts). There are a wide variety of opportunities for every stakeholder who are involved in the value chain – banks, fintechs, B2B SaaS and card schemes. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com with comments or questions.

Innovation in financial services is at an all-time high and expanding to include an increasingly diverse range of product concepts, company types, and delivery models. Yet one thing remains constant: businesses that store, move, convert, or otherwise handle customer or partner money must keep track of those funds. As they focus on building new products, delivering exceptional customer experiences, and breaking the mold, many underestimate the complexity of fulfilling that core business requirement. In this article, we unpack why application ledgers are essential for banks, fintechs, and any other company moving money, explore the growing ecosystem of Ledger-as-a-Service (“LaaS”) providers, and highlight how LaaS is emerging as a core infrastructure layer enabling the next wave of fintech innovation. What is an Application Ledger, and Why Use One? In an ideal world, every business that needs to maintain accurate records of customer or partner money — tracking balances and transaction activity — would use a robust application ledger system. At a high level, an application ledger is a purpose-built system that records the movement and balances of money at the transaction level, typically embedded directly into a company’s product or operational stack to serve as the source of truth for financial state. It sits between the business’s core product logic and its external financial infrastructure (e.g., banks, processors), enabling accurate, real-time tracking of balances and transactions that underpin operational workflows like payments, reconciliation, and customer account management. At their core, such systems should incorporate double-entry recordkeeping, ensure immutability and auditability, and function independently from the general ledger. However, the reality is often quite different, especially for early- and growth-stage companies. Instead of implementing such systems, many businesses resort to workarounds like manually tracking funds in tools like Excel, using their general ledger for dual purposes, relying on transaction logs from their payment engines, or depending on the systems and reporting provided by payment processors or partner banks (e.g., BIN sponsors). These approaches can seem sufficient when transaction volumes and operational complexities are relatively low, but often become significant liabilities as businesses scale and evolve. For instance, expanding into new geographic markets, launching more sophisticated products, handling complex transactions like splitting settlements across multiple accounts, or engaging additional bank partners can introduce complexities that expose the shortcomings of these workarounds. In many cases, businesses do not realize the full consequences of these inadequacies until it’s too late — such as in the case of Synapse, where gaps in ledgering reportedly contributed to millions of dollars in unreconciled customer funds and a highly publicized operational collapse in 2024. Figure 1: Why Application Ledgers Matter: Key Challenges & Solutions Why Not Just Use a General Ledger? Before we dig into the various options companies have for implementing an application ledger, it’s important to address a natural question: “Why can’t businesses just use their existing general ledger system for these purposes?” The short answer is that while it’s technically possible, it is far from best practice. As summarized in Figure 2, general ledger systems also track financial transactions but are designed around GAAP principles to meet core treasury, tax, and financial reporting needs. These systems typically ingest data in batches, distilling it into normalized accounts (e.g., assets, liabilities, revenue, etc.) for financial reporting. Attempting to use the general ledger for operational purposes introduces latency, lacks transactional context, and risks corrupting financial reporting integrity. In contrast, application ledgers are tailored to the practical, day-to-day activities of a business, such as payment processing and customer service. They handle detailed transaction-level data (e.g., timestamp, status, counterparties, etc.) in real time, and integrate seamlessly with other financial tools, platforms, and vendors (e.g., banks). These characteristics generally make application ledgers the best option for enabling businesses to scale and evolve while maintaining accuracy and efficiency in their financial operations. Figure 2: General vs. Application Ledger: Different Tools for Different Jobs What are the Options for Implementing an Application Ledger? Building an in-house application ledger is a significant undertaking, requiring both substantial financial investment and specialized engineering talent, which can be difficult to find. For example, Uber likely invested millions of dollars to develop its in-house ledger system, LedgerStore, to handle the massive scale and complexity of its transactional data. Uber reported it expects to save around $6 million in costs annually as a result of its migration from DynamoDB to Ledgerstore. However, for most businesses, especially those in their early stages, the level of investment required to build a ledger system fully in-house is simply not feasible. Recognizing this challenge, an expanding field of providers has emerged to help businesses solve their ledgering needs in more accessible and cost-effective ways. As depicted in Figure 3, these providers can be grouped into three primary categories: Domain-Specific Solutions, Ledger-as-a-Service (LaaS), and Ledger Infrastructure. Domain-Specific Solutions offer end-to-end systems designed to address specific workflows and business needs — such as stock trading or reconciliation and financial close — while incorporating an application ledger as a core component of the solution. Ledger-as-a-Service (LaaS) providers enable businesses to implement customizable, cloud-based application ledger systems that help update balances, synchronize with other ledgers, and support workflows like automated reconciliation. Ledger Infrastructure providers deliver the foundational technology needed to store and update balances, with performance characteristics specifically optimized for ledger use cases. These solutions provide businesses with the flexibility to build highly customized applications on top of the infrastructure. Figure 3: Application Ledger Options: Purpose-Built to Platform-Based What are the Capabilities of Ledger-as-a-Service Solutions? As summarized in Figures 4 and 5, there is a core set of ~20 functionalities that LaaS solutions generally cover. At the heart of each lies the most fundamental features of double-entry recordkeeping, transaction status tracking, balance caching, and real-time data ingestion (from internal and external sources). Providers’ coverage of more advanced capabilities like automated reconciliation, ledger event handlers, and event (transaction) linking varies. Figure 4: Application Ledger Options: Purpose-Built to Platform-Based (not exhaustive) Figure 5: Application Ledger Options: Purpose-Built to Platform-Based (continued) (not exhaustive) As one of the early developers of LaaS technology, Modern Treasury stands out as a relatively full-featured provider, serving banks, marketplaces, issuers, and other fintechs and ‘money movers’ around the world with its ledgering solutions since 2018. The LaaS market is far from a monopoly, however, with several other providers — such as Twisp, Formance, and Fragment — emerging over the past ~5 years with competing solutions. As captured in Figures 6 and 7, these newer entrants vary in their depth of functionality, but in some cases deliver niche or advanced capabilities that help differentiate their products. For instance, Twisp supports event linking, enabling multiple transactions across accounts to succeed or fail as a single atomic unit — a powerful feature for fintechs orchestrating complex fund flows. Such differentiation signals an increasingly mature and competitive ecosystem, where newer providers push the boundaries of solution design and encourage innovation across the category. Figure 6: Comparison of Select Ledger-as-a-Service Providers (as marketed on providers' websites) Figure 7: Comparison of Select Ledger-as-a-Service Providers (continued) (as marketed on providers' websites) Historically, fintechs have long used Domain-Specific Solutions to fill the application ledger role. For instance, many core banking (e.g., Thought Machine, Finxact), card processing (e.g., Galileo), and embedded finance platforms (e.g., Atelio by FIS, Synctera, Unit) offer some form of application ledger functionality as part of their broader offerings. While effective for single-product use cases, these systems can struggle to support companies operating hybrid models — such as combining card issuing with lending, or digital wallets with investing — where funds flow across different product types and business logic. As fintechs build increasingly integrated and multi-faceted platforms, the need for a more flexible, product-agnostic ledgering layer will continue to grow. This shift in needs has fueled the rise of general-purpose LaaS platforms that are designed to serve a broad array of use cases and deployment models. One of the clearest indicators of momentum in the LaaS space is the diversity of applications it now supports. From digital wallets and neobanks to investment platforms and vertical SaaS providers, businesses across the fintech landscape are adopting LaaS solutions to power mission-critical ledgering needs. As shown in Figure 8, businesses across verticals are leveraging LaaS platforms to manage complex operational workflows such as balance tracking, automated reconciliation, virtual account management, and cross-border fund flows. These deployments often go live in just a few months and yield meaningful operational improvements. For example, one company eliminated its reliance on Excel to manage over 125,000 ledger accounts, while another used its LaaS implementation to accelerate a full pivot to a cross-border payments platform. These outcomes speak not only to deployment speed, but also to the strategic role LaaS can play in enabling business transformation. Figure 8: Examples of Ledger-as-a-Service Implementations (based on publicly available information) This diversity of adoption also underscores the flexibility of modern LaaS offerings. Today’s platforms can support a wide range of product models — ranging from focused, single-use-case applications to complex, multi-party financial ecosystems — while enabling rapid customization through APIs, configuration layers, and cloud-native deployment options. As a result, more companies are choosing to “buy” rather than build their ledger infrastructure, accelerating innovation while avoiding the cost and complexity of maintaining it in-house. What's Next for Ledger-as-a-Service? As fintech companies continue to build increasingly complex, real-time, and global financial products, the importance of robust, scalable ledgering infrastructure will only grow. LaaS platforms have already demonstrated their value through faster launches, cleaner audits, and more efficient operations — but their strategic importance in the ecosystem is only beginning to unfold. Increasingly, application ledgers are becoming the connective tissue across the modern financial tech stack, interfacing with payment processors, bank APIs, orchestration engines, compliance tools, and analytics platforms. As fintechs push further into embedded finance, multi-party money movement, and cross-border flows, the need for ledgers that are not only accurate but also programmable, composable, and interoperable will become essential. The next wave of LaaS innovation will likely focus on deeper integration with surrounding systems. Expect advances in areas such as automated reconciliation with bank feeds, webhook-based orchestration, ledger-aware compliance workflows, and event-driven observability for operational finance teams. As innovation moves in this direction, differentiation will increasingly hinge on how effectively providers deliver these capabilities — making ease of integration, developer experience, and interoperability with adjacent infrastructure key battlegrounds. As LaaS adoption accelerates, regulatory dynamics are also shaping its evolution. From safeguarding obligations and auditability mandates to growing scrutiny of third-party dependencies, regulators are sharpening their focus on how fintechs track, reconcile, and report customer funds. In response, LaaS platforms are increasingly seen as strategic infrastructure that can help companies meet compliance obligations with greater speed, precision, and auditability. More broadly, the rise of LaaS reflects a structural shift in fintech infrastructure: the move from hardcoded financial logic to modular, cloud-native primitives. Just as cloud data warehouses transformed how companies handle analytics, and modern payment APIs reinvented money movement, LaaS is redefining how financial systems keep score. At the same time, emerging technologies like AI, distributed ledgers, and stablecoins are reshaping the expectations placed on modern financial systems. AI is creating new demands for real-time data availability and intelligent automation across finance workflows, while stablecoins and tokenized assets introduce new types of value transfer and custody models that require flexible, interoperable accounting frameworks. And while many DLT-based systems embed their own ledgers, traditional platforms increasingly need to bridge these new paradigms with conventional financial infrastructure. In this environment, LaaS platforms have an opportunity to serve as the connective layer — standardizing recordkeeping, enabling composability, and supporting innovation at the edges. That connective role underscores a broader truth — LaaS is not just a utility; it’s an enabler of innovation. By offloading complexity, reducing operational risk, and making core ledgering capabilities more accessible, LaaS empowers product teams to focus on what they do best: inventing the future of fintech. Please do not hesitate to contact Stephen Ford at Stephen@FlagshipAP.com with your comments or questions.

After a challenging quarter, the market is rebounding, with 9 of 14 tracked companies now posting positive 3-month returns. While growth continues, it has slowed modestly, suggesting a more measured expansion. Figure 1: Stock Price Performance (select payments equities; stock price % change to June 20, 2025) Broad market rebound: while no company saw a positive 3-month return in the prior edition of this report, 9 of the 14 companies are now positive over the last 3 months. Continued growth with some pockets of caution: for the most part, each of these companies continue to demonstrate solid growth; however, top-line growth has decelerated from prior quarters. Secular growth trends: among large public SaaS companies, embedded finance varies in scale and maturity; some have fully expanded beyond payments while others remain in the early days of monetization. Figure 2: Valuation Metrics (select payments equities; as of June 20, 2025) Restaurant and Retail Shift 4: payment volume grew 35% YoY to $45B. Expects $80M of revenue synergies from Global Blue acquisition by 2027; main source is bundling embedded payments, VAT tax refunds, and DCC capabilities. Toast: payment volume rose 22% YoY to $42B. Strong enterprise push with marquee wins such as Applebee’s and Topgolf. Lightspeed: targeting 10-15% annual growth in customer locations over the next three years, driven by a rapid scaling of the outbound sales team. Block: received FDIC approval to use in-house bank to issue consumer loans for Cash App Borrow across the U.S. id-market sellers (>$500K GPV) increased from 39% to 41% of volume YoY. E-commerce Shopify: Shopify Payments launched in 16 new markets, nearly doubling coverage to 39 countries. Multi-currency payouts also launched in 20 countries across Europe. WIX: delivered $57M of transaction revenue in Q4 (+23% YoY), driven by a meaningful step-up in take rates from further building out Wix Payments platform (GPV +12% YoY). BigCommerce: branded embedded payments offering slated for launch in early 2026 (BigCommerce Payments). GoDaddy: launched GoDaddy Capital and same day payouts; both receiving solid early traction. B2B AvidXchange: announced a public-to-private acquisition led by TPG supported by Corpay; read Flagship's analysis here. Bill: total payments volume reached $79B, up 11% YoY across 30M transactions. Introduced beta offering of advanced ACH solution, targeting larger suppliers. Intuit: total online payment volume grew 18% YoY, accelerating slightly from the prior quarter. Other Verticals Tyler Technologies: transaction revenue grew 19% YoY. Signed 96 new payment deals with software clients and closed a 5-year processing extension with Florida. ServiceTitan: gross transaction volume increased 22% YoY to 17.7B. Blackbaud: organic revenue (excl. sale of Everfi business) grew 5.8%. Please do not hesitate to contact Peter Taylor at Peter@FlagshipAP.com or Tim Gallagher at Tim@FlagshipAP.com with comments and questions

Stablecoins have demonstrated strong momentum, with transaction volumes surging to $5.7 trillion in 2024 and accelerating further with a 66% spike in Q1 2025. Investor interest is growing - evidenced by a recent increase in M&A activity, predominantly driven by strategic buyers rather than financial sponsors. A standout example is Stripe’s landmark $1.1 billion acquisition of Bridge, signaling a major strategic shift toward stablecoin-enabled payments. 1. Size & Growth: Stablecoin Transaction Volume1 (in trillion of USD) 2. M&A Activity: Number of Stablecoins’ Payments Deals (including select key events) Inside the Fast-Changing World of Stablecoins: Mapping the Ecosystem 3. Stablecoin Market Ecosystem (non-exhaustive) The stablecoin ecosystem is expanding, with a growing number of specialists offering solutions across a range of payment use cases, particularly in B2B and cross-border transactions. While adoption of stablecoin-based payments remains in its early stages, the landscape presents both compelling opportunities and material challenges. We maintain a cautious optimism, recognizing that sustained growth will depend on broader market adoption, enabling regulatory frameworks, commercially attractive incentives, and ongoing technological innovation. Latest Regulatory Changes Presenting Opportunities for Payment Providers 4. Introduction to GENIUS Act in the US (select key information) 5. Key Impacts on Payment Providers (select observations) Recent legislation addresses the growing demand for regulatory clarity and standardized frameworks governing the use of stablecoins. These developments are paving the way for broader participation from the ecosystem of payment service providers, financial institutions, and fintech innovators. In particular, the recently enacted GENIUS Act in the United States and the Stablecoins Ordinance in Hong Kong focus exclusively on stablecoins, establishing clear legal and operational frameworks. These regulatory milestones define the “rules of the game” by introducing licensing, reserve backing, and operational transparency requirements. This provides much-needed clarity for payment providers and other ecosystem participants, enabling more secure, compliant, and scalable applications of stablecoins, particularly in cross-border payments where efficiency and trust are paramount. Circle Debuts on the NYSE on June 5th, Fueled by High Demand from Investors 6. Stablecoin Market Cap (as of June 23rd) Circle (NYSE: CRCL) is a global financial technology company providing transactional services, business accounts, and platform APIs. As of June 5, 2025, Circle, the issuer of USD Coin (USDC), a stablecoin pegged to USD and the second-largest stablecoin by market cap, finalized its IPO (NYSE: CRCL). 7. Circle Share Cap and IPO Highlights (as of June 23rd) Circle raised $1.1 billion pre-IPO sales at $6.9 B valuation, the stock was massively oversubscribed. 34 million Class A common stock shares at $31.00 per share (above the expected $27 to $28 range). As of June 23rd, Circle share price reached $263.45 and $63.9 B valuation. 8. Circle Business Performance (in $ millions, 2022 - 2024) Circle’s business model is concentrated, relying on USDC adoption and high U.S. Treasury yields. It recently launched the Circle Payments Network (CPN), a platform aimed to connect financial institutions to enable payments using its stablecoin suite. Circle’s Gross Profit and Adj. EBITDA declined in 2024 due to higher distribution costs, primarily from the Coinbase revenue share agreement signed in Aug. 2023, (~90% of its COGS). Despite declining profitability and a market-driven revenue model, Circle’s IPO was well-received, underscoring strong investor appetite for exposure to stablecoin-based payments. Please do not hesitate to contact Yuriy Kostenko at Yuriy@FlagshipAP.com or Alessandro Mighetto at Alessandro@FlagshipAP.com with comments and questions.

Introduction Software platforms (ISVs or SaaS or SW companies) are rapidly expanding into payments and embedded finance, capturing more and more of the fintech value chain. In the U.S. market, we estimate that ISVs (independent software vendors), in various forms, already control 35% of the SMB merchant payments revenue pool. In response, payments service providers (PSPs) are evolving their strategies, increasingly focused on acquiring commerce software to control the full SMB product bundle. This motivation for payment companies to own commerce software is visible in recent M&A activity. What began in the U.S. with payment companies such as Global Payments, Shift4, and Fiserv is now accelerating in Europe (as shown in Figures 1 and 2). In this article, we review M&A activity along this theme and explore the strategic rationale and challenges for PSPs acquiring software assets. U.S. Trend Of PSPs Buying Software Accelerating in Europe Figure 1: US Payments + Commerce SaaS M&A (non-exhaustive; US Targets) As shown in Figure 1, there is a long list of U.S. merchant acquirers (PSPs) that have pursued software M&A over the last decade. One of the earliest and most notable examples is Heartland, a leading direct-selling POS acquirer in the U.S. SMB segment. Heartland’s direct sales approach faced pressure from ISVs working with PSPs to bring integrated bundles to market. Rather than embracing ISVs as a channel, Heartland maintained its direct distribution focus but acquired a series of software assets to better position for software-led product bundles, acquiring a series of software assets from 2011 to 2015, at which point Global Payments acquired them. After acquiring Heartland in 2016, Global Payments continued to scale this strategy, extending its software M&A well beyond POS-centric verticals and into more specialized verticals such as practice management and recreation/events. Global Payment’s recent pullback from its broad vertical software portfolio (e.g. divestment of Advanced MD) suggests that this strategy stretched too far from the group’s core of merchant payments. Shift4 is another example of a U.S. merchant acquirer using software acquisitions to go-to-market via its own distribution. Shift4 acquired multiple commerce software assets in hospitality, venues, and charitable giving while also developing its target Skytab POS platform. The strategy for PSPs to acquire commerce software is gaining momentum in Europe. As shown in Figure 2, we see an increase in PSPs acquiring commerce software. Recent examples include myPOS acquiring Toporder, a French specialty retail SaaS provider; Shift4 acquiring Vectron, a pan-European restaurant platform; and Sipay’s acquisition of Pikotea, a Spanish restaurant SaaS. Planet, a market leader in accommodation, hospitality, and retail payments, acquired a series of software companies in recent years to bolster its full-stack offering across those verticals. Figure 2: UK & European Payments + Commerce SaaS M&A (non-exhaustive; UK & European Targets) PSPs Face the Choice to Partner or (and) Own Software Not all PSPs have the strategy to own and market software. Many PSPs focus principally on partnering with software companies, powering integrated/embedded payments. While it is a strategic choice to emphasize owning software vs. partnering with software, these choices are not mutually exclusive. Some PSPs are successful doing both. As shown in Figure 3, both strategies - partnering with ISVs or owning the software stack - come with distinct rationale and success factors. Both strategies can be successful with the right focus and investment. Figure 3: Pros and Cons: Partnership-Led vs. Owning the Software (non-exhaustive) Becoming the payments partner of choice for ISVs / SaaS platforms offers greater scaling pace as it’s a one-to-many marketing outcome when successful (vs. selling each SMB merchant). Particularly in Europe, where the ISV ecosystem is fragmented and less mature, we expect rapid growth in embedded payments over the balance of this decade. The key challenge with relying on only software partners for product bundles is that the software providers seize share of the economic pie over time, owning more than 80% of the merchant payment economics at scale (e.g., billions of payment turnover). Owning software, on the other hand, provides greater long-term ownership of the lucrative economics inherent to the SMB segment. However, owning the software only matters if you can learn to sell and develop it. Owning and going-to-market with software requires a fundamental shift in organizational and cultural DNA for payments companies, however many have struggled with this transformation. As mentioned, it is also possible for payment companies to both own software and partner with software companies for embedded payments. Success with both GTM strategies requires a balance of the potential conflict. Many leading U.S. PSPs partner with ISVs who provide more vertically advanced software to larger SMBs while marketing their own simple POS software into smaller SMBs. In this case, the vertically specialized SaaS companies generally do not see simple POS software as a threat. Critical Success Factors for a SaaS-Driven PSP Strategy Just as software platforms must learn to sell payments and embedded finance, PSPs must learn how to sell software. Selling simple POS software requires adaptation, but the small SMBs that purchase these bundles tend to exhibit simple buying behaviors similar to stand-alone POS payments. Selling more advanced vertical software requires greater transformation as GTM success requires coordinated multi-channel marketing, technical sales, and patience to navigate a sales cycle that takes weeks or months. Owning software is not simply about adding a new product, it is about reshaping how you acquire, serve, and grow your merchant base. Below we outline four successes for PSPs that want to own (market and develop) commerce software. Software is your anchor product, you aren't just selling payments: For SMBs, business management software is the primary and generally first purchase. It is the brain of a merchants’ business. Payments (and fintech) is a secondary purchase. PSPs must understand their software offering deeply: its value proposition, pain points solved, and how it fits into the day-to-day operations of target merchants. Software sales require more multi-channel marketing, conversion selling, and success management: Commerce software is a more complex product than stand-alone payments, often requiring more marketing touchpoints to establish a conversion opportunity and then more work to convert and drive merchants to sustained activation. Digital engagement is a must: Digital engagement for sign-up, for boarding, for servicing, and for cross-selling is the key success factor to optimize merchant lifetime value while minimizing cost to acquire and serve. You have to have a solid digital experience to win in a software-led world. However, once you master digital engagement, software product and customers are naturally more digitally engaged, allowing for easier cross-selling. Software bundle merchants are twice as likely to use another embedded finance service (beyond payments) than stand-alone payment merchants. Data is powerful – unlocking significant monetization potential: Combining software and payments unlocks powerful data. Even market leaders are early in the learning curve for monetizing this data, but the potential is massive, for example with AI powered digital advertising linked to measured customer loyalty success. Acquisition Integration: And finally, do not underestimate the complexity of integrating a software company into a payments company culture. Software companies tend to have different DNA and cultures (more technical, more remote, etc.) and squashing such culture is a major pitfall. Conclusion: A Strategic Crossroads for PSPs Buying software marks a fundamental shift in the role PSPs play in the commerce stack. It changes how you acquire customers, how you retain them, and how you monetize merchant relationships. The partnership model [being the payments partner of choice to the ISV/SaaS] continues to be a highly effective strategy. But as competition intensifies on the supply of embedded payments, owning software can be a pathway to sustained capture of the SMB economics. We expect to see more PSPs both acquire and partner with software as the days of stand-alone payment services fade away. Please do not hesitate to contact Charlotte Al Usta at Charlotte@FlagshipAP.com, Francesca De Fina at Francesca@FlagshipAp.com or Tobias Vink at Tobias@FlagshipAP.com with your comments or questions.

Flagship Advisory Partners recently attended Money 20/20 Europe 2025 in Amsterdam, a pivotal event for the global fintech and payments industry. Our team engaged with key players and emerging innovators, gathering crucial insights into the trends shaping the future of finance. Flagship’s Key Industry Takeaways 1. Stablecoins: Hype vs. Reality Stablecoins emerged as one of the most discussed topics on the conference floor, particularly in the context of cross-border payments. Enthusiasm centers on their potential to serve as a cost-effective and transparent alternative to the often opaque correspondent banking system, especially in emerging market flows. However, key concerns persist around adoption, commercial models, and unresolved regulatory and treasury management hurdles. Questions remain about the heavy reliance on USD-denominated stablecoins, raising issues of monetary sovereignty for the EUR and GBP zones. 2. AI Transforming Product Innovation AI featured prominently across multiple tracks, notably in product innovation (e.g., advanced fraud detection and mitigation of GenAI threats) and operational efficiency (e.g., AI integration into marketing, digital commerce, and internal operations). Recent announcements regarding agentic AI for checkout sparked a wide spectrum of views. While some attendees noted practical deployment challenges and a longer-term horizon, others saw it as a near-term game-changer with transformative potential. 3. Wero - Europe's Sovereignty Play The Wero (EPI) initiative attracted substantial attention, with Europe aiming to strengthen its sovereignty in payments and reduce dependency on USD-backed stablecoins and non-EU wallet ecosystems. Initial rollouts in France, Germany, and Belgium target P2P use cases. Market observers are closely watching how adoption scales, particularly around cross-border functionality and ecosystem incentives. 4. Open Banking: Expanding Beyond Payments While open banking payments progress slowly, fintechs are pushing new use cases—particularly in credit underwriting and fraud prevention—leveraging transactional data for more intelligent decisioning. Visa and Tink unveiled new offerings, and discussions continued around strategies to reduce friction and accelerate adoption. 5. Rise of PayFac-as-a-service models ISVs and SaaS platforms are solidifying their role as vital distribution channels for SMB merchant payments. The growing presence of mature ISVs at Money20/20 highlights their evolution from peripheral players to fully-fledged PSPs and fintechs. 6. All Eyes on Embedded Lending With embedded payments reaching maturity, attention is rapidly shifting to embedded lending as the next frontier. Solutions such as merchant cash advances and invoice financing are gaining traction across both use cases. This evolution is seen as a natural next step to deepen monetization and value capture beyond payments. 7. Renewed Growth Opportunities in Card Issuing The card issuing landscape in Europe has undergone a shift, revealing new growth opportunities after years of underinvestment. Opportunities include enhanced value-added services, embedded payouts within vertical SaaS platforms, and innovative new use cases tailored to evolving consumer and business needs. 8. B2B Payments and the Office of the CFO B2B payments remain a focal point, with embedded fintech use cases within CFO-centric SaaS platforms (e.g., accounting software, accounts payable systems) continuing to gain traction. Upcoming regulatory changes, such as mandatory B2B e-invoicing in some EU markets, are likely to expand the fintech addressable market. Conversations highlighted the growing convergence between CFO software and fintech services, driven by consolidation and cross-domain innovation. 9. Cross-Border Payments Remain a Hot Topic A2A cross-border payment solutions dominated the visual footprint, alongside stablecoin propositions. Leading players like Thunes, TerraPay, Dandelion, and Visa Direct showcased their latest offerings. Financial sponsors remain drawn to the space, enticed by attractive unit economics and ongoing disruption. 10. Private Equity Recalibrates Its Investment Focus PE firms are shifting focus from traditional merchant acquiring—now heavily consolidated—toward emerging fintech verticals. Areas of interest include vertical and horizontal SaaS, B2B payments, fraud prevention, and chargeback management, signaling a broader diversification of investment theses. Flagship Attendees Erik Howell Partner Yuriy Kostenko Partner Anupam Majumdar Partner Will Hay Principal Charlotte Al Usta Principal Dan Carr Principal Please do not hesitate to contact Anupam Majumdar at Amupam@FlagshipAP.com with comments or questions.

This snapshot marks the first in our Embedded Finance Vertical Snapshot series, beginning with a focus on the US Healthcare Providers landscape (excluding payment to payer payment flows). The healthcare sector is notably complex and highly regulated, with widespread software adoption driven in large part by US electronic health record (EHR) mandates. Despite this digital maturity, the embedded finance ecosystem within the vertical remains relatively nascent, with significant room for growth. We see meaningful opportunity for fintech solutions to expand, particularly in patient payments, provider payouts, and financial services integration. Sizable embedded payments market: The vertical is associated with a large and stable card payments volume pool with potential for growth. For example, card acceptance has become order qualifying for healthcare software, but most patients still pay in other ways. High software usage: The healthcare sector is undergoing continued digitization, with approximately 85% of medical providers now using practice management solutions. Moderate embedded lending upside potential: The vertical offers the potential for business and consumer lending, buoyed by provider profitability constraints and an increasing cost of care. Fragmented, but consolidating software market: The provider landscape is consolidating, led by acquisitions from hospital systems, private equity, and large tech companies (e.g., Amazon). 1. Vertical Definition 2. Vertical Spend - US Healthcare Providers Revenue (trillions of USD, 2022-2026) 3. Vertical Dynamics (all sub-segments) 4. Software Landscape - Practice Management / Billing / EHR Healthcare providers often use multiple software products, creating competition for embedded payments and finance. Practice mgmt. and billing modules are the most common payment integration points. Practice mgmt. solutions are increasingly expanding into other software adjacencies (e.g., EHR). Sub-verticals (e.g., dentists, veterinarians, etc.) have specialized software needs and vendors. 5. Embedded Finance Monetization Maturity in the U.S. Embedded Fintech Highlights Most payments are made via insurance, which is more challenging for SaaS to monetize, there remains high volumes of ACH/check, but card acceptance and usage is growing rapidly. Embedded e-billing, POS payments, and consumer financing are the most mature embedded fintech products. Consumer financing is often offered for large patient payments. We also see potential growth in embedded pay-outs (in various forms) and business financing. Please do not hesitate to contact Peter Taylor at Peter@FlagshipAP.com or Amilee Huang at Amilee@FlagshipAP.com with comments and questions.

The issuer processing landscape is evolving rapidly, and success hinges on agility and informed decision-making. Erik Howell, Partner at Flagship Advisory Partners, and Jim McCarthy, Thredd CEO, explore the trends, data, and strategies driving the future of card issuance in this webinar. Whether you're scaling a fintech, integrating embedded finance, or leading transformation within a bank, this conversation offers practical, data-driven insights to help you navigate the next phase of growth. Click Here To Watch Webinar The presentation is available for download by clicking the PDF button in the right hand side panel (desktop view) or below the post (mobile view). Key Takeaways: The card-issuing market is fundamentally attractive, even in developed economies such as the United States or Western Europe. In recent years, the payments industry has been centered on acceptance, but given its complex nature, issuance is increasingly seen as a high-potential area. Growth in card issuing can be accelerated by enhancing value-added services tailored to both existing and emerging use cases. 30% of major SaaS platforms in the US plan to add card issuance in the next 3 years, illustrating the scale of the opportunity. AI is set to unlock substantial opportunities across card programs and providers by boosting efficiency, cutting costs, and enhancing customer experience. Please don't hesitate to contact Erik Howell at Erik@Flagshipap.com with your comments or questions.

Introduction The B2B mobility ecosystem continues to evolve rapidly, underpinned by favorable macro factors: huge volumes, unmet customer needs, complexity, and technological innovation. It now encompasses fuel and energy cards, fleet management software, specialized mobility services such as driver and fuel management, route optimization, and field scheduling, among others. To gauge the current state of activity levels in the B2B mobility ecosystem, Flagship examined the press releases of a representative sample of 39 companies from 7 different provider types for a recent 12-month period, and we highlight the results below. Figure 1: Press Releases per Category (number of press releases as advertised on global website, Jan’24 – Feb’25) Overall activity levels in B2B mobility are high. Between January 2024 and February 2025, our sample of 39 mobility providers issued 286 press releases. Most press releases focused on new product/feature launches (27% of total), new client announcements (21% of total), product partnerships (18% of total), and distribution partnerships for electric vehicle (“EV”) charging (12% of total). Announcements for other types of distribution partnerships (e.g., for traditional and alternative fuels) were less prevalent. Figure 2: Press Releases per B2B Mobility Provider (number of press releases as advertised on global website, Jan’24 – Feb’25) EV Charge Point Operators (CPOs) were the most prolific in terms of number of announcements, with the EV CPOs in our sample making 79 announcements, of which 41% were related to new clients. Fuel card providers followed with 71 press releases, with a more even distribution of announcement types. More Frequent Type of Announcements: Product/Features Figure 3: Press Releases Announcing Product/Feature Launches (number of press releases as advertised on global website, Jan’24 – Feb’25) Product/feature announcements were the most prevalent announcement type: Fleet Management Software (FMS) providers were the most prolific, with announcements focused on integrating AI into route optimization and operational efficiency tools, EV integration, and safety tools. EV CPOs announced new solutions to improve the charging experience both at home and en-route (e.g., enhancing the architecture, charging solution for commercial vehicles, omni port adaptable charger, etc.) Fuel card providers and auto manufacturers (“OEMs”) announced new products/features (especially related to EV and alternative fuels), in-car payments, and safety solutions for drivers New Client Announcements Figure 4: Press Releases Announcing New Clients (number of press releases as advertised on global website, Jan’24 – Feb’25) EV CPOs released the highest number of new client announcements, as they sought to highlight expansion of EV charging infrastructure with both private and government clients. Other provider types had markedly fewer new client announcements. Fintechs made announcements regarding new clients for core and expansion use cases, OEMs expanding their reach in EV and driverless trucks, and FMS announced new government agency clients. Product Partnerships Figure 5: Press Releases Announcing Product Partnerships (number of press releases as advertised on global website, Jan’24 – Feb’25) Announcements regarding product partnerships were more evenly distributed: FMS providers announced partnerships that embed with OEMs and fuel systems to centralize data on vehicle status, maintenance, and telematics OEMs partnered with energy providers, AI developers, in-car payment providers, and EV CPOs to push towards higher adoption of EV and vehicle digitization Fuel card card providers partnered to continue in their push to expand from traditional fuel offerings into digital payments, EV integrations and retail services EV CPOs announced partnerships to enlarge and enhance their networks with faster, more reliable, and more accessible charging solutions EV Distribution Partnerships Figure 6: Press Releases Announcing EV Distribution Partnerships (number of press releases as advertised on global website, Jan’24 – Feb’25) Fuel card providers, EV CPOs, and OEMs have been actively investing in EV charging infrastructure expansion and customer experience enhancements. Collaborations between OEMs and EV CPOs are becoming increasingly common, with the goal of accelerating the deployment of faster and more widespread charging stations. Additionally, fuel card providers are forming strategic partnerships with EV CPOs to expand merchant network coverage and to distribute co-branded EV charging cards. Figure 7: Fuel Card Providers Press Releases (number of press releases as advertised on global website, Jan’24 – Feb’25) Fuel card issuers continue to highlight their efforts to expand into EV and sustainability (DKV announced 12 EV distribution partnerships) and alternative fuels, while continuing to partner for fuel distribution (DKV 4 press releases, UTA 6). Fuel card issuers continue to expand geographically (UTA published 3 press releases on the topic, Eurowag, DKV, Radius and Wex 1) and enhance card functionalities (Eurowag and Comdata published 4 press releases each on new products/features, Wex 2), particularly in areas such as in-car payments, seamless EV charging access, and integration with digital payment ecosystems. Conclusion Using press releases as a proxy, activity levels in B2B mobility continue to be high across categories. Payments and fintech underpins or is relevant for many expansion initiatives in the space, and therefore B2B mobility continues to warrant consideration by investors and financial sponsors, different types of fintechs, and software providers. Overall, the topics with the highest announced activities clustered around EV and software, but even “traditional” mobility is still an underpenetrated area in payments with many opportunities for expansion by specialists and non-specialists alike (e.g., why don’t banks offer basic mobility solutions for their huge numbers of SMB customers, many of whom have small fleets?). Although recent macro trends in the mobility space indicate a pullback or at least slowing growth in EV generally, the overall B2B mobility space remains robust and activity levels create a call to action for all types of fintech and payments providers: most types of fintech and payment providers should assess B2B mobility for suitability as a target vertical, and many will have opportunities to grow in the space. Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com with your comments or questions.

Pix has been revolutionizing Brazil's payments landscape since its launch by the Brazilian Central Bank in 2020. Designed as an instant, account-to-account (A2A) transfer system, Pix is continually reducing dependence on traditional payment methods such as cash, Boletos, and debit cards. 1. Pix Value of Transactions by Type of Flows (in trillions of R$, by use case) 2. Pix Product Evolution Pix is transforming the payment system by increasing efficiency, lowering costs, promoting inclusion, and driving competition. The Central Bank continues to expand Pix’s use cases, boosting its relevance across segments: 2020: Pix Transfer, Pix Payment, Pix Collection 2021: Pix Withdrawal, Pix Change 2022: Pix Installments 2024: Recurring Pix 2025: Contactless Pix Future: Automatic Pix, Pix Credit, International Pix 3. Evolution of Payment Methods in Brazil (by total transacted value) Pix is primarily replacing cash, Boleto, and bank transfers, while also gaining ground against cards—mainly debit, given Pix’s A2A nature. PSPs have reported strong Pix-driven payment volume growth, especially from the displacement of cash, but this has pressured margins as Pix has lower fees than cards. While this displacement of cash is net positive, as Pix starts cannibalizing card volumes, the impact turns more negative. 4. Average MDR and Interchange Rates by Type of Card Pix monetization focuses on business acceptance fees, generally lower than cards but varying by merchant size and banking relationship. Micro / small merchants pay sticker pricing below debit cards, while larger merchants can negotiate even smaller fees when bundled with other banking services. Cards, especially in credit and installments, remain highly profitable and are growing at 15% per year, but face increasing pressure as Pix expands. The launch of Pix Credit may add further tension, as the same banks providing credit for Pix transactions also benefit from interchange revenues as card issuers. Select Key Observations Pix has been extremely favorable as a tailwind for PSPs' volume growth. However, Pix yields lower net take rates than credit cards and installments, contributing to ongoing revenue margin pressure for Brazilian PSPs to the extent that Pix cannibalizes credit. Fintechs and payment companies that innovate around Pix and adjust their business models—such as PagSeguro’s pivot toward a broader neobank offering—will be best positioned to capture growth and remain relevant in Brazil’s evolving payments landscape. Please do not hesitate to contact Pedro Giesta at Pedro@FlagshipAP.com with comments and questions.

The $2.2B acquisition of AvidXchange, Inc. by TPG and Corpay is the latest example of consolidation in B2B fintech and, more specifically, AP automation. We discuss the recent stock performance of AvidXchange and Corpay, deal structure, and deal implications on broader B2B fintech investment. 1. AvidXchange and Corpay Stock Performance (indexed to 100 on October 13, 2021, stock price to May 8, 2025) AvidXchange’s $2.2B acquisition reflects a modest premium over its stock price at the time of the announcement, but a significant discount to its IPO valuation from 2021 ($4.6B), further highlighting the challenges of fintechs in the public markets. AvidXchange went public on October 14, 2021, with an IPO price of $24 per share AvidXchange was taken private at $10 per share After the acquisition announcement, AvidXchange jumped +18% while Corpay remained stagnant at 0% 2. Transaction Details and Spinout Structure TPG will acquire a majority stake, and Corpay will invest $500 million for a minority stake of 33%. Corpay has the option to buy the rest of the shares in 2028. Transaction Details: Evaluation of $2.2 billions All-cash deal at $10 per share, a premium of 22% of May 6, 2025 closing stock price Planned completion of transaction in Q4 2025 3. M&A (Merger & Acquisitions) History of AvidXchange and Corpay (select examples since 2019) This is the most recent example of Corpay’s highly acquisitive strategy, particularly in AP (accounts payable) automation, where Avidxchange marks the company’s 4th AP automation acquisition in the past six years along with Nvoicepay (2019), Accrualify (2022), and Paymerang (2024) 4. AvidXchange Revenue (in millions of USD, by solution) Avidxchange’s revenue spans across three segments with the payment segment having the largest revenue contribution. Software: solutions to manage invoices and automate the AP function Payments: payments that buyers make to suppliers Services: fees related to buyer changes in service requests 5. Corpay Revenue (in millions of USD, by solution) Corpay generates revenue across four segments, with corporate payments contributing the largest share. Corporate Payments: includes AP automation, virtual cards, and x-border Vehicle Payments: solutions across use cases such as fuel, tolls, and parking Lodging Payments: traveling accommodations for employees, airline crews, etc. Other: includes gift and payroll card operating segments Commentary/Deal Implications Prior to the acquisition announcement, AvidXchange (‘Avid’) had been exploring strategic options amid turbulent market conditions, with the company's stock plummeting 36% earlier in the year (we recently examined public B2B fintech performance HERE) – The acquisition provides a strategic path forward, leveraging the scale of TPG and Corpay to support Avid’s growth and innovation in the AP automation space. The private market still sees fintech infrastructure, especially in B2B, as an attractive, long-term play. Marrying infrastructure with vertical specialization (like Avid in Real Estate and Media) is an attractive investment thesis as long as revenue growth can be paired with margin improvement. Corpay’s strategic stake shows continued consolidation in CFO software and fintech, especially across AP, AR, and expense management, evidenced by Corpay’s own acquisitions of Paymerang last year and Accrualify in 2022, among other examples (e.g., Modulr’s acquisition of Nook and Paylocity’s acquisition of Airbase). It remains to be seen how Corpay’s existing corporate payments assets will complement Avid’s suite of AP automation solutions, but Avid’s 8,500 mid-market customers and 1.35 million suppliers roughly double Corpay’s existing merchant network, and Avid’s c.$80B in processed volume brings Corpay’s total processed volume to c.$200B. Please do not hesitate to contact Rom Mascetti at Rom@FlagshipAP.com with comments and questions.

The European office of CFO SaaS remains a fertile ground for investments and M&A. Rapid market consolidation across CFO SaaS domains, key regulatory mandates (e.g., B2B E-invoicing) and increased adoption of embedded fintech across SaaS domains makes the space an attractive investment hotbed. We advise viewing the slides via the "PDF" icon button. General Commentary & Highlights The ‘Office of CFO’ SaaS spans across several segments and operates in a highly fragmented European market today (e.g., accounting & ERP, treasury, cash management & financial planning, AR & e-Invoicing, payroll, AP automation & spend management) CFO workflow automation SaaS continue to demonstrate strong linkages with payments and fintech, seeing embedded fintech as strong monetization growth levers Recent M&A in this B2B "Office of CFO' SaaS segment demonstrate the ongoing convergence between CFO software and B2B fintech services (payments, lending, FX, other). For example, ThomaBravo invested in Coupa and Bottomline to create a global integrated B2B automation + payments powerhouse New regulatory mandates are likely to lead to increased uptake of workflow automation and process digitization: One-Stop Shop (OSS) for VAT Registration: Creating a single VAT registration system to enabling businesses to manage their tax obligations throughout the EU Digital Reporting Requirements (DRR): Standardize e-invoicing processes and exchange of VAT info across the EU Platform Economy: Enhance VAT collection for digital platforms (short-term accommodation rentals, passenger transport etc.) New European (EU) regulatory mandates are likely to lead to increased uptake of workflow automation and process digitation Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com or Niko Berank at Niko@FlagshipAP.com with comments or questions.

Local digital wallets across Europe are experiencing varied levels of success as they face increasing competition from global wallet solutions such as Apple Pay and Google Pay. While some local solutions — often backed by strong domestic banking networks — continue to build loyal user bases and demonstrate solid growth, others are seeing stagnation. 1. Which Mobile Wallet App Do You Use Most Frequently for Payments? (survey based; % total wallet payment volume; Oct. 2024) Several European markets have developed local digital wallet leaders (e.g., Bizum in Spain), though their success in resisting the rise of global wallet solutions (e.g., Apple Pay) has seen mixed results. Wallets such as BLIK in Poland and Payconiq in Belgium continue to show strong growth, driven in large part by increasing usage in e-commerce. Established local wallets like MobilePay in Denmark and Swish in Sweden, however, are witnessing a slowdown in usage, as global wallets like Apple Pay continue to attract new users in their home markets. In markets where local alternatives have not taken root — such as the UK — global solutions like Apple Pay and Google Pay have rapidly become the default digital wallet choices for consumers. 2. Key Benefits and Drawbacks of Local Digital Wallets Local digital wallets offer several compelling benefits. These include lower merchant acceptance fees, instant or near-instant settlement with minimal chargeback risk, and strong brand recognition and user loyalty within their home markets. Additionally, these wallets often benefit from promotional backing by local banks, which helps drive user adoption. Despite their strengths, local wallets face notable limitations. These include restricted cross-border usability, and fragmented technical standards that complicate and increase the cost of integration for payment providers. Their dependence on national identity infrastructure can limit scalability and accessibility. Furthermore, many local wallets have historically offered a subpar user experience in physical retail environments — a shortcoming that several local wallet providers are now actively working to address. Key Implications of Local Wallets for the Ecosystem For Banks Enables access to a wider base of local users via infrastructure independent of Visa/MC. Creates opportunities to gain transaction-level insights and cross-sell financial products. However, some local wallets have mixed UX vs. international wallets, and some generate lower interchange revenue. For PSPs (Payment Service Providers) Prominent PSPs increasingly support local wallets to enhance their localized offerings. This improves conversion rates and strengthens local competitive position. Integration with local wallets, however, introduces technical complexity and regulatory overhead. These challenges are also often accompanied by lower margins. Please do not hesitate to contact Yuriy Kostenko at Yuriy@FlagshipAP.com and Levi van Dalen at Levi@FlagshipAP.com with comments and questions.

As the digital economy evolves, SaaS platforms across Europe are reevaluating their approach to payments, particularly at the point of sale. One innovation gaining excitement, but less so real traction (yet), is SoftPOS, a tap-to-pay technology that turns smartphones into contactless payment terminals. It is clear in our work and research that SaaS companies love the potential to accept face-to-face payments without the requirements of payment devices (which we discuss further HERE). Our recent research shows, however, that marketing of SoftPOS today remains subdued, with only 20% of the SaaS companies in our sample actively marketing a SoftPOS solution. Why Are SaaS Platforms Rethinking Hardware? SaaS platforms across verticals embrace in-person commerce, enabled by payment devices. Unfortunately, including payment devices in the product stack introduces significant complexity - another piece of hardware to maintain, another software foundation, etc. The costs also add up fast: procurement, shipping, support, breakage, and lifecycle management. Even with today’s technical tools (5G, Bluetooth, etc.), payment devices add friction to the merchant experience. 1. SaaS Platform Support for SoftPOS vs. Terminals These payment hardware-related pain points create natural excitement and demand for SoftPOS, a technology that can add card acceptance to the SaaS platform devices or to the merchant's ‘bring-you-own’ device. While the voice of the market is clear and excited about SoftPOS, the active marketing of SoftPOS solutions is more limited. In our review of 50 leading European SaaS platforms that offer in-store payment acceptance, only 20% are currently marketing SoftPOS as part of their offering. SoftPOS: A Strategic Move for SaaS Platforms SoftPOS presents a compelling utility. The technology allows merchants to accept contactless payments directly on mobile phones. The entire merchant experience can be app-based, slicker, and easier than boxes of equipment. For the SaaS platform, it simplifies operations and the product tech stack. Payment devices can be a lucrative product for stand-alone payment services providers serving SMBs, but SaaS platforms with embedded payments often have low or no profit margins on this hardware. As such, migrating to SoftPOS presents a clear EBITDA upside for SaaS companies. While the rollout of SoftPOS within SaaS embedded payments is not yet massive, we remain bullish that a wave of adoption is coming, given the clear upsides of the technology. Please do not hesitate to contact Yuriy Kostenko at Yuriy@FlagshipAP.com or Abigail Karl at Abby@FlaghsipAP.com with your comments or questions.

Global Payments has announced its acquisition of a 100% ownership stake in Worldpay for $24.25 billion. As part of the transaction, FIS will receive Global Payments' Issuer Solutions business, allowing FIS to sharpen its focus on core banking and issuer services, while Global Payments deepens its commitment to merchant acquiring and payment acceptance. Investor reactions were mixed: Global Payments' stock fell 17% following the news, reflecting concerns over integration risks and the company’s already complex M&A track record — having completed more than 20 acquisitions across merchant, issuer, and ISV segments. In contrast, FIS shares rose by 9%, signaling investor confidence in its streamlined strategic direction. 1. M&A (Merger & Acquisitions) History of Worldpay FIS originally bought Worldpay in 2019 for $43 billion, one of the largest acquisitions in the payments industry FIS sold majority (55%) stake to GTCR in 2023 Worldpay is sold to Global Payments at 8.5x adjusted EBITDA rate ($24.25 billion deal evaluation) 2. M&A (Merger & Acquisitions) History of Global Payments (select examples) 3. Global Payments, FIS, GTCR Ownership and Transaction Details (in % of ownership stake) Preacquisition, Worldpay has two owners: GTCR and FIS. FIS has a 45% minority stake, and GTCR has a 55% majority stake. Global Payments will acquire all shares from FIS and GTCR for full ownership of Worldpay. GTCR: For the 55% stake, GTCR will be given cash and stock, equaling a ~15% ownership stake in global payments FIS: For the 45% stake, FIS will be given the issuer solutions business of Global Payments (previously known as TSYS) along with cash. The issuer solutions business is sold to FIS at 12.3x adjusted EBITDA. 4. FIS Revenue (in billions of USD, by solutions) 5. Global Payments Revenue (in billions of USD, by solutions) Select Key Observations FIS is refining its strategic direction by emphasizing its core banking solutions, highlighted by its acquisition of Global Payments’ Issuer Solutions business (ex-TSYS). Conversely, Global Payments — now the sole owner of Worldpay— is pivoting toward merchant payment acceptance, consolidating its presence in this space. Global Payments investors reacted negatively (17% decline following the announcement) driven by investor M&A weariness and concerns over organic growth and execution within the core merchant franchise. FIS investors reacted positively (9% increase following the announcement). Please do not hesitate to contact Yuriy Kostenko at Yuriy@FlagshipAP.com with comments and questions.

While industry narratives often downplay the role of cash, cash remains a significant payment method at the European point-of-sale (POS). However, European policy initiatives present a unique contrast with concerted governmental efforts to reduce cash usage. 1. Transaction Volume at Physical Point-of-Sale in the Eurozone (left across eurozone, right - by select geographies in 2024) 2. Cash Usage by Vertical and Ticket Value at Physical Point-of-Sale (across eurozone, selected verticals, 2024) Methodology The ECB’s SPACE study comprises surveys conducted in 2019, 2022, and 2024, with the most recent data collected between autumn 2023 and spring 2024. The study includes responses from 40,981 participants across 18 countries. The data for the Netherlands and Germany were sourced from their national central banks. Country-specific sample sizes were determined based on the volume of point-of-sale transactions and additional demographic considerations. 3. 2024 Transaction Volume at Physical Point-of-Sale by Demographics in the Eurozone 4. 2024 Transaction Volume at Physical Point-of-Sale by Demographics in the Eurozone 5. Consumer Perceived Advantages of Cash and Cards (2024 survey across eurozone, n=40,981) General Commentary & Highlights Even though the industry narrative often downplays the role of cash, cash remains significant at the European point of sale (POS). As a result, ATMs and other cash-related businesses have a viable path forward, though they must adapt to declining volumes and find ways to sustain/grow revenues, such as adding new value-added services, leveraging existing distribution networks, etc. European policy initiatives present a unique contrast: while there is a concerted governmental effort to reduce cash usage, primarily to combat the gray economy and advance payment digitalization, there is also a strong push to maintain access to cash. The ECB continues to encourage banks to provide cash services, such as free or low-cost withdrawals, despite the high operational costs associated with handling cash. To capture the market opportunity left behind as cash use declines in European POS, fintech companies must prioritize building secure, reliable solutions that earn consumer trust while delivering fast and seamless checkout experiences at the point of sale. Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com with comments and questions.

Recent public market meltdown of North American B2B payments SaaS & fintechs likely to accelerate a wave of public-to-private M&A (along with other fintech domains). Market fundamentals, growth outlook, and opportunity for value creation in the sector remain healthy in the long term. 10 of 12 tracked publicly-traded B2B SaaS and Fintech Platforms have underperformed the S&P 500 index over this same period Such performance outcomes from B2B fintechs and other fintech domains (not illustrated) should increase public-to-private investment opportunities General Commentary & Highlights Equity markets are extremely volatile presently due to political and macro-economic uncertainty. B2B fintech equities were already under valuation pressure in Q1 as investors became more bearish on the sector’s high growth expectations. Sustained share price pressure will stimulate acceleration of public-to-private deals in fintech, with these B2B fintechs being obvious potential targets. Despite the recent public market performance, we remain optimistic about the long-term health and growth outlook in B2B fintech, given the – strong growth tailwinds from ongoing digitization of B2B workflows and financial services (which we discuss in a recent Insight which you can find HERE). AP Automation Corpay: Corporate Payments segment posted a healthy 26% top-line growth (10% overall), and adjusted EPS grew 21% YoY. BILL: Growth slowed from prior Qs and missed expectations. Core revenue rose 16%, while total payment volume grew 13%. AvidXchange: Q4 exceeded expectations in revenue, gross margin, EBITDA margin, and EPS, but the stock dropped lower than anticipated ’25 revenue guidance. AR Automation Repay: Business Payments revenue and gross profit rose 76% and 60% YoY, while Consumer Payments dropped 7% YoY. BlackLine: Despite macro challenges and customer uncertainty, revenue still grew 9% YoY in Q4. SMB Accounting Intuit: Total online volume grew 18% YoY, and Global Business Solutions revenue grew 19% YoY. Enterprise Suite shows strong uptake: Jan contracts signed were up 2x vs. November. X-Border Fintech Payoneer: Stock dropped as Q4 earnings missed expectations. Payoneer posted 18% annual revenue growth and record ’24 B2B profit. Flywire: The education segment struggled, with Canadian higher education down 50% YoY. EPS fell to a loss, falling significantly short of estimates. B2B T&E Expensify: Doubled market expectations for free cash flow ($24M vs. $10-12M). Expensify Card grew 54% YoY and 11% QoQ. WEX: Revised its long-term revenue growth outlook from 8-12% to 5-10%, reflecting macro pressures and a reset of expectations. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com or Rom Mascetti at Rom@FlagshipAP.com with comments and questions.

Flagship recently completed a survey of 100+ North American SaaS platforms on their embedded finance businesses. We will be sharing key insights in a series of infographics. The first of the series focuses on embedded finance maturity. General Commentary & Highlights Embedded finance takes years to perfect: There is a clear correlation between time in market and customer usage, suggesting that platforms take time to learn the ins-and-outs of effectively selling financial services into their install base. Most platforms are looking beyond payments: Payments is the most mature embedded finance product, but most platforms expect to broaden their product menu over the next few years. Lending is the next big thing: followed closely by issuing and banking services. Please do not hesitate to contact Peter Taylor at Peter@FlagshipAP.com with any comments or questions.

Despite macro-economic headwinds and stock pricing pressure, large SaaS platforms have succeeded in continuing to drive top-line revenue growth while embarking on a transition to profitability. General Commentary & Highlights Challenging market conditions: Not one of our selected equities delivered a positive return over the last 3 months. Shift to profitability: Companies are responding to investors’ increased emphasis on profits by shifting priorities to efficient, profitable growth. Secular growth trends: All selected equities continue to deliver top-line growth despite slowing investment. Potential bargain hunting: Broad-based weakness across sectors creates potential bargains amid those growing top-line and driving improving operating leverage. Wide range of performance: 5 of the 13 selected equities with at least 3 years in public markets have outperformed the S&P 500 over that period. Those 5 have on average more than doubled the S&P’s return over that period, returning c.84% vs. c.36%. Restaurant & Retail Toast: continued its breakneck expansion, adding a record 28K net locations in 2024, while doubling down on efficiency and delivering its first year of GAAP profits. The company plans to expand into enterprise, international, and retail in 2025 and beyond. Shift 4: introduced Unified Commerce, enabling “one platform, one integration” for worldwide commerce. Combined with the recent acquisition of Global Blue, this unlocks an estimated $80M cross-sell opportunity across 400K merchants. Lightspeed: is doubling down on North American retail and European hospitality. Payments penetration increased to 38% (vs. 29% last year). Block: is restructuring its org to improve development velocity and predictability. E-Commerce Shopify: reported its highest GMV growth in the last three years, driven by continued strength in International and offline. Offline GMV reached a cumulative $100B since inception. B2B grew 140% YoY in 2024, though it remains a small portion of total GMV. WIX: delivered $57M of transaction revenue in Q4 (+23% YoY), driven by a meaningful step-up in take rates from further building out Wix Payments platform (GPV +12% YoY). GoDaddy: grew annualized gross payment volume by 55% in 2024 to $2.6B. B2B Bill: continues its effort to enter the mid-market by enhancing its platform functionality (e.g., procure-to-pay, tools for multiple entities, embedded 1099 reporting). Total payment volume grew 13% YoY, while card payment volume grew 23% YoY. Avidxchange: announced significant progress in virtual card automation across the front book and back book; goal is to reach 80% virtual card automation in the next two years, which should contribute to continued gross margin expansion. Intuit: total online payment volume grew 18% YoY. Other Verticals ServiceTitan: continued to demonstrate success, growing total revenue 29% YoY. Gross transaction volume grew 26% YoY to $17.0Bin fiscal Q4 2025. The company remains focused on expanding enterprise capabilities, penetrating the commercial sector, and capitalizing on the roofing industry’s demand for specialized solutions. Please do not hesitate to contact Peter Taylor at Peter@FlagshipAP.com or Tim Gallagher at Tim@FlagshipAP.com with comments and questions.

Overview of Mercado Libre, a global example of how to successfully integrate fintech with commerce. From a marketplace to $100 billion fintech giant, Mercado Libre exemplifies how platform-driven expansion and embedded finance can transform digital businesses, providing a compelling blueprint for global growth. General Commentary & Highlights Founded in Argentina in 1999, Mercado Libre rapidly became Latin America’s leading e-commerce platform by expanding into Brazil, Mexico, and Uruguay, adapting to local market needs. Launched in 2003, Mercado Pago evolved from a marketplace payment solution into a full-fledged digital bank, offering payments, credit, and financial services. By 2024, it accounted for 41% of revenues—demonstrating how embedded finance within an e-commerce ecosystem drives sustained growth and customer retention. Going public on NASDAQ in 2007, rather than local exchanges, provided Mercado Libre with global capital access, credibility, and liquidity—showcasing how emerging market companies can accelerate growth through international financial markets. Diversifying beyond e-commerce, Mercado Libre expanded into multiple business units such as fintech (Mercado Pago), logistics (Mercado Envíos), storefronts (Mercado Shops), and advertising (Mercado Ads), creating a suite of interconnected services that strengthened market leadership and boosted profitability. While Mercado Libre thrived in Latin America’s dynamic market, its model—integrating fintech with commerce, scaling digital services, and leveraging global capital—offers a playbook for fintech and digital businesses worldwide. From marketplace to $100 billion fintech giant, Mercado Libre exemplifies how platform-driven expansion and embedded finance can transform digital businesses, providing a compelling blueprint for global growth. Please do not hesitate to contact Pedro Giesta at Pedro@FlagshipAP.com with comments and questions.

Open banking enables secure data sharing between banks and third parties, facilitating payments and information access. Beyond UK/Europe (initial markets), we now see other regions at the cusp of open banking adoption, driven by both regulatory and market forces. We advise viewing the slides via the "PDF" icon button. General Commentary & Highlights Open banking allows third parties to access banking data (through consumer consent) via APIs – powering innovative use cases in payments and information aggregation. Open banking adoption is driven by a mix of regulatory and market forces. UK & Europe were one of the first regions to adopt. N. America and APAC are emerging markets where open banking adoption is picking up. Open banking evolved rapidly in the UK. Adoption in Europe continues to be fragmented. Information access use cases have experienced the highest adoption. Open banking payments are yet to be a commercial success in mainstream e-commerce (UK, Europe), although the supplier fintech landscape remains competitive. India’s regulatory approach to open banking is working, with the mass adoption of Unified Payments Interface (UPI) paving the way for additional use cases. Open banking in the U.S. has so far been market led. Information aggregation fintechs (e.g., Plaid) have enjoyed success in bank connectivity with regulations steadily taking shape. There are several industry actors that can adopt open banking to disrupt existing rails, crystalize new value creation opportunities. Key Disruptors in Open Banking B2B Payments Fintechs, Office of CFO SaaS: Opportunity to embed open banking paymetns with CFO workflow automation solutions; Disrupt paper checks Information access can enrich existing products (e.g., improved reconciliation) Big Tech Companies: Play a meaningful role in developing front-end C2B payments apps/wallets that operate on open banking technology. Use information access to strengthen core IP/data Processors / Merchant Payments Value in enriching merchant payment solutions with information access. Offer open banking payments for select verticals and use cases. Proximity with banking access, gross margin expansion Alternative Payment Providers (e.g., A2A): Competes with cards (e.g., in the US), position in underserved verticals. Serves specific verticalized needs (e.g., financial services, i-gaming). Opportunities for margin expansion via information access Fraud platforms /Digital identity Fintech: Obvious product synergies with open banking information access. Ability to layer new products on top of existing (e.g., confirmation of payee) Mega-Retailers: Can create own branded payment wallets for consumers that run on A2A. Challenge cards, by layering consumer incentives, value-added-services Credit Unions / Tier II Banks / Bank Consortiums: Can monetize information access for credit scoring, affordability checks. Play a critical role in distributing information access (e.g., via Open APIs) Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com with comments or questions.

Wero, an A2A digital wallet from the European Payment Initiative (EPI), aims to (eventually) provide a pan-European instant payment solution as an alternative to foreign-owned schemes. Initially launched in Germany, France, and Belgium for P2P payments, it will soon expand to include POS and e-commerce, and seeks to prioritize trust, efficiency, and adaptability for diverse stakeholders across Europe. Overview Wero utilizes the SEPA Instant Credit Transfer protocol and existing account-to-account (A2A) rails to enable rapid funds transfers between users' bank accounts. With Wero, users can send and receive money within 10 seconds using a phone number, email address, or app-generated QR code. Since its launch in July 2024, Wero has gained 14 million users and processed 8 million transactions in live markets (as of November 2024)[1]. EPI, a joint venture between 14 European banks, has alluded to several goals to transform the European payments landscape: Create a Unified Payment Solution: Develop a seamless and unified payment method for consumers and merchants across Europe, improving convenience and interoperability throughout the region; Support Instant Payments: Enable instant A2A payments to ensure quick and efficient transaction processing across the Eurozone; Promote Digital Wallets: Drive widespread adoption of digital wallets, establishing them as a standard payment option for European consumers; Enhance Consumer Experience: Simplify payments and make transactions more accessible, improving the overall user experience; and, Enhance Europe's Independence in Payments: Strengthen Europe's financial autonomy by offering a local alternative to global payment systems like PayPal, Visa, and Mastercard. This homegrown solution aims to reduce reliance on international providers, increase control over Europe's payments infrastructure, and foster a resilient, self-sufficient financial ecosystem. To date, Wero has launched in Germany, France, and Belgium and currently supports only P2P (peer-to-peer) transactions. In 2025, EPI plans to expand Wero's geographic reach to additional EU member states, starting with the Netherlands, and to introduce C2B (consumer-to-business) use cases. Future developments on the roadmap include Buy Now, Pay Later (BNPL), loyalty programs, recurring payments, and more. Figure 2 illustrates the process of a Wero P2P transaction through the BNP Paribas mobile banking app in France. Once Wero is activated within the app, users can select a recipient from their contact list, if the recipient has also activated Wero in their banking app. To complete the transaction, the user enters the payment amount and authorizes it within the app, typically using a one-time password (OTP) or similar security measures. European Payments Initiative (EPI) Europe has a history of unsuccessful pan-European collaborations aimed at launching new payment schemes and harmonizing the European payments landscape. As shown in Figure 3, the challenges faced by such initiatives are not new. Many have failed due to a range of factors, including a lack of political alignment and insufficient commitment among stakeholders (e.g., EPI's initial phase, the Monnet Project), the absence of a compelling value proposition that meets unmet market needs (e.g., the Euro Alliance of Payment Schemes), and/or misaligned priorities within different local market structures (as seen with PayFair). Launched in July 2020, the European Payments Initiative (EPI) represented a collaborative effort led by 14 major banks and two payment service providers (PSPs), with the initial goal of creating a pan-European payments network to rival Visa and Mastercard. However, this ambition faltered in March 2022, when 20 supporting banks, including all Spanish members, withdrew from the project. Consequently, the remaining founding members were forced to abandon their plans for a competing payments network. In light of these developments, EPI shifted its focus to developing a digital wallet and instant payment system. EPI's founding members include some of the EU's largest and most influential banks, representing over 75% of retail banking customers in Belgium, France, and Germany[2]. Each bank member holds 6.49% of EPI's share capital, while PSPs Nexi and Worldline each hold 4.55%. EPI increased its capital from €99 million in 2022 to €329 million in 2023 in order to acquire two major local payment solutions: the highly successful Dutch remote commerce A2A method, iDEAL, and the Belgian A2A solution, Payconiq. EPI’s balance sheet reflects the acquisitions, with €92 million recorded as goodwill. As of December 31, 2023, EPI had invested €14 million in development costs for the Wero digital wallet, classified as intangible fixed assets[3]. This amount could increase substantially in 2024 and beyond as EPI rolls out its services across European countries, incorporates POS and e-commerce capabilities, and integrates current (and future?) acquired assets. EPI has taken significant steps to advance Wero's development. As noted above, EPI acquired iDEAL and Payconiq , and also obtained a payment institution license from the National Bank of Belgium — paving the way for Wero's launch in Germany, France, and Belgium. As of February 2025, Belgian scheme Bancontact announced Wero's rollout to Belgian merchants, and plans to phase out the Payconiq brand by 2026. Looking ahead, EPI intends to introduce Wero to the Netherlands and expand its features by mid-2025, and add new partners such as PPRO to help facilitate Wero’s e/m commerce and in-store payments flows. Market Landscape Outside of Visa and MasterCard, Europe's payment landscape is fragmented, with various payment methods, local card schemes, A2A bank coalition schemes, digital wallets, and BNPL options available (see Figure 6). While non-European wallet providers such as PayPal, Apple, and Google have successfully expanded across Europe, EPI's Wero aims to establish a unified and local alternative. However, to achieve sustainable market penetration, EPI must navigate the challenges posed by Europe’s fragmented ecosystem of local schemes and wallets, while meeting the underlying needs of stakeholders. Principally among these is to overcome the “chicken or egg” dilemma inherent in all new payment methods, ideally by solving an unmet customer need (or significantly improving on a customer need that has already been met) while offering a compelling business case to merchants, PSPs, issuers and other stakeholders. Conclusions Wero is an intriguing initiative due to its ambitions, bank backers, significant investment capital, and M&A-led approach of acquiring local A2A schemes. Skeptics can rightly point to the long history of European payment scheme failures (see Figure 3), EPI’s slow development timeline, basic initial products, lack of serving unmet customer needs, lack of compelling reasons for consumers to change behavior, lack of clarity around roadmap, and lack of a compelling business case for stakeholders. Proponents can rightly point to the success of A2A in Europe (compared to other regions), the need to harmonize a fragmented European payments landscape (and subsequent benefits of interoperability and scale), and the benefits of Europe controlling its own payments destiny in a changing geopolitical landscape. The eventual truth is likely somewhere in the middle, and while it is still too early to draw meaningful conclusions, large, well-funded projects like EPI/Wero are relevant to the industry. EPI/Wero’s ultimate success and impact will ultimately depend on how it addresses several currently unclear questions: Future Political Support: challenging successful, widely adopted incumbents (e.g., Visa, MasterCard) and well-positioned local incumbents (e.g., Blik) is challenging regardless of the industry. Experience shows that if governments and/or regulators throw their weight behind new initiatives, the probability of success increases dramatically (e.g., Pix in Brazil). Will the European Union and/or the European Central Bank proactively support Wero in a more meaningful way than just a cheerleading role, such as a combination with the Digital Euro initiative, or embedding Wero more fundamentally into SEPA payments infrastructure? Overcoming Inertia: changing stakeholder behavior (particularly consumers) is notoriously difficult, and requires either the right combination of levers (as noted above – meeting unmet needs, improving on existing solutions, business case, etc.) or a true “killer app” that incents change. Although Wero’s M&A-led strategy of acquiring local payment schemes is a logical path to market, is that enough to win (and do other schemes want to sell?), and if not, what else is in the works to overcome classic chicken or egg problems? Ability to Power Continued Growth: Assuming Wero is successful, how will it restructure itself to remain successful in an ever-evolving payments landscape? In the absence of state intervention (first point above), coalitions of corporations have not proven to be a highly successful form of ownership due to competing priorities, different attitudes to investment, etc. As Visa and MasterCard changed first to member-owned associations and then later were spun-off into publicly traded companies, what will a successful Wero look like that will enable it to sustainably power continuous growth? And whose capital will be used to get it to that point, how much more capital will be needed, how long will that journey take, and will the current and future owners have the patience and willpower to fund it? In addition to these strategic questions, there is a long list of more detailed, tactical questions to be answered, for example: E-commerce Checkout Flow and User Experience (UX): Uncertainty around how smoothly Wero will integrate into online shopping platforms. A seamless, intuitive experience is essential to reduce cart abandonment and drive adoption. Retail POS Payments Applications: Technically unclear how Wero will enable POS payments (e.g., QR codes, NFC) and how it will compete with contactless card payments or popular wallets like Apple Pay and Google Pay. Value-Added Services (VAS) and Loyalty Features: Lack of clarity around incorporating VAS or loyalty features, which are important for user engagement. Details about these roadmap items have not yet been defined. Commercial Model and Incentives: EPI intends to offer a more affordable and convenient payment solution, with Wero expected to provide an attractive model for retailers. However, while the model remains undefined, Wero's future success depends on providing competitive margins and incentives for all stakeholders in the payment ecosystem, which are still uncertain. As with all big initiatives with political overtones, Wero will be one to watch. While we have tried to outline a balanced perspective in the overview and analysis above, we welcome your comments and your thoughts on what we missed! Please do not hesitate to respond to our posts in social media channels or reach out directly to Erik Howell at Erik@FlagshipAP.com or Alessandro Mighetto at Alessandro@FlaghsipAP.com with your comments or questions. [1] Wero shows first results: Promise of fast, secure and simple digital payments becomes reality. (https://epicompany.eu/media-insights/wero-shows-first-results-2) [2] EPI (https://epicompany.eu/) [3] EPI’s 2023 Financial Statements from National Bank of Belgium (https://www.nbb.be/en)

Part 3: Operating Efficiencies is the 3rd installment of Flagship’s multi-part series assessing the potential impacts of AI on payments and fintech. Read Part 1 & Part 2 If you are an investor in fintech, AI gets exciting when you consider the potential for efficiency gains and resulting earnings acceleration. In a decade, financial services will be almost entirely digitized, powered by AI. Most of us reading this article already consume our financial services digitally. But in the background, financial services infrastructure and operations remain frustratingly manual and people dependent, including costly deployment of people for rote tasks. Fintechs, leveraging AI, will innovate all aspects of financial services operations, transforming the industry and unlocking shareholder value while allowing people to focus on higher-value purposes. The Ethics of AI and Jobs Displacement Before we discuss the financial upside of displacing people with machines, let us first address the ethical sensitivities of the topic. For centuries, skeptics have preached the downsides of innovation, “machines replacing people is bad.” History proves otherwise. Innovation created more jobs than it displaced across human history. Innovation is at the heart of society’s ability to support larger populations at higher standards of living. As shown in Figure 1, U.S. jobs grew at 2% per annum from 1950 to 2025, a period of tremendous innovation. Employment never declined for more than two years in a row during this period (declines driven by macroeconomic cycles and more recently by COVID). Labor force participation increased from 55% to 60% from 1950 to 2025. Although we note the deceleration of jobs growth since the rise of the internet and web-based technologies (from 2.2% to 0.8% jobs growth), we generally dismiss the idea that innovation is fundamentally bad for people. AI will not be good for all people either. AI will create labor market disruption, forcing people to find new forms of employment. Will AI lead to job reduction in financial services in the aggregate? … most likely yes. Product innovation (e.g. mobile banking apps) tends to create net new jobs, while process innovation (e.g. chatbots) tends to remove jobs. We expect AI to deliver more process innovation than product innovation in financial services, although both will happen. Most financial services investors would agree that eliminating jobs and people costs is a necessary evil in progressing towards a more sustainable industry.On the precipice of AI disruption, we expect financial services jobs to decline in the aggregate in the coming decade. You need only to read the headlines of major global banks to know that jobs reduction is likely. However, we expect jobs growth in fintech as a sub-segment, although fintech has its own people cost challenges. AI disruption will favor leading fintechs, who will leverage both people and AI development to power ongoing financial growth. Jobs displacement will be more severe in financial services companies that do not adapt to AI. Even Fintech Has Lots of Room for Efficiency Improvements Financial Technology, by definition, should be a high-leverage industry where topline growth consistently and materially exceeds expense growth. Fintech providers should excel at building technology that dramatically improves operating leverage. When we examine the reality, however, we see an industry achieving middling results relative to the potential. Figure 2 charts a sample of fintech companies by one simple metric: Gross Profit Growth vs. Operating Expense Growth (which we refer to as our efficiency growth index). A company delivering positive efficiency gains has an index over 1.0. Our entire sample of fintech companies delivered a weighted average efficiency growth index of 1.5 from 2021 to 2023. Illustratively, this 1.5 index equates to 15% gross profit growth with 10% opex growth, fueling a 20% operating income growth. These kinds of growth and efficiency gains are decent, but far from the potential upsides if you are bullish on AI. AI will help fintech leaders to improve and accelerate efficiency gains. This is not to say that all fintechs should be operating well above 1.0 on this efficiency index. It is understandable that fintechs investing in growth acceleration may operate below an efficiency growth index of 1.0 for some time. But all fintechs should have efficiency gain objectives on the horizon. To be a winner in fintech, we believe that you must use AI to increase efficiency performance in the coming years. We expect the fintech industry overall to materially improve its efficiency growth index from 1.5 in the coming years due to AI. Klarna, which we discuss as a case study shortly, is effectively off-the chart on this metric based on their all-in investment in AI. People Cost Are the Key Operating Constraint in Fintech People costs is the reason why the fintech industry is not yet delivering greater efficiency gains. As shown in Figure 3, personnel costs make up the majority of operating expenses in the industry, representing approximately 60% or more of the total operating costs for the fintechs examined in the sample.People are expensive. As Figure 4 illustrates, the average cost per FTE for fintechs ranges from $60k per FTE per annum to more than $200k (the range mostly driven by the global location of the people). People are also only getting more expensive, particularly the most talented. Figure 4 admittedly includes a small, random sample of fintechs admittedly, but most of these fintechs experienced avg. FTE cost inflation of 8% or more from 2022 to 2023.The fintech industry has a tremendous opportunity to leverage AI to get more out of people, to grow revenue and profit while slowing or even reversing people cost growth. This is not an outright call to start whacking people from your organization. Rather, it’s about being smart investing in both people and AI. AI Will Drive Operational Improvement Across Many Functional Domains So, how will AI allow fintechs to accelerate efficiency gains? As we describe in Figure 5, the AI efficiency opportunities are broad, though we expect the biggest financial impact in the technology and servicing costs. Fintech companies invest massively into ongoing development and maintenance of software and related technologies. AI will help to power software development and testing, allowing people investment to focus on feature and quality improvement. Similarly, despite the moniker, many fintech companies still power front and back-office operations with people and manual processes. AI will eliminate most (not all) of these manual functions in the coming decade. Klarna Blazing The Path on AI Klarna is a unique and powerful case study on the ability of AI to power efficiencies within fintech. Klarna is on the bleeding edge of AI possibilities, leveraging AI-based tools such as OpenAI to change all aspects of its operating model while dramatically reducing costs and people dependencies along the way (as shown in Figure 6). Klarna uses AI across the organization, including: Underwriting – Klarna is a seasoned user of AI to underwrite consumers based on behavior, helping to make smaller and more transactional credit available to consumers. Marketing – Klarna uses AI to develop marketing content such as image generation. AI helped to reduce Klarna’s spend on external marketing agencies by 25%. Service Assistance and Automation – Klarna’s AI Assist, a chatbot written in collaboration with OpenAI, handles two-thirds of all customer service inquiries. According to Klarna, AI was already doing the job of 700 service agents in Feb.’24. Accounting and HR – Klarna announced plans to jettison software such as Salesforce and Workday in favor of customer, AI-powered solutions, saving millions as a result Conclusions Not every fintech is as bold as Klarna, a company all-in on AI in the lead-up to its pending IPO. But Klarna does illustrate the art of the possible in the fintech industry, an industry with massive opportunities for acceleration of operating efficiency. For fintech winners, AI will change the game, allowing ongoing growth while reducing people constraints. This is not to say that people don’t matter in fintech. People will continue to lead fintech to new heights, but these people will also be better directed to higher-value pursuits, while AI does the rote work of answering service inquiries and writing software code. In our next piece in this AI series, we will focus on AI’s impact on UX and product improvement and revenue-driving ability; admittedly, this is a more optimistic topic than cost and job reduction. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com or Alessandro Mighetto at Alessandro@FlaghsipAP.com with comments or questions.

On 23 January 2025, we had the pleasure of co-hosting a live event in collaboration with UBS at their New York office, on the trending topic of Beyond Payment: The Embedded Finance Opportunity. Watch the highlights and a peak into the insightful discussions that took place in the aftermovie below. Aftermovie | Beyond Payments: The Embedded Finance Opportunity | 23 January 2025, New York City Should you have any questions regarding Embedded Payments and Finance, please feel free to contact Joel Van Arsdale at Joel@Flagshipap.com, Ben Brown at Ben@FlagshipAP.com, and Scott DeHaven at Scott@FlagshipAP.com.

General Commentary & Highlights Press releases are a proxy for market activity levels. While an imperfect measure, fintech providers typically make a press release for large or interesting events. Next-gen issuer processors activity levels continue to be high Traditional processors show wide variance in announcements Announcements from the sampled processors focused on home markets in the US & EU European processors seem to be making more traction on global expansion, though i2c has a notably global footprint, Galileo has stated a focus on LatAm, and Marqeta is certified in 40+ countries More than a dozen similar processors (not shown) exist or have launched outside of the U.S. and Europe Next-gen processor new client announcements remain focused on fintechs and digital banks, with no announcements related to traditional banks Conversely, traditional processor announcements focused on traditional banks Announced new client wins for Next-gen processors are either similar to or lower than prior years Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com with comments and questions. Should you wish to dive deeper into the topic of Issuer Processing, feel free to book in time via the link below. BOOK TIME

General Commentary & Highlights Visa and MasterCard both delivered another year of strong performance, driven by sustained growth in consumer spending and continued expansion in cross-border volumes and value-added services. Cross-border remains a key growth driver, but expansion is slowing. Visa's growth fell from 33% (2022) to 15% (2024), and Mastercard's from 45% to 18%, marking two years of growth deceleration. Still, both firms see cross-border as a core growth engine. Visa and Mastercard card counts rose 7% and 8%, consistent with last year. However, Visa’s average spend per card fell 2%, while Mastercard’s grew 1% from Dec. ’23–’24. Visa and Mastercard revenue rose 10% and 12% Y/Y. However, Visa’s international transaction growth slowed from 14% to 10%, and Mastercard’s cross-border growth fell from 27% to 21% (’22–’24). Mastercard’s client incentives outpaced year-over-year net revenue growth (7% vs. 4%), while Visa’s grew 5% year-over-year, aligning with net revenue. Strategic partnerships remained a core focus for both companies, though the emphasis shifted. Visa shifted focus to banks (46% of mentions), while Mastercard balanced banks and fintechs (40% each), reversing last year’s trends. Visa and Mastercard prioritized fraud prevention in 2024, acquiring Featurespace and Recorded Future, respectively. Visa also launched Visa Protect, its AI-powered fraud detection model for A2A payments. This is a shift from 2023 where Visa prioritized payment processing investments (Prosa and Pismo) and A2A expansion (Form3), while Mastercard diversified investments across money transfers, open banking, and cybersecurity. Please do not hesitate to contact Rom Mascetti at Rom@FlagshipAP.com or Sal LoBiondo Sal@FlagshipAP.com with comments or questions.

Introduction In the world of B2B commerce, the order-to-cash (O2C, tied to A/R) and procure-to-pay (P2P, tied to A/P) cycles manage the transaction journey between buyers and suppliers. These processes are critical to happy customers, operational efficiency, and financial health. Software and fintech have automated some of these flows, but many pain points remain. In this article, we examine the current state of A/R and A/P software & fintech, highlighting remaining pain points and discussing the tremendous opportunity for B2B fintech achieve growth by continuing to solve these challenges. The Order-to-Cash and Procure-to-Pay Processes Order-to-Cash: The Revenue Pipeline Order-to-Cash (O2C) process, also referred to as the ‘revenue pipeline’ for suppliers, often associated with A/R automation, includes all activities related to receiving and fulfilling customer orders, invoicing, and collecting payment. From the moment a customer places an order to the point of cash receipt, O2C involves multiple steps including: Order Management & Fulfillment: Receiving and processing customer orders including packaging/delivery of goods or services Credit Management: Assessing buyer creditworthiness before confirming orders including setting credit limits and tailoring payment terms (e.g., setting invoice duration and stipulating accepted payment types) Invoicing: Generating and sending invoices to customers, often with several flavors (e.g., standard, pro forma, recurring, interim/progressive, timesheet, purchase-order-linked, etc.) Payment Remittance & Collection: Receiving payment instructions (e.g., payment type, credentials, amount, timing) and funding of the supplier’s bank account Reconciliation: Matching payments and remittance data to invoices and internal system of record (e.g., accounting/ERP system) When managed effectively, O2C ensures a steady cash flow, but delays can strain cash reserves, disrupt budgeting, and lead to higher operational costs. Procure-to-Pay (P2P): The Spending Pipeline On the spending side, the P2P cycle, often associated with A/P automation, includes steps from identifying suppliers to paying for goods/services. The P2P process is crucial for managing supplier relationships, optimizing costs, and maintaining supply chain stability. The key stages of the P2P process include: Supplier Identification & Selection: Sourcing and selecting suppliers, often involving compliance checks and vetting in traditional B2B transactions (vs. B2B marketplace transactions) Purchase Order (PO) Creation: Issuing a PO that specifies expected terms and pricing (typically aligned with the final invoice) Receipt of Goods/Services: Confirming delivery and quality of goods or services Invoice Verification & Processing: Executing a three-way match across (i) purchase order, (ii) receiving report (e.g., a receipt with quantities and SKUs), and (iii) supplier invoice with the total amount due Payment Remittance & Processing: Sending payment instructions (e.g., issuing a virtual card, preparing ACH instructions, informing supplier that a paper check was sent) Reconciliation: Matching payments (e.g., bank statements) and remittance data (including three-way match) to internal system of record (e.g., accounting/ERP system) An efficient P2P cycle helps businesses control costs and improve supplier relationships, but inefficiencies in this area can lead to missed opportunities, wasted resources, and financial strain. B2B Workflow and Financial Services Many Pain Points Both O2C and P2P workflows present challenges, especially when manual processes are involved. In Figure 2, we highlight pain points raised by small and mid-size businesses across surveys conducted by Flagship over the past 6 months. The most prominent pain points include: Buyer/Supplier Relationship Management: For both sides of the equation, it is often a challenge to manage and update business information and preferences (e.g., changes in bank account info, early payment discount eligibility, card vs. ACH acceptance, net-30 vs. 60-day terms, etc.). Manual Data Entry and Inaccuracies: Manual entry of invoices, remittance data, and reconciliation creates room for errors, missed payments, and delayed revenue. Lack of Payment Visibility: Without real-time tracking, both O2C and P2P processes suffer from delayed or incomplete information on payment status, making cash flow management a challenge. Disparate Systems: Businesses (still) use separate systems for orders, payments, and accounting with often light (or no) integration, resulting in data silos and cumbersome reconciliation processes. Payment Timing Delays: Outstanding invoices and write-offs still plague suppliers, with average payment duration increasing over time (Refer to Figure 3) Cost of Payment Acceptance: While the benefits of digital payments are clear, there is a direct cost of acceptance (especially on virtual cards) that suppliers struggle to manage, sometimes opting for less efficient payment methods (e.g., traditional ACH or paper check) to avoid costs (but therefore exasperating some of the challenges above). Time-Consuming Dispute Resolution: Errors in invoicing or payment reconciliation can lead to disputes that delay payments, disrupt cash flow, and damage relationships. The persistence of paper within B2B flows, be it invoices, check payments, or other, underscores many of the manual processes that exist today. Flagship estimates that 38% of total B2B payments volume in the U.S. is still processed via paper checks (see Figure 4). Check conversion helps, but not relative to the future state in which digital invoices directly initiate digital payments (supported by programmatic controls). B2B SaaS & Fintech Solving Business Challenges Broken B2B processes create tremendous demand growth for B2B fintech, where providers have and are evolving with feature rich automation plus embedded payments and finance offerings. B2B fintechs position to solve specific pain points with their solutions, which we describe in Figure 5. Core to the success of these fintechs are their integrations into both horizontal (e.g., accounting) and vertical (e.g., wholesale trade) software platforms. We acknowledge that the lines between software-DNA companies and fintech-DNA companies in B2B is increasingly blurry. U.S. B2B fintechs are achieving excellent growth on the back of surging demand for their problem-solving solutions. Figure 6 shows the revenue growth of some of the publicly listed B2B fintechs, with this small sample achieving topline growth of 15-42%. Conclusions As the B2B payments ecosystem evolves, the challenge and opportunity lie in reimagining the O2C and P2P cycles, beyond basic automation of legacy ways-of-working. For the fintech industry, the opportunity is clear: process automation attached to embedded finance. With trillions of dollars at play and innovation tailwinds such as AI, the opportunity is riper than ever. Fintechs that enable deeper digital collaboration between buyers and suppliers, integrate seamlessly into surrounding horizontal and/or vertical software platforms, and deliver rich embedded finance services will thrive on residual paper and processes finally fade away. Please do not hesitate to contact Rom Mascetti at Rom@FlagshipAP.com with comments or questions.

This is Part 2 of Flagship’s multi-part series assessing the potential impacts of AI on payments and fintech. Read Part 1 here where we introduce AI, outline the historical context for AI’s impact on our industry, and introduce the impacts of AI. As we assess the broad potential impacts of Artificial Intelligence (AI) in fintech, fraud management is the obvious place to start. AI is a well-established force of innovation in fraud prevention, the most mature application of AI in fintech. Real-time, machine decisioning on payment transactions and account opening and access have been around for decades. More recently, in the last decade (more or less), Machine Learning has been vital to growing beyond reactive, legacy methods for developing and implementing payment decisioning models. Unfortunately, fraudsters also innovate, and AI has helped them to launch attacks (e.g., phishing) at greater scale and levels of efficiency. In this second part of our AI Impact on Payments and Fintech, we cover the evolution of fraud prevention and AI's role in addressing this pressing market need. Fraud Remains a Massive Problem, Constantly Evolving Fraudsters are highly innovative. When you close one loophole, they find another. Compounding this natural to and from, the market demands payment services that are faster, more convenient, and more virtual, all of which broaden fraud vulnerability. For decades now, it has been a constant battle for fraud management professionals in banking and payments to stay one step ahead of fraudsters. AI is a vital weapon in this battle, allowing risk professionals to concentrate their focus on strategy development rather than data manipulation and model building. Fraud remains a massive challenge to the banking and payments industry. Global losses from banking and payments fraud are measured in hundreds of $ billions. As Figure 1 shows, nominal fraud losses on payment cards (a primary category within broader banking fraud) continue to grow. However, fraud rates have shown improvement, noting this varies by country and transaction channel. Virtually all providers of payment fraud prevention solutions and services leverage machine learning. But before we get into how AI is helping to improve fraud management performance, let us first review how payment and banking fraud has evolved. Figure 2 illustrates the parallel development of payment use cases and fraud use cases. Years ago, payment fraud was concentrated on counterfeiting physical cards. The mag stripe was easy to emulate, and transaction monitoring controls behind the POS were limited. The market achieved great success in mitigating counterfeit card fraud, leveraging physical encryption and PIN codes along with machine-driven payment monitoring and decisioning engines across multiple points in the transaction journey. However, as this form of fraud ramped down, digital payments to merchants and each other ramped up. Fraudsters were no longer dissuaded by physical controls as stolen payment credentials could be used online. The market again responded with identity verification solutions and better decisioning and monitoring engines. Pure payment fraud (e.g., stolen card numbers) has declined for years because of these solutions. Unfortunately, fraud finds a way, and today, it increasingly comes in the form of identity theft and account takeover. In these cases, the payment credentials are not abused in isolation but as part of a broader identity hijacking. In the case of account takeover, a simple risk algorithm built on payment transaction fields is not a highly capable solution for fraud prevention. Beyond identity theft, other forms of identity abuse, such as promotion or loyalty abuse, are also flourishing. Figure 3 illustrates the changing mix of fraud by type. AI Is Ideally Suited for Managing Fraud AI is a superior foundational technology for combating identity theft and account takeover. Detecting potential identity theft requires a much bigger and broader scope of data. Machine learning models built to prevent account takeover don’t just rely on the dozens of fields in a payment transaction file. Rather, these ML models effectively consume the entire estate of available data from the start of a fraudster journey, thousands and thousands of indicators (web page navigation, etc.). AI gives us virtually boundless scope for data consumption and usage. AI is also good at pattern recognition, much better than any person could be at monitoring and reacting in people's time while carrying people's biases. Success in fraud management is about balance; the more restrictive the avoidance controls, the higher the collateral damage (i.e., false positives). It is this balance that AI is also particularly well suited to optimize. Legacy fraud controls, such as rule sets, are naturally rigid and often improperly tuned. For these controls to improve, a human must constantly monitor and adjust. And in making these adjustments, humans tend to be biased, often turning the dials too tight or too loose in pursuit of specific fraud patterns. AI, on the other hand, trains itself continuously while solving for a broader set of objectives, such as the delicate balance between too much and too little fraud risk. Note that today, AI models still often require consistent human intervention for optimization, but human dependencies should dissipate in time. AI is computing power and data needy, but it is less constrained by people resources. Staffing the risk function and executing the manual review queue in a timely manner are two of the leading challenges for payment-accepting merchants and banks. LexisNexis1 cited requirements for more people resources as the most common driver of increased fraud costs in 2023. AI solutions allow for smaller risk teams and the concentration of those experts on higher-value activities. Risk controls, including ML-based solutions, remain complex and challenging for SMBs to use. Designing risk tools that are simple to use, effective, and ideally chargeable products for SMBs has been a challenge since the dawn of e-commerce. SMBs are simply not big enough to employ risk experts. The market is now leveraging AI to make these controls more usable by non-experts. Stripe Radar Assistance, for example, constructs and adapts risk rules based on simple natural language instructions. AI A Double-Edged Sword, A Tool For Fraudsters As Well Regrettably, fraudsters also leverage AI as a valuable weapon to exploit digital vulnerabilities. Technology-driven mass attacks such as phishing, malware, and deepfakes are growing. Fraudsters are learning to use AI to train and improve these attacks. According to a 2023 Deloitte study2AI-generated content contributed to $12 billion in fraud losses in 2023, and this is expected to grow beyond $40 billion by 2027. Fraudsters use AI to better target their phishing attacks and to create more compelling content and virtual identities (deepfakes) capable of tricking vulnerable people. Adapting to phishing and deepfakes is now a central challenge for providers of financial accounts. Less sophisticated financial institutions relying on legacy fraud controls are exposed to the potential liabilities of growing scam sophistication. According to PYMNTS3, scam-related fraud jumped 56%, and financial losses from these scams grew 121% in 2024. According to the Harvard Business Review4AI-orchestrated phishing attacks are already equally capable as hum-orchestrated attacks, but they are executed at only 5% of the cost/effort. Conclusions AI, particularly machine learning detection models, is already vital to ongoing improvement in combating payment and banking fraud. Fraudsters learn and adapt, and legacy fraud tools are not well suited for today’s evolving use cases (increasingly powered by malicious AI). AI has advantages over humans; it is not limited by resources, hours in the day, or the scope of human observation lenses. To be clear, machine learning models still need plenty of human intervention today, but as the technology evolves, AI will grow out of much of this dependency. This will allow fintech providers and users to refocus valuable, expert resources on higher-value activities. In the next part of our AI series, published in the coming weeks, we will cover AI’s Impact on Efficiency in Fintech. Till then, you can read our Part 1 introduction and plans for this insights series here. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com or Charlotte Al Usta at Charlotte@FlagshipAP.com with comments or questions.

This is Part 1 of Flagship’s multi-part series assessing the potential impacts of AI on payments and fintech. Read Part 2 on Fraud Prevention here. Artificial Intelligence (AI) is all the buzz in fintech as we kick off 2025 and rightfully so. The inevitable impact of AI in financial services is massive and multifaceted. AI will change the way all of us experience financial services and reinvent performance and competitive dynamics within the industry. In this introduction to Flagship’s five-part series assessing the potential impacts of AI on payments and fintech, we introduce AI, outline the historical context for AI’s impact on our industry, and introduce the impacts of AI to be further explained in the subsequent parts of the series. What is AI? Artificial Intelligence (AI) is a technology that mimics human intelligence, enabling machines/software to execute functions previously depended on people and our ability to create, comprehend, and make decisions. AI can deliver human-like functions, such as answering questions by providing research and learning support. AI has the potential to exceed human intelligence (the so-called point of singularity). More practically, AI can already compute and scale better than humans, potentially releasing fintech businesses from a primary constraint. AI relies on massive amounts of data and computing power and is the culmination of decades of technological evolution. AI builds upon a series of innovations such as machine learning, neural networks, and natural language processing, all being powered by increasingly massive computing power. These advancements, some of which originated decades ago, allow machines to ingest natural/human data inputs, learn from these inputs, and output results in our desired format. There are different types of AI, including Generative AI, a form of “Narrow AI,” or AI designed for specific tasks only. GenAI is used today to generate text, sound, images, and video. Other forms of AI include Reactive Machines and Limited Memory AI, which include applications such as chatbots, autonomous driving, and playing Chess vs. a computer. AI is not yet fully aware and self-autonomous, but scientists expect these milestones in the future. Powering today’s rise of AI are numerous foundational technologies, as shown in Figure 2 below. As stated earlier, AI requires massive computing power, which is made possible via the ongoing evolution of chip technology. Massive amounts of data are another prerequisite for AI development, with most data coming from the Internet and social media/mobile applications powered by data infrastructure designed to record and store everything. Finally, AI is founded on scientific and mathematical evolutions, such as neural networks that enable machines to think.AI and Its Precursors Are Not New To Fintech Artificial intelligence and robotics are not new to financial services. More so than most industries, financial services and especially payments, have relied on machines for decades to automate and accelerate transactions between people. Transaction authorization, credit underwriting, fraud detection, digital identities, and autonomous payments are all examples of machine-driven innovations that help us to transact on a daily basis more easily, securely, and effectively. While recognizing the decades-long technological journey to date, it is clear that AI is now pushing fintech beyond people-based dependencies. For example, fraud management models/machines are increasingly self-learning LLMs, not people-driven regression or rules-based models. We cover the impact of AI on fraud prevention in Part 2 of this series here. In Figure 3, we list examples where the usage of machine-/AI-driven decisions and robotics are well-established in the fintech industry today: Credit decisioning: credit scoring and predictive models such as those offered by FICO have been around for decades, always evolving and improving. Underwriting processes that once took days are now done in real-time. Beyond the traditional scoring algorithms that are generally regression-trained on application and credit bureau data, AI (machine-learning) based underwriting models use broader, more comprehensive data inputs to find incremental lending opportunities. Transaction decisioning: all payments involve payer and payee decisions to accept or deny the transaction, with a card authorization being a prominent example. Once a person presents an electronic payment, machines make these decisions and have for decades. Processors (merchant and bank) and networks now deploy AI models to optimize conversion while balancing potential fraud. Fraud prevention and identity verification: paramount to making good transaction decisions, machines today recognize and validate our digital identities to avoid bad actors. Payment fraud detection is one of the most obvious examples of AI today. In parallel, forms of digital identities and technologies used to validate our identities continue to arise and evolve. Automated servicing: servicing of financial services has migrated towards machine-based automation for many years, starting with the advent of banking chatbots in the mid/late 2010s. Self-servicing, real-time notifications, chatbots, and personalized web or app user experiences are all technologies that allow servicing without needing a person on the other end. Orchestration and smart routing: machines are now working to improve your checkout experience and to ensure your payment requests are optimized as they travel through the complex value chain of payments. AI Disruptions Increasingly Visible 2025 feels like a tipping point because we see and feel the buzz mounting, informed by both public and non-public observations. Publicly, there are a series of events that have us excited about AI’s tangible impacts on the fintech market as we start 2025. Some of these examples/milestones are summarized in Figure 4 below. What’s Next We recognize that the impact of AI and its precursor technologies is already highly visible in fintech. Transacting in 2025 is light-years ahead of transacting in 1975 because of machines. However, we also recognize that real-time, digital payments are just the beginning, and that AI will have far-reaching impacts on the fintech industry over the next decade. The first impact, already well underway, will be ongoing improvements to fraud management. The second (potentially most financially consequential) will be a vast expansion of operations automation; the financial services industry is still riddled with slow, inefficient manual processes that can and will be automated. The third impact will be creating better customer experiences, leading to new revenue models. Each of these waves of impact will disrupt the landscape of providers of financial services, creating winners and losers. We will cover each of these impacts in subsequent insights published in the coming weeks, including: AI’s Impact on Fraud Prevention in Payments & Fintech Read here AI’s Impact on Operating Efficiency in Payments & Fintech AI’s Impact on Product/UX and Revenue in Payments & Fintech AI’s Potential Disruptions to Payments & Fintech Competitive Landscape Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com, Aigerim Smrckova at Aigerim@flagshipap.com, Taijasi Sharma at Taijasi@flagshipap.com with comments or questions.

During 2024 Flagship shared insights on a diverse array of payments and fintech topics. Our analysis of Apple’s iOS NFC launch in Europe drew significant attention, highlighting its impact on in-store payments. Other topics included the decline of European local card schemes, the growth of next-gen POS systems, the success of PSPs in merchant VAS and opportunities for banks in merchant acceptance. An overview of our most significant insights is below. Links to our 5 most read insights here: Apple Opening Up iOS NFC in Europe – Will it Change the Game for In-Store Payments? Europe's Local Card Schemes on a Steady Decline Next-gen POS Driving Impressive Growth Merchant VAS Now a Lucrative Reality for PSPs Banks Can Still Make a Comeback in Merchant Payment Acceptance 1. Apple Opening Up iOS NFC in Europe – Will it Change the Game for In-Store Payments? Our most popular article focused on Apple opening its iOS NFC (“Near Field Communication”) technology to third parties after a European regulatory investigation found it was hindering competition. This change enables third-party market participants to access NFC hardware for contactless POS payments, providing alternatives to Apple’s previously closed ecosystem. Card-based wallet providers and issuers stand to benefit, as wallet providers can now reach a broader audience, and issuers can promote competing wallet solutions. In late 2024, rival payment methods and wallets such as Vipps and Swish launched their own NFC solutions, while others, like Bizum, have announced plans to roll out their own in 2025. It will be fascinating to track the adoption and evolution of these solutions in the coming months. Links: Apple Opening Up iOS NFC in Europe – Will it Change the Game for In-Store Payments? 2. Europe's Local Card Schemes on a Steady Decline European local card schemes are losing ground to Visa and Mastercard, driven by several key factors contributing to the decline of what was once the backbone of domestic banking systems. These include a lack of technical innovation, slow adoption of digital wallets, limited geographic reach and high integration costs for local schemes. However, these are just a few of the factors contributing to the growing dominance of Visa and Mastercard, with other underlying challenges at play. Link: Europe's Local Card Schemes on a Steady Decline 3. Next-gen POS Driving Impressive Growth Next-gen POS solutions redefine traditional markets for POS software, hardware, and payments, and have created a new class of high-growth fintechs. There is still plenty of growth runway to capture, as software products continue to add functional modules (HR, CRM, etc.) and connect value-added apps. Similarly, as payment acceptance becomes more mature, there is a logical roadmap for expanding fintech services into lending, expense management and pay-out services, payroll, and others. Lastly, we expect next-gen POS winners to increasingly expand globally, which has proven more difficult than in digital commerce software (e.g. Shopify). As small and medium-sized businesses increasingly embrace the advantages of modern-tech-led product and service bundles, the provider landscape will continue to be disrupted as legacy providers cede share to next-gen fintechs. Link: Next-gen POS Driving Impressive Growth 4. Merchant VAS Now a Lucrative Reality for PSPs VAS revenue on the back of merchant payments is no longer an aspirational upside, it has become an essential driver for growth. As the growth fundamentals of merchant payments mature and slow, driving topline growth and EBITDA is increasingly a function of VAS success. Fortunately, there is no mystery, the menu of available VAS is now well-defined. Capturing this opportunity, however, requires a focused strategy, strong GTM execution, and a well-chosen operating model (partner vs. in-house). Link: Merchant VAS Now a Lucrative Reality for PSPs 5. Banks Can Still Make a Comeback in Merchant Payment Acceptance Banks continue to face numerous challenges when it comes to merchant acceptance, losing distribution share with SMBs against ISVs and SaaS platform propositions. Despite this, we believe that there are sizable opportunities for banks provided they choose the right operating, brand positioning, and value-added services. Link: Banks Can Still Make a Comeback in Merchant Payment Acceptance We look forward to delving into more diverse topics that generate debate and challenge perspectives in the coming year. Should you have any questions, please do not hesitate to contact us at Info@FlagshipAP.com

Amsterdam, NL and Annapolis, MD, USA – Flagship Advisory Partners, the leading global strategy boutique focused exclusively on fintech, is pleased to announce the promotions of Anupam Majumdar based in our Amsterdam office, and Scott DeHaven, based in our Annapolis MD office to Partner. "Flagship has grown from three people to 40 in less than five years and Anupam and Scott have been integral to this success. We are excited to now have Anupam and Scott as co-owners of the business, leading our next wave of growth and development in Europe and North America. " – Joel Van Arsdale Anupam Majumdar has 17 years of experience both as an advisor and practitioner within payments and fintech. At Flagship, Anupam has successfully led dozens of engagements, and specializes in B2B payments, open banking, digital identity/fraud, merchant acceptance, and bank payments, with a focus on growth strategies, new market entry, and M&A commercial due diligence. As a Partner, Anupam will drive the ongoing growth of Flagship’s consulting and M&A services focused on B2B fintech, digital identity/fraud, and A2A payments. Scott DeHaven has 12 years of experience advising payments and fintech market participants. Scott's experiences include supporting fintech and payment companies with strategic initiatives, performance benchmarking, M&A activities, strategic partnership formations, and market research. As a Partner, Scott will continue to lead development of Flagship’s North American practice focused on merchant acceptance and embedded payments. The promotion of Anupam Majumdar and Scott DeHaven to partners reinforces Flagship’s commitment to growth fueled by exceptional client service and deep market insights. About Flagship Advisory Partners Flagship Advisory Partners is a boutique strategy consultancy and mergers and acquisitions advisory firm specializing in payments and fintech. Flagship delivers 80+ engagements per year across the areas of growth/innovation strategy, business optimization, client and market insights, and M&A due diligence. We support clients around the world and across all segments of the payments, banking, and fintech landscape. Joel Van Arsdale Managing Partner Flagship Advisory Partners For more information about Flagship Advisory Partners and our services, please visit www.flagshipadvisorypartners.com.

Successful IPO ServiceTitan went public last week and immediately traded up more than 40% as investors flocked to the attractive growth fundamentals of ServiceTitan specifically and the field services vertical software & embedded generally. For embedded finance buffs like us, the TTAN S-1 was a compelling reading, so no surprise that investors reacted favorably. We review these attractive vertical fundamentals and ServiceTitan’s business below. Field Services: A Highly Attractive Software + Embedded Finance Vertical According to the TTAN S-1, field services generate $1.5 trillion of spend in North America, including sub-vertical use cases such as home construction, HVAC, roofing, landscaping, electric, plumbing, painting, and many other trades. ServiceTitan considers just-under half of this $1.5 trillion spend to be its Service Addressable Market volume ($650B). In its last 12 reporting months of trading, TTAN captured c. 10% of this market volume ($62B). On this $62B, TTAN generated revenue of $727 mil., a total revenue take rate of 1.17%, inclusive of SW subscription fees, fintech services, and other sources of revenue. Figure 2 shows ServiceTitan’s revenue splits and growth for the years ending July 2023 and July 2024. Most of TTAN’s Usage revenue comes from embedded payment acceptance (processing of card and ACH payments). Using management’s general statement about the company presently penetrating 50% of the take rate opportunity, TTAN’s usage take rate of 29 bps implies a payments take rate of c. 55+ bps on attached and penetrated embedded payments. There is significant upside to this embedded payment acceptance revenue given the white space for software usage in the field services vertical and given the embedded payment penetration opportunity (lots of check volumes or bespoke, non-integrated payments in the vertical). Sitting at the heart of the service SMB’s interactions with customers and billing flows, vertical ERPs such as TTAN are ideally positioned to capture a high attach rate and penetration rate of payment flows in and out (more nascent in vertical ERPs today). The usage advantages (faster collections, automatic bookkeeping, etc.) relative to using non-embedded horizontal payments are overwhelming. Beyond the obvious upside of fully capturing the embedded payments opportunity, we also see the broader embedded finance opportunities in field services as highly attractive. Field services SMBs are ideal targets for embedded working capital, trade finance, payroll, procure-to-pay, and issuing / spend mgmt. products. There is also a consumer finance opportunity on large ticket transactions such as HVAC or roofing. ServiceTitan has only a nascent penetration of these broader embedded finance opportunities presently. Figure 3 illustrates the ServiceTitan proposition including key software feature domains and parallel embedded finance opportunities. As shown in Figure 4, ServiceTitan positions primarily in the middle and upper size segments of the field services market, across a broad range of sub-verticals. TTAN competes with Xplor (FieldEdge), Workwave, HouseCall Pro, and Jobber, among others (some of these being more small segment-focused). TTAN also competes against sub-vertical specialists such as AccuLynx and JobNimbus and, to a lesser extent, more generalized construction software such as Procore and BuilderTrend. Horizontal ERPs such as Salesforce, SAP, and Net Suite also play a role in the larger segments of field services companies but are less broad in capturing these types of vertical opportunities, particularly embedded finance. Conclusions ServiceTitan’s IPO was a success because it is a champion in the highly attractive field services SW + fintech vertical, which provides both scale and growth tailwinds. TTAN today captures less than half of its embedded finance opportunity, ongoing penetration of which will help to fuel double-digit embedded finance revenues for many years to come. More broadly, the successful TTAN IPO bodes well for the broader software and fintech community still emerging from a valuation through started in late 2021. Barring macro headwinds, we expect to see many more software + fintech offerings come to the public markets in 2025. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com or Rohan Manudhane at Rohan@FlagshipAP.com with comments or questions.

Flagship Advisory Partners’ Executive Interview Series provides readers with exclusive insights from thought leaders in the payments and fintech industry. This edition spotlights One Inc, a digital payments platform specializing in insurance premiums and claims. Flagship Advisory Partners met with Ian Drysdale, CEO of One Inc, to learn about how they are revolutionizing insurance payments and their innovative approach to addressing industry complexities. Image: Ian Drysdale, CEO, One Inc One Inc has carved out a strong niche in the insurance payments space. Can you tell us about the company’s journey and evolution? One Inc started in 2012 as a software company focused on policy and agency management software for insurers. Our goal was to develop exceptional software to support insurance carriers in their core operations as we noticed a significant gap. Insurance carriers were struggling to find tailored solutions that addressed the complexity of insurance transactions. We initially focused on non-standard auto insurance, serving individuals with limited credit or previous accidents. This market revealed that insurance payments required complex workflows that generic payment providers couldn’t handle. Finally, our team is at the heart of everything we do. With over 600 employees, we operate as a flat, highly motivated organization. Our culture is built around core values like “Think Big, Work Small,” “Lead with Integrity,” “Rise Together” ,“Wow Everyone” and “Own It.” These values drive our innovation and set us apart in the market. The insurance industry is incredibly diverse and complex. Who are your target clients, and what problems are you solving for them? Globally, insurance payments account for $11 trillion annually, and our mission is to connect every player in this ecosystem. There are diverse stakeholders each with their own unique challenges which we have built solutions to address the needs of everyone in the ecosystem: Policyholders and Suppliers: After an auto accident, insurers don’t just pay policyholders—they also pay suppliers like repair shops, doctors, and contractors. Our solution ensures seamless, accurate payments across all these parties. Mortgage Servicers: In the U.S., most home insurance premiums are paid by mortgage servicers, not policyholders. We’ve created workflows that integrate directly with their systems. Lienholders: Total auto losses require payouts to lienholders to settle loans. We automate these payments, saving time and reducing errors. Agents: Insurance agents collect the first premium at the time of policy issuance and receive commission payments. We ensure these funds are routed correctly. Inter-Insurer Payments (Subrogation): If my car hits someone else’s, insurers need to transfer money between themselves. This process, called subrogation, is another area we streamline. You mentioned that the global insurance payments market volume is $11 trillion. How much of that remains untapped? A significant portion still remains untapped. Within our existing client base alone, expanding into all their divisions and cross-selling our pay-in and pay-out solutions could grow our revenue by over 10x, representing a $1T annual payments opportunity. Beyond that, many insurers—both in the U.S. and globally—are still underserved. We see strong demand from global insurers for solutions in regions like Europe and APAC, where few comparable offerings exist. Altogether, the white space is immense, with potential growth at least 20x of what we’ve captured so far. How does One Inc differentiate itself from competitors? Our differentiation lies in many areas. We have created specialized workflows for pay-ins and pay-outs to manage the complex nuances of insurance payments, automating traditional insurance workflows from weeks to down to seconds. We have a network of approximately 780,000 suppliers, including contractors, auto body shops, medical providers, etc., that insurers can access via our platform. For instance, a recently signed top 10 U.S. insurer will increase their digital supplier payments from 15% to 75% upon launch . For consumers, we’ve also integrated popular modern payment methods like Apple Pay, Google Pay, PayPal, Venmo, etc., not just for convenience but as they’re critical for driving digital adoption in an industry that, in the U.S., has historically relied on paper checks. Finally, our core partnerships with major banks such as J.P. Morgan and U.S. Bank are a significant advantage, not just for their extensive domestic reach but also for their global reach. They operate in dozens of countries, giving us access to international markets that would otherwise be difficult to penetrate on our own. While they manage payment rails, we handle the customer-facing processes for multi-party transactions or complex insurance use cases. These partnerships have allowed us to align with major global insurers who are looking for solutions across regions. As banks open doors to new segments and geographies, it enhances our ability to bring value to clients in new territories, further strengthening our market position.   Compared to other providers, One Inc seems to successfully handle both insurance pay-ins and payouts. Do you think this double-sided strategy is a defensive moat? Absolutely. The integration of both has proven to be a significant defensive moat and a key driver of our growth. Our ability to facilitate both pay-ins (premium collections) and payouts (claims, lien payoffs, subrogation) through a unified platform has created significant value for our clients. For example, we offer a Treasury Workstation that allows insurers to manage all payment flows in one place. I recently spoke with the CFO of a midsized carrier who explained how crucial this is. She’s responsible for managing large daily payouts on claims while simultaneously reconciling incoming premiums. The ability to oversee and control both flows from a single platform gives insurers not only operational efficiency but also real-time cash management capabilities. Another advantage is our One Inc Wallet, which enables seamless transactions across pay-ins and payouts. When customers pay their premium using a specific payment method, we can leverage that same channel for claims payouts. This removes the need for back-and-forth communication as it’s all done seamlessly. Our unified approach also drives cross-sell opportunities. Once clients see the savings and efficiencies of our inbound solution, they almost always want to adopt our outbound solution as well—and vice versa. By serving both sides of the equation, we’re not just simplifying workflows for our clients; we’re also making it harder for competitors to replicate our model. How do you view the competitive landscape in the U.S. market? Most of our U.S. and global competition historically came from major banks or horizontal payment companies that serve multiple industries; however, these players lack the specialization required for insurance. There are a few small, insurance-focused competitors, but none offer the breadth of solutions that we do. Interestingly, some of our former competitors have now partnered with us and this type of collaboration has become a key differentiator. While our short-term focus remains on the U.S., international expansion is a clear next step. Many of our global clients want us to deploy solutions in other markets. Regions like Europe and APAC represent significant opportunities, but they require adapting to local payment preferences; in Northern Europe, account-to-account payments dominate; in Africa, mobile wallets like M-PESA are critical, and in markets like India and Brazil rely on state-sponsored payment systems. We plan to enter international markets within the next 24 months, starting with Europe and this will involve partnering with local players to ensure seamless integration. What is your view on independent software vendors (ISVs)? Do you see them as a potential threat, and is there a risk they might expand into payments? We think about ISVs, although more on the merchant acquiring side/inbound payments side than the outbound payments side. Inbound payments come with intricate use case challenges, such as customer service payments where insurers should not have access to card details or complex refunds on multi-policy payments. ISVs are not easily able to solve these use cases, especially in large, multi-core-system environments. Outbound payments are incredibly complex, which makes it harder for ISVs to enter that space effectively.   One critical issue ISVs face is fragmentation. Many insurers use multiple core systems—one for policy management, another for billing, and a third for claims. If an ISV provides a payment solution tied to just one core system, it creates limitations. For instance, if an insurer uses one system for inbound payments and another for outbound payments, they may not be able to use the same ISV solution across both. That’s where One Inc differentiates as we provide cross-system compatibility and a unified approach. To date, we haven’t seen ISVs succeed in making a significant push into payments for insurance. However, this doesn’t mean we’re complacent. We continually innovate and add value to maintain our leadership position and ensure that our solutions create distance from simpler, generic payment platforms. This ability to stay ahead of ISVs and other potential entrants is a cornerstone of our strategy. Are there plans to expand into adjacent verticals? While there are potential opportunities in other verticals, our current focus remains 100% on insurance. The industry is unique because it combines pay-ins and pay-outs at scale, which is uncommon in most other markets. That said, within insurance, we’re constantly finding new niches to address. Pet and cyber insurance are, respectively, growing markets that we’ve already started building solutions for. There’s still so much room for growth within insurance that we don’t see the need to expand into other verticals anytime soon. At Flagship, we do significant work in embedded SaaS and payments. The U.S. market has been a bellwether for embedded SaaS and pay-ins, but embedded payouts haven’t matured yet. Do you see embedded payouts as the next big trend? Embedded payouts are still at an earlier stage of development compared to embedded pay-ins. While embedded pay-ins have matured across many industries, payouts are far more complex, particularly in sectors like insurance. That said, I believe embedded payouts hold enormous potential, especially as more industries look for seamless, closed-loop systems that combine pay-ins and payouts. Insurance is uniquely positioned to lead this trend because it operates at scale on both sides. We’re already seeing strong interest in our unified pay-in and payout solutions, and as technology advances, I expect embedded payouts to become a key area of growth and innovation. Flagship has been tracking U.S. tailwinds like real-time payments (FedNow), open banking regulations, and pay-by-bank solutions. Do these pose any opportunities for One Inc? FedNow and real-time payments are particularly exciting for the insurance industry as instant payouts can be critical, especially in disaster scenarios where policyholders need immediate access to funds. We’re also closely watching the progress of open banking and pay-by-bank solutions as they can potentially reduce friction in premium collections and claims disbursements by enabling direct account-to-account (A2A) transactions. Given the complexity of insurance payments, integrating open banking capabilities with our workflows can further enhance efficiency and transparency. We already leverage advanced payment modalities like virtual cards, but A2A payments and open banking solutions will allow us to expand our offerings and add even more value for carriers and their customers. These innovations align well with our mission to simplify and modernize insurance payments. What are some of your strategic priorities for the coming years? Our strategic priorities include: Scaling Instant Payments: Real-time payments are especially critical in disaster scenarios, where policyholders may lose access to their ATMs or mailboxes. Our goal is to make these payments seamless. Infrastructure Expansion: With our volume projected to exceed $200 billion annually by 2027, we’re investing in system scalability and redundancy. Enhancing Customer Experience: We want to make insurance payments as seamless as possible for all stakeholders. Deepening Partnerships: Strengthening collaborations with insurers, banks, and system integrators will remain a key focus. Artificial Intelligence (AI) is a trending topic in the world of fintech and payments. What role does AI play in One Inc’s strategy? AI has transformative potential across both insurance and payments. In insurance, AI is being used to speed up underwriting and claims processing. It can analyze diverse inputs like videos, documents, and weather data to make faster, more accurate decisions. AI is also being used to predict which claims are likely to escalate into lawsuits, helping insurers address them proactively. In payments, we use AI to identify suppliers in our network who are most likely to adopt digital payments. This data-driven approach has been instrumental in scaling our operations. We’re also exploring AI-driven innovations to add value across the network, but these remain proprietary for now. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com with comments or questions.

Global fintech M&A deal volume showed steady growth during Q3 ‘24, with private equity-led M&A activity significantly contributing to the deal performance. Strategic acquisitions also saw an increase in deal numbers, with notable players such as MasterCard and Visa actively acquiring fintech companies during Q3 ‘24. We advise viewing the slides via the "PDF" icon button. General Commentary & Highlights North American Fintech M&A Activity Sustains Steady Momentum in Q3 2024 In Q3 ‘24, North America experienced a gradual increase in fintech M&A deal volumes, with growth in the low to mid-single digits compared to the same period last year. Global US-based private equity firms significantly contributed to this modest uptick. Investors in North America have focused on strategic, value-driven deals this quarter. Europe’s Fintech M&A Activity Rebounds After a Slow Summer Period Europe’s fintech sector saw a surge in M&A activity during the final month of Q3 ‘24. The UK market retained its leadership position in European fintech M&A in Q3 ‘24. Although deal activity saw a slight increase in Q3 2024 compared to the same period last year, overall funding has declined, reflecting a shift toward smaller, strategic investments. APAC Fintech M&A Activity Slows in Q3 2024 The APAC fintech sector saw a notable decline in M&A activity at the end of Q3 2024, though overall, Q3 ‘24 outperformed the same period last year. Despite the downturn, some areas within the APAC fintech sector demonstrated resilience. While a swift recovery is unlikely, opportunities for deal-making remain in a few categories. LATAM and MEA Regions Facing a Subdued Fintech M&A Environment in Q3 2024 The LATAM fintech landscape experienced a modest surge in M&A activity during mid-Q3 2024, primarily driven by strategic acquisitions aimed at consolidating market positions. In contrast, the MEA region saw more subdued fintech M&A activity in Q3 2024, marked by targeted strategic investments rather than large-scale mergers and acquisitions. Global Fintech M&A Witnesses Moderate Growth in Deal Count in Q3 2024 In September 2024, Visa announced its agreement to acquire Featurespace, a UK-based fintech specializing in real-time AI technology for payment protection. This strategic move aims to enhance Visa’s fraud detection and risk-scoring capabilities. Featurespace’s AI solutions will complement Visa’s existing products and position Visa to offer more robust value-added services to banks, fintechs, and payment service providers. The acquisition is expected to close in 2025, subject to regulatory approvals. Please do not hesitate to contact Yuriy Kostenko at Yuriy@FlagshipAP.com with comments or questions.

General Commentary & Highlights Volatility: 53% of our select payments equities sample swung up or down by 10% or more and 30% swung up or down by 20% or more. Even modest misses produced sizable volatility to the downside. More winners than losers: Payments industry generally outperforming expectations in 2024. Small caps outperformed in Q3: A year ago, we were wrong about the challenging market conditions for small cap fintech stocks. Payoneer, Priority Technologies, Expensify, Avidxchange, Olo, and Lightspeed all exceeded expectations and traded up materially. Commerce platforms: Shopify, Toast, Lightspeed, exceeded expectations. Commerce software + embedded payments leaders continue to deliver impressive, sustainable growth buoyed by new embedded finance revenue streams. B2B fintechs: Bill, Avidxchange, Expensify, Corepay; Mostly outperform, Expensify specifically. X-border payment fintechs: Payoneer, Wise, D-Local: Most outperformed expectations. USD strength: USD strengthens post-election, BRL under pressure: Mercado Libre, PagSeguro, Stone Co. For any questions please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com.

In collaboration with Flagship Advisory Partners, Transaction Network Services (TNS) has released a new report, "A Guide to Payment Orchestration: Navigating In-Person and Online Payment Complexity", shedding light on the growing demand for payment orchestration solutions, particularly in unattended and fuel and convenience retail sectors. Link through to this page: Payment Orchestration Platform | TNS SELECT REPORT EXTRACTS The surge in digital transactions, increased consumer demand for convenience and speed, and growing concerns over cyber security all place immense pressure on the underlying payment infrastructure. Addressing these challenges head-on is essential for merchants to deliver seamless experiences and stay ahead of the competition. Below we highlight select key takeaways from the report. The Payments Landscape is Growing Increasingly Complicated With consumers demanding new payment methods and expecting smooth, secure transactions across various channels, merchants are faced with the challenge of navigating the growing complexities of commerce. Enterprise-level merchants need a comprehensive solution that not only standardizes the customer experience but also simplifies internal payment procedures – all while catering to the specific requirements of different industries. Payment orchestration for omnichannel merchants can be particularly complex, as the payment processing flow must facilitate transactions from payment terminals across a diverse hardware footprint. Merchants operating with in-person channels will prioritize robust, secure hardware and integrated POS systems that are capable of handling high transaction volumes while ensuring data integrity. Figure 1- Complexities of Channels, Payment Hardware, and Use Cases for Fuel and Convenience Retailers Source: Report "Navigating in-person and online payment complexity" (Transaction Network Services and Flagship Advisory Partners) Powering payments both domestically and internationally is a challenge for enterprise (and larger) merchants who are navigating expanding products, services, commerce channels, and use cases. Globally, every market has localization requirements that require a level of optimization to align with the local acquirers (to process card payments), customer payment preferences (alternative payment methods), regulations, and more. Figure 2- Example of payment localization in US, UK, and AUS Source: Report "Navigating in-person and online payment complexity" (Transaction Network Services, Flagship Advisory Partners, and Global Payments) Payment Orchestration: A True Flexible-Vendor Solution To tackle the complex challenges of today’s payments environment, the industry is shifting toward the latest evolution in digital commerce: payment orchestration. Payments orchestration is a unification of payments, technology, hardware, and connectivity – elevating the merchant’s pressure from a disjointed payment network and streamlining the entire payment infrastructure via a single point of reference. Core benefits of payment orchestration include improved merchant experience and operational flexibility, easy facilitation of a resilient acquirer-agnostic environment, and more. Figure 3- The Impact of the Payment Orchestration Unified Stack Source: Report "Navigating in-person and online payment complexity" (Transaction Network Services and Flagship Advisory Partners) The Perfect Fit for Orchestration The larger the scale of operations, the greater the need for orchestration. Merchants who recognize the value proposition either opt to build an orchestration solution in-house or look to third-party orchestrators for their online and/or in-person needs. Merchants in digital-native verticals were the earliest adopters of payment orchestration due to their online orientation and global nature. Innovation within in-person channels, use cases, and terminal hardware (e.g., SoftPOS, unattended/ self-checkout terminals) drove demand for payment orchestration within more traditional in-person verticals such as fuel and convenience, retail, groceries, and other select unattended verticals like parking. Despite clear demand from merchants for in-person-led verticals, few payment gateways/orchestrators focus on enabling POS-terminal use cases today. Figure 4- Payment Orchestration Adoption by Industry and Channel Source: Report "Navigating in-person and online payment complexity" (Transaction Network Services and Flagship Advisory Partners) Final Thoughts A payment orchestration platform enables enterprises to pick the best-in-class services to meet their needs, but still access the range of services through a simplified API layer. This significantly reduces the time, cost, and complexity of expanding online and in-person commerce use cases and integrating new providers across markets. In summary, Payment orchestration simplifies payments. Click here to download the full report of insights on how merchants can navigate the complexity of payments through payment orchestration, and more. For any questions related to Payments Orchestration, please do not hesitate to contact Rom Mascetti at Rom@FlagshipAP.com.

In today’s digital world, Authorized Push Payment (APP) fraud is becoming one of the most deceptive and dangerous scams. As these scams evolve and grow, understanding how they work and how to protect yourself is more important than ever. In this article, we delve into APP fraud growth, use cases, solutions, and ultimately how payments ecosystem providers can act to prevent this type of fraud. APP fraud (see Figure 1) is a type of scam in which victims are tricked into authorizing bank payments to fraudsters, believing they are transferring money to legitimate entities. In the UK, APP fraud alone accounts for 80% of all fraud volumes in 2023, and we observe strong growth in fraud volumes across several geographies (see Figure 2). The rapid growth of instant bank payment networks and the widespread adoption of P2P apps have significantly increased the prevalence of Authorized Push Payment (APP) fraud (see Figure 3). These apps have become a favored tool for fraudsters, who exploit the speed of instant transfers to quickly move stolen funds, making it more difficult for authorities to trace the transactions. To further complicate investigations, fraudsters often convert the stolen money into cryptocurrency, further hindering detection and recovery efforts. The rise of AI-powered deepfakes has introduced a new and rapidly growing tool for fraudsters. The growth in detected AI-powered deepfakes has increased by 780% in Europe and 1,740% in North America between 2022 and 2023 (see Figure 4). These AI-driven manipulations—whether videos or images—are becoming increasingly realistic and harder to detect, with their quality improving at an exponential rate. Fraudsters use deepfakes to enhance phishing campaigns, creating personalized messages and tailored schemes that target a broader range of victims. This technology makes their efforts more efficient, significantly increasing their chances of success. Fraudsters are increasingly using social media platforms to target potential victims, exploiting the widespread use of sites like Facebook, Instagram, and WhatsApp (see Figure 5). By creating fake accounts and sending AI-generated messages, scammers are able to reach individuals more effectively than ever before. According to the US Federal Trade Commission, nearly 70% of scams in the country originate on Meta platforms. A similar trend is seen in the UK, where social media and other online channels accounted for 70% of Authorized Push Payment (APP) fraud cases in 2023. The growing use of these platforms for financial scams highlights the rising risks associated with online communication. Fighting APP Fraud: List of Key Regulations & Initiatives Payments ecosystem providers must step up efforts to address the rising threat of APP fraud. Several key regulations and initiatives have been introduced to protect consumers and hold fraudsters accountable. Here we summarize some of the most important regulations and initiatives currently shaping the fight against APP fraud. PSR Regulation in the UK (effective as of 7 October 2024) Consumers, microenterprises, and charities are entitled to mandatory reimbursement within five working days for APP fraud incidents. The costs associated with these reimbursements will be shared equally between the sending and receiving Payment Service Providers (PSPs). Both Faster Payments and retail CHAPS payments will be included under this reimbursement policy. The maximum reimbursement limit for Faster Payments is set at £85,000. PSD3 Regulation in the European Union PSD3 proposes to introduce reimbursement policies for APP and Phishing fraud. The specific amounts and procedures yet to be determined. Banks will be required to implement a confirmation of payee system to ensure the account name matches the International Bank Account Number (IBAN) during transfers. PSPs will be enabled to share fraud-related information, and PSD2’s TRA, including device analysis checks, will be mandatory for all PSPs. Amendment to EFTA Legislations in the US According to an investigation by the US Senate in 2023, EWS (owner of Zelle) and participating banks rarely reimbursed customers who fall victim to scammers on Zelle. Proposed legislation to amend the EFTA (Electronic Fund Transfer Act) to offer protection to consumers and reimburse them for APP fraud. Meta (Social Network) Partnering with UK Banks In Q3 2024, Meta partnered with NatWest, Metro Bank, and Stop Scams UK to share data and combat app scams. leading to the removal of 20,000 scammer accounts across 185 URLs in a pilot phase to combat against ticket fraud. Several more banks are expected to join the initiative aimed at protecting social media users from scams. Key Recommendations to Fight App Fraud As APP fraud grows, it's essential for financial institutions, fintechs, regulators, and consumers to find effective solutions to fight against it. Along with existing regulations, proactive strategies are needed to counter evolving fraud tactics. The following recommendations outline key actions to strengthen defenses and reduce APP fraud's impact. Banks & Financial Institutions Embrace new technologies such as AI/ML based transaction monitoring capabilities and detect fraud in real time (moving away from more traditional rules-based engines). Adopt additional transaction monitoring capabilities, e.g., monitoring of ‘payees’ via new tools/ AI based models. Add additional risk signals to monitor transaction activity, beyond just looking at historical spend patterns. Expanding the risk monitoring models to additional signals such as: Behavioral data (e.g., click speed, pressure on screen). Device intelligence (e.g., if device far away from payments form factor) Adopt dynamic risk assessments to reduce false positives. Embrace additional authentication methods against suspicious transactions (e.g., a biometric challenge to authenticate payers during a potential scam ). Continue to educate customers to be wary of APP fraud patterns; regular consumer notification services in online banking apps to prevent scams. Fraud Fintechs & Other Service Providers Be on the forefront of innovation and product development to fight against APP fraud, e.g., utilizing new technologies such as gen AI tech to authenticate genuine users from scammers, behavioral analysis. Have solutions in place that can offer an end-to-end approach for banks/FIs to attack APP fraud (e.g., having a unified view of the customer identity across the customer lifecycle / touch-points). Innovate in creating data sharing networks to share anonymized fraud data across banks (e.g., consortiums with data providers such as Falcon, Alloy, Sardine). Regulators Provide for balanced regulations that fairly allocate risk and responsibilities to consumers, FIs and 3rd parties (e.g., social media channels). Ensure the purview of regulations is extended to all push payment Apps and use cases (e.g., when using APMs, beyond online banking). Create regulations to foster information sharing across banks/FIs around suspicious behavior, anonymized data signals, fraud patterns in a quest to make banks remain more informed on potential scams, fraud patterns. Consumers Always double-check unexpected requests for money or sensitive information, even if they appear to come from a trusted source. Use multi-factor authentication (MFA) for account access and keep one's software and devices updated to protect against security vulnerabilities. Regularly educate oneself on common fraud tactics and warning signs, as fraudsters often use new, sophisticated methods to deceive consumers. Conclusions As APP fraud grows with the rise of instant payment networks, P2P apps, and AI-driven tools, both financial institutions and consumers face increasing risks. Fraudsters are exploiting these technologies to quickly move stolen funds and evade detection. However, new regulations like the UK’s PSR and the EU’s PSD3, alongside proposed US legislation, offer hope for better consumer protection. To combat APP fraud, banks must adopt advanced fraud detection systems, while fintechs and regulators can support data-sharing efforts. Consumers also play a key role by staying informed, using strong security practices, and being cautious of emerging fraud tactics. With collaboration across all parties, the fight against APP fraud can be more effective, though ongoing vigilance is essential. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com or Stanislav Dubský at Stanislav@FlagshipAP.com with comments or questions.

Flagship Advisory Partners’ Executive Interview Series provides readers with exclusive insights from thought leaders in the payments and fintech industry. This edition spotlights Liberis, a leading global embedded finance platform that provides funding and financial products to small businesses. Flagship Advisory Partners met with Rob Straathof, CEO, to learn about Liberis’ perspectives on embedded finance and lending in today’s marketplace. Image: Rob Straathof, CEO, Liberis The term ‘embedded finance’ means different things to different industry actors. Could you define the term and who it serves today? At Liberis, we refer to embedded finance as the seamless integration of financial services or products, including payments, lending, insurance, or cards, into non-financial platforms/apps or operating systems. We work with companies like eBay and Barclaycard, and verticalized solutions such as Vagaro where we can offer embedded business financing in their dashboard /operating system. We can create a seamless 45-second, four-click journey that gives small businesses (SMEs) access to up to £40,000 in instantly available, pre-approved funding, and up to £1m in funding in under 24 hours. SMEs have traditionally gone to their bank first for working capital needs, despite banks having a history of traditionally underserving such needs. How does embedded finance fit into SME needs? The key is to understand who will own the relationship with SMEs in the future. Traditionally, banks controlled all financial services for small businesses—loans, cards, accounts, and payments—since few platforms could manage POS systems or channel configuration. Now, however, we’re seeing innovation that shifts this financial relationship from banks to operating systems—the platforms that small businesses rely on to run their operations. Vagaro, a SaaS for salons and fitness, manages bookings, runs business operations, takes payments, and integrates with adjacent platforms (i.e., accounting). This system consolidation allows small business owners to access all their financial and business data (from revenues to bank account details) on a singular platform. They now embed lending, insurance, and other financial products through providers like Liberis. Merchants need more than just acquiring from payments companies. The operating systems that can integrate and collate all the services under one roof and collect data will likely dominate relationships with SMEs. But this doesn't mean banks do not have a role to play, because banks are very good at core services such as risk management, deploying deposits, loans (and others) that are good for small businesses. They do, however, need to become more API-enabled to effectively serve a broader customer base by providing these services to third parties (outside of banking customers). How hard is it to create integrated layers of financial products, software, and data, considering that the CFO SaaS landscape continues to be fragmented (especially in Europe), and market winners are unclear? It is an immense task to develop this, and ultimately, the company that comes up with a rapid and workable solution will be the market leader. Today, Liberis receives over 1.2 million records from small businesses across all of our partners, which translates to over 15 million data points every single month that we crunch. As we link more products, services, and partners, this number will multiply significantly. If you can make sense of all the data signals that you're receiving and offer actionable insights to businesses, this is a truly valuable resource for customers and not just another standard service. Embedded lending is one of the most sophisticated use cases under the embedded finance umbrella and is arguably the hardest to localize at an individual market level. How difficult has Liberis’ journey been thus far? The European economy is complex and fragmented, navigating multiple countries, each with unique regulations, language, and propensity toward taking out funding. Even if you look at ISVs, marketplaces, and acquirers, they are all regionally spun up into their localized countries. The U.S. has some regulatory differences by state, but scalability is higher due to the unified language and larger economy. To give some vertical insights, the size of daily payments from all U.S. hairdressers equals the total daily payments of the entire Netherlands, which showcases the incredible potential within the U.S. The U.S. is better funded and more competitive, although Europe does offer more greenfield opportunities. In embedded finance and alternative finance, only an estimated 5% to 6% of EU revenues come from small businesses (a figure that is much higher in the U.S. and the UK), however, McKinsey predicts a five- to six-time growth over the next five/six years. European embedded finance revenues are forecasted to surpass €100 billion by 2030. For Liberis, our partners love to have one API and platform that deals across the U.S., UK, and EU. Our approach is to go live in the core countries our partners operate in, allowing them to scale with us and offer financial products to all their customers, regardless of location. While smaller European markets may not be sizeable and profitable alone, they become valuable as part of a whole package. The key to unlocking the EU market is scalability and automation to remove the need to roll out separate platforms for each country. Lastly, a crucial point for fintechs to focus on is the uptake of regulations such as PSD3 and Open Banking that aim to alleviate the challenges in the European economy. The EU harmonization framework is still very much fragmented, but they're moving towards one regulatory outcome. Still, one thing that will never be solved is the language and cultural barriers where markets like Germany have a high aversion to debt compared to the UK or Nordics, who are far more open to taking on debt to grow their businesses.   Embedded finance has a clear fit for the SME segment, but what is the opportunity for targeting up-market businesses? There's a significant opportunity in the mid-market segment, which is often overlooked as the "forgotten middle.” Banks tend to focus on larger clients, as mid-markets are too small for dedicated account managers. Alternative finance providers serve small businesses as mid-markets are too large to really be of interest at this point. However, a few establishments (Allica Bank) are making inroads in the middle market. Mid-markets often have finance directors or CFOs instead of owners making decisions, meaning a different approach is needed. You have to hook them with the right product that’s of interest with clear value proposition, which could be cash flow or channel insights, tailored financing options, etc. It is also very sector-dependent, as some of these verticals are notoriously difficult to serve, especially if they're offline. The target focus should be on tech-enabled businesses, restaurants, franchises, etc., where it makes sense to have an integration into their booking or management software. We should adopt the mindset that businesses don’t just need a product for its sake, but that it should be offered at a point in the lifecycle where it makes sense. A good example is Amazon, an amazing marketplace, but its 3rd party insurance offering for customers aren’t always on target, i.e. £4 insurance on £10 batteries. The applicability of embedded finance needs to be seen in the context of the services that are offered, and not a one size fits all kind of approach. Can you please describe Liberis’s journey to date, and what makes you differentiated in the marketplace? In the last few years, we have heavily invested in developing a best-in-class customer application journey. That means we understand our customers and partners, ensuring that our APIs are top-notch. The key for us is to have the best technology and aim to make the application journey as little as 4 clicks. We make sure to understand our end customers’ needs. This interest is driven from a behavioral and data perspective. We have upgraded our data repository and currently receive 118 million monthly data entries from our entire merchant customer base, which we use to test actionable outcomes. Over the last nine months, we have updated our risk algorithm approx. 70 times with tweaks to maximize deal time and acceptance rates, focusing on what end customers need and not one size fits all. We are also launching multiple new products, including Flexi Advance, an overdraft product for businesses. Based on months of trials, tests, and feedback, we successfully developed something that people love to use (with plans to roll out in the U.S., UK, and EU). Liberis has been actively pursuing partnerships with SME-focused verticalized SaaS/ISV platforms (e.g., MyPOS) in recent times. What is Liberis’ strategy when it comes to partnerships? Liberis had been actively meeting with partners where merchants have high touchpoint rates, i.e., salons using Vagaro’s platform to manage general operations, bookings, etc. The more touch points the merchant has with the software, the higher our penetration is. In our first month embedded with Vagaro, nearly 6% of their merchant base applied for funding, which is a win-win as we are simplifying the lending process in just 4 clicks with no need to provide additional data.   We serve 3 types of merchants: thin credit file merchants that do not have enough background data to apply for funding from banks, high-growth merchants seeking investment to scale their business, and opportunity merchants seeking investment to kick-start their business in a timely manner. With these in mind, we base our partnerships on who controls these merchant relationships, which are the SaaS /ISV platforms, PSPs, acquirers, and (neo)banks. Specialized marketplaces across the U.S., UK, and EU are also great opportunities for us to collaborate with for merchant funding. Regardless of the type of partner, the goal is to simplify onboarding with full API integrations. Once a level of trust is established, the customer cohorts that we serve show an average revenue uplift of more than 20% over the first year. What are some of your strategic priorities through 2025? Our expansion strategy is to follow and launch in markets with a joint business case for our partners, merchants, and ourselves, successfully launching in five countries: Iceland, Norway, Poland, Canada, and Germany. We have also launched several new strategic partnerships to strengthen our distribution with partners such as Sezzle, MyPOS, Shop Circle, eBay, Paytrail, Viva Wallet, etc. Going forward, we are focused on three core elements: continuing to strengthen our core revenue products, expanding and diversifying our partnership base to include more marketplaces, ISVs, and platform partners, and expanding our product offerings. Artificial Intelligence (AI) is a trending topic in the world of Fintech. What is your view on its impact, and how does it relate to Liberis’ future business plan? In the next five to ten years, the market will shift toward a system where businesses can easily switch between best-in-class banking, lending, and accounting products across different providers. With current advancements in topics such as open banking, AI, and Gen AI, the main lever is going to the financial operating system coupled with multiple products, cash flow insights, and data-driven insights that guide small businesses in making informed decisions. Gen AI will have a larger impact than previous technological revolutions like cloud computing, mobile phones, etc. It will transform industries such as financial services, customer service, and compliance; however, the adoption and impact will take longer than expected. While it won't displace the human workforce just yet, it will significantly increase productivity and will be beneficial for executives to use for tasks like document drafting, compliance, and data management. Looking towards 2025, Liberis will focus on maximizing the potential of the data in our data repository. Using Gen AI tools to help generate data insights that we can present to the customer and use to validate the right type of advice will be highly valuable. The next stage would be to create a layer that will eventually learn to select the right product for the right customer at the right time. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com with comments or questions.

Payments software startup, kevin, once seen as Lithuania's next unicorn, has declared bankruptcy, leading the National Central Bank of Lithuania to revoke its PI license after months of financial struggles and employee layoffs. kevin’s insolvency underscores the critical importance of developing robust economic models that can effectively support scalability and long-term success in the fintech landscape. About Kevin kevin offers a brand-agnostic white-label A2A payment solution that allows customers to pay directly from their bank accounts using existing card terminals, thus bypassing card transaction fees. The platform features customizable interfaces, granting users complete control over payment processes and ensuring direct integration. The company uses a multi-tenant network, allowing multiple customers to share infrastructure while keeping their data separate and secure. Leveraging its A2A payment technology, the platform ensures real-time processing and instant fund settlement, benefiting merchants' cash flow. The solution employs tokenization, replacing sensitive banking information with secure tokens, allowing consumers to link their bank accounts to merchants for one-click payments Recent Developments In Sep ‘23, kevin opened a new office in Dubai to strategically enter the Middle Eastern market. However, insufficient revenue generated hindered the geo expansion. FTE count dropped from 113 to 22 between Jan ‘24 and Sep ‘24, following layoffs. The Lithuanian Labor Inspectorate received 62 employee complaints claiming up to two months of salaries. In Jul ‘24, the Central Bank of Lithuania blocked kevin from taking on new clients due to delays in submitting annual reports and appointed a representative to oversee operations. The company started accumulating social security tax debt in April ‘24, reaching ~€440k in liabilities by the time of kevin’s bankruptcy. Despite raising ~$75 million in funding over the past years, kevin struggled to transform venture capital flows into a sustainable business model. Key Challenges Checkout flow: kevin's checkout flow highlights a limitation of the open banking model: multiple steps may deter users who prefer simpler card payments, negatively impacting conversion rates compared to the seamless experience of Apple Pay and Google Pay at POS. Additionally, while its 'Account Linking' feature streamlines e-commerce checkout, it lasts only 90 days and must be repeated for each merchant portal. Margins & Economics: A2A payment schemes typically have lower margins than card schemes: achieving sufficient margins to compete with Visa and MasterCard is challenging. Merchants may save around 25 basis points on acquirer fees, but issuer-side economics still need validation. Product Development: The product development cycle was relatively long: building the core product took about 3 years, requiring significant resources and costs. Geo Expansion: Geographic expansion requires a carefully crafted strategy. While following customer trends can drive progress when aligned with the overall strategic vision, poor execution can waste valuable resources and efforts. Implications & Success Factors Adoption & Consumer Engagement: kevin's bankruptcy underscores the revenue model challenges of A2A payment systems, particularly the 'chicken or egg' dilemma in scaling consumer payment methods in physical environments. It illustrates the difficulties in achieving widespread adoption while resolving unmet market needs and ensuring strong merchant and consumer engagement with a straightforward payment experience. Market Competition: Building an end-to-end payment system and driving adoption is challenging without large partners, especially in a physical POS environment. Success hinges on offering attractive margins and incentives for all players in the payment ecosystem. A2A Success Factors: A2A holds strong potential in e-commerce, B2B, and sectors like subscriptions, high-risk, and high-value transactions. Key success factors to drive innovation and adoption are government incentives, bank coalitions, “open-access” networks, and simplified UX. Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com or Alessandro Mighetto at Alessandro@FlagshipAP.com with comments or questions.

SoftPOS, also known as "tap-to-pay" and "pin-on-glass," has been touted for years as the future of face-to-face payments, with the promise of transforming how businesses accept payments by eliminating the need for payment hardware. Ten-plus years since the technology was first created, the question remains: Has SoftPOS truly arrived, or is it still awaiting its breakthrough? In this article, we examine the foundations of SoftPOS, assess its development vs. expectations, and explore growth headwinds. What is SoftPOS? Simply put, SoftPOS is a software-based application that allows non-payment devices, like smartphones or tablets, to accept card-based payments. This technology emerged from advancements in Near Field Communication (NFC), mobile operating systems, and cloud-based payment processing. Initially, mobile payment acceptance depended on hardware-based POS systems or attachments, such as dongles connected to smartphones. However, as NFC technology became more prevalent in smartphones and tablets (as seen with mPOS devices like Zettle and SumUp), it paved the way for software-only POS solutions, eliminating the need for additional payment hardware. In Figure 2 below, we outline the key distinctions between SoftPOS, mPOS, and traditional payment devices. In simple terms, the main distinctions between SoftPOS, mPOS, and traditional POS terminals are in their hardware requirements and flexibility. Traditional POS terminals are specialized hardware solutions built around payment features and security, with mostly one purpose in mind. mPOS technology innovated by payment devices by further thinning the needs of the payment device by leaning on connected mobile phones for communication and more advanced features (via a mobile app). SoftPOS goes a step further, removing the need for a payment device entirely. It relies solely on technology either native to mobile phones or delivered via a mobile app and corresponding payment host. By eliminating the need for a specialized device, SoftPOS offers clear ease of use and incremental cost advantages. Users of SoftPOS Early adopters of SoftPOS in Western markets (North America and Europe) are mostly small and micro businesses. These businesses are cost-sensitive, complexity-averse, and tend to be operated via the owners’ mobile device. SoftPOS providers can equip these merchants with the ability to accept payments almost instantly, offering a flexible and cost-effective solution. This is especially beneficial in sectors where mobility is a premium and where commerce interactions are already app-based. Note that this general persona fit also takes us beyond small/micro businesses and into corporate verticals such as gig platforms, transportation, and field services. Figure 3 highlights industries and use cases where SoftPOS is making a notable impact. SaaS platforms with embedded payments are also a segment where we see early adoption of SoftPOS. These SaaS companies, or ISVs, are keen on SoftPOS as a means to eliminate the need for a second payment device. POS ISVs already provide or operate via commerce-enabling hardware (tablets, desktops, etc.), so having a second or third hardware domain (payments devices) complicates their lives materially. Many ISVs, particularly those in less volume-intensive verticals (beauty, field services, etc.) want to simply enable their existing devices for payment acceptance. As mobile payments continue to gain momentum, the synergy between SoftPOS and SaaS is set to transform how businesses manage their operations and process payments. These partnerships promise a more flexible and cost-effective future, empowering businesses to streamline their processes while offering seamless payment experiences. Providers of SoftPOS SoftPOS is not yet disruptive in scale, but most of the top merchant PSPs in Western markets are now actively marketing the product, a clear indication that we are on the precipice of real scale. As shown in Figure 4 below, we analyzed the top 50 merchant PSPs in Europe and North America, and determined that 72% of these PSPs are actively marketing SoftPOS while 28% are not yet marketing SoftPOS. The scaling of Apple’s Tap-to-Pay rollout is another indicator of SoftPOS’ scaling curve. As shown in Figure 5, Apple now has more than 100 active or in-flight solution/GTM partners, up 63% from last year (with 3 months remaining in the calendar year). Note that Apple’s approach to SoftPOS enablement is fundamentally different from Google’s (Android’s) approach as Apple directly wholesales a closed platform to merchant payment service providers, while Google provides an open (more or less) capability set to the market, allowing innovators to build product with these capabilities. Growth Challenges SoftPOS is a significant advancement of payment technology, offering merchants an ultra-easy and low cost way to accept face-to-face payments. However, its journey toward mainstream adoption has been slow, given the birth of the concept in 2012. Several factors contribute to the slow growth vs. potential: Trust and education: merchants oftentimes, still need to get comfortable that SoftPOS is safe and effective relative to the terminals or mPOS solutions they are used to using. Device compatibility: Not all smartphones or tablets are equipped with the necessary NFC technology, limiting the pool of compatible devices for SoftPOS solutions. Integration and investment: Integrating SoftPOS into existing business systems can be complex and costly. Many businesses have already invested in traditional payment infrastructure and may not see an immediate benefit in switching to SoftPOS. Limited awareness: SoftPOS technology remains relatively unknown to many small businesses, and its adoption might require a “crowd effect” to gain momentum across markets. New to business: New businesses are more likely to adopt SoftPOS, but overall penetration remains slow, as new businesses represent only a tiny fraction of the total merchant base today. Security standards: SoftPOS faces ongoing challenges in ensuring consistent security standards across various devices and operating environments. Meeting regulatory requirements and building consumer trust are critical areas that still need to be addressed. The Certification Journey: MPoC Enabling Market-Wide Readiness SoftPOS evolved through several technical standards milestones, with the latest iteration, MPoC (2022), addressing the major limitations of earlier versions. The first standard, SPoC (2018), allowed PIN entry on a COTS (Commercial Off-The-Shelf) device but still required a separate card reader to accept payments, offering minimal advantages over mPOS devices like Zettle or SumUp. The subsequent CPoC standard (2019) enabled card-reading directly on the COTS device but did not allow for PIN entry, limiting transactions to those that didn’t require a PIN (i.e. low-value payments). The introduction of the MPoC standard (2022) was a game-changer, as it enabled both card reading and PIN entry on the same COTS device, addressing key security concerns and significantly broadening the appeal and use of SoftPOS solutions across Europe. This progression has laid the foundation for wider adoption. Figure 7 compares the evolution of these standards. The Future of SoftPOS Despite some ongoing growth headwinds, the future of SoftPOS in Europe and North America continues to look promising. We have no doubt that scale is coming given the marketing prevalence across leading PSPs, the clear and compelling value proposition, and the rising visibility in our day-to-day lives. SoftPOS technology and the advantages it brings (low cost, ease of use, real-time enablement, etc.) are simply too compelling to be held back indefinitely. As with any innovation, SoftPOS requires bellwethers to drive the herd toward mass-market adoption, and the market seems to be waiting for these leading case studies to be more visible (e.g., we are now seeing it more regularly within field services, weekend markets, etc.). We believe it is only a matter of time before SoftPOS becomes a mainstream payment acceptance tool in North America and Europe, focused around certain merchant segments and use cases where the utility of stand-alone devices are less consequential. Please do not hesitate to contact Yuriy Kostenko at Yuriy@FlagshipAP.com or Elisabeth Magnor at Elisabeth@FlagshipAP.com with comments or questions.

The x-border payments fintech market is massive. Currently, banks control around 75% of the total transaction volume, but they are steadily losing market share to fintech companies. In this slide presentation, we analyze the growth of x-border fintech, examine recent M&A activity, and explore the various business models within this space. We advise viewing the slides via the "PDF" icon button. General Commentary & Highlights Global x-border payments is a sizeable market. Today banks process c.75% of the volumes but continue to lose share to fintechs at pace. Fintechs have built strong ‘front-end’ propositions and ‘back-end’ rails to better serve consumers and businesses. X-border payment fintechs continue to demonstrate strong growth momentum globally, and we observe fintechs winning across all segments (C2C, C2B, B2B and B2C/B2B2X). Recent macroeconomic headwinds have led to some investor anxiety and underperformance of fintech stocks in public markets (e.g. Wise, Remitly, D-Local, Flywire), although the sector fundamentals remain strong. Strong signs of consolidation evident in the sector. M&A activity in the space has been intense, with several transactions unfolding in recent times. Fintechs serving emerging markets provide green field opportunities for value creation. The x-border fintech space is not homogeneous – we observe several fintech business models serving consumers & businesses in a B2X and B2B2X capacity. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com or Pedro Giesta at Pedro@FlagshipAP.com with comments or questions.

In an increasingly globalized economy, local card schemes in Europe, once the backbone of their respective domestic banking systems, are rapidly losing ground to international giants Visa and Mastercard. Key Influencing Factors Lack of technical innovation: Challenged to innovate at the same pace as V&MC, which leverage economies of scale and remain at the forefront of payment tech and UX. Fall short in enhancing interfaces, customer service, and loyalty programs. Slow Support of Digital Wallets: Slow to adopt and integrate the increasingly popular digital wallets (e.g. Apple Pay, Google Pay), compared to V&MC, which are quicker and more agile in implementing new technologies e-CommerceChannel Gap: Failed to invest in developing robust and secure online payment capabilities, resulting in a missed opportunity and increasing vulnerability in the rapidly evolving digital payments landscape. Limited Geo Reach: Confined to home markets and find it challenging to compete x-border. Local schemes often depend on co-badged V&MC networks to manage the growing volume of cross-border payment transactions. Integration Requirements: The cost of integrating Europe’s local card schemes remains high, requiring significant investment in technical infrastructure, regulatory compliance, security measures, and ongoing maintenance. Collaborative Shortcomings: While local cost-effective, local schemes struggle to forge strategic alliances with high-growth stakeholders in the payment ecosystem. New-to-market providers frequently default to V&MC for partnerships. Please contact Yuriy Kostenko at Yuriy@FlagshipAP.com with comments or questions.

Last month, Flagship published an article describing the surge of interest in B2B mobility & fuel payments, specifically within the fleet management and related card-issuing domains. While innovation permeates payment issuance and related value-added services, payment acceptance innovation adoption is still relatively nascent in mobility and fuel despite new entrants and emerging technologies. This lack of innovation is not due to a lack of demand, but rather the fact that mobility and fuel merchants are still encumbered by legacy technology and infrastructure that is difficult (and expensive) to simply replace. Flagship has observed an uptick in demand for innovation across mobility & fuel payments acceptance that major brands, OEMs, payment service providers (PSPs), and merchant acquirers must be prepared to address, or else risk being left behind in a large payments/fintech revenue pool. We advise viewing the slides via the "PDF" icon button. General Commentary & Highlights Mobility & Fuel Payment Acceptance Use Cases & Payment Methods Mobility & fuel payment acceptance spans a variety of use cases for both residential (consumer) and commercial (business) customers Merchants are challenged by the multiplication of use cases and payment methods, driven by customer demands and internal business needs (e.g., fraud mitigation and geo expansion) Today, merchants commonly deploy point solutions to enable multiple use cases and payment methods, primarily to avoid disrupting current state processes U.S. Mobility & Fuel Payment Acceptance Volume1 & Growth Tailwinds More than $600 billion in payment acceptance volume in the U.S. comes from mobility & fuel payment acceptance use cases Fuel & convenience retail represents more than 80% of mobility & fuel payment acceptance volume Several tailwinds (examples listed to the left) are increasing digital payments penetration and, therefore, the payments/fintech revenue pool across use cases Similar growth tailwinds persist in other regions including the UK, EU, LATAM, and APAC Fintech M&A in APAC Accelerating Through Q2 2024 Mobility & Fuel Payment Acceptance Complexities Mobility & fuel merchants are trying to enable seamless, omnichannel experiences across multiple use cases and payment methods It is common for current-state payments infrastructure to inhibit merchants from enabling such experiences organically (i.e., designing the experience with existing capabilities and vendors is challenging) Factor in the data demands of B2B mobility and fuel payments (as described in our previous article HERE) and merchants are actively looking for solutions to solve these various challenges/complexities Mobility & Fuel Payment Acceptance Landscape Mobility & fuel payment acceptance technology is a crowded and competitive market that continues to innovate Industry participants are evolving to solve merchant pain points, with many converging across domains (e.g., fuel brands and OEMs becoming more like payment service providers) Regardless of use case, all industry participants should have a forward-looking payments strategy Please do not hesitate to contact Rom Mascetti at Rom@FlagshipAP.com with comments or questions.

Unlock unparalleled insights into the transformative world of Embedded Finance and Banking-as-a-Service (BaaS) with The Paypers' latest report. As a collaborator, Erik Howell Partner at Flagship, dives into the topic of how Embedded Payouts Will Follow the Success of Embedded Payins as the Next Frontier in Embedded Finance. Download to the full report here: https://bit.ly/4dwDSGy Introduction The 2024 Embedded Finance and BaaS report offers a detailed analysis of how financial services are integrated into digital platforms, systems, and business processes, transforming financial interactions for both individuals and businesses. What began as a trend among consumers adopting digital payments has now evolved, with business leaders leveraging Embedded Finance to address challenges, meet needs, retain customers, and unlock new revenue streams. Gain access to three meticulously organized chapters that provide a thorough understanding of Embedded Finance and BaaS, featuring exclusive interviews and articles from industry leaders: Key Market Trends and Future Outlook: Successfully Navigating the Path Ahead Strategic Insights: Winning Solutions, and Use Cases Global mapping and Infographic of Players in Embedded Finance & BaaS 2024-2025 Key insights from the report include: The driving factors behind the surge in Embedded Finance and what’s fuelling its growth. Real-world examples of successful Embedded Finance implementations and promising use cases. How SaaS companies can prepare for Embedded Finance Strategies for leveraging Embedded Finance to boost revenue and solve key challenges. Common obstacles and solutions in implementing Embedded Finance, plus tips for choosing the right partner The impact of digital transformation, including AI and blockchain, on embedded payments. The evolution of B2B Embedded Finance to align with B2C advancements. Future trends and growth opportunities in the Embedded Finance sector. Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com with comments or questions.

Banks continue to face numerous challenges when it comes to merchant acceptance, losing distribution share with SMBs against ISVs and SaaS platform propositions. Despite this, we believe that there are sizable opportunities for banks provided they choose the right operating model and more. Introduction Banks continue to lose market share in the distribution of new small business (SMBs) merchant acceptance but remain an important distribution channel for physical point-of-sale merchants (Flagship estimates c.20% in the US and UK and 55% in the EU as shown in figure 1). Although banks have predominately competed against PSPs for some time, ISVs and SaaS platforms have emerged as the more meaningful competitors. This is driven by the common SMB buying cycle in which they select their underlying SaaS platform prior to their banking relationship, and a strong propensity to use the default payment acceptance option that is bundled into the SaaS platform. SaaS/ISVs are especially powerful distributors of e-commerce payment acceptance solutions where banks tend to be significantly weaker distributors due to the more technical nature of the sale (not to mention that most banks continue to underinvest in e-commerce capabilities, and as a result, their product often significantly lags PSPs and ISVs/SaaS). Banks’ Challenges in Excelling in Merchant Acceptance Banks face numerous challenges when it comes to merchant acceptance (detailed in figure 2), and from an executive-level perspective, the key challenges we observe are: Flawed operating model: often a result of trying to rely too much on in-house operations, which distracts from higher-value distribution focus Over-milking the cash cow: failing to continually and sufficiently invest in technology, product, and distribution Difficult to work with: although appropriately focused on risk management, lawyers and risk departments can make banks challenging to work with Lack of specialized focus: success in merchant payments requires specialization which banks struggle to achieve when acquiring is just one of many products Culture clash: banks have a poor track-record for integrating fintech acquisitions driven by the challenges of migrating from a small/casual/tech-driven culture to the more bureaucratic culture of a bank The root cause of many of these challenges is that as a product, payment acceptance is minor in the broader scheme of a bank’s P&L that demands specialization and continuous investment into product and go-to-market strategies. It is often difficult for banks to internally justify the “real estate” and resources necessary to be truly successful in payment acceptance. Bank Merchant Acceptance Propositions Flagship recently researched how select top U.S. and European banks position payment acceptance in their broader transactional banking product set on their websites. Key observations include: U.S. banks have generally clear propositions for SMB and corporate payment acceptance, with most offering similar packages and price points for SMBs (figure 3A) European banks have less clear and harder to find propositions, and generally do not release pricing on their website (figure 3B) Payment acceptance is clearly not a priority product, with most banks requiring ca. 3 menu clicks to reach the payment acceptance product page from the home page (figure 3C and 3D) U.S. banks use relatively generic key selling points in positioning their acceptance products, with security, fraud prevention, and quick funding commonly mentioned (figure 3C) European banks take a somewhat more product feature-driven approach and are somewhat more specific in their key selling points although with wide variance (figure 3D) Why Banks Should Market Payment Acceptance Despite these findings, fundamentally, there are strong quantitative and qualitative rationale for banks to market and focus on payment acceptance (figure 4) including: Quantitatively higher customer lifetime value; Higher deposit balances; Stronger overall transactional banking proposition and customer experience; and, Generates monetizable transactional data. The recipe for banks to improve their distribution of payment acceptance is clear, as we describe in figure 5 below: Align stakeholders on the “why”; Bundle acceptance into the broader transactional banking proposition; Focus on sales force tactics, measurement, and incentives; Master the basics of managing existing merchants; Do not underestimate the power of a clear, attractive web page and digital marketing basics; Execute basic acquisition campaigns via bank channels; and, Test and learn based on campaign results. However, it is often difficult for banks to execute on these opportunities, and many have chosen to change their operating model from in-house to various forms of partnerships with PSPs. While no partnerships are perfect, they can create a stronger combined business by combining complementary strengths (figure 6). The most common form of partnership we observe today is a Contractual Alliance, also called a Revenue-Sharing Alliance in North America. In this arrangement, the bank acts as the primary distributor with the PSP providing the product and operations. However, as we illustrate in figure 7 below, there are other types of operating model options. Conclusions Regardless of the operating model chosen, we continue to believe that there are sizable opportunities for banks in payment acceptance and that most banks have the capabilities to capture these, provided they choose the right operating model for their needs and are able to muster the internal alignment to execute well. To summarize, our take on key opportunities include: Brand, trust, distribution: bank brands are still among the most trusted in the market One-stop-shop: banks have the advantage of being able to offer a one-stop shop for banking and payments Cards + A2A payments hub: merchants want, but generally lack, a single comprehensive dashboard for all their transactions B2B verticals: banks are positioned to succeed in B2B verticals where A2A payments, check services (in North America), and commercial card issuing are important parts of the overall value proposition Float: banks have built-in models for monetizing the float benefits of merchant acquiring Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com and Emilia Cavallini at Emilia@FlagshipAP.com with comments or questions.

Global fintech M&A deal volume rose by 20% from Q1 2024, growing at 2x compared to last year's 10% increase for the same period. In Q2 2024, the fintech M&A landscape was characterized by strategic consolidations and a strong focus on integrating advanced technologies such as AI. This sector remains dynamic and attractive for strategic buyers and PE investors. We advise viewing the slides via the "PDF" icon button. General Commentary & Highlights North America Fintech M&A Growing Coming Out of Q2 2024 In Q2 2024, North America witnessed a notable increase in fintech M&A, fueled by heightened investment in new domains and PEs targeting public-to-private buyouts. This resurgence in deal flow is indicative of the growing confidence in the fintech sector, as well as the strategic importance of technological innovation in financial services Europe’s Fintech M&A Activity Rebounding in Q2 2024 European fintech M&A still somewhat subdued in Q2, but momentum appears to be picking up heading into Q3. Activity still mostly smaller deals including capability acquisitions and some increased activity in growth equity. Fintech M&A in APAC Accelerating Through Q2 2024 In Q2 2024, fintech M&A deal activity in the Asia-Pacific (APAC) region experienced a notable surge, marking a 6% increase compared to the same period in Q2 2023. During Q2 2024, APAC fintechs secured significant funding, raising over $3.3 billion—a 40% increase from the prior quarter—which fueled much of the M&A activity in the region. Modest Uptick in Fintech M&A Activity in LATAM and MEA Regions in Q2 2024 In Q2 2024, fintech M&A in both the LATAM and MEA regions saw a modest increase, driven by a rise in foreign investment and continued maturation of the fintech ecosystem. This increasing activity reflects the growing interest of venture capitalists and PE funds, who are attracted by these large underserved markets and promising fintech startups. Fintech M&A Deal of the Quarter: Advent Acquired Nuvei in a $6.3B Deal Advent acquires an asset with strong growth performance at a reasonable valuation. Public valuation hindered by 2023 short-seller activity and company’s reputation for serving higher-risk verticals. Nuvei’s c.40% YOY growth is impressive given the c.10% growth in the underlying revenue pool, the company is clearly winning share. The Advent – Nuvei acquisition is one of few public-to-private transactions in payments in recent years, despite steep declines from valuation peeks in 2022. Please do not hesitate to contact Yuriy Kostenko at Yuriy@FlagshipAP.com or Alessandro Mighetto at Alessandro@FlagshipAP.com with comments or questions.

Flagship has observed a surge of interest in the B2B mobility space over the past year, driven by several factors: the growing popularity of EVs, the introduction of Visa Fleet 2.0, the lack of product differentiation amongst traditional providers paving the way for new entrants, and the rising adoption of embedded payments in verticalized SaaS and fleet management software. We advise viewing the slides via the "PDF" icon button. A Complex and Rapidly Evolving Sector The mobility and transportation needs of corporate customers have always been more intricate than those of private drivers. Businesses often need a diverse fleet that includes passenger cars, as well as light commercial vehicles and trucks. Additionally, they might require specialized items such as fuel cards, telematics systems, fleet management software, and tax services. These multifaceted needs have led to the development of an advanced mobility payments ecosystem, featuring fuel and energy cards, financial solutions, and a range of mobility services (such as, field scheduling, driver and fuel management, and route planning). Other services are emerging and disrupting the B2B mobility sector; for example, autonomous vehicles, mobility operating systems, smart parking, and Mobility-as-a-Service. B2B M0bility Providers are Diverse and Evolving B2B mobility providers play within a dynamic and sophisticated ecosystem that is rapidly evolving and expanding: Fuel retailers supply fuel and gift cards, along with value-added services (e.g., vehicle services, fleet management, and data services) though some product gaps remain. Auto Manufacturers (OEMs) provide leasing, vehicle services, and EV solutions. However, only a few OEMs excel in offering robust analytics, telematics, and assistance services. Leasing companies give customers the option to integrate various products and services into the leasing contract (e.g., tax services, EV solutions and consulting, and data services and software). Payment providers offer a bundle of services as one product: different types of cards, detailed reporting and analytics services, fraud management, expense management, and others depending on the geography and size of the fleet. Technology providers offer a range of services, such as fleet management software, data analytics, telematics and route planning, often bundled together. Emerging providers, like those in parking, EV solutions, and AV solutions, are entering the market with innovative solutions that can be seamlessly integrated with other products (e.g., fuel card, telematics software, fuel retailers mobile app). The B2B Mobility Space is Poised for Significant Transformation in the Future While payment providers have successfully expanded into close adjacencies and B2B payments, fuel retailers are still refining their offerings, often hindered by legacy tech and complex systems. On the other hand, auto manufacturers have teamed up with payment providers to start offering in-vehicle payments. Moreover, emerging mobility providers, characterized by diverse business models, segment focuses, geographies and technologies, are rapidly gaining market share. We observe several key trends poised to shape the future for the B2B mobility sector (EV adoption, spend management, embedded payments, integration of fuel and EV charging payments, integrated ecosystems). Increased EV adoption will need comprehensive solutions beyond just EV charging Integrated ecosystems through APIs to bring together providers across the value chain with an integration layer Embedded payments into verticalized SaaS and fleet management software Integration of fuel and EV charging payments will be key in the future Spend management for SMB, low-frequency, B2B use of personal vehicles, etc. In such a rapidly evolving market, all major players (fuel retailers, OEMs, technology providers in particular) must be prepared to address and capitalize on the opportunities presented by new technologies and emerging trends. Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com and Emilia Cavallini at Emilia@FlagshipAP.com with comments or questions.

Introduction Much of the market’s embedded payments focus is on pay-in use cases feeding into payment acceptance and acquiring. Embedded payouts are less-developed than pay-ins, but a massive growth opportunity for both platforms and fintechs. In this article, we walk through key growth tailwinds, specific use case opportunities, and potential partners for supporting embedded payouts. We focus primarily on the U.S. market but acknowledge that many of these same upsides exist elsewhere in the world. High-Value Payout Use Case Opportunities Let’s start with a basic definition of embedded payouts. First, we acknowledge there are relationships between payers and payees (aka disbursement recipients), noting that our focus within this article is mostly on business-to-consumer payouts. We acknowledge the scale of both business-to-business payouts and person-to-person remittances, both vital domains within the broader payouts opportunity. B2B accounts payable (A/P) automation and expense management are particularly attractive domains for both platforms and fintechs, generating a massive revenue pool in the U.S. powered by commercial card economics. Next, we note that not all payout use cases have high-value potential. B2C payout use cases that provide a strong fintech monetization opportunity are higher in value because they meet one of the following criteria: 1) Urgent timing 2) Cross-border 3) Recipient is under-banked 4) Integration of the payment into a broader automated workflow 5) The payment needs to be tightly controlled In other words, most traditional payouts from businesses are simple, batch bank transfers. Batch ACH is low-cost and works fine when none of the above criteria hold. But when one of the above criteria is met, then traditional batch bank payments fail to fully meet the needed value-adds, and this is where the lucrative opportunity for fintechs is created. We also focus herein on embedded payouts, meaning payout use cases that are part of a broader relationship with the parties, oftentimes via a technology platform, such as ERP software, a marketplace, or a gig-economy platform. In Figure 1, we depict several high-value payout use cases, noting that this list is not comprehensive. We also delineate between the enabling disbursement product (e.g., plastic card, virtual card, real-time bank transfers, etc.) and the nature of the disbursement relationship (e.g., employee, gig worker, business supplier, etc.). Note that in the interest of keeping Figure 1 simple, we do not fully portray the use case variance across verticals. For example, verticals such as government, insurance, healthcare, charities, etc. all have unique requirements. As payout fintech matures, the vertical angle oftentimes becomes the natural battleground as vertical specialists (i.e., vertical ERPs) compete with horizontal point solution providers. Embedded Payouts Growth Tailwinds Now let’s talk about why embedded payouts are booming. There are four primary drivers of growth acceleration in embedded payouts: 1. SaaS-embedded acceptance has been an exceptional success, but often maturing, and platforms and PSPs are looking for the next embedded finance opportunity. 2. Payouts are highly monetizable, particularly card-based payouts. 3. Penetration of software and other forms of platforms with the potential to embed payments continues to increase as well as the utility (use cases) powered by these platforms. 4. The supply of embedded payout services and operating models is growing and maturing. Growth Driver #1: Need for Embedded Finance Revenue Growth Beyond Acceptance As shown in Figure 2, leading platforms have moved beyond acceptance and have proven the value of other embedded finance product categories. In many cases, these companies are generating over 50% of revenue from embedded finance. With demonstrated success, many platforms are now looking to enter adjacent fintech product categories and/or build upon current payment capabilities to enable new use cases. Growth Driver #2: Payouts Can Be Lucrative Simply put, embedded payouts have the potential to be very lucrative for platforms, especially card-based payouts and use cases that demand additional, monetizable value-added services (e.g., x-border payouts, earned wage access, etc.). Scaled platforms enabling spend via virtual cards can earn 150 bps (before any potential client incentives/rebates) or more from commercial card interchange sharing from their issuing partner, margins which are even higher than typical pay-in acquiring net take rates. Visa and Mastercard continue to innovate their rails to capture the payouts opportunity including the rapid globalization of their OCT programs (Visa Direct, Mastercard Send) and ongoing evolution supporting virtual and commercial card issuing. Growth Driver #3: Platforms Growing Rapidly, Expanding Fintech Use Cases We continue to see steady adoption of platforms across industry verticals. As merchants become increasingly acclimated to using vertical software as their primary business management operating system, the platforms’ right-to-win with embedded finance grows. Further, the utility of these platforms, the ability to support many use cases, is also stimulating demand (for example, being able to support normal payroll, earned wage, and x-border gig payouts, etc.). Growth Driver #4: Expanding Payout Partner Supply Leading PSPs recognize the opportunity in embedded payouts, and platform-focused providers are rapidly building comprehensive suites of embedded finance tools for platforms (as shown in Figure 3). While it won’t always be the case that vertical platforms should source payouts from their current payment acceptance partner, there are obvious benefits to building embedded finance on a single, primary partnership. Operating Model Considerations To capture the payout opportunity, platforms must find the right operating model, powered by the right payouts partner(s). We illustrate the embedded payouts operating model option set in Figure 4 below (noting that this is a simplification relative to the reality of many options and permutations). As illustrated in Figure 4, the operating models range from simple but not customizable to complex but highly customizable. The simplest option is to use a turnkey partner like Stripe who may already be integrated for enabling pay-ins. If you require more customization and control over the user experience, then there are program managers that can meet these needs (as shown in column #2). Lastly, platforms who can deliver large scale have the option to build a customized stack, working directly with a processor and a sponsor bank. In our experience, most software platforms lack the scale to effectively build their own issuing/payout stack. We also acknowledge that this operating model illustration is not universal across verticals and use cases. For example, cross-border payouts or vertical-specific payouts introduce a different set of partners. Conclusions Many embedded payouts use cases are still relatively nascent or at least small relative to their potential (SMB B2B, payroll, insurance, healthcare) while others are already scaling rapidly (travel, corporate B2B, gig worker, gambling). We see rapid growth across many vertical use cases in the coming years. Payouts embedded into technology-driven use cases are a powerful value-add for the payers and payees, and a great way for platforms to make money (particularly when cards or FX are involved). We are also encouraged by the rich supply of fintech providers focused on powering embedded payout use cases across. Please do not hesitate to contact Peter Taylor at Peter@FlagshipAP.com, Tim Gallagher at Tim@FlagshipAP.com, or Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.

This webinar explores the crucial decisions facing financial institutions today: should you build your own dispute management solution, or buy a third party system? This expert-led session guides you through the essentials of dispute management, covering key topics including: - Dispute management and why it matters - Challenges banks face with their dispute management process - Building vs buying: key factors to consider - The hidden costs of in-house customization - Protecting data privacy - Balancing customer experience with dispute volume management Whether you're leaning towards building in-house or leveraging a third-party solution, this webinar will equip you with the knowledge to balance cost, efficiency, and security in your decision-making process. Webinar Recording (20 June 2024) Joined by: - Erik Howell, Partner at Flagship Advisory Partners - Thor Arne Vartdal, Scheme Compliance Expert and Dispute Specialist at Rivero - Kevin Saaremäe, Product Specialist at Rivero Please contact Erik@Flagshipap.com for any questions.

Introduction The tremendous growth of next-gen point-of-sale (POS) providers highlights a transformative shift towards innovative product and service models in the physical commerce environment. The introduction of new iOS and Android software and hardware has disrupted the traditional POS market, and has contributed to the development a broad range of affordable, highly flexible and innovative products. Payment and software providers that cater to small and medium-sized merchants currently achieve impressive revenue growth by marketing next-gen POS hardware and software coupled with integrated payments and other fintech services. We expect this trend to continue until ultimately, legacy, on-premise solutions become extinct. If you are not marketing next-gen software + hardware + integrated payments in mature POS markets like the U.S., then you are likely struggling to grow in the small and medium-sized business segments. In this article, we dissect the public data on growth and revenue mix among next-gen POS providers. Next-Gen POS Market Segmentation As shown in Figure 1, we segment next-gen POS providers into two distinct groups of companies: (1) providers with payments-DNA and (2) providers with software-DNA. The payments-DNA category includes payment providers that have expanded into owning commerce software. Providers that fall into this bucket include Clover (Fiserv), Square, and Shift4. These companies excel in product innovation of their ‘software + hardware + fintech’ service bundles, a distribution strategy that has evolved from traditional feet-on-the-street and telesales channels of yesterday. Payment companies buy software companies to position for this product disruption curve. A notable example of this strategy is Shift4, which acquired more than nine software companies across various verticals, including restaurant, retail, hospitality, stadiums, and non-profit. Shift4 also announced the acquisition of Revel for $250 mil. in May 2024, one of the leading restaurant SaaS in the U.S. Other examples of payment companies buying into software include Elavon, Global Payments, Nexi. The software-DNA category demonstrates an even more impressive evolution, with SaaS leaders such as Toast, Shopify, Lightspeed, SpotOn, and others. While software (subscription) revenues are still modest at payment companies such as Fiserv or Shift4, payments and fintech services now account for a majority of revenue for the most successful POS/commerce software companies (KPIs which we cover in more detail shortly). The Rise of Next-Gen POS The market share of next-gen POS providers with software-DNA and payments-DNA providers is growing rapidly. As illustrated in Figure 2, the processed annualized payments volume of next-gen POS providers is growing at double digits (where it is not unusual to hit the 40-50% CAGR mark). Another indicator of success is the significant increase in the number of POS terminals and locations served by next-gen POS providers (Figure 3). The swift expansion of next-gen POS providers indicates that the adoption of next-gen POS terminals is projected to grow over the next five years. Legacy, on-prem solutions will eventually phase out. As demonstrated in Figure 4, the growth in gross and net revenues (gross profit) of next-gen POS providers since 2019 underscores their robust growth fundamentals. This trend begins to emerge among European next-gen SaaS players such as Mews and eposnow. As mentioned above, payment and fintech products have become the leading revenue generator for several next-gen SaaS companies. Although software remains a fundamental part of their offerings, the profit margins from software are typically lower compared to those from payments. In other words, software is the lead product generating sales, while payments and fintech drive profitability. As illustrated in Figure 5, payments and fintech represent the lion's share of revenues for next-gen POS software providers. Toast, a leading restaurant SaaS platform, has surpassed Shopify in terms of payments and fintech monetization, with 87% of its overall 2023 gross revenues attributable to payments, hardware, lending, issuing, and other fintech products. It is important to note that our examples, extracted mostly from publicly traded companies, represent the largest SaaS and fintechs in the market. Setting aside the most successful examples, there are still hundreds, even thousands, of SaaS companies that likely struggle to scale and grow into their next-gen position. We anticipate ongoing consolidation among smaller providers (a strategy executed by companies such as Lightspeed) as smaller SaaS lack the capital to affect a meaningful evolution to next-gen products and achieve full potential on monetizing financial services. Conclusion Next-gen POS solutions redefine traditional markets for POS software, hardware, and payments, and have created a new class of high-growth fintechs. There is still plenty of growth runway to capture, as software products continue to add functional modules (HR, CRM, etc.) and connect value-added apps. Similarly, as payment acceptance becomes more mature, there is a logical roadmap for expanding fintech services into lending, expense management and pay-out services, payroll, and others. Lastly, we expect next-gen POS winners to increasingly expand globally, which has proven more difficult than in digital commerce software (e.g. Shopify). As small and medium-sized businesses increasingly embrace the advantages of modern-tech-led product and service bundles, the provider landscape will continue to be disrupted as legacy providers cede share to next-gen fintechs. Please do not hesitate to contact Charlotte Al Usta at Charlotte@FlagshipAP.com, or James Morgan at James@FlagshipAP.com with comments or questions.

Flagship was at the Stripe Sessions conference in California last month to meet with our SaaS and payments clients. It was a well-run event with several thousand attendees - and both San Francisco and the Moscone Center were delightful venues. Stripe announced more than 50 new product updates and showcased speakers like Larry Summers (former Secretary of the Treasury), Jensen Huang (CEO of Nvidia) and 20 other C-level executives across the Internet Economy. Flagship also joined the Stripe Partner Program as one of their recommended payment advisory partners for SaaS companies and enterprises that need help with growth, product and commercial strategy. The volume of Stripe’s product updates was impressive and a case study in how much merchant acquiring has shifted from a sales-driven industry to a product-driven one over the last decade. That has been a tough transition for many companies and acquirers that continue to focus most of their time on distribution partnerships, outbound sales, and pricing should make some time to look at whether they are still fundamentally offering a competitive product and customer experience. Following our detailed breakdown of Stripe’s announcements here, it is worth paying particular attention to their new Vault & Forward API as well as their decoupling of value-added services (starting with Optimized Checkout, Billing, and Radar) from payment processing. These are both big strategic moves that make it easier for SaaS developers and enterprise merchants to work with Stripe. Other acquirers should look at whether these “open platform” moves are something worth responding to or replicating in their own business. Flagship’s Key Industry Takeaways Looking beyond Stripe’s individual announcements, we find the content, exhibit halls and 1:1 conversations at these industry events to provide a good barometer of what’s happening in payments and fintech. Here is a brief summary of what we saw and what we believe it means for the future: Focus on Enterprise and B2B Stripe, Square, Affirm, Brex, and other breakout winners in the last wave of fintech innovation got their start making financial services easier for small merchants and startups, which were poorly served by existing mainstream providers. All of these companies have now expanded their focus to include enterprise customers and B2B - areas where trillions of dollars of money movement continues to flow via legacy systems. Stripe’s most notable product updates at Sessions are intended to make Stripe a better solution for enterprise clients. Mainstream providers should expect the next few years to be more volatile as innovators turn their attention towards the enterprise and B2B payments. All Payments Will Be Integrated The natural fit of payments within business software is a surprise to no one - ISVs have been building payments into POS solutions since the early 2000s (remember, Lightspeed launched in 2005 with one of the first integrated POS solutions for SMBs) and Silicon Valley has focused on it since Square Register and Clover launched in the early 2010s. Stripe announced that 13,000 platforms use Stripe Connect to enable payments for more than 8 million SMBs, which is in-line with the broader trend: today, ISVs are the single-largest distribution channel for merchant services in the U.S., UK, and EU (and the majority of new digital-first accounts in the U.S. and UK in 2023) according to Flagship’s research. Integrated and embedded payments result in lower CAC, higher pricing, lower attrition, and a normal chargeback profile relative to standalone payments. We expect effectively all SMB payments to be sold through integrated solutions in the future, so any payment processor without an ISV strategy should have a clear rationale why not. Embedded Finance is the Future There are many other types of financial services that could benefit from the same SMB distribution advantages as integrated payments: business lending, BNPL and branded credit, business banking, payroll, benefits, insurance, spend management, and more. Our team at Flagship has worked on some of these product expansions and seen the impact; to point to two public examples, Square has facilitated more than $14 billion of small business loans since launching its product a decade ago and Shopify reported the recipients of its loans grow 36% faster than their peers. Stripe’s John Collison agreed, saying that Stripe finds “that offering Financial Services to the end businesses tends to just work tremendously well for those platforms.” Tom Aveston (the CFO of Mindbody) shared that after 15 years providing payments and credit, Mindbody plans to add banking, payroll, insurance, collective purchasing, and more. As embedded payments becomes a given, we believe platforms that provide embedded finance offerings relevant to their brand will outperform their peers in the years to come. This could be an area where diversified processors (FIS, Fiserv, Global Payments) have an advantage by bringing their other businesses (and bank clients) to the table to enable embedded finance offerings for ISVs. Great Fintech Unbundling In the early days of this latest wave of fintech innovation, it was common to talk about “fintechs unbundling the bank,” with dozens of point solutions appearing to attack every part of the typical multi-line product set of a large commercial bank like JPMorgan Chase or Wells Fargo. Over time those entrants have continued to invest in product and moved far beyond their origins: Stripe and Square now each advertise 20+ different products, Adyen has more than 10, Brex has at least a half-dozen. Stripe’s announcement that it will start to make its value-added services like Optimized Checkout, Billing subscription management, and Radar fraud prevention available to companies that don’t use its payment processing is part of a trend of fintech companies voluntarily unbundling themselves. For example, Navan launched a “bring your own card” solution (Navan Connect) last year that lets people use its spend management solution with third-party corporate cards and Intuit allows customers to use its QuickBooks Money product (a business bank account with payment processing) without using its core QuickBooks Online accounting product. Innovators have long recognized the strategic importance of value-added services; now they are looking for natural opportunities to monetize them directly (our recent Flagship research found that PSPs should derive 15-30% of net revenues from VAS). New Forms of Payments The last ten years have seen a dramatic shift of consumer payments from cash to card. Today, more than 78% of U.S. consumer payments are facilitated through card. But the global payment landscape is much more complex with many forms of non-card digital payments, including stored value wallets, bank buttons, open invoice and prepaid vouchers, and more. We are likely to see more of that complexity come to the U.S. in the next few years (while non-U.S. markets benefit from many more years of cash conversion). This will be good for consumers, who gain choice; good for merchants, who will see more competition in payments; and good for acquirers, who can help enable new payment options like pay by bank, BNPL, and digital currencies. Innovation Under the Surface Attendees at Stripe Sessions were not just talking about how people pay - they were also talking about how payments work. The operational transformation of payments (and financial services generally) through data and automation is coming and it’s hard to overstate the importance. Klarna, for example, has applied generative AI to its customer support operations and reduced the average handling time per case by more than 80% (from 11 minutes to 2 minutes) and Stripe is deploying AI to personalize checkout experiences for millions of individual consumers in real-time. Issuers and merchants are both looking at how direct integrations to share data in real time can better feed analytical models to prevent risk and improve reconciliation. Innovation is not just what you see, it’s also happening behind the scenes, and we are likely to see more focus on that in the years to come. Flagship will continue to be present at industry conferences and trade shows in the U.S. and Europe over the coming months. Some events on our calendar include Money20/20 (in Amsterdam in June and Las Vegas in October), TreviPay Crossroads, SaaStr, and more, in addition to our own upcoming Flagship-hosted events in DC and NYC. We look forward to seeing you all out there. Please do not hesitate to contact Ben Brown at Ben@FlagshipAP.com with comments or questions.

We attended Stripe’s annual conference—Stripe Sessions—where they announced 50+ new product features. Read our reactions to these new features. We advise viewing the slides via the "PDF" icon button. Please do not hesitate to contact Peter Taylor at Peter@FlagshipAP.com or Salvatore LoBiondo at Salvatore@FlagshipAP.com with comments or questions.

Flagship Advisory Partners’ Executive Interview Series provides readers with exclusive insights from thought leaders in the payments and fintech industry. This edition puts the spotlight on Arab Financial Services (AFS), a leading fintech that serves businesses and fintechs in the Middle East and Africa (MEA) region. Flagship Advisory Partners met with Samer Soliman, CEO of AFS to learn about AFS’ perspectives on challenges and key opportunities in the MEA region. Image: Samer Soliman, CEO AFS Firstly, how would you describe AFS for those who are not familiar with the fintech that you lead? AFS is a leading innovator in digital payments solutions for the MEA region. We empower businesses of all sizes; from financial institutions, merchants, governments, and fintechs – with a comprehensive suite of services. Our key services include issuer processing, merchant acquiring, open finance, and instant payments. In essence, AFS functions as a digital bridge, facilitating secure and streamlined transactions between consumers, merchants, and financial entities. Our network facilitates seamless payments, fostering economic growth throughout the region. The Middle East and Africa (MEA) region is tremendously dynamic, but also widely varied in terms of local market scale and maturity. How do you define and segment this complex region? The MEA region represents a dynamic, yet diverse landscape. We at AFS recognize this complexity and segment the region based on key factors that influence payment solutions: Market maturity: We consider the level of infrastructure development, digital adoption, and existing payment methods in each country. Geo and culture: We segment countries with common economic characteristics, demographics, and cultural nuances. Regulatory landscape: Varying financial and payments regulations across the region require us to tailor our solutions to meet specific compliance requirements by market. By segmenting the MEA region as described, we at AFS strategically focus on three key areas: High-growth markets: We prioritize emerging markets experiencing a surge in mobile phone adoption alongside a growing middle class. This creates a perfect environment for accelerating financial inclusion through our innovative digital payment solutions. Financial inclusion: We actively support initiatives that bring the unbanked and underbanked population into the financial ecosystem across the region. Cross-border collaboration: We address the challenges of fragmented regulations by facilitating seamless cross-border payments, which is essential for regional economic integration. As we see it, there are several key benefits to our segmented approach. Firstly, targeted solutions. We tailor our payment solutions to the specific needs and opportunities of each market segment. Secondly, enhanced client value. By understanding the local nuances of each market, we deliver solutions that maximize value for our clients. Thirdly, and lastly, sustainable growth. Our focus on financial inclusion ensures long-term growth for both AFS and the MEA financial ecosystem as a whole. What payments challenges and opportunities are particularly unique to the MEA region? And how do addressing these challenges fuel AFS’s position as a leading local provider of payment and fintech services? The MEA region's payments landscape is booming, fueled by digital and mobile solutions. However, cash dominance persists, hindering security, efficiency, and financial inclusion. AFS tackles these challenges head-on by: Partnering for change: We collaborate with regulators and financial institutions to transition from cash-based systems. Our innovative digital payment products create a more inclusive, efficient, and secure financial ecosystem. Navigating complexity: Complex and fragmented regulations across MEA can be a barrier to entry. AFS has a proven track record of navigating these complexities, working directly with regulators to promote digital payments across the region. Enabling seamless cross-border payments: Disjointed regulations often hinder cross-border transactions. AFS offers international and cross-border transfers embedded in our white-label solutions. This simplifies the process, enhancing security and reliability for users. Empowering Micro, Small and Medium Enterprises (MSMEs): Large unbanked populations and informal economies pose challenges in MEA. AFS actively supports MSMEs with tailored digital transformation solutions. We leverage mobile technology and payment acceptance solutions to expand access to financial services, aligning with the region's thriving digital commerce. What would you say to global merchants, technology platforms, and fintechs that want to capture the MEA growth opportunity? MEA is a thriving region and presents a massive growth opportunity for global merchants. The region is home to a massive 1.6 billion people, a significant proportion of which are under the age of 30. This group is eager to digitally transact and connect. AFS empowers global merchants to effortlessly tap into this young and tech-savvy population. We bridge the current gap by offering advanced payment technology solutions across various sectors, including hospitality, F&B, and MSMEs. In addition, our solutions ensure seamless access to the young demographic, maximizing your reach and potential for growth in the MEA region. You mentioned AFS has been in the business of payments for 40 years, with such a long history, do you have any comments or insights into what lies ahead? Four decades in the dynamic world of payments has given AFS invaluable experience. Looking ahead, we see several key trends poised to significantly impact the landscape: The seamless integration of finance: Payments will become increasingly invisible, seamlessly woven into everyday experiences. Embedded finance will be the new frontier. Central Bank Digital Currencies (CBDCs): CBDCs take the center stage, are gaining traction and have the potential to reshape the entire financial ecosystem. Generative AI Transforms Banking, The Rise of Digital Identity and Wallets: Secure and convenient digital identities paired with digital wallets will become the preferred method for conducting transactions. Mobile Finance Continues to Reshape the Future: Mobile technology will remain a driving force, defining the future of banking technology and standards. Open Finance: Will further unleash innovation in fintech and payments. By strategically investing in open finance, digital wallets, and generative AI, AFS is positioned as a leader in navigating this evolving landscape. We are committed to staying ahead of the curve and continuing to deliver exceptional value in the world of digital payments for years to come. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.

A cautious but optimistic sentiment is prevailing in the Fintech and Payment sector. Despite a subdued start in 1Q 2024, investors anticipate an uptick in M&A deal flow throughout 2024. General Commentary & Highlights Global: Fintech M&A and Fundraising Poised for a Rebound from Q1 2024 Deal volume of global fintech M&A deals remained subdued in Q1, with the number of deals dropping 15% in 1Q 2024 (compared to 1Q 2023). We expect an acceleration of deal activity through 2024 and we are already seeing evidence of this acceleration in North America and Europe. North America: Evidencing Expanded Fintech Deal Flows in Q1 '24 North America rebounding from a market low in fintech deal activity in Dec 2024. We expect growth momentum established in Q1 to continue through 2024 culminating in growth vs. 2023. Europe: Also Showing Signs of Rebound with Q1 Ramping up from 2023 Trough 2024 deal activity trending on similar levels to 2023. But we expect an acceleration of activity in rest of 2024 as buyers and sellers align to a new normal of valuation. APAC: Fintech M&A Remains Somewhat Subdued Thus Far in 2024 Fintech M&A deal activity remains subdued in the Asia Pacific, including a 25% decline in number of transactions in Q1 2024 vs. 2023. China macro challenges expected to drive ongoing conservatism in this market, although markets such as Japan could see an increase in deal activity. LATAM & MEA: Fintech M&A Remain Subdued, Facing More Macro-Headwinds Fintech in rest of the world (LATAM and MEA regions) is muted by macro headwinds including political instability and armed conflict, which is likely to continue in 2024. But the attractive fundamentals of these high-growth markets remains and a return to higher deal volumes will come quickly if the market reaches greater stability. Fintech Deal of the Quarter: Capital One Acquires Discover Capital One + Discover will become the largest credit card issuer in the US market, accounting for 19% of the US credit card market. The acquisition will generate expense synergies of ~$1.5B in operating expenses and ~$1.2B in network expenses by 2027. The acquisition will drive cost of funding efficiency, cross-selling opportunity, and create an appealing opportunity for innovation by owning a national payment network that also has a strong international presence. Please do not hesitate to contact Yuriy Kostenko at Yuriy@FlagshipAP.com or Alessandro Mighetto at Alessandro@FlagshipAP.com with comments or questions.

The newest edition of the Global Overview of Payment Providers 2024 – Key Players and Trends in B2B/B2C Ecommerce is designed to help you stay up to date with key trends, investment patterns, mergers and acquisitions (M&As), innovations, and emerging technologies – and gain insights into the capabilities of the top companies in the payments industry. Additionally, the report features four comprehensive infographics detailing the strategic M&As and the main investments in the payments industry in Q3 and Q4 of 2023. Download the full report at The Paypers here. Introduction to the Evolving World of Payments – Global Overview of Key Industry Themes in 2024 The fintech hype bubble burst in 2022, leading to a reset of expectations and objectives in 2023. Thus, 2024 marks the beginning of the new normal for the payments industry. The once irrational exuberance in payments is gone. To make it in today’s payments industry, you need to have a strong product, business model, strategy and leadership, and capital backing. The current shakeout will prove hygienic, contributing to a better payments industry, in which hundreds of fintechs thrive. Product and go-to-market innovations in payments continue unabated, helping to improve the lives of consumers and businesses. If you think about your own day-to-day life, it becomes clear that commerce has never been easier, and payment innovation plays a large part in this advancement. Payment companies also continue to improve business models, finding new ways to create value. For example, a decade ago, payment value-added services that discrete revenue at scale were mostly a thing of fantasy. However, in 2024, these services have become a reality. Within this introduction, I plan to focus on the most interesting and impactful areas of market development, by covering the following themes: 1. Maturity and competitive intensity in payment acceptance; 2. How technology platforms in the US are thriving with embedded payments, and how this phenomenon is also ramping up in Europe; 3. The acceleration of growth and scale in cross-border payments and payouts; 4. How B2B fintech is reaching its potential in the US and emerging in Europe; 5. How wallets and A2A payments are thriving globally, but not everywhere; 6. Insights into how a crowded field of fintechs is stepping into the massive need for trust and security; 7. How investors are adapting to a more challenging investment environment in payments. I. Merchant payment acceptance is now an industry of haves and have-nots In merchant payments (payment acceptance), double-digit growth used to be a foregone conclusion. For decades, the displacement of cash-powered card usage surged, while card acceptance grew towards ubiquity. In 2024, these tailwinds are now mostly played out for much of the Western world. At present, acceptance is effectively saturated in mainstream verticals (retail, hospitality, etc.), and little cash remains. Additionally, the competitive landscape is more crowded than ever, also as a result of competition from software companies that are marketing embedded payments. Achieving 10% topline growth as a merchant franchise is now a challenge. Within this environment, we see an increasing separation between winners and losers (growth laggards). Market leaders, some of whom are listed below, continue to thrive. For example, in the case of point-of-sale (POS), great companies such as Square, Shift4, SumUp, Clover (part of Fiserv), Dojo, and others continue to grow, often well above 20%. Similarly, in ecommerce, market champions such as Stripe and Adyen and challengers such as Nuvei, dLocal, Mollie, and BlueSnap also continue to capture over 20% of growth. While ecommerce went through a rationalisation of growth expectations in 2022, 2023 saw a return to strong results from market leaders. Some of these payment service providers (PSPs) such as Adyen and FreedomPay are also rapidly closing the competitive divide between POS and ecommerce, growing at high rates based on their ability to solve omnichannel needs. For many others, growth has become more challenging. PayPal, for example, an ecommerce payments champion across many global markets, has come under significant growth pressure, particularly due to the cannibalisation effect of Apple Pay (a topic that we will return to later). Figure 1: Select leading fintechs in merchant payments II. Technology platforms are thriving with embedded payments and finance There is no bigger category of winners in fintech than software platforms that are monetising embedded payments and other forms of Embedded Finance at scale. This trend is most visible in the US, where there are now thousands of technology platforms monetising payments as a meaningful portion of their revenue mix. Software and fintech monetisation tends to start with payment acceptance (payins), but payouts, lending, and card issuing are all now lucrative for some of these platforms. The US market’s propensity for cards and comparatively lucrative card economics make issuing and card-based payouts particularly interesting. This development is visible across dozens of different verticals in the US, beyond the headlines – such as education, childcare, charity, field services, and professional services, among many others. Figure 2: Relative maturity of select embedded payments verticals, US vs. Europe In Europe, the adoption of Embedded Finance across different verticals is less mature, as illustrated in the above figure. Some of this nascence is simply a reflection of timing, as European software platforms are smaller and more fragmented, and therefore naturally slower to focus on Embedded Finance. But the monetisation of Embedded Finance in Europe can be more challenging if the embedded use cases are already well served by low-/no-cost account-to-account (A2A) payments. We remain highly bullish on Embedded Finance across use cases and verticals in Europe, but some of these developments will require patience. Part of our optimism is based on the value creation of workflow automation. Even if a bank payment is digital and free, it is still too bespoke, resulting in exceptions and requiring manual effort. The software and fintech community will solve these needs (more so than banks) and establish new monetisation models as a result (e.g., a willingness to pay BPS for a SEPA instant transaction). Figure 3: Select examples of platforms thriving in embedded payments and finance III. Payouts, especially cross-border payments, are realizing impressive growth and scale As merchants become more ecosystem-based, payout fintechs are thriving, particularly those with strong positions serving the cross- border needs of marketplaces and gig economy platforms. These platforms operate complex networks of buyers and sellers, often around the world. They require not only global payment acceptance, but also global payouts to their sellers and gig workers. Both the platforms and specialised fintechs, such as Payoneer, have come to realise that they can also provide a broader range of services to these gig customers – for example, card issuing and neobanking. Beyond supporting platforms, payout specialists continue to chip away at market share from banks and traditional money remittance providers. Modern technology allows these companies to move money faster and cheaper than ever before including digital user experience (UX) on both the initiation and receiving end of the transaction. Given that cross-border digital commerce grows at 1.5-2x the rate of domestic commerce, we expect cross-border fintechs to continue thriving. Figure 4: Select leading fintechs in cross-border payments IV. B2B fintech achieving its potential in the US and emerging in Europe The powerful story of software plus Embedded Finance is highly visible in B2B commerce. In B2B verticals, there is massive fintech value creation in the US, but not yet in Europe. In the US, companies such as Bill, Tipalti, Brex, Coupa, Inuit, and others thrive serving the B2B financial services needs of small and enterprise businesses across a range of use cases, including, among others: 1. Working capital lending; 2. Trade finance (financing transactions on terms, factoring, purchase finance, etc.); 3. End-to-end automation of corporate payments (invoice-to-cash, procure-to-pay); 4. Expense and accounts payable (A/P) management and card issuing; 5. E-billing and accounts receivable (A/R) and embedded payments. Some of these same embedded payment product innovations are also growing rapidly in Europe (e.g., expense management and payments, working capital) while others are not yet breaking out (e.g., corporate payments, trade finance). However, we believe that it’s only a matter of time before the latter become more prevalent. B2B spend will reach approximately USD 140 trillion in 2024, two to three times bigger than consumer-to-business (C2B) spend. Banks still process and hold most of this spend, but fintechs will continue to find proposition and GTM advantages to chip away. Figure 5: Select examples of leading B2B fintechs V. Wallets and A2A payments are thriving around the world, but not everywhere Wallets, in various forms, continue to thrive in 2024. Apple Pay, for example, has achieved scaled success around much of the world in both face-to-face (F2F) and digital payments. While Apple is notoriously tight with data on Apple Pay, their wallet is clearly thriving, and it is a primary contributor to PayPal’s growth struggles. Success for wallets elsewhere tends to be more domestic, and often A2A driven, rather than the Visa and Mastercard (V/MC) rails that power Apple Pay. From developing to developed markets around the world, the real-time A2A banking infrastructure has been a massive catalyst for the scaling of mobile payments. A2A payment schemes, built to power mobile and digital payments, are achieving rapid growth and success around the world. Most of these are national initiatives, supported by the local banks (UPI in India, Pix in Brazil, Blik in Poland, etc.). Across markets in Asia, we also see the development of wallets as part of broader ‘super app’ platforms designed to enable many day-to-day use cases. Telco or mobile money-based wallets are also thriving in developing markets such as Southeast Asia (SEA) and Africa – for example, GCash (the Philippines) and M-PESA (Sub-Saharan Africa), among others. Of course, not all forms of wallet or A2A payments are thriving. We are still waiting for scale in Open Banking payments and the development of potential A2A payments disruption in the US. And while I won’t hold my breath on these disruptions, there are visible ripples. US consumers are increasingly accepting of Open-Banking opt-ins (where Plaid is becoming ubiquitous in the US as an access enabler). Moreover, some of the vertical A2A disruption use cases, such as those pursued by Trustly, are quite interesting as a precursor to a broader disruption Figure 6: Types and examples of leading digital wallets (or wallet backbones) VI. Identity verification, trust, and security are critical in a digital world In a world in which digital commerce is booming and payments are smarter than ever (i.e., embedded, via wallets, etc.), one would hope that we were making progress in tackling fraud issues. Unfortunately, fraudsters are talented and motivated, continuing to find ways to exploit the payments ecosystem. For every door that technology closes to fraudsters, another is open by our constant need for more frictionless use cases. Payments and identity fraud is still growing and evolving. For example, counterfeit card fraud is down significantly, but account takeover fraud continues to grow. There is a massive and relatively fragmented community of fintechs positioned to solve the needs of identity validation, payment, and account security. This vast community tends to be product-specialised, as shown in the figure below. We expect consolidation and breakouts from this group of fintech in the coming years. Figure 7: Landscape for identity, trust, and security fintechs VII. Fintech investors adapting to a payments industry with tightened fundamentals Fintech investors had it easy for the better part of three decades, starting in the early 90’s. This easy road ended in 2022. Fintech remains a great place to invest, but the arbitrage is gone. For investments to thrive looking forward, investors must pick the right companies and leaders – and make investments at the right valuations. We expect some of the private equity investments made from 2019 to 2022 to generate negative equity returns, as the valuations outpaced future cashflow potential. We already see a shakeout happening at the lower end of the market as venture capitalists (VCs) pack up and exit deals that lack a clear path to profitability. We will see a similar shakeout among larger private companies over the next several years. In summary, there remains much to be excited about in the world of payments. But there is also a new dose of reality and focus on building great businesses, not just innovation for innovation’s sake. Read the full report by The Paypers here. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.

A decade ago, Value-Added Services (VAS) in the context of merchant payments were more aspirational than tangible. Today, we see merchant Payment Services Providers (PSPs) achieving lucrative success across a range of value-adds including software subscriptions, lending, multi-currency, card issuing, and others. Isolating Square, given that they are publicly listed, we see a healthy 28% of gross profit derived from VAS (not payments) in 2023. Given the range of proven VAS products now available, we believe that all PSPs should derive 15-30% of net revenues from VAS. Within this article, we examine the range and fit of VAS for different merchant segments, and we dissect Square’s and Adyen’s VAS profiles as an illustration of these segment-driven VAS outcomes. VAS Heatmap – Where Are Your Best Opportunities? As shown in Figure 1, there is a broad menu of VAS available to merchant PSPs. Some of these VAS are more proven and lucrative than others. An optimal prioritization of VAS is segment, channel, and geo-driven. Within the enterprise e-commerce segment, multi-currency settlement is the biggest money maker, but fraud management, tokenization/vaulting, and chargeback services are also demanded and strategic. Within the SME segment, software subscriptions and lending are the big profit generators, but there is also a broader range of options given the natural success of bundling and cross-selling within the small segment. Well-established Dynamic Currency Conversion (DCC) and tax-free shopping VAS continue to be lucrative if your geographic and vertical footprint (i.e., foreign cardholders shopping and engaging in hospitality and entertainment) aligns well with these products. Software Subscriptions and the Convergence of Payments and SaaS Software subscriptions stand out as the most intriguing facet of VAS within the SME segment. However, categorizing software as VAS is somewhat misleading. Core business software, for example, commerce-enabling or ERP software, which is the operating system of the business for an SME business is the lead product; payments are a secondary buying decision in the merchant’s purchasing cycle. There is an ongoing convergence of software and payments/ fintech, which is reshaping each of these industries. In Figure 2, we illustrate this convergence, software companies expanding into payments and fintech and payments companies expanding into software. Both evolutionary paths have produced success, although the software companies are more advanced in penetrating the fintech revenue pool than PSPs are penetrating the software revenue pool. While software, as explained above, is the primary purchase decision (vs payments) for small merchants, payment processing is a more lucrative driver of gross profit than software (at least in the small merchant segment, in mainstream verticals such as retail and hospitality). In these mainstream verticals, software and hardware tend to be a lower-margin (software) or no-margin (hardware) while gross profit and EBITDA margins are driven primarily by payments and fintech services. For example, only one-third of Toast’s gross profit comes from software and hardware, while two-thirds of gross profit comes from payments and other financial services (Toast being a software company at heart). It is not an easy transition for merchant PSPs to learn how to market software. Fiserv is highly successful with its Clover platform today, but it took many years for the company to train its distribution channels to effectively sell Clover. Similarly, Shift4 delivers strong growth with its SkyTab and Appetize software products, but this success comes on the back of distributing restaurant software for many years. Our strategic viewpoint is that leading small merchant PSPs need to find success in at least one of two strategic paths as illustrated in Figure 3. Some PSPs manage to succeed with both product and go-to-market strategies (e.g., Bill.com, Fiserv, Sumup), but channel conflict is created when a company both owns and partners with software providers. Finally, rather than owning the software, some PSPs elect to white-label basic SaaS products, for example, as Worldpay does with GoDaddy. We draw a strategic distinction between small merchant SaaS (the simplest, more generic SaaS) and more advanced, vertically specialized SaaS. We see PSPs as having a strong right to win with low-end software bundles for Point-of-Sale (POS), web commerce, or e-billing. But we see a more challenging right to win for PSPs owning/selling highly-verticalized software (which brings you upmarket into medium-sized and larger merchants). Before we move on to other specific VAS examples, it is also worth noting that hardware itself is a form of VAS in today’s market. Hardware is not a major contributor to gross profit, as it tends to be a loss-leading component of a fintech bundle, but it is the foundation for a broader POS kit. As a POS fintech, if your hardware is not elegant and does not deliver the range of use cases required, your go-to-market will suffer. In Figure 4, we illustrate Clover’s hardware range. This range illustrates the fundamentals of solving for the range of POS use cases 1) pure mobility payments, 2) basic terminal, 3) robust portable device capable of advanced interactions, 4) virtual terminal and 5) a full desktop station, noting that Clover’s hardware seems to satisfy basic elegance requirements. Examining Square and Adyen’s VAS Revenue Square and Adyen are both publicly listed companies, and we use their data as proxies for VAS within the context of a small merchant franchise (Square) and an enterprise e-commerce franchise (Adyen). As shown in Figure 5, Square has one of the most diverse product menus in fintech, touching on many VAS domains. The sheer breadth is a testament to the possibilities. If you are the primary operating system of a small business, your right to win across the needs of that merchant is strong. Square’s gross profit breakdown of revenues is shown in Figure 6. Here it becomes apparent that: Payment processing/acquiring accounts for 76% of the gross profit (after interchange, scheme fees, and processing fees) Hardware is a loss leader, generating negative gross profit (-3.5% of gross profit) Non-payment financial services and software subscriptions account for 28% of gross profit. Unfortunately, Square does not break this down further. Lacking more information, we assume this gross profit is roughly split 50/50 across financial services VAS and software subscriptions as shown in Figure 6. Square is successfully expanding its VAS penetration. This is evident in the development of gross profits: ‘payments’ grew at 21% vs. ‘subscriptions and FS VAS’ grew at 32% between 2019 to 2023. Adyen’s primary VAS are 1) multi-currency settlement, 2) fraud management and related services such as chargeback automation, 3) tokenization, and 4) card issuing. Adyen’s public financial data is not perfect for analyzing VAS as their VAS products fall across two of three reported revenue buckets. Thus, we make certain simple assumptions about what percentage of ‘Transaction Services’ revenue is VAS vs. core gateway revenue. On this basis, as shown in Figure 7, we estimate that Adyen’s VAS revenue accounts for 22% of total revenue, with multi-currency settlement as the largest of the VAS. Multicurrency settlement is a great money maker core to processing and ‘collecting’ payments for multi-national merchants. Fraud management, 3DS, and chargeback automation are also attractive VAS domains with solid growth fundamentals, albeit a more complex product area where specialists often lead. Conclusions VAS revenue on the back of merchant payments is no longer an aspirational upside, it has become an essential driver for growth. As the growth fundamentals of merchant payments mature and slow, driving topline growth and EBITDA is increasingly a function of VAS success. Fortunately, there is no mystery, the menu of available VAS is now well-defined. Capturing this opportunity, however, requires a focused strategy, strong GTM execution, and a well-chosen operating model (partner vs. in-house). Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com or Peter Taylor at Peter@FlagshipAP.com with comments or questions.

Nuvei announces $6.3B acquisition by Advent International, breaking out from what has been a slow period for merchant payments M&A We advise viewing the slides via the "PDF" icon button. Nuvei is a high-growth merchant payment service provider focused principally on serving global e-commerce merchants. M&A was an important source of growth for the company, the acquisition of SafeCharge being the lynchpin event. We expect Advent to continue to acquire companies on the Nuvei platform. Advent is one of the world’s most successful private investors in payments. The Nuvei acquisition comes at a reasonable valuation relative to growth. General Commentary & Highlights Nuvei is a high-growth merchant payment service provider focused principally on serving global e-commerce merchants. M&A was an important source of growth for the company, the acquisition of SafeCharge being the lynchpin event. We expect Advent to continue to acquire companies on the Nuvei platform. Advent is one of the world’s most successful private investors in payments. The Nuvei acquisition comes at a reasonable valuation relative to growth. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com or Rom Mascetti at Rom@FlagshipAP.com with comments or questions.

General Commentary & Highlights Visa and Mastercard agreed to reduce credit card interchange fees and change some rules as part of a proposed antitrust settlement with U.S. merchants that could conclude 19 years of litigation and negotiation if approved. U.S. merchants have experienced consistently rising card acceptance fees for decades (see Figure 2), in part because of interchange fees driven by network competition for issuers and issuer competition via credit card rewards. The schemes agreed to lower published credit card interchange fees by 0.04% for at least three years while ensuring that the average effective interchange rate (including posted rates and negotiated rates) is at least 0.07% lower than the average for the 12-month period ending on March 31, 2024, for five years. According to the plaintiff’s attorneys, the fee rollbacks and caps alone are worth $29.8B. Flagship’s analysis expects $27.4B with less impact from fee rollbacks alone, but potential impacts from tender mix shifts (see Figure 3). Visa claims that SMBs comprise more than 90% of U.S. merchants, but we expect large merchants to accrue most of the benefits (who accept two-thirds of U.S. card volumes and receive IC+ pricing). Equally important, the settlement effectively removes most of the V/MC restrictions on surcharging, although for merchants to be fully unencumbered, certain states will also have to roll-back laws that restrict card surcharging (see Figure 4). Other notable rule changes include: Merchants may provide discounts (not surcharges) based on the card issuer and/or product type Merchant can choose to accept or decline specific digital wallets whereas previously V/MC required merchants to honor all pass-through wallets like Apple Pay at brick-and-mortar locations Merchants may now form “buying groups” to collectively negotiate with V/MC on fees We see this settlement having modest impact on the total cost of accepting credit cards in the U.S. but a potential for meaningful change in the payment experience if surcharging becomes more common. A 0.04%-0.07% reduction in interchange is not highly disruptive to financial institutions given the scale of their interchange revenue pool. Please do not hesitate to contact Rom Mascetti at Rom@FlagshipAP.com or Ben Brown at Ben@FlagshipAP.com with any comments or questions.

On 6 March 2024, we had the pleasure of hosting a live event in collaboration with The Payers and European Women Payments Network on the trending topic of Embedded Payments and Finance. Watch all highlights and a peak into the insightful discussions that took place. Aftermovie | Embedded Payments & Finance Event | 6 March 2024, Amsterdam Should you have any questions regarding Embedded Payments and Finance, please feel free to contact Joel Van Arsdale at Joel@Flagshipap.com or Charlotte Al Usta at Charlotte@Flagshipap.com.

Discover the future of finance with our webinar unpacking CBDCs (Central Bank Digital Currencies) and the ECB (European Central Bank) ambitions for the Digital Euro. CBDCs have emerged as a pivotal topic, intersecting finance, technology, and policy. In this session, we delve into definitions, characteristics, use cases, and potential impact CBDCs have on stakeholders in the wider payment ecosystem, and outline key characteristics of the Digital Euro as proposed by the ECB. Webinar Recording (13 March 2024) The presentation is available for download by clicking the PDF button in the right hand side panel (desktop view) or below the post (mobile view). Joined by: - Erik Howell, Partner, Flagship Advisory Partners - Stanislav Dubský, Manager, Flagship Advisory Partners - Alessandro Mighetto, Senior Analyst, Flagship Advisory Partners Please contact Erik@Flagshipap.com for any questions.

Gaining access to the physical POS (‘Point-of-Sale’) has been a pain point for local wallets and APMs (‘Alternative Payment Methods’) in several European markets. Apple Pay, Google Pay, and contactless cards have excellent customer experiences and broad acceptance, and APMs have struggled to match these card-centric form factors in terms of ease of use. European regulators have focused on Apple for blocking third-party access to the NFC (‘Near Field Communication’) element in iOS devices, as this would be required (in regulators’ view) to increase competition and access to payments for European users in stores. In response to regulatory pressure, Apple committed, effective 19 January 2024 to allow third-party wallet and payment providers to access iOS devices' NFC functionality via APIs, free of charge. Opening access to iOS device NFCs is a big deal for wallet providers that run on card rails (e.g. PayPal, Google Wallet, MobilePay, Vipps), but likely not (at least for the moment) for APMs that run on account-to-account (‘A2A’) rails (e.g. Swish, Blik, iDeal), as the underlying technology applies to card, not A2A rails. In this article, we explain the commitments made by Apple to European regulators to open up iOS NFCs, discuss potential implications for ecosystem participants, and whether this will change the game for in-store mobile payments. Background NFC is the technology enabling the communication of contactless payments between a form factor (e.g., a smartphone or a plastic card) and a POS terminal. Since the launch of Apple Pay nearly 10 years ago, Apple has held exclusive rights to access the NFC technology in its proprietary iOS devices, essentially forcing all iOS device holders to use Apple’s proprietary Wallet (also referred to as Apple Pay) to make NFC payments in-store. This exclusivity has caused headaches for banks (which must either pay Apple fees on volume run through Apple Pay, or simply not be able to provide mobile payments to the significant portion of bank customer bases that use iOS devices) and other rival wallets, which have struggled to create a similarly seamless user experience for in-store payments (e.g. QR codes and BLE beacons being significantly clumsier at the physical POS than NFC). As a result, Apple has been blamed by the European Commission for hindering innovation, freedom to choose, and fair competition. A formal investigation of Apple by the European Commission was initiated in 2020 and concluded that Apple violates EU competition rules and abuses its dominant market position by limiting access to the NFC hardware required to make payments at physical POS devices. Per European Union rules, breaches could result in significant fines up to 10% of Apple's global revenue. Apple proposed in January 2024 to make several commitments as a response to competition concerns by opening access to their NFC technology to third parties. The European Commission has invited feedback on these commitments and could decide to push for further changes. Commitments The most critical commitment made by Apple is enabling access to iOS device’s NFC technology via HCE (‘Hosted Card Emulation’). Apple has not committed to grant direct access to the ‘secure element’ chip within the iOS device itself but has offered to allow ‘equivalent access’ via HCE, similarly to how Google Wallet enables NFC payments today (see Figure 2 on how the two wallets compare). In simple terms, in the ‘HCE mode’ there is no direct reliance on a secure element to complete a transaction as payment credentials are stored and transactions are completed in the cloud, rather than on the device itself. Other important commitments by Apple include allowing the iOS device to default to third-party payment apps (effectively allowing a third-party wallet, not Apple Wallet, to display a card when tapping the iOS device at a contactless POS terminal), and enabling the utilization of Face ID, Touch ID, and other authentication features at a physical checkout. To gain access to Apple’s NFC technology, developers must be authorized under the ‘Apple NFC Entitlement Program’, and will need to enter into a binding license agreement with Apple. Apple has also developed a dispute resolution mechanism where Apple's decision to deny access to third parties will be reviewed by independent experts. Apple has stated that the solution will be ready in Q1 2024, and the European Commission has gathered feedback from market participants. This implies that there is room for changes to be made, and likely a delayed implementation timeline. Third parties seeking access to iOS solutions will require time to prepare and build, so we are unlikely to see a live solution anytime soon. See Figure 3 for a summary of Apple’s commitments. Implications and Opportunities As we have discussed in prior insights (The Rise of Alternative Payment Methods in Europe), the physical POS has proven to be a pain point for most payment apps. Note that with ‘payment apps’ we mean everything from A2A-based APMs to card-based wallets, which can come in a range of constructs, as explained in the article ‘Digital Wallets Thriving, Proliferating in All Directions’. Many payment apps have tried and failed in the physical channel primarily due to a worse user experience than contactless cards and wallets like Apple Pay, when (arguably) apps need a superior user experience and/or value proposition to gain user adoption. Some providers of these alternative payment apps have cited the closed ecosystem of Apple as a contributing factor to their failure; iOS devices are after all a significant proportion of devices in Europe (see Figure 4), and finding an equally seamless solution to NFC (which has been exclusive to Apple Wallet and Apple Pay) at the physical POS is hard. Wallets as a means for payment in-store to date represent a relatively small proportion of payment volumes in several European markets (see Figure 5), which leaves white space to grow. Market participants like issuers and competing wallets (that run on card rails), might therefore have popped the champagne when reading the news on Apple's commitments to open up their NFC technology, as new opportunities now arise. For example, issuers can take back more ownership over their customers if they tightly integrate a wallet with their banking app, and for rival wallets, it can make sense to issue own-branded cards and control the full user experience. While this is the moment some have waited for, realizing advantages (e.g., reducing fees paid to Apple for Apple Pay, changing consumer behaviors) are likely to be challenging to achieve. Opportunities will be less prominent for other participants like accounts-based payment methods, merchants, and PSPs. We summarize opportunities and requirements to achieve these in Figure 6 below. Will it Change the Game for In-Store Payments? While Apple opening up access to NFC for in-store payments certainly creates new opportunities for stakeholders, it is unlikely to be a game changer for two core reasons; User experience: Third-party wallets’ user experience will at best be on par with Apple Pay, but likely still clunkier overall, which leaves little incentive for consumers to change their payment behavior. Additionally, Apple can still build in features in the remainder of its ecosystem to further differentiate Apple Wallet. Card-rails: As the solution still will run on card-rails this does not solve the (arguably) sub-optimal in-store user experience for account-to-account-based payment apps (e.g. Twint, Blik, Bizum), other than leaving the option to issue cards in a digital wallet environment (which then defeats the fundamental purpose of account-based rails as an alternative to cards). For competing card-based wallet providers, however, these are interesting developments as they will be able to distribute their solution to a broader audience, some of which have already started issuing cards (e.g. PayPal), while others will be incentivized to do so (e.g. MobilePay, Vipps). Issuers are also winners, given that they can convince their customer base to avoid using the Apple Wallet and instead use a competing wallet (in fact, some issuers like DNB, the largest bank in Norway, still have not purposely enabled Apple Pay on their card portfolio) although for the vast majority of issuers, as they have already enabled Apple Pay, convincing customers to change behavior will be very difficult. In Figure 7 we summarize the impact and impact strength for select industry participants. Conclusion Apple opening up NFC will not result in instant changes overnight and will not prevent Apple from developing features and functionality to better integrate Apple Wallet into iOS devices and the broader Apple ecosystem, providing ever-stronger incentives for users to use Apple Wallet. Competing card-based wallets are undoubtedly the winners of Apple opening up, but cannot simply piggyback on iOS devices to win market share. Growth and success will depend on the ability to build a seamless customer experience at the physical point-of sale (UX being the holy grail of mobile payments), in addition to changing consumer habits - a tough nut to crack. Please do not hesitate to contact Elisabeth at Elisabeth@FlagshipAP.com or Erik at Erik@FlagshipAP.com with comments or questions.

Land-based Gaming is a Unique Fintech Vertical, Now With IGT + Everi at its Core Land-based gaming is a unique payments opportunity with specific product requirements, an attractive revenue profile, and specialized set of providers. The proposed merger combines Everi’s market-leading set of verticalized payments products with a leading CMS and games proposition (IGT). The combined entity strengthens Everi’s competitive moat in payments and fintech and introduces compelling expansion opportunities. The combined company expects to deliver sustained mid-single-digit growth and improve operating leverage over time. Land-based Gaming Has Huge Scale, Solid Growth Gaming operators make more than $100B of gross gaming revenue from land—based environments (excluding online) in the U.S. alone. The US land-based gaming (LBG) market is significantly larger than US online gambling, but this is not consistent in Europe. 95%+ of LBG spend in the U.S. (excluding markers) remains cash-based. The opportunity for fintechs to drive displacement of this cash is massive. Land-Based Gaming Payment Methods and Utility Casinos remain cash-based today, given its ubiquity, anonymity, and profitability for casinos (who earn most of the cash access fees). TITO tickets are a good cashless substitute vs. coins but have the limitations of paper. Cards increase velocity of funds, including the cash advance option, but come with regulatory restrictions in gaming, issuer dependencies, and high cost. Wallets reduce friction and cover all use cases including integrations with loyalty, KYC, and gaming systems. Wallets are not yet reaching their potential in LBG, however, given more challenging sign-up and integration requirements, and patrons being used to cash. Wallets Hold Massive Potential to Drive a Cashless Casino Future Wallets hold a massive opportunity to displace cash in LBG. Wallets introduce powerful feature advantages for gamers (e.g. integrated loyalty), reduce friction and increase velocity for operators, and the often-native KYC helps to promote responsible gaming standards. However, the cash-to-wallet transition has been slow to date due to: Mixed operator incentives: Casinos today earn a great deal from cash access and advance fees; the shift to cashless will reduce this revenue stream. On the other hand, operators recognize the future is cashless and see the velocity benefits of a purely digital UX. Ingrained consumer behaviors take time to change: Casino patrons are ingrained in their behaviors for cash and tickets. Such ingrained behaviors can take many years to change. We see the operators as the key force for change with more active wallet promotions and value as the catalyst for the inevitable move to cashless. Various fintechs and casino platforms are competing to win the battle to own the wallet. Below we illustrate the different forms of wallets and key actors in this landscape. Please do not hesitate to contact Peter Taylor at Peter@FlagshipAP.com with comments or questions.

General Commentary & Highlights In North America, 16% of the payfacs registered today are new since Mar ’23. However, 5% of the payfacs from Mar ’23 were unregistered by Jan ’24, a 6% annual attrition rate. In the EU & UK, 14% of the payfacs registered today are new since Mar ’23, on the other hand, 12% of the payfacs from Mar ’23 were unregistered by Jan ’24, a 14% annual attrition rate. We believe that payfac model continues to be a popular operating model to enable payments; however, a relatively high attrition rate in both regions suggests that companies realize the operating burdens of payfac model, and thus decide to pull out. The maturation of PSP’s managed payfac offerings have also made it easier for companies to realize the benefits of the model without registering. In North America, 43% of the payfacs registered today are ISVs/SaaS companies. North America continues to be the bellwether for integrated payments. Although, this is a contraction from Mar ’23 when ISVs/SaaS companies accounted for 47% of registered payfacs; likely evidence of the maturation of managed payfac models in NA. In the EU & UK only 8% of the payfacs registered today are software companies. While embedded payments is gaining steam in the EU & UK the registered payfac model is still relatively nascent. North American payfacs tend to be vertically specialized. As of Jan ’24, 31% of North American payfacs offer general consumer-to-business and e-commerce payments, while the remaining 69% of payfacs are vertically specialized. The leading verticals of North American ISVs include government & education, healthcare, fundraising, property management, membership services, mobility & vending, and hospitality. Payfacs in the EU & UK are less vertically specialized and diversified, as of Jan ’24, 61% of payfacs are consumer-to-business, and e-commerce payments generalists and 20% of payfacs are financial services providers; the rest of verticals have < 4% of the payfac list. U.S. payfacs are more commonly vertical software providers than European payfacs because in Europe payfacs are also required to be registered payment institutions whereas in the U.S., payfacs are not required to have any form of banking license. ISVs/SaaS platforms in Europe generally operate under the payfac lite operating model that does not require a PI license. In the U.S. ISVs/SaaS at scale often favor full payfac registration. Please do not hesitate to contact Peter Taylor at Peter@FlagshipAP.com or Salvatore LoBiondo at Salvatore@FlagshipAP.com with comments or questions.

Omnichannel commerce and payments, once forward-looking concepts, are now mainstream. A majority of merchants (excluding micro-segment) in the U.S. are today, selling through both physical and digital channels. In the enterprise segment, omnichannel infrastructure (payments being just one piece) has been a priority for more than a decade. It used to be that enterprise merchants' own commerce infrastructure (SW, HW) was the primary bottleneck, not payments. But today, we frequently encounter merchants that have transformed their commerce stack to be omnichannel but still lack a corresponding omnichannel payments service. The message here is clear, whether you are a PSP focused on small business or a PSP focused on enterprise clients, delivering omnichannel payment propositions is critical for success in merchant payments.. Most Merchants Are Now Omnichannel As shown in Figure 1, we estimate that 2024 will be the first year in which a majority of U.S. card-accepting merchants are omnichannel (defined as selling and accepting card payments in both face-to-face and digital channels including a website, mobile app, etc.). Merchants today want and need to sell through multiple channels. Payment service providers that do not embrace all of these channels’ needs miss easy value creation, leaving the door open to competitors. Until now, merchants have been mostly reactive in their payment strategies, creating a fragmentation of services, tech stacks, and payment partners. Today, even small merchants frequently rely on multiple PSPs (2+ on average according to our research in the U.S.) to facilitate channel, geography, and local payment methods coverage. This fragmentation of payment partners inhibits the enablement of some of the more advanced omnichannel use cases (but is also a catalyst for the emergence of payment orchestration which we explain in this article). While the enterprise segment has a higher maturity of omnichannel payment enablement and prefers to own key aspects of the user experience for better control, SMEs (small and medium enterprises) are still grappling with siloed channel support. SMEs generally require more backend support for core multi-channel payment acceptance and offering value-added services such as loyalty and rewards. Omnichannel Behavior is Prevalent across Verticals Omnichannel needs and developments are playing out at different paces and to varying degrees across verticals. Clearly, many verticals skew towards one channel, as shown in Figure 2 below. But we also see a development towards omnichannel across verticals. The pandemic contributed to an acceleration in this shift as most traditionally POS-centric merchants were forced to move online to continue serving their clients. In the post-pandemic era where in-store payments are back, a majority of digital merchants also started to realize the importance of selling via face-to-face channels. There is a long list of historically traditional POS-centric verticals that shifted towards digital payments, most notable verticals include retail, beauty, pharmacy, transportation, and restaurants. For example, COVID clearly stimulated an already notable shift in restaurants towards digital commerce and payments (in-app, online, via kiosk, etc.). In physical retail, most small merchants are also selling via a website or marketplaces such as Amazon. It is worth noting that merchant payments in the U.S. have traditionally been more omnichannel-centric while Europe was more traditionally siloed (i.e., POS specialists and e-comm specialists). This is due to the late adoption of EMV (chip and PIN technology), the lack of adoption of strong authentication in the U.S., and the prevalence of various forms of key-entered and non-traditional (not pure e-comm) remote payments. Most PSPs Also Now Offer Omnichannel Payment Services As a PSP, covering POS and digital payments is an increasingly relevant success factor. Offensively, introducing a new channel-enabling product broadens the addressable revenue base and customer lifetime value. Defensively, if you don’t do it, one of your competitors will. Our research indicates that a majority of SME merchants use multiple PSPs, citing channel enablement as the primary rationale. It is becoming increasingly rare for merchant PSPs to not support POS and e-commerce. And there is a long timeline of PSPs making the move to augment channel coverage, for example: Nuvei (a leading global e-commerce payment service provider) announced the global roll-out of its Unified Commerce offering on 7 February 2024 Shift4’s recently completed acquisition of Finaro Mollie announced in May 2023 the launch of its POS offering Buckaroo’s acquisition of Sepay in July 2022 Stripe’s acquisition of BBPOS, an OEM provider, in January 2022 Planet’s acquisition of Datatrans in November 2021 Amongst others Adyen, a leading global e-commerce payments specialist, is a bellwether for driving omnichannel success in the enterprise segment. Figure 3 illustrates Adyen’s ongoing success in growing its POS volumes (42% growth in POS volumes from 2022 to 2023), noting that Adyen’s POS volumes are driven by merchants wanting an omnichannel payments product, not standalone POS payments processing. Adyen’s unified commerce success is particularly notable among merchants who prize a rich and unified customer experience across channels and tracking of customer purchase data across channels to fuel loyalty investment (e.g., fashion, experience-focused hospitality, etc.). Adyen clearly has a winning unified commerce proposition, although it is not limitless. Merchants working with Adyen cannot use 3rd party acquirers for POS transactions and they must select from a limited range of payment devices (not bring their own). These limitations help to limit the complexity of achieving a unified proposition. What Makes a True Omnichannel Proposition? At its core, omnichannel payments is the ability to recognize customers, securely store credentials, cover all relevant payment use cases and payment methods with a common experience, and provide a single set of data and dashboard services to the merchant. We illustrate these concepts in Figure 4. Omnichannel payments is not a complex concept, but many PSPs and merchants struggle with infrastructure designed around a single channel, or disparate infrastructure resulting from acquisitions. We see omnichannel payments as driven by a handful of foundational principles: For small merchants, it just has to be easy: Frictionless integration into the merchants' SaaS (WooCommerce plugins, etc.) Single dashboard Single point of service Single set of settlement flows, etc. For enterprise merchants, you also need a unified payment proposition … Technical Integration Toolkit: a common set of technical tools (documentation, support, etc.), even if payment channels involve different APIs Cross-channel tokenization: single tokenization service for recognizing customers across channels and, as needed, securely storing, and presenting the customer’s payment credentials Settlement & Treasury: Automated and unified reconciliation across these channels achieved by the customers’ bank account harmonized in one single database Data: Single data service with consolidated reporting for transactions across different channels and ideally, value-added analytics on customer behaviors Commercial, relationship management: Single point of contact for account servicing, a common commercial and contracting model, and unified billing 3. .. and for enterprise merchants, the PSP must enable all the relevant omnichannel use cases and transacting platforms: Transacting Platforms: Web In-app POS device Kiosk Paylink (e-bill, chat, email, etc.) Use Cases (noting that the commerce software does most of the work to enable these use cases, not the PSP): Click and collect Endless aisle Buy and return across channels Self-checkout Pre-auth or pay-as-you-go Conclusion PSPs must be omnichannel because most merchants (in mature markets) are now omnichannel and they increasingly demand an omnichannel payment proposition. Merchants need to be proactive and forward-looking when choosing a PSP that can facilitate their omnichannel strategy. PSPs, in turn, must adapt their offerings to deliver a unified proposition that is not channel siloed. Payment service providers that remain channel fragmented or limited will increasingly struggle to compete. Please do not hesitate to contact Charlotte Al Usta at Charlotte@FlagshipAP.com or Sameer Verma at Sameer@FlagshipAP.com with comments or questions.

General Commentary & Highlights PayPal’s stock dropped 9% after PayPal issued low guidance and warned of a transition year. PayPal's account numbers fell for the first time while net revenue remained disappointingly flat, in part due to ongoing price pressure (net take rate declined by more than 50 bps since 2019). PayPal’s recent strategy to price compete aggressively for unbranded volumes of enterprise merchants (our market observation) share seems to have exacerbated revenue margin pressure, though it has generated strong volume growth for Braintree. PayPal’s wallet is losing share to Apple Pay, which provides broader omnichannel coverage and experience than does PayPal (this feels like PayPal’s failures @ POS coming home to roost). Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com or Pedro Giesta at Pedro@FlagshipAP.com with comments or questions.

General Commentary & Highlights Visa and Mastercard both had another year of strong performance on the back of healthy growth in consumer spending and cross-border volumes. Cross-border continues to drive volume growth, though growth slowed from 22% to 16% for Visa and 31% to 18% for Mastercard between Dec.’22-23 and Dec.’21-22, respectively. Visa and Mastercard card counts grew 6% and 9% respectively. Average spend per card also grew 2% for both companies after experiencing declines between Dec.’21-22 (-5% and -1%, respectively). Visa and Mastercard revenue grew 9% and 13% Q/Q, respectively. Both companies continue attributing success to cross-border spending, but cross-border revenue growth slowed. International transaction revenue growth for Visa and cross-border revenue growth for Mastercard slowed from 29% to 8% and 30% to 23% between Dec.’22-23 and Dec.’21-22 for each company, respectively. Client incentives continue growing faster than net revenue on a dollar basis for both Visa and Mastercard. Visa’s client incentives as a % of GDV grew 12% Q/Q versus net revenue growth of 1%. Similarly, Mastercard’s client incentives as a % of GDV grew 8% versus net revenue growth of 1% over the same period. Key partnership wins and relationship expansions were a key talking point during earnings calls for both companies. Visa’s highlighted partnerships were heavily focused on fintechs (47% of logos mentioned), while Mastercard’s highlighted partnerships were more heavily focused on banks (50% of partnerships). Visa announced large strategic investments in payment processing (Prosa and Pismo) and A2A payments platform Form3. Mastercard’s investment activity was spread across a variety of payment use cases (international money transfer, open banking, cybersecurity, etc.) Please do not hesitate to contact Rom Mascetti at Rom@FlagshipAP.com or Salvatore LoBiondo at Slavatore@FlagshipAP.com with comments or questions.

Regardless of the wide variance in definitions for the term “embedded finance” (which Flagship defines in detail in an article here), most market participants can agree on the need to quantify how big embedded finance actually is today, and what its trajectory is towards obtaining its (typically huge) theoretical market size. This article seeks to provide some quasi-quantifiable evidence for indicating the level of traction that embedded finance has in the market today by mapping the press releases of a key segment of embedded finance providers, next-generation card issuer processors, in 2022 and 2023. While there are obvious limits to the utility of press releases as a data source, they provide an instructive indicator of market activity levels because (i) providers have a natural motivation to issue as many press releases about their growth and success as possible, and (ii) typically only relatively significant items get announced in press releases. Based on this analysis, we found that the market traction of what Flagship defines embedded finance as (financial products embedded into non-financial use cases) is relatively modest (see Figure 1 below). Out of 44 new clients announced in North America and Europe, only 5 were with corporates (meaning non-banks and non-fintechs). Fintech clients represented the majority of new clients announced (29), followed by banks (7), and government (1). Arguably, some of the fintech clients announced by these next-generation card issuer processors can be providers of embedded finance, but in our experience, most large corporates typically evaluate utilizing a processor directly (although often utilizing that processor’s program management layer) rather than considering smaller providers. Other key observations include: Overall, new client announcements are relatively modest: 72 globally over two years for all 10 providers, or about an average of 3.5 new client announcements per provider per year (see Figure 2). There was little traction in the bank segment and most announcements were for relatively small pieces of business rather than converting banks’ primary portfolios (see Figure 1). Relatively high emphasis on product introductions and partnerships: 55 over two years for all 10 providers, or about an average of 2.75 new product announcements per provider per year (see Figure 2). Few announcements regarding feature/functionality upgrades (4 total) and technical integrations (2 total) (see Figure 2). Although embedded finance has massive potential, it is clear that for next-generation issuer processors, that potential is still in the very early stages of being realized. In Flagship’s view as it pertains to card issuer processors, significant work still needs to be done to realize this potential. In particular: Corporates (non-banks and non-fintechs) are seeking end-to-end value chain coverage (e.g., white label end-customer front-ends, back office capabilities, etc.) at price points that work for their business case, and there is a gap in supply of end-to-end solutions today; Non-financial companies are often not looking to implement a “program” that takes several months and requires a meaningful amount of resources and subject matter expertise, and are not yet “developer-led” enough to simply work with APIs and a developer page; therefore the product offering and delivery model needs to change to meet these customers’ needs (often for a more basic product that can be MVP’d quickly, but with some hand-holding); and, Go-to-market strategies still need work, particularly around scalable, multi-geo sales, such as via focused targeting of use cases and verticals, and by leveraging distribution partners (e.g., local consultants and system integrators, etc.). Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com, Andrej Gažo at Andrej@FlagshipAP.com, or Claire Hoffman at Claire@FlagshipAP.com with comments or questions.

This article is part II of our Central Bank Digital Currencies series. For more insights, please refer to Part I: Demystifying CBDC (Central Bank Digital Currencies) here. Central Bank Digital Currencies (CBDCs) have emerged as a pivotal topic at the intersection of finance, technology, and policy. As described in our previous article here, a CBDC is a digital form of a nation's currency created and overseen by its central bank. It is different from the existing type of "digital" funds (those that holders can see their bank balance online) as CBDCs are issued directly to holders by the central bank (as opposed to the holder's bank), and the funds held on the central bank's ledger (as opposed to the holder's bank's ledger). In this article, we outline the key characteristics of Digital Euro as proposed by the European Central Bank, and the anticipated impact on stakeholders in the European payment landscape. The European Central Bank's (ECB) proposal for the Digital Euro is positioned by policymakers as a revolutionary step in modernizing monetary policy, financial services innovation, and payments in the Eurozone (see Figure 1). As proposed by the ECB, it will be responsible for the back-end infrastructure and collaborating with banks and payment service providers (PSPs) to develop the market's most affordable and convenient digital payment solution. In our view, the proposed design leaves key questions unanswered regarding future functionality and design. The proposed Digital Euro will be available in two types (see Figure 2): Retail: for public use, individuals and businesses access digital currency from the central bank, replacing cash and improving payments; and, Wholesale: for financial institutions and governments, used for interbank and cross-border transactions, settlements, and reserves management. Since the origin of the concept in 2020, the ECB has explored and prioritized the retail application, working with intermediaries to build back-end and front-end prototypes. At the moment, wholesale applications of the Digital Euro have been sidelined since European banks can already use a 24/7 instant solution, such as the Eurosystem’s TIPS, for inter-settlement transactions in the Eurozone. Due to its programmability and technological flexibility, Digital Euro is intended to cover multiple payment use cases and form factors. The ECB will be responsible for issuing, ledger management, and settlement processes, whilst participating PSPs and commercial banks will provide the onboarding, servicing, and payments infrastructure. One of the key priorities for the ECB is to build a solution that can guarantee a high level of privacy and usability equal to that of private digital solutions. After years of research, the ECB entered the Preparation Phase of the Digital Euro project in November 2023, and the Digital Euro is expected to actually launch in 2027. Digital Euro Value Chain As proposed by the ECB, PSPs will play a critical role in distributing Digital Euro to users, and will have key operational responsibilities across almost all steps within the value chain (see Figure 3). In addition, the ECB is exploring the creation of a fraud detection system that will collaborate with PSPs to make the Digital Euro ecosystem more resilient to malicious actors. PSPs will onboard users in their Digital Euro account (see Figure 4), perform the required KYC/KYB processes, and communicate this to the ECB which will keep track of any account creation in its database. Users can load their accounts via their PSPs' app and exchange their holdings to/from Digital Euro. On the back-end side, the ECB will update the user's account balance on its ledger (called N€XT), sending confirmation to the PSP which will then update the balance in the PSP’s app that serves as the front-end app to end users (see Figure 5). The ECB proposes that the Digital Euro transaction flow will be a four-party scheme, identifying two major payment types and use cases: Merchant-Initiated: As shown in Figure 6A, the data flow is similar to card payments at POS/e-commerce gateways, where the merchant submits the request to its PSP (acquirer). The user PSP (issuer) will confirm the transaction's validity to the ECB (scheme). User-Initiated: As shown in Figure 6B, the data flow is similar to account-to-account (A2A) payments, where the user transacts via its PSP app (issuer). The merchant PSP (acquirer) will confirm the transaction's validity to the ECB (scheme). The ECB and participating PSPs will communicate through an API connection built by the ECB. N€XT (the ECB’s centralized ledger) will record the transaction, update its database, and start the settlement process. Next, the ECB confirms settlement, allocating the interchange fee (the level/amount of which has not yet been specified) to the user PSP (issuer) and the remainder to the merchant's PSP (acquirer) (see Figure 7). Finally, both PSPs update the user and merchant account balances, subtracting the service fee from the merchant's balance. However, the operating model for the Digital Euro is still evolving. As an example, on January 3rd 2024, the ECB issued five calls for vendor applications to intermediaries for services relating to Digital Euro components: Risk and fraud management; App and software development kit (SDK); Offline solution; Secure exchange of payment data; and, Alias lookup (facilitate transactions by using simple aliases, such as phone numbers or email addresses, instead of long account numbers). The allocated budget for these five components is €1.15 billion[1], and the ECB estimates that the contracts for these services will span four years, starting in January 2025. Digital Euro Economic Model The Digital Euro economic model is structured as a four-party scheme (somewhat similar to the cards four-party model), but to date, only the conceptual pricing structure (not actual levels/amounts) has been proposed (see Figure 8). According to the first legislative proposal, the high-level economic model will be: The Digital Euro will be free of charge for end-users The Digital Euro is intended to be the market's most affordable and convenient digital payment method; hence, the ECB will set a cap on merchant service fees User PSPs (i.e., issuers) will receive an interchange fee, although the amount/level has not yet been determined ECB will bear costs (and presumably charge service fees) related to the back-end infrastructure, Digital Euro issuance, processing, and settlement Overall, the incentives for PSPs to distribute Digital Euro and the supporting economics are still uncertain. The ECB is expected to provide further clarification during the current “Preparation Phase” (from Nov. 2023 onwards). Impacts & Conclusions In theory, when customers fund Digital Euro accounts, they would be removing cash from their regular bank accounts at commercial banks, ultimately reducing banks’ deposits and liquidity, effectively shrinking banks’ balance sheets and, in aggregate, the entire financial system. This would generate a series of knock-on impacts, the most obvious of which is that banks’ ability to fund loans via low-cost deposits could be significantly reduced. As a mitigant, the ECB is considering limiting how much Digital Euros each person can hold. Capping Digital Euro holdings at €3,000[2] per person is viewed by ECB studies as balancing the objective of stimulating usage, without threatening the stability of the banking system (see Figure 9). The ECB estimates that approximately €1 trillion could be taken out of bank deposits without preventative measures and that this would negatively affect mostly smaller banks, as they have the highest reliance on customer deposits. According to analysts at Mediobanca Securities, with an increase in Digital Euro adoption, more money is taken out and put into these accounts, leading to a greater impact on banks' profits, estimating a loss between 5% and 20% (see Figure 9)[3]. However, it's important to note that the limit on Digital Euro holdings per person is not yet final, and the ECB is expected to detail its intentions further during this Preparation Phase. The advent of the Digital Euro presents an intriguing opportunity for the Eurozone. Its innovation potential, driven by its technological characteristics, hold promise yet remains ambiguous. The prospect of this new digital currency offers a new revenue stream for PSPs and could (per proponents) revolutionize the payment landscape for merchants, offering benefits like instant settlement transactions, reduced costs, and increased protection against fraud. The Digital Euro's potential to increase access to financial services inclusion is a key objective of policymakers, with the potential of free-of-charge account opening and seamless transactions at points of sale and e-commerce to drive broader financial inclusion and accessibility. Despite these positive attributes, EU policymakers are navigating uncharted territory and have left critical questions unanswered (see Figure 8). The economic model remains vague, casting uncertainty over its viability, as the economic motivations for stakeholders to support the system (particularly user PSPs which will have many responsibilities) are unclear. In particular, acquirers' and issuers' revenue will apparently be capped, interchange levels are still unclear, and PSPs are expected to bear substantial costs of building front-end and ECB back-end integrations. Moreover, limitations on Digital Euro holdings, coupled with privacy and security concerns regarding the technical solution (e.g., could the ECB’s central ledger be hacked?) underscore the need for careful consideration and robust solutions to mitigate potential risks. In conclusion, while the Digital Euro as proposed by the ECB presents an intriguing vision for a technologically advanced financial ecosystem, future demand from end users and supply from PSPs hinges upon resolving these uncertainties and improving stakeholder motivations. Only through concerted efforts in addressing these challenges can the Digital Euro emerge as EU policymakers envision: a transformative force, unlocking innovation while safeguarding the integrity and security of the Eurozone's financial landscape. Please do not hesitate to contact Erik Howell at Erik@flagshipAP.com, Stanislav Dubský at Stanislav@FlagshipAP.com, and Alessandro Mighetto at Alessandro@FlagshipAP.com with comments or questions. [1] Calls for applications for digital euro component providers (europa.eu) [2] A digital euro: gauging the financial stability implications (europa.eu) [3] CBDC/digital euro: more than a token impact on banking profits (ft.com)

Annapolis, MD – Flagship Advisory Partners, the leading global boutique strategy consulting and M&A advisory firm focused on payments and fintech, is pleased to announce the addition of Ben Brown as a Partner, based in our Annapolis, MD office. "We are excited to welcome Ben to Flagship," said Joel Van Arsdale, Managing Partner of Flagship Advisory Partners. "His years of experience working with fintech innovators around the world and his unique market insights will advance Flagship’s mission of helping innovators and investors to position for the future of financial services." Image Credits: Ben Brown “I’m thrilled to join Flagship and build upon the firm’s early success as a highly specialized advisor to market leaders in the payments and fintech world. Flagship is a special firm dedicated to the boutique model: focus, passion, subject matter expertise, agility, and personal relationships with our clients and our people. I look forward to helping the fintech ecosystem benefit from our ability to rapidly unlock value and accelerate innovation,” said Ben Brown. Ben has over 15 years of experience working with payments and fintech companies, technology giants, major merchants, banks, and private equity investors. Most recently, Ben co-founded Accenture’s Fintech Practice and led their Cross-Industry Payments Practice in North America. Prior to that, he worked for First Annapolis Consulting where he was an integral contributor to development of that business in Europe and established their West Coast office in San Francisco. Over his career, Ben has worked with more than 100 fintech, technology, and banking clients on growth, business transformation, and product innovation topics. Ben also supported fintech innovators through angel investments, various fintech accelerator programs, and mentoring early-stage companies. Ben's addition to the Flagship team aligns with the company's strategy of bringing in top-tier talent to advise payments and fintech leaders on the rapidly evolving financial services ecosystem. Ben will focus on helping fintech companies diversify their revenue, helping banks leverage the fintech ecosystem through partnerships and M&A, and helping merchants unlock value in their integrated payments and embedded finance initiatives. About Flagship Advisory Partners Flagship Advisory Partners is a boutique strategy consultancy and mergers and acquisitions advisory firm specializing in payments and fintech. Flagship delivers c. 75 engagements per year across the areas of M&A advisory, growth/innovation strategy, operational transformation, and client and market insights. Flagship is comprised of 30+ professionals with a unique blend of deep industry knowledge, practical operating experience, and proven consulting and analytical skills. Flagship serves clients globally from three offices across North America and Europe. We look forward to delving into more diverse topics that generate debate and challenge perspectives in the coming year. Should you have any questions, please do not hesitate to contact us at Info@FlagshipAP.com

In 2023, Flagship published insights across a wide range of payment and fintech topics. The scope and scale of Apple’s fintech ecosystem, in parallel with our analysis of fintech’s efficiency, generated the most traction amongst our readers. Other topics that gathered attention were our definition of the widely used catchphrase ‘embedded finance’, KKR’s failed investment in German PSP Unzer (and lessons learned), and the proliferation of digital wallets in the global economy. We summarize our most impactful insights below (and in this video). In 2023, Flagship published insights across a wide range of payment and fintech topics. The scope and scale of Apple’s fintech ecosystem, in parallel with our analysis of fintech’s efficiency, generated the most traction amongst our readers. Other topics that gathered attention were our definition of the widely used catchphrase ‘embedded finance’, KKR’s failed investment in German PSP Unzer (and lessons learned), and the proliferation of digital wallets in the global economy. We summarize our most impactful insights below. Links to our 5 most read insights here: Scope and Scale of the Apple Fintech Ecosystem High-Growth Fintechs Must Now Learn Efficiency Peeling Back the Onion of Embedded Finance KKR’s Failed Investment in German PSP Unzer Digital Wallets Thriving, Proliferating in All Directions 1. Scope and Scale of the Apple Fintech Ecosystem The dissection and sizing of Apple's fintech ecosystem was our most popular article. As Apple has heavily invested in its fintech business and does not publicly disclose any data, this is an interesting topic that Flagship frequently receives questions on from our clients, who increasingly see Apple as a competitor in the fintech and payments space. Flagship estimated that Apple ‘controlled’ c. $800 billion of payments flows in 2022, which we estimate to grow to $3.2 trillion by 2030, with the largest flow from ApplePay and a material proportion of growth from services that are yet not mature today (e.g. tap-to-pay, BNPL, banking). We followed up this article with an analysis of the failed Apple/Goldman partnership, where we estimated the profitability of the Apple Card program which we believe to be the root cause of Apple pulling the plug on the relationship. Links: Scope and Scale of the Apple Fintech Ecosystem; The Rise and Fall of the Apple-Goldman Sachs Consumer Finance Partnership 2. High-Growth Fintechs Must Now Learn Efficiency The year 2023 started with a continuation of company valuations getting down-to-earth. In the prior period, there was an investor notion of limitless growth, and many fintech companies (as in many other industries) had become over-valuated. We double-clicked on the financials of 50 fintechs, which showed a clear difference between mature fintechs and high-growth fintechs. Mature fintechs such as ‘Diversified Processors’ outperformed their higher-growth peers on operating leverage, resulting in strong profit performance that generally exceeded expectations. We firmly believe that public investors in the current market environment will look for revenue-efficient investments, rather than patient long-term growth opportunities. Link: High-Growth Fintechs Must Now Learn Efficiency 3. Peeling Back the Onion of Embedded Finance Fintech is full of acronyms and catchphrases, none more used and yet more confusing than ‘embedded finance’. As everyone seems to have a different definition and understanding of this term, we attempted to, given our constant exposure in the market, define and explain exactly what embedded finance is by peeling back the onion and illustrating its many layers with real-life examples. Link: Peeling Back the Onion of Embedded Finance 4. KKR’s Failed Investment in German PSP Unzer KKR acquired a majority stake in Unzer from AnaCap for $668 million in August 2019, and after less than four years into the deal, KKR announced plans to hand over its majority stake in Unzer to its creditors. The failed investment in Unzer reinforced several key lessons in merchant payments. Here are our key four lessons: 1) Investors must pay a fair valuation to generate equity returns; 2) conglomerations of many small merchant PSPs acquired at full valuation is a challenging playbook for generating equity returns; 3) compliance matters; and 4) risk-seeking in merchant payments often does not end well. Link: KKR’s Failed Investment in German PSP Unzer 5. Digital Wallets Thriving, Proliferating in All Directions Digital wallets have gone through several rounds of trial and error in major economies, but there is no longer any basis to question the massive influence and potential of digital wallets. We estimate that wallets powered $12 trillion global C2B payment volumes in 2022, and penetrated e-commerce payments with 23%. In this popular article we examined the global state of digital wallets and the reasons behind their success. Link: Digital Wallets Thriving, Proliferating in All Directions We look forward to delving into more diverse topics that generate debate and challenge perspectives in the coming year. Should you have any questions, please do not hesitate to contact us at Info@FlagshipAP.com

General Commentary & Highlights A mobile wallet is a payment tool that stores the user’s payment credentials on a mobile device, which can be used to pay in stores and/or remotely (incl. person-to-person and C2B mobile commerce The prevalence of mobile wallets has risen in Europe, stemming from tech advancements in acceptance, heavy presence of smartphones, and consumer desire for convenience and speed Together with North America, Europe is still lagging in mobile wallet adoption vs. other regions, primarily driven by the fact that cards (which have high penetration among Europeans) persevere Please do not hesitate to contact Yuriy Kostenko at Yuriy@FlagshipAP.com with comments or questions.

The Wall Street Journal’s reporting on Nov. 28 that “Apple is pulling the plug on its credit-card partnership with Goldman Sachs” caps off months of highly public news about the dissolution of Goldman’s entry into consumer financial services. In this article, Flagship estimates the profitability of the Apple Card program, which we believe is the root cause of the situation: the fundamental construction of the program is simply not profitable for Goldman, and Goldman, due to its desire to enter into consumer financial services with a marquee brand, likely agreed to partnership terms with Apple that restrict its ability to return the program to profitability. Background In March 2019, tech giant Apple teamed up with Goldman Sachs as its banking partner to venture into consumer credit card issuing with the launch of the Apple Card. For Apple, the Apple Card marked a further push into services, seeking to diversify its revenue streams beyond hardware sales. For Goldman Sachs, the partnership was the cornerstone of Goldman’s entry into consumer financial services. After launching in August 2019, the Apple Card quickly gained traction in the market. While some pundits panned the card as topical improvements rather than true innovation that lived up to the hype, the card was unquestionably a success with consumers due to the brand cache of Apple, the card’s front and center placement in Apple Wallet, a straightforward application process, no fees, and some innovative UX/UI tweaks (e.g., a wheel graphic to set payment amounts). While popular among consumers, the Apple Card had several challenges. These included atypical operational design and pricing requests from Apple, aggressive underwriting requirements, and subsequently, profitability challenges for Goldman Sachs. Despite these discouraging partnership data points, in October 2022 Goldman reportedly doubled down by renewing the consumer-finance partnership through to 2029. However, within the following year, Goldman seemingly began to regret the renewal as reports of Goldman wanting out began to surface in the Spring of 2023. Goldman’s wishes are soon to be granted per Wall Street Journal’s report in late November 2023 stating that Apple is pulling the plug on the Goldman credit card partnership. Apple reportedly proposed a withdrawal plan to take effect within an estimated 12 to 15 months, which includes the full scope of Apple and Goldman’s consumer finance partnership (the credit card and savings account initiative launched in early 2023). Information about the succeeding issuer of the Apple card is unavailable at the present time. Refer to the full partnership timeline below (Figure 1). A little over one year after launching, Apple cards totaled 3.43 million1 at the end of 2020 and, within the following year, the number of cards grew 122% to 7.6 million2 at the end of 2021. However, in the subsequent year, growth slowed to 58% in 2022. Despite slowing growth rates, Flagship estimates that the Apple Card has penetrated 18% of its potential addressable customer base (under-writable adults in the US), which is a significant achievement relative to other tenured co-brand programs (see Figure 2 below). Challenges The Apple-Goldman partnership has faced its share of (highly public) challenges and controversies. Ahead of its launch, Apple was reported to have made significant demands, which subsequently led to profitability, risk management, and operational problems. We delve into the operational design, pricing, and underwriting standards issues below. Operational Design Apple requested a suite of unusual operational designs that included billing statements that align with the calendar month (rather than staggered billing cycles to spread out the operational load of inbound calls), instant cash-back rewards, and the design of the physical card. Pricing In addition to the operational design requests, Apple atypically requested a literally no-fee card, meaning a lack of chargeable fees (such as annual, late, over-limit, and foreign transaction fees). For comparison purposes, in Figure 3 below we briefly illustrate how the Apple Card stacks up with similar cards from top US issuers. The Apple Card has a competitive value proposition, although the card’s rewards feature primarily appeals to consumers who regularly utilize Apple Pay. Notably, utilizing the Apple Card for traditional e-commerce transactions, where physical point-of-sale terminals are bypassed, and the merchant does not allow for Apple Pay checkout, does not result in reward accrual, and given the high penetration of e-commerce in the US, is meaningful. Another attractive (to consumers), yet odd from the perspective of issuers, standout feature is the card’s comprehensive fee-free structure, notably the absence of late fees. Late fees are typically utilized by credit card issuers to encourage timely payments and serve as a means of risk mitigation and revenue generation. Underwriting Standards As a result of (relatively) aggressive underwriting standards, Goldman has experienced comparably high credit loss rates. In 2022, Goldman’s net loss rate on credit cards was 3.46%3, which was nearly double that of competitors like JPMorgan (1.47%3) and Bank of America (1.60%3). As overall credit card loss rates rise, Goldman continues to feel the heat as its loss rate rose to 6.2% in Q3 2023. Among other market factors, a likely culprit of such a high loss rate: the composition of Goldman’s credit loans. Goldman’s 2022 Q2 Report shows that more than a quarter of Goldman’s card loan balances have gone to customers with a FICO score below 660. This number continued to rise to 35% per Goldman’s 2023 Q3 Report, which is much higher than competitors (see Figure 4). Editorial note for our readers less familiar with the US credit system: FICO scores are standardized credit scores based on credit-bureau data aggregated on most US consumers and are commonly used by US lenders as an industry-standard input and comparative tool to assess an individual’s credit risk. The scores range from 300 to 850, with scores above 660 considered good to exceptional, leading to an increased likelihood of approval, and scores below 660 considered fair to very poor, leading to a lowered likelihood of approval. In addition to aggressive underwriting impacting credit loss rates, reports about gender bias in Goldman’s credit approval process surfaced, leading to an investigation by the New York Department of Financial Services. Both Apple and Goldman pledged to address the issue and ensure fair treatment for all applicants. Poor Profitability The combination of a substantial portion of Goldman’s clientele holding a FICO score below 660 coupled with the absence of late fees, forms a potent catalyst for impacting Goldman’s earnings—and it did. Flagship estimates that Goldman will incur a pre-tax loss on the Apple Card program of approximately $500 million in Q4 2022 – Q3 2023 (refer to Figure 5). Lessons Learned The Apple / Goldman sags is instructive for several reasons: Brands, the “cool factor”, and UX matter, even in payments and fintech. While traditional institutions often scoff at new products (e.g., “BNPL is just a credit card”, “Apple only tweaked the optics”), customers see it differently. Only Apple could power what is arguably a decent, but not outstanding, cash-back rewards card, to approx. 15 million accounts and penetrate 18% of its eligible user base within 4 years. Underwriting tech evolves, but credit risk principles don’t. While many issuers and fintechs tout the benefits of advanced models and data sources for underwriting, core predictive elements are relatively constant. Sub-prime underwriting is going to result in higher credit losses, no matter how you do it, as Goldman learned the hard way. Mass market consumer credit card issuing in the U.S., while a huge TAM, is not easy to penetrate and still maintain profitability. Goldman is a large FI and invested heavily, and while it (arguably) made some questionable decisions when negotiating its partnership with Apple, it was never able to achieve the scale and expense efficiencies necessary to compete with the large U.S. mega-issuers. Unit profitability matters, no matter how much scale you have. Even if Goldman was able to scale up efficiently enough to compete on operating expenses, constructing a card program with a competitive interest rate, no fees, aggressive underwriting, and high royalties to a partner was always going to be challenging (or more pessimistically, near impossible). Partnerships need to be balanced, and sometimes it’s better to just say “no”. As a well-funded, eager new entrant into consumer financial services, Goldman bid too aggressively to win the Apple partnership. It arguably gave away too much, not only in terms of partnership economics to Apple, but also in influence over underwriting standards, features/functionality, and pricing decisions. While we can debate the wisdom of bank regulators’ and executives’ conservatism at times, that level of conservatism is fundamentally due to good reasons: unsecured lending to consumers is difficult and risky. Fortunately for Goldman, the parent is able to absorb these losses. Smaller fintechs would simply go under. From Apple’s perspective, the outcome is also poor. Getting a good deal in a partnership negotiation can quickly become a Pyrrhic victory, because if partnership economics and control become unbalanced and one partner continues to lose money, the entire program suffers (from lack of investment, lack of motivation, and disruption from dissolution of the partnership). Moreover, Apple can likely be certain that future potential partners will have learned from Goldman’s lessons, and we speculate that the next deal that Apple gets will be worse than if it had struck a more balanced deal with Goldman. The math on getting a great deal, have it fall apart early, then getting a restrictive deal, is probably on average worse for Apple than if it had struck a more balanced deal with Goldman in the first place. It will be interesting to see what happens next. Apple will certainly find a new partner given the power of its brand, and it will likely be one of the mega-issuers (Citi, Amex, Bank of America, Chase, etc.). Apple’s deal will be worse, and the card program will look more like other co-brands, and the program will still be big. Some intangible pre-bubble “sparkle” will go out of the industry, but like the latest version of the iPhone that carries only marginal improvements but is still cool enough that customers buy a new one more often than they arguably need, U.S. consumer credit card lending will march on. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions. [1)Top Issuers of General Purpose Credit Cards in the US.” Nilson Report, no. 1192, 28 Feb. 2021 [2)Top Issuers of General Purpose Credit Cards in the US.” Nilson Report, no. 1214, 28 Feb. 2022 [3) Calculated by Flagship as total 2022 credit card gross credit losses less recoveries divided by average quarterly balances for the four quarters of 2022 from Goldman Sachs Bank call reports

General Commentary & Highlights Investments in the European fintech sector have slowed down in the second half of 2023 but have started to show signs of recovery recently Challenging macro-economic conditions and concerns of depressed asset valuations have been acting as key obstacles in the recuperation of fintech M&A activity in Europe Feedback from investors and the volume of deals that are currently in flight, however, suggest that deal activity will recover in 2024 as fintech M&A returns to pre-2020 level. Please do not hesitate to contact Yuriy Kostenko at Yuriy@FlagshipAP.com with comments or questions.

The European office of CFO SaaS is a new battleground for embedded fintech. Leading SaaS platforms are increasingly embedding fintech solutions with software workflows and creating a winning formula of success. In this article, we analyze this space and present our key takeaways. We advise viewing the slides via the "PDF" icon button. Select Key Takeaways The ‘Office of CFO’ SaaS spans across several segments and operates in a highly fragmented European market today. Needs and buying behaviors for office of CFO SaaS vary across business segments. Several SaaS specialists compete to address such needs. EU businesses still heavily rely on banks to service financial needs, but banks fall short as they often lag in service quality or technical enablement (e.g., integration with CFO SaaS). Winning CFO SaaS platforms see clear value in embedding fintech solutions with software workflows. We already see clear evidence of an acceleration of embedded SaaS & fintech with some office of CFO SaaS verticals in Europe, e.g., accounting SaaS, Payroll SaaS. Embedded fintech expansion use cases and maturity vary across CFO SaaS segments. Commerce front end, spend management, accounting, and payroll are leading the pack. Investments into SME CFO SaaS have increased in prior years. Fintechs that embed into such software have also benefitted from funding rounds. The European CFO SaaS space has been an M&A hotbed. Accounting and payroll SaaS show the most deal activity. In some instances, CFO SaaS have acquired fintechs. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com with comments or questions.

Flagship Advisory Partners’ Executive Interview Series provides readers with exclusive insights from thought leaders in the payments and fintech industry. This edition puts the spotlight on TerraPay, a leading fintech that serves businesses and fintechs in the B2B cross-border payments space. Flagship Advisory Partners met with Ram Sundaram, Co-Founder and COO of TerraPay to learn about TerraPay’s perspectives on fintech disruption and success in the B2B cross-border payments market. Image: Ram Sundaram, TerraPay 1. TerraPay has been at the forefront of fintech disruption in B2B cross-border payments. Can you walk us through what TerraPay does and how it has evolved from its early days? Ever since our inception in 2015, we have stayed true to our mission of simplifying global money movement by making it instant, digital, and fully compliant. The idea of interoperability played a key role in shaping our vision and what we do. Despite the global movement towards digitization, we saw the real-life challenges plaguing the world of small-value cross-border payments. We identified the gaps that legacy FIs could not address for such payments and took the initiative to obtain our own licenses and establish an ecosystem capable of assessing risk and accommodating varying Know Your Customer (KYC) and compliance standards across different markets. That’s what helped us build our trusted network of partners, with compliance and technology at the core. The first successfully piloted interoperable transaction on TerraPay occurred between a money transfer operator in the UAE and Airtel Money in Rwanda back in 2015. At that time, the only option for such transfers was through one of the largest MTOs in the world (who is now a client!), which had a total cost of a steep 25%. Today, we partner with leading banks, MTOs, wallet operators and global businesses to provide an instant, inclusive, and accessible payments ecosystem. When we say that we power instant cross-border payments, we are saying that more than 97% of the payments that are processed on the TerraPay platform are done in less than 60 seconds. 2. The B2B cross-border payments market is massive, with an estimated $30 trillion in turnover. Banks still own the lion's share of this market, but we see fintechs slowly winning share. What are some of the opportunities for fintechs in the B2B cross-border payments space? Before diving into the opportunities, it is crucial that we understand what led to the widespread emergence of fintechs. Armed with a vast network, robust regulatory and technical infrastructure, and sufficient liquidity, banks have supported multinational cross-border payments for decades, front-ending them through the SWIFT network. However, over the past decade, there has been a notable shift. The rapid rise of e-commerce, gig workers and a growing number of international sellers selling goods through local e-commerce platforms has accelerated SMB cross-border payments. According to the World Bank, SMBs represent approximately 90% of businesses and more than 50% of employment worldwide. They are responsible for over $17 trillion of cross-border payments annually. However, the experience of a bank’s SMB customer sending or receiving payments is radically different from a large business. SMBs face several unique challenges, and this becomes even more pronounced for lower-value B2B payments where parameters like forex trading volatility, liquidity, compliance, a lack of transparency, processing, and settlement times bear a significant impact on business. This is where fintechs come in. They are able to navigate these complexities quickly and come up with different solutions that address the market. They also target specific segments, avoiding massive multinationals with long sales processes, focusing on their strengths in addressing SMBs. At this point, fintechs hold 2% of global financial services revenue pool, which we estimate to be valued at $1.5 trillion in revenue by 2030. Competition isn’t the way forward. In this interconnected economy, I think the real opportunity lies in building strong fintech-bank partnerships that will strengthen the future of cross-border payments. 3. What kind of cross-border payment B2B use cases do you see where fintechs have found a sweet spot and banks have underserved? B2B payments, in essence, present a mosaic of scenarios, from individual entrepreneurs to global enterprises, demanding systems with the robustness to manage this intricate diversity. You’ll find a variety of use cases where fintechs are thriving. Let’s consider the travel industry, where there are businesses like travel aggregators, global distribution systems, etc. on one side, and on the other, you have suppliers, like hotels, tour guides, transit systems, etc. This landscape is fraught with an overwhelming number of challenges and unmet needs. Sometimes, the supplier is a single person who may require highly-specialized solutions, such as immediate payments and transparent fee structures. Fintech has been able to successfully address these needs to a large extent. 4. Are there any specific verticals that are underserved where Fintechs have more room to grow versus banks? At TerraPay we have realized that an industry or a vertical-led approach can drive customized value for organizations. Take travel for instance. Now, you might think that this trillion-dollar industry is well-served but in reality, there is still tremendous potential. Fintech has the opportunity to boost the efficiency of payment processes within this multi-player sector, improving payment experiences and overcoming challenges related to flexibility and personalization; meeting the evolving needs of the end consumer. The booming social media industry is another area of focus for us. Many social media firms are also venturing into e-commerce, enabling influencers to sell products and users to make purchases. This dynamic introduces an intriguing use case, as a significant portion of these transactions involves cross-border micropayments, which are currently associated with high costs. TerraPay collaborates with innovative startups aiming to develop solutions in this domain, allowing customers to make cost-effective payments of mere cents within a sustainable business model. E-commerce is another vertical packed with potential. However, we focus on targeting emerging and underserved markets in this sector. In the African continent, for instance, many use mobile wallets as their primary financial instrument. But they face limitations in using these wallets to make purchases from platforms like Amazon U.S. The current solution for consumers involves engaging a local retailer with a verifiable address and bank account, who then places orders on their behalf and charges an additional fee. TerraPay has been actively addressing this issue, most recently through collaborations with mobile money network operators (MNOs) like Airtel Money. This partnership seeks to enhance the accessibility and efficiency of e-commerce transactions for consumers in these markets. Lastly, with SMB payments, there is always a layer of intricacy owing to the nature of the industry or market they operate in. A simple example of this is a cross-border account receivables e-invoice sent by a supplier to their buyer which needs to be accompanied by documentation such as tax and customs papers depending on the place of origin and destination. Moreover, such requirements tend to be corridor-specific. Fintech can easily build capabilities to facilitate B2B transactions within well-established corridors, particularly in Western and U.S. regions where streamlined document exchange systems are already in place. However, the approach and challenges change when we talk about developing countries. , TerraPay actively collaborates with SMBs in Africa, a region characterized by robust import activity, notably from China. Needless to say, this geographical span linking Africa and China presents a new world of complexities in terms of regulatory requirements to enable the seamless movement of funds. The “white space” here is the opportunity to connect traditional supplier markets with emerging buyers spanning various markets. 5. Who are TerraPay’s key clients? Our key clients have always been financial institutions (FIs) for account payout networks. This includes money transfer operators (MTOs) who rely on other networks to deliver cross-border transactions. Next, are banks that are seeking to offer real-time solutions to their customers. The final segment is MNOs who need the ability to interoperate across other wallets. The B2B payment space is vast and each industry has specific needs and complex use cases. Across the three verticals I mentioned earlier, we work closely with our partners to identify their unique needs. Recently, we worked with a global e-commerce platform to transform their cross-border pay-out capabilities. We built customized pay-out experiences using diverse functionalities to offer the payees their preferred pay-out methods in their local currencies. We delivered multiple secure pay-outs such as fund disbursement to employees, sub-merchants, suppliers or customers and pay-outs to bank accounts, wallets, and cards – across the globe with a built-in compliance management system. We were able to deliver a success rate of 99%, with 90% of the transactions delivered under 15 minutes across 115k unique receivers with coverage of all leading banks within the region. All within a matter of months. 6. When it comes to Fintechs in the space, do you see any winners or losers? Many fintech startups are tackling cross-border challenges and truly changing the global payment environment, yet we anticipate eventual consolidation in this space. You see, most fintechs don't develop their technology in-house and outsourcing their core platform takes away their autonomy. This is what sets TerraPay apart, we have built our core platform, card acquiring, and recently tested issuance solutions from the ground up. This gives us complete control over our product. Ultimately, to establish a robust business, ownership of the core elements is crucial, and in fintech, what sets you apart is an equal blend of technological expertise and financial domain chops. Piecing together services from various sources limits capability and I think that renders the current fintech ecosystem somewhat delicate, akin to operating a Lego structure with borrowed blocks. 7. What are your growth areas or planned focused growth opportunities for the future? For geographical growth today, we are in 128 countries with an internal mission to reach 150 countries by 2025. The bigger that number gets each year, the harder those countries are to reach as now you are at the long tail of markets where there is no local infrastructure. Over the last few years, TerraPay has established itself as a leader in International Money Transfers. At the same time, we are constantly developing and adding new payment products and solutions to best use our existing network for Business pay-outs, Wallet enablement, Issuance, and Acquiring, Card-to-Account, through necessary regulatory licenses and approvals, adding more settlement banks for regions with an aim to remove the dependency on cash overall. We recently closed our Series B equity financing round, raising over $100 million in equity and debt financing, accelerating our global expansion plans, especially across the LATAM and MENA regions while also growing our existing pay-out network to 150 countries by 2024. 8. Given that Visa now has a strategic investment in TerraPay, what does the future hold from that perspective? With Visa joining us, the idea is to build holistic solutions and enhance connectivity. Our quality of service is something that stands out for Visa. They have been leveraging our technology for account transfers and Visa Direct is leveraging our network reach for payouts, expanding wallet reach and access to all our corridors. This grows the ecosystem substantially because for us to individually integrate with every bank in the world would be impossible. There are some interesting things that we are exploring with Visa where we can build, and they can scale to their customers because of the existing connectivity networks. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com with comments or questions.

General Commentary & Highlights Q3 earnings season brought heavy volatility to payments stocks Share price increases or decreases of +/- 20% were common as shown above Technology investors are now hyper-sensitive to earnings misses, even small misses (-5% vs. expectation) seem to drive c. -20% impacts to share price Substantially negative guidance, such as that provided by Worldline recently or Adyen back in August (some impact recently recovered) leads to even larger share impacts of c. -50% The combination of some strong earnings announcements and favorable views on interest rates boosted the entire sector so far this month and it feels like a sector with real upside for investors Please do not hesitate to contact Joel van Arsdale at Joel@FlagshipAP.com or Pedro Giesta at Pedro@FlagshipAP.com with comments or questions.

General Commentary & Highlights In 2011, The Federal Reserve implemented the Durbin Amendment which capped debit card interchange for U.S. financial institutions with over $10 billion in assets at $0.21 + 0.05%, plus a $0.01 fraud prevention fee for eligible transactions. The Fed had not altered this cap since implementation. Last month, The Fed proposed a revision to the debit fee cap, which, if approved, would reduce interchange revenue for capped financial institutions by approximately 28% (see Figure 1). The public comment period will last for 90 days once the proposal is formally published, and the new cap would become effective at least 60 days after the rule is finalized (i.e., as early as April 2024). Debit transactions subject to the cap made up c.31% of 2022 U.S. credit + debit card volume (see Figure 2). Flagship estimates that the proposed regulation would decrease total interchange revenue for U.S. financial institutions subject to the cap by c.$4 billion, with an especially large impact on regional banks who primarily issue debit cards and who are already under financial and investor pressure (see Figure 3). The proposed revision does not impact credit card interchange, which is also under pressure from the proposed 2023 Credit Card Competition Act (See our reactions to the proposed act HERE). Please do not hesitate to contact Rom Mascetti at Rom@FlagshipAP.com with comments or questions.

General Commentary & Highlights While Block works to fix its corporate challenges including a recently announced and much-needed expense reduction program, Square continues to demonstrate steady (though not spectacular) progress in the organic international expansion of its core merchant products, which achieved $380M of annualized gross profit in the most recent quarter. Square becoming more visible in key European markets, including UK, FR, and ES, though not yet disruptive (small market share in each of these markets). AfterPay results less impressive, achieving 22% YOY gross profit growth as credit conditions worsen. International FTE now comprise c. 27% of total company FTE (25% YE ’22). The company currently 96 open LinkedIn job positions, with 46% of them being international. Please do not hesitate to contact Joel van Arsdale at Joel@FlagshipAP.com or Pedro Giesta at Pedro@FlagshipAP.com with comments or questions.

Video Summary Introduction The evolution of SaaS embedded payments is the preeminent theme in merchant payments in North America and is also now increasingly in Europe. The U.S. market remains the clear bellwether of SaaS + payments disruption, but the U.K. and Europe are fast followers as the shift towards integrated payments gathers speed. ISVs/SaaS are the leading and fastest-growing distribution channel for SMB merchants payments in the U.S. As shown in Figure 1, we estimate that c.40-65% of newly signed SMB merchants in the U.S. will source their payment acceptance/acquiring via ISVs. The ISV/SaaS channel is less mature in the U.K., and even less so in the EU, but this channel is accelerating rapidly in both markets. The Rise of Integrated Payments in Europe The market is moving towards deeply embedded payments, where software and payments are completely bundled and owned by either a single party or via tightly integrated software and payments partners. ISVs have proven to be a superior payments distribution model (as the business software is often the more critical and earlier lifecycle decision), but integrated or embedded payments are also a superior value proposition for merchants. An integrated software + payments platform becomes a one-stop-shop for merchants, with one single point of service, data, settlement, billing, and business insights. As illustrated in Figure 2, the U.S. market also leads the world on product penetration levels for embedded and integrated payments (c.75-90% of SMB merchants are using embedded or fully integrated payments). U.K. and Europe are still years behind on the integration of software and payments @ POS, although e-commerce platforms are also generally deeply integrating payments in Europe. PSPs in Europe are rushing to develop ISV go-to-market strategies, knowing that global competitors such as Stripe have a head-start on ISV propositions and global partnerships. SaaS + Payments Operating Models ISVs tend to evolve from simple referral partnerships to more complex integrated operating models as they scale. Larger SaaS in the U.S. are already generally leveraging Payfac Lite or Full Payfac operating models, though smaller ISVs still often use a referral model given the complexity of taking on more payments ownership. Most European/U.K. ISVs still rely on a simple referral model for monetizing payments. But, we see a rapid rise of the deployment of Payfac Lite operating models where the SaaS are not in the money flows or licensed as payment institutions. We describe the functional differences of these various operating models in Figure 3. The right operating model is a combination of various factors, but generally speaking, SaaS platforms controlling more than $1 billion of annual payments flows should seek an operating model that provides greater control and monetization (moving from left to right on Figure 3). A PayFac Lite operating model provides the platform with the ability to brand the proposition, to price the proposition, and to act as the primary UX for customer sign-up and servicing. As shown in Figure 4, there are far more SaaS companies opting for a Full Payfac operating model in the U.S. vs. Europe. This is due to both scale dynamics, but more importantly, the requirement for a payment institution license in Europe for any platform wishing to intermediate money flows with its merchants/sellers. The additional burden of a lite banking license is significant vs. simply needing to remain compliant with card scheme rules as a registered PayFac in the U.S. Nearly half of all PayFacs registered with Mastercard in U.S. and Canada are SaaS companies. Maturity of European SaaS Embedded Payments: Commercial Models Payments are lucrative for software providers. It is not unusual at scale for a SaaS company to generate more than half of its revenue from payments. Large-scale SaaS companies often retain c. 80%+ of the net take rate from payments (the remainder flowing to the payments partner). The split of economics is mostly a function of scale. The larger the ISV, the larger the share of economics. SMB payments yield rich take rates in both the U.S. and Europe/U.K. The net take rate earned by ISVs has traditionally been less than those in the U.S., though this gap is closing as European platforms gain scale and the operating model matures. Figure 5 illustrates typical SaaS + payments economics in the U.S. and Europe (noting that these illustrative economics apply only to SMB-centric SaaS in mainstream C2B payment verticals such as retail). Integrated Payments Across Verticals Most ISVs are vertically specialized, though some are functionally specialized (i.e., accounting or e-billing software). The vertical has a heavy influence on the availability and maturity of SaaS + payments opportunities. In Figure 6 we compare the maturity of integrated payments in the U.S. vs. Europe/U.K. across vertical and functional SaaS categories. Given its head start, the U.S. is almost always more mature, though Europe is following a similar evolutionary path with most commerce-centric verticals (e.g., retail, hospitality, etc.) adopting integrated payments first. B2B verticals in the U.S. are far more mature on monetization of payments as European SaaS are still learning how to monetize A2A payments. Integrated and embedded payments are rapidly accelerating as the key force of disruption in European payments. Lessons from the U.S. provide us with a clear set of value-creation playbooks. European SaaS platforms and PSPs looking to thrive in 2024 and beyond must adapt clear strategies for integrated/embedded payments and then invest and organize to execute on these strategies. Please do not hesitate to contact Charlotte Al Usta at Charlotte@FlagshipAP.com with comments or questions.

It continues to be a rough ride for virtually all listed fintechs, large and small, although small cap fintech stocks are particularly challenged in today’s tough (and worsening) market conditions. In Figure 1, we compare the relative share price performance of large cap fintechs (market cap >$10B) vs. small cap fintechs (market cap < $2B). Both cohorts declined as market conditions worsened, although the share price decline of small caps was significantly greater. On average, small caps declined by c. 60%, while large caps declined on average by 36% (and only 15% on a weighted average basis).Small cap fintechs thrived during the heady days of 2017-2021, when investors were anxious for growth and willing to bet on potential. Today’s investors have cast aside potential and are investing instead in value, as evidenced by cashflow. Markets are also now quick to punish any disappointment, as evidence by the recent steep declines in the shares of both Wordline (-57% share price decline on 25 Oct) and Crown Agents Bank (-72% decline on 24 Oct). We firmly believe that small cap fintechs are better suited to private, patient capital, at least as market conditions remain hawkish. Private money is simply more patient and focused on longer-term growth and earnings development. The public markets are now a brutal environment for growing into profitability. As valuations continue to decline, we expect numerous public to private transactions. Private equity is not without its own challenges, however, as rising interest rates are also exerting downward valuation pressure on private valuations. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.

Introduction The U.S. has the highest payment acceptance costs in the world despite being a large and mature fintech market (you can read our prior assessment of this topic here). This situation is ripe for disruption, the question is just when and how. Real-time A2A payments would appear to be the ‘disruption how’ given the ongoing development of real-time A2A clearing infrastructure. FedNow, officially live in July of this year, is the latest A2A (bank account to bank account) clearing network built on modern, real-time infrastructure. FedNow is viewed by many as a potential catalyst for disrupting card scheme dominance in U.S. payments. However, as we explain in this article, clearing networks are just technology enablers, not disruptive products in and of themselves. Real disruption must come from products built and distributed to consumers, and here is where the uncertainty remains for the disruptive potential of U.S. A2A payments. In this article, we take a closer look at FedNow in the context of consumer payments and examine what it will take to change the game for the U.S. consumer payments landscape. What is FedNow Relative to Other U.S. A2A Initiatives? FedNow, launched by the Federal Reserve, is an A2A payments clearing network that allows financial institutions to move electronic payments in real-time, offering businesses immediate access to funds, 24x7, 365 days a year. FedNow improves upon the inefficiencies present in the traditional U.S. ACH networks which are driven by periodic batch processing. Faster A2A payments networks are not new to the U.S. The Clearing House’s RTP network, launched in 2017, was the U.S.'s first real-time A2A payments network. As illustrated in Figure 1, slow uptake among smaller banks and credit unions, coupled with the restricted range of use cases (i.e., RTP only enables push payments) have hindered RTP’s impact (accounting for less than 1% of U.S. A2A payments today). Prior to RTP, NACHA introduced a ‘same-day ACH’ product. None of the A2A clearing infrastructure upgrades have disrupted card usage or even significantly cannibalized traditional ACH. Clearing networks (U.S. faster networks summarized in Figure 2) serve as the foundational technology for A2A payments. Actual consumer use cases, such as consumer-to-merchant payments, must then be powered by products such as digital banking, fintech apps (e.g. CashApp), or forms of software-embedded payments. Supply of this consumer end product continues to lag in the U.S. market. As illustrated in Figure 3, U.S. A2A bank services (i.e., via internet banking) are rather confusing, although Zelle has added focus. On average, U.S. banks have done a poor job delivering robust A2A use cases, leaving many consumers to use PayPal (Venmo) or CashApp for their P2P A2A payments. Cards and checks are still most frequently used for bill payments. Even the more successful consumer A2A products still often rely on traditional ACH for clearing, rather than RTP or the new FedNow. Bank readiness is a challenge for payment networks in the U.S., given the ongoing fragmentation of an industry that includes c. 4,000 commercial banks and several thousand credit unions and savings and loans companies. RTP, launched six years ago, claims to currently reach 65% of U.S. bank deposit accounts (increasing to 90% if you count all potentially reached accounts via participating banks). There are reasons to believe that FedNow account readiness should move at a faster pace. For example, FedNow offers more elegant interbank settlement for member banks given the Fed’s longstanding interbank settlement role. Are A2A Payments Disrupting U.S. C2B Payments? Why Not? As illustrated in Figure 4, A2A payments, enabled via digital banking or wallets have struggled to gain relevance in a C2B payments landscape dominated by cards. There are four fundamental reasons for the persistence of cards in U.S. merchant payments, despite the high cost to merchants: Consumer demand: Simply put, U.S. consumers love card payments because they are incentivized to do so via cashback/rewards from their issuing bank. Reliability: Visa and Mastercard have spent decades building trust and dependability that payments will work. Speed: The card networks quickly settle with merchants and enable consumers to see their transactions in near-real-time. Lack of real alternatives: A2A and Buy-Now, Pay-Later (BNPL) have relatively low penetration and are not relevant for in-store transactions today while digital wallets (e.g., Apple Pay, Google Pay, PayPal, etc.) are primarily card-linked. U.S. banks are mostly happy to support the persistence of cards as card interchange is the golden goose that keeps on laying. U.S. consumers love their credit card points and credit and U.S. banks love their interchange and card fee revenue. Figure 5 illustrates the relative cost of different consumer payment methods and how credit card acceptance costs have slowly increased since 2016. In Figure 6 we illustrate how these costs (primarily driven by interchange) make up a meaningful portion of issuer revenues today. In summary, the status quo of reliance on cards persists in the U.S. because no one has created a superior A2A consumer value proposition and banks lack the incentive to cannibalize interchange. As illustrated in Figure 7, A2A payments have found most success in P2P payments use cases today, with Zelle and Venmo leading the way. Realtime Clearing Has Proven Disruptive When Consumer Product Innovation is There In other global markets, killer A2A propositions riding newly minted real-time bank clearing rails are disruptive. For example, in emerging markets like India and Brazil, governments’ desire to reduce cash and achieve a leapfrog effect in digital payments led them to introduce modernized A2A payment networks. Such A2A networks were created with an “open access” participatory network which, in turn, allowed large tech companies, mega merchants, and fintechs to develop mobile payment apps that run on these networks. In Figure 8 we illustrate the adoption curve of PIX in Brazil and UPI in India, two highly successful A2A real-time payment networks that have grown rapidly as a result of increasing participation and innovation from such front-end mobile apps. Can FedNow Break the U.S. Status Quo? There are many roadblocks to FedNow being a major force of disruption in the U.S., which we highlight in Figure 9. In addition to competing against cards, FedNow must first foster bank/processor adoption of its network and then the banks must innovate their consumer A2A products and use cases. Given the fragmentation, atrophy, and opposing economic incentives, it feels farfetched to assume banks will lead an A2A disruption. If not banks, then who could dive U.S. A2A disruption? In Figure 10, we summarize our views on who could drive U.S. A2A payment disruption. Big Tech has some vested interest in bringing down payment acceptance costs, and the consumer platforms to drive use case innovation; thus it feels like Big Tech will certainly be an influence on any disruption. We also see fintech disrupters such as Square and Stripe as well as established APMs such as PayPal and Trustly as being relevant to a disruption story. While merchants must embrace A2A disruption for it to happen, we do not see them as the catalyst. The acceptance (merchant) side of the disruption formula is not the roadblock. Clearly, merchants will steer customers to lower-cost payment options if they are viable. The roadblock comes from winning the consumer and changing their behavior. Technology companies such as Amazon, Square, and Apple would seem to hold the key to unlocking these consumers. But how do you incentivize an American consumer to abandon their beloved credit cards and points? Conclusion FedNow accelerates the potential for real-time A2A payment disruption in the U.S., offering another alternative to RTP for real-time bank clearing. The opportunity for C2B payment disruption is clear as U.S. cost of card payments is the highest in the world. There are many stepping stones to achieving A2A disruption, however. Firstly, bank accounts must be enabled for real-time A2A. Secondly, and most importantly, innovators must provide killer A2A apps with a clear incentive for consumers to use them. Thirdly, the merchant ecosystem must fall in line (which we view as the lowest hurdle). We see various technology companies as having the greatest potential to drive consumer innovation, but rather than one company soloing this outcome, we believe it will take several working in concert to drive real disruption. Our best guess is that FedNow does not, in and of itself, significantly increase the disruption risk to cards in mainstream (retail) C2B payments. Clearing is just one, smaller piece of this complex A2A disruption puzzle. However, we do expect FedNow to potentially accelerate check displacement in alternative C2B use cases such as bill payment. We also expect FedNow to have a greater impact on B2B payments, which we will cover in Part 2 of this series on U.S. A2A payments disruption in the coming weeks. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com or Rom Mascetti at Rom@FlagshipAP.com comments or questions.

Erik Howell, Partner at Flagship Advisory Partners recently joined Don Riddick, Company Secretary and Chief Legal Officer for Featurespace on Enfuce's latest episode of their In The Hot Seat podcast. Hosted by Denise Johansson, co-founder and co-CEO of Enfuce, the episode emphasizes the critical role compliance and transparency play in the financial industry. Key talking points discussed include: The allure of compliance and transparency in the financial industry when executed effectively. Rebuilding trust and restoring integrity after financial industry mishaps. The fundamental aspects of proper compliance. The essential role of compliance and transparency in fintech. Strategies for upholding a compliant and transparent financial sector. Listen to the latest episode on Enfuce's website via the following streaming platforms: Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com with comments or questions.

The inaugural edition of The Paypers' Embedded Finance and Banking-as-a-Service Report 2023 covers essential business models and key players in the Embedded Finance and BaaS ecosystem. It also highlights the latest trends, technologies, and real-world examples illustrating how Embedded Finance is revolutionizing various industries. Download the full Embedded Finance and Banking-as-a-Service Report 2023 at The Paypers here. The Paypers sat down with Erik Howell, Partner at Flagship Advisory Partners, to discover relevant use cases for Embedded Finance, how banks can leverage it, and more. There have been multiple interpretations of Embedded Finance, which suggests that it can hold varying meanings depending on the individual. To ensure a clear understanding from the onset, could you kindly provide us with your definition of Embedded Finance? Embedded Finance involves implementing (as seamlessly as possible) fintech services into non-financial use cases, which in turn makes these use cases better and more lucrative. The concept of Embedded Finance is far from new; what is different today is the prevalence of software in several verticals, which provides a strong platform for allowing a fintech service to be frictionlessly embedded within a broader use case. We summarize client types and product domains in the table below. Source: Flagship Advisory Partners, February 2023 How can we differentiate between Banking-as-a-Service and Embedded Finance? We are curious about the nuances that set them apart. Could you clarify the distinction between these two concepts and how they relate to each other? We’re particularly interested in hearing your definitions and insights on the topic. Banking-as-a-Service is one of several business models that provide Embedded Finance (others include embedding payments acceptance into software, Open Banking enablers, Cards-as-a-Service, Payments-as-a-Service, etc.). The BaaS business model provides a bundle of licencing, payments, banking, and other fintech services, historically to other fintechs (e.g., neobanks) but are now targeting corporate customers. Embedded Finance is a much broader concept that includes many other business models. "Embedded Finance is far from new, but current software allows fintech services to be frictionlessly embedded within a broader use case." What are some real-life use cases of Embedded Finance that we observe in our daily lives? Please provide some examples. The most common Embedded Finance use cases focus on commerce enablement, for example, frictionless shopping (e.g., Amazon) or frictionless mobility (e.g., Uber). Other common use cases involve retailers and corporates promoting co-branded cards and/or offering end customers financing options (both of which have existed in less technically sophisticated forms for many years). We summarise key Embedded Finance client types and use in the chart cases below. Source: Flagship Advisory Partners, February 2023 Could you describe the categorization/value chain in Embedded Finance? What is the role of each participant? The key roles in Embedded Finance are end users, clients (e.g., a non-fintech), and suppliers of Embedded Finance. Key value chain elements are licensing, products (inclusive of technology), integration into the client (typically via APIs from the supplier’s integration layer), and supporting services and back-office processes. What opportunities exist for banks in this space? Key opportunities for banks are (1) to become a direct provider of Embedded Finance via a BaaS business model (e.g., Starling Bank), (2) partner with a broad-based BaaS provider (e.g., NatWest with Vodeno), (3) be the balance sheet provider for Embedded Finance service providers, (4) utilize an Embedded Finance service provider as a vendor to fill out the bank’s own product suite, or (5) enable an Embedded Finance service provider to cross-market to the bank’s customer base. What are the myriad of business models visible in the Embedded Finance market? We summarise 11 key business models in the chart below: Source: Flagship Advisory Partners, February 2023 What actions can regulators implement to promote market expansion and guarantee ethical and reasonable practices in the Embedded Finance industry? Regulators typically play a critical role in creating the statutory and regulatory framework for Embedded Finance to thrive. Regulators can widen their scope to promote standardisation of the enabling technology required (as they appear to be doing with the European Commission’s proposal for PSD3). A case in point is the UK FCA’s active role in establishing the regulatory and technical framework for Open Banking/Finance which has leapfrogged the UK as the leading European country in Open Banking adoption. Regulators can also play a role in creating a universal framework for Embedded Finance, reinforcing measures for fraud prevention, data protection, data sharing and liability shifts. Such a framework protects participating entities and allows for increased innovation in Embedded Finance use cases. Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com with comments or questions.

The proposed (but not yet voted on) U.S. Credit Card Competition Act of 2023 continues to make headlines, most recently on the back of The Wall Street Journal’s report that Visa and Mastercard will raise card fees in October 2023 and April 2024 and Congress’ visceral reaction to the news. According to Senator Dick Durbin’s website, “The Credit Card Competition Act of 2023 would enhance credit card competition and choice in order to reduce excessive credit card fees.” But will the proposed legislation have the desired effect on the U.S. payments landscape? In this article, we take a closer look at the proposed legislation, the current card network landscape, and provide our view on potential outcomes. What is the Credit Card Competition Act of 2023? In Figure 1 we compare the Credit Card Competition Act of 2023 (‘CCCA’) to its predecessor bill, the Durbin Amendment, which was passed as part of the Dodd-Frank Reform and Consumer Protection Act in 2010. The Durbin Amendment requires issuers to have two unaffiliated networks on debit and prepaid cards, and caps interchange at banks with over $10 billion in assets. The Durbin Amendment successfully reduced the cost of debit card acceptance for merchants, largely due to the existing alternative debit schemes in the U.S. (more on this later). The CCCA is seen as the reincarnation of the Durbin Amendment but for credit cards. Specifically, the CCCA stipulates that issuing banks with assets over $100 billion (of which there are approximately 30 in the U.S.) are required to offer a secondary network to process credit card transactions (beyond Visa and Mastercard). The CCCA is still held up in Congress after failing to be added as an amendment to the National Defense Authorization Act for the second year in a row. There is no scheduled vote for the CCCA, but sponsors are still hopeful the legislation will get a standalone vote before Congress adjourns at the end of 2023. The key difference between the CCCA and the Durbin Amendment is that the CCCA is not trying to regulate interchange. Interchange regulations would have a materially negative impact on the U.S. credit card industry broadly, as we witnessed in Europe. The impact would be exacerbated by U.S. issuers' reliance on rewards to drive usage which are funded through interchange. This is an important distinction as we describe the current state of affairs and our view on the impact of the CCCA. Current State of Affairs in the U.S. The U.S. consumer payments market is largely card-driven, with more than half of domestic transaction volumes come from credit or debit cards (Worldpay from FIS 2023 Global Payments Report). According to a recent report from The Wall Street Journal, Visa and Mastercard (‘V/MC’) were planning to increase interchange and scheme fees this fall and next year. On the heels of this news, the sponsors of the CCCA have ramped up their push for the passing of the bill and have called for V/MC to withdraw any plans to increase their fees. Visa responded to the report in an email statement, explaining that it hasn’t notably increased fees and has cut fees for some businesses. Mastercard said that it is not increasing interchange or network fees associated with processing transactions but will increase ‘authorization optimizer service’ fees. Potential V/MC rate increases are exactly what the CCCA attempts to mitigate for credit cards. To do so, alternative credit card networks are required. Figure 2 illustrates the various credit and debit networks in the U.S. American Express (‘AmEx’) and Discover are the only other standalone U.S. credit networks. Some domestic U.S. debit networks (i.e., Star, Accel, Shazam) offer dual messaging, a core requirement for credit card transaction processing, versus single messaging which is the basis for debit and prepaid card processing. But how likely are these networks to compete for Visa and Mastercard volumes, and how will it impact merchant acceptance fees? We discuss this matter in the following sections. Likely Outcome #1: Little Impact on SMB Merchant Acceptance Fees The CCCA can only be effective if other networks make themselves interoperable with V/MC. The likelihood of AmEx and Discover investing to support V/MC transactions and win business seems low, as investing the resources to act as “secondary” options to V/MC may not be worth the cost and/or effort. Despite some being dual messaging enabled, secondary debit networks are not interoperable with V/MC because of the lack of standardized messaging in the U.S., and, unlike Europe, there is no mandate for interoperability (although notably in Europe, despite an interoperability mandate, neither Visa nor Mastercard process each other’s transactions as there is no commercial driver to do so). The technical requirements for these secondary debit networks or any new entrants into the market would require substantial investment and potentially many years to launch. Even if both AmEx and Discover decided to invest, it would not have a material effect on merchant acceptance costs. As illustrated in Figure 3, AmEx’s average cost of acceptance is more expensive than V/MC, while Discover’s is slightly lower but not materially different. This is because there is a fundamental difference between “networks” for routing and “networks” for interchange. In other words, as long as a Visa card is run as a “credit” transaction at the POS, the transaction still accrues Visa interchange fees from the card’s issuing bank which make up c.70% of card acceptance costs in the US (we further discuss the high cost of US payments here). Likely Outcome #2: Enterprise Merchants Uncover New Cost-Saving Tactics While the CCCA will have little (if any) impact on SMB merchant acceptance fees in the near future, the more obvious opportunity for cost savings sits with large enterprise merchants. Companies like Amazon, Walmart, and other mega merchants could negotiate custom routing deals with secondary networks (e.g., Discover/Pulse) which, given their market weighting, could shift portfolio average acceptance costs. Future Outlook We summarize our view on the likely outcomes in Figure 4. Even if the legislation is passed, we would not see material impacts on interchange revenue or merchant payment acceptance costs for multiple years. In the long term, in the absence of interchange regulation, the U.S. credit card industry should continue along its current trajectory, with an emphasis on credit card rewards funded by issuer interchange. On the card issuing side, future secondary networks will need to compete to win business from the issuers, which could equally drive interchange rates up close to or level with that of V/MC. Stakeholders should continue monitoring the CCCA voting situation as it is only the first domino in a long string of events that would impact the U.S. payments ecosystem. Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com or Rom Mascetti at Rom@FlagshipAP.com with comments or questions.

General Commentary & Highlights: The recent public equity experiences of Adyen and dLocal highlight the increased importance of investor relations and communications in fintech. The share prices of both companies have fallen sharply from their peaks (-75% for Adyen and -70% for dLocal as of today). Part of this fall is consistent with the entire fintech industry, but Adyen and dLocal share price declines are more extreme as the result of what we see as lackluster investor communications. Adyen’s share price struggles are the result of missed earnings expectations. Growth headwinds resulting from market maturity and price competition played a role. Still, poor communication on expenses and EBITDA margins were clearly a self-inflicted wound that compounded the slowing growth. Adyen’s OPEX rose 110% from H2 2021 2022 to 1H 2023 vs. net revenue growth of 33%. From their share price peak on 24 August 2021, EBITDA margins fell from 64% to 43% in their most recently announced half-year. dLocal shares entered the market in July ’21 with high valuation expectations ($10.4B at IPO). Following a peak in August ’21, shares fell -70% as of today. Much of this share price decline was also a general pullback in e-commerce stocks, but dLocal also underperformed its peers based on a series of adverse news events and changing shareholder expectations, specifically: Q4’21 share pressure was partly driven by disappointment from a sharp slowdown in growth (from 186% to 123% from Q2 to Q3 ‘21) and margins (44% adj EBITDA margin in Q2’21 vs. 38% in Q3’21). Pressure on both topline growth has continued, although dLocal’s EBITDA margin performance remains impressive overall. Shares dropped 51% intraday following the release of a short-seller report from Muddy Waters. The company was surprisingly passive in responding to a report that we found lacked understanding of the business (16 Nov 2022). Shares dropped 17% intraday following the announcement of the Argentina government launching an investigation of Dlocal for potential fraud (26 March 2023). dLocal shares bounced back more recently, however, following more favorable investor communications, including the announcement of a new CEO on 15 August 2023 (after which the shares climbed almost 40%) The overall lesson learned from recent Adyen and dLocal share performance is that the role of investor relations has never been more critical for listed fintech companies. Surprises in today’s public equity markets are severely punished. The days of easily beating expectations in fintech are over. Fintech companies, notably higher growth companies, must focus more on communicating a longer-term path on revenue growth and EBITDA margins in an increasingly mature industry. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.

Central Bank Digital Currencies (CBDCs) have emerged as a pivotal topic at the intersection of finance, technology, and policy. As traditional forms of currency give way to digital alternatives, central banks worldwide are exploring the potential of CBDCs to revolutionize how we conduct financial transactions, manage monetary policy, and safeguard economic stability. The article attempts to demystify CBDCs via a status update on various central bank initiatives, as well as insights into CBDC characteristics, use cases, and potential impact on stakeholders in the payment ecosystem. Central Bank Digital Currency (CBDC) A Central Bank Digital Currency (CBDC) is a digital form of a nation's currency created and overseen by the central bank. It is distinct from current “digital” funds (those that holders see in their bank balance online) as CBDC is issued directly to holders by the central bank, held on the central bank’s ledger (not on the ledger of banks, as is the case today). In some design constructs, the central bank operates or manages wallets and payments attached to the CBDC. Central banks have diverse motivations for issuing CBDCs. For example, Nigeria and Brazil aim to increase financial inclusion and serve the underbanked, while Russia and China seek to reduce reliance on Western currencies and reduce exposure to sanctions. The European Union, currently researching a digital Euro CBDC, views it as a potent monetary policy tool to mitigate wide variances in economic conditions across the eurozone. CBDCs come in two types: CBDC Retail: for public use - individuals and businesses access digital currency from the central bank, replacing cash, and improving payments. CBDC Wholesale: for financial institutions and governments - used for interbank and cross-border transactions, settlements, and reserves management. Due to its programmability and technological flexibility, a CBDC can cover multiple payment applications, which depends on the chosen issuance model and intermediaries' role in the value chain. Central banks around the globe are particularly intrigued by the potential applications of such technology. CBDC development is in its early stages, but two models are emerging: one where the central bank handles the entire value chain, including CBDC holder interfaces (wallets and portals), and another where the central bank leverages existing bank or payment service provider (PSP) infrastructure with specific incentives. Although CBDC offers potential advantages (cost reduction, increased financial inclusion, financial innovation, etc.), some stakeholders and commentators have raised concerns about financial stability, privacy and cybersecurity risks, operational risks, and user adoption challenges. The specific model and design features chosen for an individual country’s CBDC will determine how real these advantages and disadvantages will ultimately be, and different stakeholders will have varied impacts. One of the most advanced and successful CBDCs projects are the Nigerian e-Naira and the Chinese Digital Yuan. In October 2021, the Central Bank of Nigeria introduced its CBDC with the target to achieve a 95% financial inclusion rate by 2024. After some initial challenges with app functionalities in the first year, the Central Bank of Nigeria updated the eNaira wallet a year later in October 2022. Since then, 12x times more wallets have been activated, and penetration reached 6% (as of March 2023). The eNaira app allows individuals to sign up without having a bank account; in this case, a phone number and/or NIN (National Identification Number) is required. According to the profile and the sign-up process, individuals are split into tiers with daily transaction limits and maximum cumulative daily balance. Launched in April 2020, China's digital yuan pilot (e-CNY) has evolved rapidly. The People's Bank of China expanded its nationwide reach, testing the initiative with existing payment channels. The user base has grown to over 260 million wallets since its debut, operating in only 23 cities (based on numbers cited by the PBoC). Unlike the set-up in Nigeria, the e-CNY employs an indirect CBDC architecture. In this setup, nine Chinese banks, seven commercial and two online banks, serve as intermediaries responsible for offering the application and front-end infrastructure. CBDC projects in Western economies are still in the early stages, and most efforts to date have focused on prototypes and technology research, and initial issuance is not expected before 2025. Conversely, CBDC issuance in some major emerging economies is expected sooner. For instance, India, Brazil, and Russia expect to issue their CBDC in the next 18 months. Conclusions and Impacts Since CBDCs are still in their very early stages, it is premature for most stakeholders to draw definitive conclusions as much will depend on the ultimate design choices made by the central bank issuing the CBDC. For most stakeholders, the path forward is vigilant monitoring and assessing impacts as design specifications and business models become apparent. We summarize the potential implications for key stakeholder categories as they stand today in the table below. Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com, Stanislav Dubský at Stanislav@FlagshipAP.com, or Alessandro Mighetto at Alessandro@FlagshipAP.com with comments or questions.

We advise viewing the slides via the "PDF" icon button. Vertical Targeting Strategies for PSPs Well-crafted vertical-targeting strategies are a winning playbook for U.S. payment service providers (PSPs) however, success is not homogenous. Before investing in a vertical strategy, PSPs need a deep understanding of factors such as: The merchant landscape (e.g., merchant concentration, average business size) Consumer payment preferences and trends Distribution partnership opportunities (e.g., vertically specialized business management software solutions) Competitive dynamics Armed with this information, PSPs can form a winning value proposition and merchant targeting strategy. Flagship routinely evaluates vertical market opportunities for our clients. U.S. Merchant Payments: Medical Practices In this presentation, we provide high-level perspectives on U.S. Merchants Payments within Medical Practices, with the following key takeaways: >75% of the payment service provider (“PSP”) revenue pool for the Medical Practice vertical is earned from merchants with <$5M in annual revenue (i.e., SMB merchants). The cardabale payments industry within the U.S. Medical Practice vertical is sized at $325 Bil. (2022). Family practices have the highest market share. The Medical Practice vertical generates ~$800 Mil. in annual revenue for PSPs. ~60% of PSP revenue is earned from POS payments. The Medical Practice ISV landscape can be organized by foundational (e.g., electronic health records) and more niche (e.g., dentistry) use cases. Medical Practices may use several software solutions and payments may need to be integrated across solutions. Some PSPs have deep specializations in the Medical Practice vertical, while others leverage more generic offerings to target the space. Please do not hesitate to contact Scott DeHaven at Scott@FlagshipAP.com with comments or questions.

Flagship Advisory Partners recently sat down with PCN CEO Rogier Rouppe van der Voort for their 'In Check with Fintech' podcast episode to discuss the latest developments and opportunities within the B2B payments space. Delving deeper, they explored Fintech adoption trends in the U.S. and Europe, breakthroughs in real-time payment systems, key themes within B2B payments in the U.S. and Europe, and potential M&A activity within the B2B payments space. For more information on the B2B market space, read our analysis on the massive opportunity for cross-border fintechs in a traditionally bank-dominated space here. Listen to the latest episode on the following platforms: PCN media Podbean Apple Podcasts Spotify Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com or Rom Mascetti at Rom@FlagshipAP.com with comments or questions.

Image Credit: Unzer.com Introduction For the better part of two decades, from c. 1995 to 2015, private equity investments into merchant payments were practically failproof. Deal after deal delivered solid, if not exceptional returns buoyed by strong fundamental electronic payment growth tailwinds, and a business model with naturally strong scale economies. By the late 2010’s however, valuations began to outpace fundamentals and in recent years, we observe an increasing rate of unsuccessful private equity investments in merchant payments. Private equity-backed, payment service provider Unzer is one such failed investment that we analyze herein. KKR acquired a majority stake in Unzer from AnaCap for $668 million in August 2019, rumored to be backed by a loan of c.$230 million. After less than four years into the deal, the private equity firm announced plans to hand-over its majority stake in Unzer to its creditors including Alcentra Asset Management, Goldman Sachs Asset Management, and Partners Group. The agreement, which is still pending final regulatory approval, was made after the payment service provider failed to meet its financial covenants earlier this year. The current owner would retain a minority stake in Unzer. Lenders are expected to inject a “significant amount” of fresh equity. Discussions among the Management team, the private equity firm, and debt investors had already been going on since May 2023. About Unzer Founded in 2003, Unzer (formerly known as Heidelpay) is a Germany-headquartered, multi-channel, full-stack payment service provider, serving over 70,000 merchants. As shown in Figure 1, most of the group’s revenues in 2021 were generated from e-commerce payments. The majority of the revenues emanate from Germany, yet the payment service provider also generated c.14% of its revenues from crypto-related activities out of Malta through its Danish subsidiary and acquirer, Clearhaus. The group has been highly acquisitive ever since being under the private equity umbrella. As illustrated in Figure 2, Unzer bought over a dozen companies since 2017, expanding its geographic footprint, product, and distribution capabilities. Additional debt was injected into Unzer to partially finance the add-ons. Under Regulatory Lens Unzer’s outlook started to sour on 18 June 2021 when the German Federal Financial Supervisory Authority known as BaFin informed Unzer’s German subsidiary (Unzer E-Com GmbH) that it had to undergo a special regulatory audit due to strong suspicions of lack of oversight of anti-money laundering between 2018 and 2021. The audit, completed in July 2022, revealed “a large number of deficiencies” in onboarding processes, compliance, and money laundering prevention. The German regulator ordered Unzer to take immediate action, banned the subsidiary from onboarding new customers, and appointed a special representative to monitor the implementation of remediation measures. Additionally, Unzer was fined €350,000 by the BaFin on 7 September 2022. As of today, it is still unclear if the ban on new customer onboarding has been lifted by the German regulator. Following the failure to properly regulate Wirecard, the German BaFin has exercised a high degree of scrutiny on payment service providers and fintechs. Yet Unzer was the only payment service provider that required a special audit, received a ban on onboarding new customers, and was fined. BaFin was not the only regulator that scrutinized Unzer. Shortly after the completion of BaFin’s audit, on 12 August 2022 the financial regulator in Luxembourg (CSSF) imposed a fine of €145,000 against Unzer. The CSSF identified similar shortcomings and cited Unzer "for non-compliance with certain professional obligations relating to the fight against money laundering and the financing of terrorism" during an on-site inspection carried out in 2020 and 2021. Unzer’s Financial Performance Unzer released full-year consolidated group figures for the first time in 2021 and reported revenues of €176.4 million in 2021, budgeted to reach €276.3 million in 2022 (Figure 4). The group generated a consolidated EBITDA of €4.8 million in 2021. It is worth noting that the consolidated financials do not reflect the full-year revenue and EBITDA contribution of Unzer’s 2021 acquisitions, namely Clearhaus, 3dsecure.io, and Quickpay. Six subsidiaries have been driving most of Unzer’s revenues, as shown in Figure 5. Their historical top-line performances up until 2021 are relatively strong. Financials for 2022 are not yet available, except for the Danish subsidiary, Clearhaus. The acquirer’s gross revenues decreased by 48% in 2022 vs. 2021, primarily due to the bankruptcy of one of its merchants. Additionally, Clearhaus has had strong exposure to crypto. Although Clearhaus decided to reduce the number of crypto merchants in its portfolio in 2022, the performance of its remaining crypto merchants was significantly impacted by market downturn. Key Lessons Learned & Conclusions The investment in Unzer reinforces a number of lessons learned for investors in merchant payments: Acquisition valuations must be reasonable, leaving room for equity returns as organic topline growth slows. The days of easy growth are over, and therefore investors must pay a fair valuation in order to generate equity returns. Even market leaders Stripe and Adyen have learned this lesson given steep declines in market value. Conglomerations of many small merchant PSPs acquired at full valuation is a challenging playbook for generating equity returns. Conglomerates of smaller PSPs too often underestimate the investment and hard work required to extract cost synergies (for example, full consolidation of technology, infrastructure, and business administration). A similar lesson can be gleaned from the steep fall in market valuation experienced by PayU prior to its recently announced acquisition by Rapyd. Compliance matters. Compliance in merchant payments is a far lesser burden than consumer lending, for example, but it remains an absolute business requirement in an environment of heightened regulatory scrutiny. Particularly on the back of Wirecard’s many failures, Unzer jeopardized its business with inadequate compliance controls. Risk-seeking in merchant payments often does not end well. Certainly, you can earn outsized margins in merchant payments by taking on reputational risk, excessive chargeback risk, and credit risk, but such risks often come back to bite you. ING’s failed investment in PayVision was also doomed by excessive risk combined with lax compliance controls. It will be interesting to see if Unzer can emerge from the creditor-backed ashes as there remains quality within its conglomeration of acquisitions. The company already parted ways with merchants not meeting compliance requirements and invested heavily into new compliance processes. The investment in Unzer also emphasizes an important lesson for any strategic and financial investor: M&A has the potential to be transformative but requires significant work both pre-acquisition and post-acquisition (incl. rationalization of tech stacks, development of a common product, and go-to-market strategy), especially at these valuation levels. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com, Charlotte Al USta at Charlotte@FlagshipAP.com, or Aigerim Assembayeva at Aigerim@FlagshipAP.com with comments or questions.

Over the past few years, several major payment service providers (PSPs) have expanded their product sets by introducing banking solutions such as cards, credit, and business accounts. In this article, we analyze the banking offerings of select PSPs across Europe and the U.S., listed in Figure 1. Banking products present a natural cross-selling opportunity for merchant payment providers by helping them to differentiate themselves, strengthen their value proposition, and increase the stickiness of merchants. Card issuing is often a space PSPs look to expand into due to attractive revenues earned from commercial card interchange fees and the relatively low operational complexity of introducing this offering (when leveraging vendors). Working capital lending is another area PSPs are increasingly expanding into, as there is naturally high demand from SMEs for lending, and a relative lack of supply by banks. When introducing a banking solution, some PSPs like Square (for issuing) partner with product specialists (i.e., Marqeta etc.) for faster go-to-market and lower complexity. Other providers like Adyen develop in-house capabilities and source their licenses to have full control over the product stack and user experience. Regardless of the model chosen (partner vs. build), the development of a banking proposition comes with costs. For example, Stripe and Adyen have made a significant investment in building their banking proposition with little public evidence of reaching a meaningful scale thus far. Despite the lack of data and ability to fully assess the success of PSPs’ banking products, the number of payment providers expanding to banking for the past few years does tell us that there is a demand for such solutions and (presumably) attractive financial benefits. What is clear is that any PSP that is considering introducing banking solutions should accurately pinpoint its proposition (product and geo focus), determine a precise distribution strategy, calculate the business case, and carefully choose its operating model (partner vs. build). Key Observations: Card Issuing Based on our observations on the current card products offered by select PSPs (Figure 2), we can summarize the following: Debit and prepaid cards are a staple banking product offered by PSPs across Europe and the U.S. that help merchants to access their accepted funds and manage business expenses. Only select PSPs in the U.S. offer credit cards (i.e., Square and PayPal). Virtual cards are still a nascent category, primarily addressed by enterprise-focused providers that offer their merchants a flexible way to pay suppliers and manage employee expenses. The pricing structure for card products varies across providers and card types. Based on available pricing information from select PSPs (Figures 3A & 3B), we can summarize the following: Debit & prepaid cards: In Europe and the U.S., most providers offer debit and prepaid cards free of charge as value-added services to their merchants, except for a few providers (i.e., Stripe and myPOS), which charge a fee per card. Credit cards: A few providers offering credit cards often charge zero fees, though some set specific eligibility requirements. Gift cards: The pricing structure for gift cards varies between those that charge a fee per card (i.e., Square), while others apply a % fee of the gift card value and additional fees per purchase (i.e., SumUp). Key Observations on Working Capital Offering Based on our observations on the working capital products offered by select PSPs (Figure 4), we can summarize the following: Merchant cash advance and instant settlement are often offered as a value-added service as these products are highly demanded by merchants and relatively easily monetized. Only a few PSPs offer revolving credit cards and short-term loans, likely due to increased credit risk and balance sheet requirements. SME-focused PSPs operating in retail verticals tend to incorporate Buy Now Pay Later (BNPL) solutions via partnerships with third-party providers to offer more flexible payment methods for end-users. The pricing structure for working capital solutions is mostly consistent across geographies amongst the PSPs who offer these value-added services to merchants. Based on available pricing information from select PSPs (Figures 5A & 5B), we can summarize the following: Merchant cash advance: In both Europe and the U.S., most providers charge a flat fee as a % of daily sales. Instant settlement: Fee structures vary between providers that pair instant settlement with a business account at no additional charge (i.e., myPOS in Europe) and providers that charge a fee per transaction (i.e., Square and Stripe in Europe and the U.S.). BNPL: The fee structure for BNPL solutions is inconsistent across PSPs primarily due to partnerships with third-party providers. Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com with comments or questions.

Image Credits: FreePik General Commentary & Highlights: Investments in the payments sector had unusually limited activity in Q1 2023, yet rebounded exceptionally quickly in Q2 2023, well above historical levels Despite macro-economic headwinds, the market is anticipating an acceleration of M&A activity in the payments sector heading into Q3 2023 and beyond With a significant shrinkage in recent asset valuations to offset market recovery, these ongoing valuation corrections will see well-funded strategic investors using M&A to acquire technology and capabilities, and PE firms remaining keen to invest in the payments sector Please do not hesitate to contact Yuriy Kostenko at Yuiry@FlagshipAP.com with comments or questions.

General Commentary & Highlights: CAB Payments, the holding company for Crown Agent Bank (CAB), a B2B FX and payments specialist got listed on the London Stock Exchange on 6th July ‘23 The deal had a market cap of £851 mil. at the IPO (largest public debut in London this year) The stock fell sharply on its first day of trading (9.6% fall in stock price by close of day) Overall Strong Financial Profile: Impressive revenue growth of c.79% Y-O-Y, fueled by strong growth in FX & payment volumes and higher take rates; Adjusted EBITDA increased by c.480% Y-O-Y, EBITDA margin at c.50% in 2022 Strong defensive moat with coverage across 150+ markets, c.220 trading partners and c.25 central bank relationships; Specializes in B2B FX and payments to/from emerging markets Future growth strategy focuses on enhancing products, expanding geo footprint, and increasing customer base (e.g., global tier 1 banks) Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com or Simone Remba at Simone@FlagshipAP.com with comments or questions.

Please do not hesitate to contact Joel Van Arsdale Joel@FlagshipAP.com or Rom Mascetti Rom@FlagshipAP.com with comments or questions.

Less than a year after an abandoned de-SPAC deal that valued the company at $480 million, Plastiq, a U.S. B2B payments automation platform, filed for Chapter 11 bankruptcy and entered into an agreement to be acquired by Priority Technology Holdings, a publicly traded U.S. merchant acquirer/payment service provider. In this article, we summarize the rise of U.S. payment service provider investment in B2B payments and how the rise and fall of Plastiq illustrates such investment. B2B Investment by U.S. Payment Service Providers Over the last several years, we have observed U.S. merchant acquirers and payment service providers (‘PSPs’) increasing their strategic focus on B2B payments. Figure 1 highlights select B2B payments-related activity from these merchant acquirers and PSPs. Overarching themes of such investments include: Robust ERP and B2B vertical SaaS/platform integrations to embed payments within business management and other critical SaaS solutions. Acquisitions and/or partnerships with AP/AR automation providers to become a “one-stop-shop” for B2B payments. Expansion and monetization of non-card payment acceptance products like ACH, ACH+ (ACH transactions with enhanced remittance data and/or payment terms), and real-time payments. Expansion into other embedded finance and value-added services such as spend management and B2B lending. As an AP/AR automation and short-term financing solution, Plastiq’s merchant value proposition marries well with several of the aforementioned investment themes. Its untimely demise proved to be an opportunity for Priority Technology Holdings (‘Priority’) to further invest in its own B2B payments strategy. We describe this investment story in more detail in the following sections. Plastiq Background Founded in 2012, Plastiq is a buyer-driven AP/AR automation platform for SMBs that offers card, account-to-account (including check, ACH, and wire) payments, and short-term financing. In Figure 2, we profile Plastiq including its geographic coverage, product offerings, customer segmentation, and funding rounds. Plastiq’s flagship product, Plastiq Pay, allows businesses to pay suppliers with virtual/commercial cards, even if the supplier does not accept credit cards themselves. This process, also referred to as “buyer-initiated payments” (‘BIP’), deposits payments directly into a supplier’s bank account while charging the buyer a fee of up to 2.9% for using the card. In exchange, buyers extend the amount of time they have to pay (also known as days payable outstanding or ‘DPO’), get access to short-term financing, and utilize the payment controls embedded within many of today’s commercial/virtual card programs. Plastiq Pay is not a substitute for buyers looking to use card payments at card-accepting suppliers (where the buyer does not need to pay the 2.9% fee), but rather at non-card-accepting suppliers where the flexible payment terms and controls of commercial cards offset the cost of capital and potentially offer better short-term financing options than traditional SMB loans. Other product groups include Plastiq Accept (an SMB supplier payment acceptance solution) and Plastiq Connect (an embedded AP/AR solution for B2B SaaS/platforms). In Figure 3, we further illustrate Plastiq’s product offerings and corporate card issuing and processing partner network. Plastiq Financial Performance & Bankruptcy According to Pitchbook, Plastiq raised over $220 million from investors since 2012 and was last valued at $480 million in August 2022, well below its peak valuation of $940 million in January 2022, due in large part to overall fintech valuation compression. While Plastiq presented impressive revenue growth and expectations in its August 2022 Investor Relations report, it also presented increasing net losses (see Figure 4 below). Plastiq’s 2023 ambitions for margin and EBITDA expansion were cut short after its Chapter 11 bankruptcy filing on May 24, 2023. While Plastiq’s fundamental business value proposition is strong, three liquidity-related factors stand out when explaining what led to the business’s demise: Plastiq’s failed de-SPAC with Colonnade Acquisition Corp. II: Colonnade attempted to merge with Plastiq to take the firm public in August 2022 at a $480 million valuation. At the time of the agreement, Plastiq expected to add more than $300 million to its balance sheet. While the reasons for the deal falling through were not publicly disclosed, we can speculate that overall economic headwinds related to fintech investment created deal pressure. The lack of additional liquidity and post-failure litigation between Colonnade and Plastiq strained the company’s financial health. Plastiq’s $57 million stock and cash acquisition of Nearside failed: Nearside, an SMB banking and lending fintech, was acquired by Plastiq in September 2022 and, according to Plastiq’s management, was shut down 3 months later after failing to cross-sell its technology and products into Plastiq’s customer base. Expenses related to the acquisition, integration, and unwinding of Nearside’s business put even more pressure on Plastiq’s capital position. Plastiq was one of the many Silicon Valley Bank (‘SVB’) fintech casualties: SVB served as Plastiq’s primary BIN sponsor, payment processor, and treasury disbursement partner. Upon collapse, Plastiq was forced to halt operations and scramble to find a new banking and payments partner, creating liquidity strains from lost customers and revenues linked to the collapse. In Figure 5, we highlight key events in Plastiq’s bankruptcy timeline. Most notable from the bankruptcy filing is the position of Priority as a preferred buyer of the business back in March 2023. Plastiq engaged the distressed company advisory firm Portage Point for an asset sale and received a non-binding LOI from Priority for an out-of-court merger, but Priority subsequently backed out. Plastiq is now seeking court approval for $7.1M debtor-in-possession (‘DIP’) financing from middle-market lending company Blue Torch and a stalking horse bid from Priority in which it would acquire most of Plastiq’s assets. The terms of the deal are not fully disclosed but would be inclusive of a $27.5M cash payment with assets and liabilities estimated at $50 and $100 million, respectively. Priority Potential Acquisition & B2B Payments Strategy Priority is a publicly traded U.S. payments technology company operating three business segments: (i) SMB payment acceptance and card acquiring, (ii) B2B payments via AP automation, and (iii) Enterprise payments via embedded payments and banking solutions for platforms. In Figure 6, we profile Priority including its geographic coverage, product offerings, customer segmentation, and recent M&A activity. Priority’s roots (founded in 2005) are in payment acceptance and merchant acquiring, where the business has scaled into the fifth largest non-bank merchant acquirer in the U.S. by volume. In Figure 7, we highlight Priority’s most recent 10-K and 10-Q financial performance by business segment. Priority’s B2B segment (c.2% of Priority’s Q1’23 Revenue) provides AP automation services to merchants and financial institutions through its CPX platform, offering a bridge for buyer-to-supplier payments by integrating directly to a buyer's payment instruction/procurement solutions and moving money to suppliers via virtual card, purchase card, ACH/ACH+, dynamic discounting, or check. According to Priority’s public filings and management commentary, the B2B segment is core to diversifying the company’s sources of revenue. However, Priority has not yet scaled its B2B payments segment (at least on the buyer/AP automation side of payments) relative to its SMB payment acceptance and merchant acquiring business. Plastiq’s buyer-driven AP/AR automation platform adds scale and product features such as buyer-initiated payments capabilities to Priority’s AP automation platform (CPX) and the overall B2B segment. Referring back to our observed investment themes introduced at the beginning of the article, Priority’s potential acquisition of Plastiq further positions itself as a “one-stop-shop” for B2B payments (offering AR and AP automation) while expanding its products into other embedded finance and value-added services such as short-term financing/B2B lending via Plastiq’s platform. Future Outlook The Plastiq story illustrates several themes for investors targeting payments and fintech: B2B investment is defining the next wave of activity among U.S. merchant acquirers, PSPs, and financial investors. We further describe the value of B2B payments in a recent article here. For B2B payments, the flow of payments data and control of capital is just as important as the underlying payments form factor (card, ACH, check, etc.). Solutions like Plastiq demonstrate that the cost of payment acceptance (typically borne by the supplier) can be shared or completely paid by buyers if value is created (e.g., buyer extends payment terms, buyer accesses incremental line of credit, both parties access additional remittance data, supplier receives early payment and settlement, etc.). Future winners in B2B payments will offer a comprehensive, software-enabled AP/AR solution set alongside payment acceptance and other value-added B2B services (e.g., card issuing, spend management, supply chain financing, payroll, treasury management, etc.). Controlling costs and having a prudent mindset for organic and inorganic investment is critically important. High capital burn rates can destroy even the most fundamentally sound business plans and value propositions. M&A, especially for growth-stage fintechs, is a double-edged sword. Mis-evaluating acquisition targets can create an operational and financial pitfall that distracts from the company’s core value proposition. It is important for fintechs to get their core product right before expanding into other product adjacencies. Meanwhile, Plastiq’s failure is just one of the latest examples of fintech companies struggling out of the most recent economic downturn. Fintech financial struggles reinforce an attractive environment for strategic buyers, including merchant acquirers and PSPs seeking to acquire strong products and services at reasonable valuations. Separately, for financial investors, the market for bolt-on assets for core portfolio companies is as attractive as ever, as well as opportunities to make inroads into new B2B-payments-related domains to execute go-to-market improvement. Please do not hesitate to contact Rom Mascetti at Rom@FlagshipAP.com with comments or questions.

General Commentary & Highlights: Wise’s stock price surged c.20% to £641.40 on 28th June, fueled by its FY23 results that included surprisingly high growth. Wise stock is up more than 100% since its all-time low one year ago The customer base grew 34% YoY (66% of which joined through word-of-mouth), while volume grew at 37%; strong customer and volume growth across both consumer and business segments Transaction speed improvement via instant payment capabilities launched to and from Brazil, Singapore to Malaysia; and via new partner integrations in countries like Japan and the U.S. Impressive 51% YoY revenue growth powered by volume growth, margin expansion, and acceleration of interest income in a rising rate environment Strong growth across global regions, but particularly strong in APAC and ROW Growth propelled in part by Wise Platform (i.e., embedded partners) expansion, 60 new partners Adjusted EBITDA increased by ~100% YoY, and the net income margin surged by 3x as Wise Account features drove the increase in profitability from the higher interest rate environment Please do not hesitate to contact Joel Van Arsdale Joel@FlagshipAP.com or Pedro Giesta Pedro@FlagshipAP.com with comments or questions.

Article Synopsis and Visuals Guide: We summarize some of the key themes discussed during the conferences attended by Flagship Advisory Partners’ leadership team from January to June 2023 in the UK/Europe and the U.S. General themes and topics covered: SAAS & Payments/Fintech (C2B & B2B) Payment Orchestration Marketplaces B2B Payments A2A, Open Banking Fraud & Risk Management Regulation Crypto & CBDC Please do not hesitate to contact Joel Van Arsedale Joel@FlagshipAP.com, Erik Howell Erik@FlagshipAP.com, or Yuriy Kostenko Yuriy@FlagshipAP.com with comments or questions.

Article Synopsis and Visuals Guide: The US acquiring processing market is dominated by a select number of monolithic, legacy processors (visual #1) The prolific M&A activity of legacy processors created fragmented, complex platform environments (visual #2); however, the collection of platforms also resulted in processors with breadths of capabilities that are difficult to replicate Legacy processors’ platform fragmentation and relatively dated technology have created pain points for merchants and other industry stakeholders; cloud processing environments would rectify many of these pain points (visual #3) While legacy processors are aware of how cloud acquiring processing would benefit some customers, several barriers have prevented or slowed legacy processors’ investment in cloud processing solutions (visual #4) Cloud acquiring processing investment is building momentum in the US; incumbents and new entrants alike are modernizing acquiring processing (visual #5) Please do not hesitate to contact Scott DeHaven Scott@FlagshipAP.com, Peter Taylor Peter@FlagshipAP.com, or Brittany Logan Brittany@FlagshipAP.com with comments or questions.

Image and Logo Credits: FreePik, PayPal General Commentary & Highlights PayPal lost ~$155 B in market cap with ~70% decline in share price since Jan ’22 Share price hit a 6-year low on 12 May this year Pace of M&A clearly slowing with potential for divestitures (i.e., Xoom sale being explored) GAAP EPS recorded a net loss of ~$0.45 related to PayPal’s strategic investments in Q2 ’22 Returned $4.1B through share repurchases in the last 12 months, FY ‘23 expected to reach ~$4B International gross revenues were impacted by FX fluctuations in FY ’22. Revenue loss in the EU from Q2 ’21 to Q3 ’22. Any single country, except for US, accounts for less than 10% of Revenue VAS revenue decreased by 4% from FY ’17 to FY ’20, but has since rebounded well with a 23% CAGR from FY ’20 and growth of 39% in Q1 ‘23, driven by interest revenue Opex as a % of gross profit was flat from 2017 to 2022, which means the business achieved no scale efficiencies across those five years (influenced by declining gross margin). FY ’22 guidance incorporated $900M cost savings with the annualized benefit of ~$1.3B in FY ’23 Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.

Image and Logo Credits: FreePik, Visa, and Mastercard General Observations Visa and Mastercard continue demonstrating strong performance. Cross-border is a key growth driver, significantly outpacing domestic volume with management citing travel and B2B as key drivers While card counts have grown for both Visa and Mastercard (7% and 5%, respectively), average spend per card has declined Visa and Mastercard both grew at approx. 11% quarter-over-quarter, again due in large part to cross-border related revenue growing 25% and 33%, respectively North America continues to represent a significant portion of revenue for both card schemes Client incentives as a % of GDV and net revenue as a % of GDV are headed up, but on a dollar basis incentives are growing at a faster rate than revenue Please do not hesitate to contact Rom Mascetti at Rom@FlagshipAP.com or Salvatore LoBiondo at Salvatore@FlagshipAP.com with comments or questions.

We advise viewing the slides via the "PDF" icon button. General Observations Banks have not become the commoditized utilities that many feared, but they are clearly losing out on many growth opportunities in payments and fintech. Nevertheless, banks do have strong capabilities that can help them compete and many opportunities to win in payments in fintech. Key Opportunities For Banks in Payments and Fintech: Use strengths in the balance sheet and credit to reclaim consumer transactional lending via partnerships or M&A Hook new SME customers with transactional lending products (B2B BNPL, merchant cash advance, digital factoring) via product partnerships Optimize distribution of payments acceptance products (most operate sub-optimally) Become BaaS and PaaS platforms to penetrate the embedded finance opportunity Keep cards relevant online outside the US Diagnose problems with 3DS and improve UX by applying whitelisting, transaction risk assessments, etc. Use data enrichment and subscription management vendors to improve the cards’ in-app UX Re-invent SME banking: usability, partner and software integrations, etc. using neobanks and select PSPs as benchmarks Automate and digitize back-office processes (compliance, disputes, fraud investigations, reconciliations, etc.) Innovate cross-border payments to manage declines in FX and wire transfer fees Grow commercial cards Optimize vendor/partner relationships Card scheme rebates Merchant acquiring alliances Card processing platforms A2A/bank transfer payment platforms Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com with comments or questions.

General Observations The largest banks in the US are both competing with and collaborating with fintech challengers in payments. Looking beyond the challenges posed by their legacy systems and processes, banks possess several key advantages over fintechs: Key Payment Assets: banks already have most of the core underlying assets needed to grow licenses, scheme connections, products, brand, customer bases, scale, distribution networks, etc. Data: The largest banks have superior credit underwriting capabilities compared to new fintech entrants Deposits: Banks enjoy very low cost of funding, providing a huge financial advantage vs. fintechs in the lending space While many of the bank-fintech partnerships grab headlines, a significant portion of banking technology innovation happens quietly on a more incremental basis with the US patent office. Bank of America, JP Morgan Chase, and Wells Fargo were issued hundreds of technology patents in 2022, surpassing technology companies such as Thermos Fisher Scientific (240), Snowflake Inc (218), and Palantir Technologies (191). Notably, a significant portion of Capital One’s patents relate to vehicular technology, indicating a move into mobility payments. Please do not hesitate to contact Brittany Logan at Brittany@FlagshipAP.com with comments or questions.

Introduction The Nordic P27 initiative is the latest pan-European payments collaboration to fail. Coupled with last year’s struggles of the European Payment initiative (EPI), Europe has seen a slew of failures in pan-European collaborations that have desired to launch new payment schemes and harmonize the European payments landscape. At the time of writing this article, the EPI has just announced to acquire Currence iDEAL (Dutch A2A payment method) and Payconiq International (Belgian and Dutch A2A payment method) and pivot towards creating a pan-European digital wallet and instant payments infrastructure, abandoning its initial plans to create a Visa/Mastercard rival card network. As illustrated below in figure 1, failures in pan-European payment collaborations are not new as there have been several such initiatives in the past. Most of these initiatives failed due to multiple reasons: lack of political alignment and poor commitment across too many stakeholders (e.g., EPI, the Monnet Project); lack of a killer value proposition that fits market needs (e.g., the Euro Alliance of Payment Schemes); or misaligned priorities in context of local market structure (e.g., in the case of PayFair) The P27 Initiative As we wrote previously here, the P27 initiative was launched in 2017 by a consortium of Nordic banks with an aim to introduce a modernized A2A payments infrastructure for 27 million inhabitants in the Nordics, replacing 9 fragmented A2A clearing houses in the Nordics. The end goal was to create a harmonized cross-border payments infrastructure that could achieve cost synergies in back-end payment processing, create opportunities to offer innovation on top of the combined rails, and create new front-end value-added services (e.g., overlay services such as alternative payment methods, bill payments, cross-border payouts, cash management amongst others) (see figure 2). On paper, P27 had strong underlying rationale, met key market needs: rationalization of the Nordic A2A processing infrastructure, reduction in x-border processing costs, and creation of a platform for fintechs and non-bank participants to build front-end innovations for consumers and businesses. Also being a Nordic initiative, there were no cultural integration challenges. Reasons Behind Failure 6 years after the launch, as we illustrate in figure 3, a series of events led to the collapse of the initiative. To start with, P27 did not initially see participation from most Norwegian banks. However, in 2020, some Norwegian banks were rumored to join the initiative, but we are unclear as to how many. In 2020, P27 completed the acquisition of Bankgirot, the Swedish A2A clearing house and also the owner of SWISH, the main A2A mobile payment scheme in Sweden used by c.85% Swedish consumers. This was a logical steppingstone as P27 was likely to process all A2A payments in Sweden, including SWISH volumes, in the future. In 2021 Vipps (the leading Norwegian A2A and cards mobile payment method) merged with MobilePay (the leading Danish A2A and cards mobile payment method) to develop a new entity Vipps MobilePay A/S. Pivo, Finland’s leading mobile payment scheme was initially in the mix, but was later blocked by the European Commission. The merger was a critical milestone as Danske Bank (who used to own a 65% stake in MobilePay, announced to hold c.28% stake in the new entity) as well as other Danish banks which owned MobilePay, along with the consortium of Norwegian banks which owned Vipps, decided to create a competing pan-Nordic infrastructure for A2A payments. The objective was to harmonize cross border A2A mobile payments across 11 million consumers in Norway, Denmark, and Finland. Unsurprisingly, in April 2023, it was announced that the Danish banking sector had decided to relinquish the P27 initiative. At the same time, it was also announced that P27 would not be able to process SWISH A2A volumes (reasons remain unclear). Lack of political alignment across too many stakeholders, conflicting interests, and a lack of critical mass to start up with (as none of the scalable Nordic mobile payment schemes, e.g., MobilePay and Vipps were to be supported) ultimately led to the failure of P27, with further uncertainly on what this means for the consortium. Summary of Lessons Learned As noted above, this is not the first time that pan-European coalitions have failed. The P27 failure reinforces a number of lessons learned for participating banks and fintechs: Collaborations at a pan-European level are hard. It requires sharing a common vision, dedicated and sincere focus, as well as very strong stakeholder synergies to launch successful payment schemes. Thus far, we have failed to come across a perfect example that meets all of the above. Participating shareholders having conflicting priorities. Danske Bank, a key participant of P27 also had ownership of MobilePay. With the MobilePay and Vipps merger, Flagship's assessment is that Danske Bank (a key influencer in the Danish banking sector) was able to influence the Danish banking sector's approach to P27. Danske Bank disagrees with Flagship's assessment, and stated to Flagship that, "Danske Bank having ownership of MobilePay has nothing to do with the fact that the Danish banking sector unanimously decided to move forward without P27, and Danske Bank has not been swaying the Danish banking sector to abandon P27". Lack of meeting unmet needs and poor business case. Most of the pan-European initiatives have been politically motivated projects without a clearly thought-out revenue model or backed by adequate market research to meet a clear market need. Therefore, in most cases stakeholder willingness to fund (often large) required investments has been limited. Bank coalitions to create a national payment scheme can be successful; however, extending the vision at a pan-European level is hard. Coalitions at a national level can be successful provided banks are willing to back it up with the required investments and play an active role in developing a successful merchant acceptance ecosystem. This has been observed in several e-commerce payment methods in bank centric markets such as the Netherlands (e.g., iDEAL), Poland (e.g., BLIK), Sweden (e.g., SWISH). However, scaling this vision at a pan-European level requires achieving a commonality across problem areas, finding overlap in solutions and respecting local market conditions and structure. Not many pan-European solutions exist today that share this vision. Very often coalitions fail if the vision is too ambitious. For example, the EPI which wanted to establish a pan-European C2B scheme (across cards and A2A) was too ambitious, and from the sidelines appeared requiring a lot of heavy lifting – building the infrastructure, heavy consumer marketing, building the acceptance infrastructure, all of this required heavy leg work and lot of investments. P27, on the other hand, was not overly ambitious. However, as argued previously, it failed due to poor stakeholder alliance and political misalignment across the participants. Payments infrastructure rationalization has clear upsides, however it requires strong execution. A case in point is Geldmaat, the recently created entity for managing ATM infrastructure in the Netherlands, that required strong execution from the three largest Dutch banks (ING, ABN AMRO, Rabobank) to rationalize their ATM networks within 3 years. Conclusion The failure of P27 adds to the long list of failures in pan-European payment scheme coalitions. As history has told us, coalitions often fail unless there is a proper consensus across stakeholders, zero conflicting priorities, a strong market-product fit backed by strong execution from participants. While P27 is not a case in point, stakeholders embarking on future pan-European payment coalitions may want to resolve conflicting interests and priorities upfront, remain committed to a common vision, and have enough vested interest to remain invested for the long run. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com or Simone Remba at Simone@FlagshipAP.com with comments or questions. Sources: Finextra, Mobile Pay, Financieel Dagblad

The struggles of Railsr, a former fintech unicorn that raised $187 million and was one of Europe’s most visible Banking as a Service (“BaaS”) providers, have been well documented. Once valued at $1 billion in 2021, Railsr was sold in a prepackaged bankruptcy to a consortium of investors and management for $500,000 plus up to another cca. $500,000 in trailing collected receivables. In this article we summarize key highlights from the bankruptcy filing documents and identify lessons learned. Background Railsr (formerly branded as Railsbank) is a partial BaaS provider that holds EMI licenses in the UK and Lithuania and provides a relatively broad offering of banking, card issuing, account-to-account (“A2A”) payments, and credit products to fintechs and corporates via APIs to enable clients to embed payments and banking products into their end-user facing apps and use cases (see Figure 1 below). Although primarily focused in the UK and Europe, Railsr also has a presence in APAC and the US, and reports that its clients service over 5 million end users. Railsr promotes its BaaS platform as providing a turnkey, vertically-integrated stack that offers a broad range of embedded financial products (see Figure 2 below): Banking: current accounts, open banking, ledger transfer and safeguarding of assets Cards: BIN sponsorship, issuance of virtual and physical cards (debit, pre-paid, credit) Payments: A2A, X-border and FX transactions, mobile wallet Lending: credit facility solutions such as BNPL and Debt Funding Others: Embedded rewards, capabilities to promote customer loyalty, data-driven dashboards and insights Like many BaaS providers, Railsr has signed multiple vendor and partnership agreements with processors, product vendors, payment networks, and sponsor banks to enable its offering, and to enter new markets (see Figure 3 below). Not all of these have been successful; e.g., Australian launch partner Volt ceased operations, and Railsr’s Lithuanian subsidiary, from which Railsr sources its European Union E-Money license, has compliance challenges. Since its founding in 2016, Railsr embarked on an ambitious product and geo expansion roadmap (see Figure 4 below). In August 2020, Railsbank acquired the UK arm of troubled Wirecard Card Solutions, which as a much bigger business that Railsr at the time, caused many commentators to speculate if the acquisition was simply too big and/or too troubled to successfully integrate. Financial Position Railsr raised more than $185 million from multiple investors, and reported a valuation of $1 billion in July 2021. As market conditions became increasingly challenging, Railsr’s financial situation deteriorated. Although Railsr exhibited impressive revenue growth, expenses ballooned following the Wirecard acquisition, resulting in net losses increasing from £1.2 million in 2018 and 2019 to £13 million in 2020 (see Figure 5 below). Although financial statements for 2021 are not available, analysis of bankruptcy filing documents shows a resulting massive decline in net assets between 2020 and 2022. By the end of 2022, Railsr was insolvent, and that gap increased by a further ~£10 million over the next 3 months (see Figure 6 below). As of the reporting date of Railsr’s bankruptcy documents (9 March 2023), the company owed £36 million to creditors, including: £22.1 million to subsidiaries within the Railsr Group £4.9 million to trade creditors (the top 10 creditors account for 71% of the total balance) £4.3M in employee liabilities £3.3M to Foris, a customer £1.4M in tax payable to the UK Authorities Sale In the summer of 2022, Railsr engaged FT Partners to run a sale process. According to the bankruptcy filing, FT Partners approached 248 strategic and financial investors, but was unable to find an attractive buyer. D Squared Capital, a London-based financial investor, emerged as the preferred buyer in February 2023, after finalist Flutterwave, a Nigerian fintech unicorn, pulled out (according to market commentators). On 8 February 2023, the sale to D Squared was blocked due to Railsr’s Lithuanian subsidiary, UAB PayrNet, being investigated for alleged AML regulatory breaches and terrorist-financing laws by the Bank of Lithuania, which prevented the subsidiary's customers from onboarding new end users. On 20 February 2023, Railsr management decided to run an accelerated sales process by re-engaging with D Squared and four prior bidders, and requested new offers within 1 week. The other bidders declined to submit offers, leaving D Squared as the only bidder. On 9 March 2023, Embedded Finance Limited (a consortium of D Squared, Moneta Venture Capital, VCapital, and other investors) acquired Railsr as part of a pre-packaged bankruptcy (see Figure 7 below). Railsr was acquired for $500,000 (approx. £413,906) compared to a third party valuation of the IP, tech, and fixed assets of ~£1.9 million. Additionally, the buyer will return to creditors 50% of collected receivables (total estimated at £4 million) up to a cap of £430,000. According to Railsr’s management, between £1.9 million and £4 million of these outstanding receivables are likely uncollectible. Notably, Railsr’s buyer, Embedded Finance Limited, is a consortium of 10 investors – (see Figure 8 below) that includes several former backers (Moneta Venture Capital and VCapital) and former management (Clive Mitchell, Railsbank co-founder, and non-executive Director of Railsbank Tech, and Richard Haytharnthwaite, Director of Railsbank Tech). Key Lessons Railsr’s bankruptcy reinforces a number of lessons learned for fintechs (noting that these are not necessarily specific to Railsr): Particularly in the “as a Service” segment, serving fintechs at large with a broad and/or generic offering is insufficient. Success requires sharp product and vertical focus. Aggregating multiple vendors to enable an end-user offering via APIs is undifferentiating. Value creation requires strong underlying tech assets coupled with unique and/or vertically-specific product features. Controlling costs and having a firm grasp on unit economics is critically important. As we illustrate in a recent article here, many fintechs are challenged by balancing growth and expense management. M&A has the potential to be transformational, but for early or growth stage fintechs, risks being too large and/or distracting to properly digest. Geographic expansion requires a well though-out strategy. Following the customer can be effective if the customer’s path accelerates the overall strategic vision, but if done incorrectly, far-flung geographic expansion dilutes valuable effort and resources. Most importantly, Railsr is only the tip of the iceberg. The combination of adverse market conditions, over-supply in many segments, and challenging cash flows will lead to a wave of fintechs coming to market in 2023 in an effort to stave off bankruptcy. This creates a welcome environment for strategic buyers seeking to acquire strong product, tech, and geo expansion assets at reasonable valuations. For financial investors, 2023 will be an excellent time to acquire bolt-on assets for core portfolio companies, and to acquire new core assets to execute classic expense optimization and go-to-market improvement strategies. Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com with comments or questions.

General Observations As of April 2023, there are ~1,000 active fintechs in LatAm (vs. ~3,300 in Europe and ~4,200 in the US). ~70% of all LatAm fintechs specialize in lending, payment acceptance, and wealth management & investment (similar category breakdown as the US and Europe). ~65% of LatAm fintechs are based in either Brazil or Mexico. The LatAm payments acceptance space has been growing fast, propelled primarily by domestic players (e.g., PagSeguro, Mercado Pago, Stone, etc.) offering mPOS terminals, digital payments, and other solutions. We expect further growth to be driven by fintechs such as dLocal and Ebanx, expanding outside the LatAm region. Global PSPs such as Stripe, Adyen, and SumUp are increasing their presence in the region, focusing on the largest markets first. Due to its sheer size, Brazil is often the first entry point for international PSPs expanding to the region (e.g., Adyen opened an office in Brazil in 2011 and SumUp in 2013) Instant Payment Schemes Several LatAm countries have introduced instant payment initiatives running on account-to-account rails. The largest are state-owned such as PIX (Brazil) and CoDi (Mexico); although there are also privately-owned schemes in Colombia (Transfiya) and Peru (Yape and PLIN). The Brazilian Central Bank launched PIX in 2020, which is rapidly growing in adoption. As of 2022, PIX reached ~$200 bil. in monthly transactions and has been used by ~130 mil. users. As one of the global poster children for A2A schemes, PIX presents serious challenges to legacy and cards-based payments infrastructure. Other LatAm instant payment initiatives haven’t gained such massive traction as PIX. Since September 2019 to March 2022, ~$316 mil. transactions were processed via Mexican CoDi by ~17 mil. registered users. Private-led real-time payments initiatives in Colombia (Transfiya with < ~2 mil. users) and Peru (Yape and PLIN, each having < ~10 mil. users) are still in the early days of development. It is worth mentioning that Peru’s Central Bank mandated Yape and PLIN to interoperate from 2023 to eliminate the friction in instant payments; as a next stage the Peruvian regulator is planning to establish a general interoperability system to connect all fintechs and banks in the country. Despite current relative success, instant payments schemes have the potential to disrupt the lucrative cards market, driving the growth of digital payments and opening new opportunities for LatAm fintechs. Please do not hesitate to contact Aigerim Assembayeva at Aigerim@FlagshipAP.com or Pedro Giesta at Pedro@FlagshipAP.com with comments or questions.

The Indian payments landscape completely transformed over the last decade, catalyzed by a shift from cash, cards, and other traditional payment methods to real-time A2A payments, powered by the UPI network and mobile apps. This globally-relevant case study on fintech innovation and disruption was fueled by a crescendo of forces including government policies, banking infrastructure upgrades, and the influence of mobile phone technologies. Figure 1 shows the rapid ascent of UPI-powered mobile payments while usage of cash, cards, and prepaid wallets diminished in share of wallet. Within this article, we tell the story of the rapid transformation of payments in India, and what the future might hold. Mobile Payments Disruption Prior to UPI, Indian fintechs were already driving the market towards mobile payments, a push that started with the introduction of digital wallets powered by prepaid accounts such as the Paytm Wallet in 2014. These mobile wallets were propelled by India’s demonetization policy, a large scale macro-economic exercise implemented by the government to combat corruption and push for digital payments. In November 2016, the government of India discontinued the acceptance of all existing currency notes overnight (larger than Rs. 500), with the motive of replacing them by printing new notes. The policy led to a shortage of cash in the country forcing consumers to find digital alternatives. This created the perfect opportunity for fintechs such as Paytm to fill this gap by offering digital propositions designed for both consumer and merchant. Digital wallet adoption rate skyrocketed as consumers became more comfortable with mobile payments. UPI Payments Explained The introduction of UPI turbo-charged the pace of innovation and disruption in India. Unified Payments Interface or UPI, launched by the National Payments Corporation of India (established by the Reserve Bank of India) in 2016, is an account-to-account payment system that enables consumers and merchants to send and receive payments with real-time settlement. Currently UPI accounts for about two in every three retail non-cash transactions in India. UPI is not an end-user product (not a mobile app), but a payment network, used by fintechs and banks who develop and distribute the mobile apps that power payments through the UPI network. Users can easily enable this payment method by creating a unique UPI identification key that is linked with the user’s bank account and mobile number. Many mobile payment apps such as PhonePe, GooglePay, and Paytm (among others) support UPI sign-up, initiation or receipt of payments to and from users’ bank accounts. For P2P transactions, users can simply use the mobile number linked with a UPI ID to transfer money instantly making the user experience extremely quick and frictionless. Figure 3 illustrates the primary use cases for C2B (merchant) payments, which are enabled by QR codes. There are two types of QR codes used with UPI: Dynamic QR and Static QR. Larger merchants that have integrated payments at their point-of-sale, will utilize the dynamic QR code, which is generated upon billing and presents the customer with the exact amount to be paid. As software embedded payments are still relatively nascent in India, and limited to larger enterprises, static QR codes provide a simpler way for small merchants to receive payments without having an integrated POS system. The static QR only contains the UPI ID of the merchant and customer needs to manually input the amount to be paid. The key success factor for achieving a frictionless experience is that UPI transactions are real-time, allowing both consumers and merchants to receive instant notification of payment completion. Government Incentive and The Real Cost of UPI UPI’s rapid growth as a preferred means of C2B payments is fueled in part by a government policy for zero-cost UPI payments, which today, are free for both consumers and merchants (a policy introduced on 1 Jan 2020). The government does subsidize market participants, but this subsidy is small in comparison to the actual costs of the ecosystem (subsidies of c.$295 million in 2022 to merchant acceptance participants falls vastly short of the estimated total costs that are in excess of $1 billion). In the recently announced Budget for FY 2023-2024, the government reduced the subsidy amount to less than $200 million. According to ecosystem cost estimates from the Reserve Bank of India (RBI), on average, a C2B UPI transaction generates a total cost of approximately 0.25% considering the roles of the different stakeholders in the value chain. We break-down RBI’s cost estimates in Figure 4. Due to India’s current zero-merchant-discount-rate policy, UPI C2B payments are unusually unprofitable for fintechs and banks. PSPs and app providers such as PhonePe, GooglePay, and Paytm (shares shown in Figure 5) are forced to find other sources of revenue such as bill payments and most notably, various forms of embedded credit to consumers and merchants. The lack of payments profitability is one reason why fintechs such as Paytm still struggle to achieve profitability. Paytm reported a -30.5% EBITDA margin for FY 2022, despite its scale and relatively long tenure in the market. The company did however, report a positive EBIDTA margin of c. 1.5% for the first time in Q3 FY 2023, which is attributed largely to expense reductions. Some Indian market participants expect the ‘zero-cost’ policy to fade, resulting in more natural economic incentives for parties involved in C2B UPI transactions. Merchants continue to lobby in favor of the current policy, which seems to be working as the Indian Ministry of Finance announced last year that UPI is a digital good and the government has no intension of changing the current zero-cost policy. For now, there remains a tension between the massive fintech potential of UPI and the lack of payments profitability for UPI service providers. Growth of Mobile Payments and Future Implications India is now the global market leader for real-time A2A payments, but certainly not the only country which has seen a massive uptake in digital payments, as shown in Figure 6. This trend is replicated in other markets such as Brazil and Thailand, where A2A banking infrastructure combined with mobile means of payment are powering disruption. We do not see the same pace of A2A + mobile disruption in more mature western markets. This is a classic example of the ‘leapfrog effect’ in payments where less-developed markets evidence far more rapid innovation and disruption versus mature markets, where behaviors linked to cards are more deeply entrenched (formed over decades). Countries around the world are drawn to the India (UPI) case study as they aspire for efficient, digital payments and alongside financial inclusion. The National Payments Corporation of India (NPCI) is working to internationalize UPI, recently signing a memorandum of understanding with 13 countries including Singapore, Thailand, France, Netherlands and the U.K. to enable acceptance of UPI outside the countries. NPCI is working with payment providers such as Worldline in Europe to implement Indian payment methods including RuPay and UPI in countries including Netherlands, Belgium and Switzerland. Through this partnership, Worldline’s merchants in Europe will be able to accept UPI payments at the point-of-sale using QR codes. The Reserve Bank of India also recently announced an agreement with the Monetary Authority of Singapore allowing interoperability between UPI and PayNow (Popular alternative payment method in Singapore). This allows users of both instant payment systems to use the other seamlessly without additional sign-ups and send money cross-border. This alliance is a unique global case study on interoperability of A2A schemes, and one which we expect to be replicated in other markets. India is a perfect example of the power of fintech to transform an economy and the day-to-day lives of people. In less than a decade, India went from a wide-spread lack of financial inclusion to a country that is now leading the world in A2A-powered mobile payments. This success is the result of government policy working hand-in-hand with banking and fintech innovation. Going forward, however, the fintech community must tackle challenges posed by zero-cost payments, as while Indian consumers and merchants benefit from payments innovation, shareholders are still searching for return on investment. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.

Flagship Advisory Partners’ Executive Interview Series provides readers with exclusive insights from thought leaders in the payments and fintech industry. This edition highlights Stripe’s evolution at the point-of-sale. Flagship Advisory Partners met with Roshan Sadanani, Product Manager at Stripe to learn more about Stripe’s perspectives on Stripe’s journey to supporting universal commerce. Roshan’s role at Stripe includes overseeing Stripe Terminal’s integration experience, as well as the Stripe Dashboard tool, Terminal logistics, and distribution. Image: Roshan Sadanani, Stripe 1. Roshan, can you first please describe your background and role at Stripe? I’m a product manager and one of the founding members of the Stripe Terminal team. Terminal delivers a unified commerce experience for businesses that want to deliver both in-person and online payments to customers. 2. Can you tell us about Stripe’s journey at the point-of-sale for in-person payments? We launched Terminal around five years ago to help businesses on Stripe accept in-person payments as they grow, open brick-and-mortar storefronts, and add flexibility to their checkout experience. Our users have told us that online and in-person payments are best managed on a platform that can serve as a one-stop shop for all their financial data. Terminal collects and centralizes revenue data to Stripe so businesses can easily manage it in one place. Just like the simplicity of Stripe APIs, Terminal makes the whole process smooth. Terminal’s product strategy was built on our commitment to prioritizing developers. Early on we said, “We need to start with helpful SDKs, APIs, and developer interfaces to empower customized point-of-sale experiences.” Today, that approach continues to be well-received and a big reason why many software platforms have adopted Terminal and integrated it into their own products.   3. How does the acquisition of BBPOS fit into Stripe’s evolution @ POS? Payments hardware is fundamentally complex and requires the same level of abstraction Stripe offers to online payments in order to work well for users. In creating a great in-person payments product, there’s much more to consider: EMV standards, certifications, point-to-point encryption, and more. Before the acquisition of BBPOS in January 2022, the company was already a key partner to Stripe. Now that they’re part of Stripe, we’re able to integrate BBPOS hardware and Stripe even more cohesively. Generally, we’re seeing more innovation in a sector that is really benefiting from hardware-free acceptance, such as Tap to Pay on iPhone, which was announced last year and more recently, Tap to Pay on Android. It’s likely that some businesses will never fully give up payment hardware, but we’re excited about helping more users offer payment convenience if they want more options. 4. How does Stripe think about the dichotomy between legacy requirements (existing devices, traditional protocols, etc.) and modern technology when designing products and services for @POS? A lot of merchants want to transition to new technology for several reasons—operational efficiencies, easier updates, and better branding, to name a few. Stripe is first and foremost a financial infrastructure platform for businesses, and we're enabling merchants that want to transform their revenue operations with really powerful tools. 5. What is unique about providing POS solutions for SaaS platforms? Platforms on Stripe comprise many of our users. For example, Mindbody is building a vertical-specific platform, but layering payments across online commerce and in-person POS hardware. Stripe is a platform for platforms, and we’re helping them build upon their existing technology stack and create custom payment experiences. 6. How did Stripe evolve to deal with the physical and logistical requirements of payments hardware? We evolved by addressing a few of the table stakes like warehousing, shipping, and chain-of-custody tracking for point-to-point encryption. But we also saw an opportunity for software to play a larger role in hardware innovation. For example, warehouse devices are in every region where we support Stripe Terminal and our APIs enable users to dropship hardware anywhere to their supported customers. Jobber is a great example. If a contractor on Jobber wants a Terminal reader, they order it on Jobber’s web portal. Jobber uses Terminal API’s to provision and ship the device. Terminal also helps users remotely deploy and update software in the field, provision encryption keys, and provision configurations. Stripe pushes software updates to all Terminal readers in the field monthly and often more frequently. For example, when the U.K. increased its contactless payments limit during the early stages of the pandemic (source), we pushed this update to all of our U.K. devices overnight. Terminal users can also customize typing behavior and splash screens that are displayed in idle state remotely. Someone doesn’t have to physically touch a device every time a change is needed. 7. What does omnichannel mean to Stripe? ‘Omnichannel’ has turned into a bit of a buzzword. ‘Unified commerce’ is a more accurate term for Stripe for a few reasons. Large retailers looking to survive into the next decade will have to unite the customer experience across multiple channels. Unified commerce is a better description of revenue collection and consolidated reporting, which are two areas of revenue management that go beyond accepting in-person payments. At Stripe, we’re removing complexity by providing a single, simple, and global integration. Our approach enables improved data insights, personalized checkout experiences, and streamlined reporting for businesses that are building in-person and online commerce platforms. 8. Finally, how do you think Tap to Pay on iPhone will fit in the grand scheme of point-of-sale payments over the next couple of years? Stripe was a launch partner for Tap to Pay on iPhone, and it’s been a big step in offering hardware-free payments in live environments. Our companies are aligned incredibly well because we both care deeply about the user experience. With Tap to Pay on iPhone, platforms like Thumbtack or Housecall Pro can easily provision payments for any of their merchants with an iPhone. In parallel, I'm betting that the increased adoption of contactless payment methods will only accelerate in the US. It's different across markets globally, but as that number ticks up, hardware-free payments will be an even more interesting option, even for traditional retailers. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com, Scott DeHaven at Scott@FlagshipAP.com, or Peter Taylor at Peter@FlagshipAP.com with comments or questions.

For the last decade, particularly during the pandemic, fintech was synonymous with high growth, oftentimes assigned unobtainable topline growth expectations. In 2022, expectations came crashing back to reality. Gone are false expectations for limitless growth, in are ‘boring’ expectations for profit. We recently examined a sample of 50 publicly listed fintech companies, comparing topline growth (based on gross profit*) and opex growth results between 2021 and 2022. The results suggest a clear dichotomy between mature fintechs and high-growth fintechs. Mature fintechs such as ‘Diversified Processors’ outperform their higher-growth peers on operating leverage, resulting in strong profit performance that generally exceeded expectations in 2022. On the other hand, many high-growth fintechs delivered ’22 opex growth that was badly disconnected from topline growth reality, causing investor disappointment and a now-urgent need to refocus on expense efficiency in 2023. *Note that we use gross profit rather than gross revenue as many fintech businesses orient around gross profit as the key measure of topline performance. Figure 2 illustrates the categorical definition of our fintech cohorts. Our sample includes 50 publicly listed fintech companies with (mostly) market values in excess of $1 billion. We assign each company to a cohort, based on their categorical business model. We do this in order to understand business model variation within our analysis. Now let’s examine the results of our analysis. What Does The Data Tells Us? Fintech, particularly payments, is supposed to be a business model with natural economies of scale; revenue growth (or gross profit) should outpace operating expense growth. In Figure 1, our Diversified Processors cohort illustrates this principle well. This cohort generated 13% gross profit growth (8% gross rev. growth) vs. 6% opex growth between 2021 and 2022. Achieving gross profit growth at 2X opex growth generates powerful operating leverage that accelerates bottom line performance; our Diversified Processor cohort achieved a weighted-average operating income growth of 32% from ’21 to ’22 (likely benefiting somewhat from the bounce-back from the pandemic). Interestingly, none of our other cohorts produced positive operating efficiency in the aggregate between 2021 and 2022; all other cohorts saw deteriorating expense efficiency on a weighted average basis. Peeling back the onion on our cohorts, we see idiosyncratic results that dragged on some of our cohorts: Merchant PSPs: Shift4, Tyro, and dLocal all delivered operating efficiency improvements between 2021 and 2022, while Adyen, Nuvei, and Flywire did not (gross profit growth < opex growth). Payment Schemes: Mastercard delivered efficiency improvements, but Visa, Amex, and PayPal did not. B2B Fintech: WEX and Avid Exchange delivered efficiency improvements, Bill.com was effectively flat, and others delivered expense efficiency declines. Global Tech + Fintech: most of the cohort (e.g., Uber, Sea, StoneCo) delivered efficiency improvement, but the group was dragged down by Tencent and Alibaba, resulting in efficiency decline on a weighted average basis. Three of our cohorts delivered consistently negative expense efficiency gains: Product Specialists, SaaS + Fintech, and B2B Fintech. Within these cohorts, only 6 of the 22 companies delivered operating efficiency improvement (gross profit growth > opex growth) in 2022. Not surprisingly, these cohorts also realized the highest topline growth (34%, 28%, and 27% respectively). This reveals a clear pattern: fintechs focused on delivering 30%+ topline growth tend to over-invest (lagging efficiency outcomes) in expenses to drive such growth. Maybe ‘over-invest’ is a bit harsh, as shareholders might be happy with 40% topline growth, even if it’s fueled by somewhat higher (e.g. 50%) expense growth. However, many of the companies that fit this profile delivered significantly imbalanced outcomes in 2022, for example Shopify delivered only 11% gross profit growth vs. 62% growth in opex and Affirm delivered 19% gross profit growth vs. 77% opex growth. The clear conclusion here is that many high-growth fintechs simply lost their way on expense management, believing that growth investment was the singular imperative heading into 2022. Such companies face a different set of expectations in 2023. We believe that our categorical analysis tells an important story, but we also recognize that many company specific circumstances drove the results shown in Figure 3. For example, below we list a number of specific case studies where the individual company story is more nuanced than the category performance: The Good (select examples): Nexi – Nexi posted a solid 7% growth in revenue/gross profit from 2021 to 2022. But this topline growth combined with a tidy 1% growth in opex to result in an impressive 14% EBITDA growth from ’21 to ’22. Sea Limited – Sea came under significant shareholder pressure during 2022, with its share price dropping 77% from $223.31 to $52.03. As with many e-commerce centric fintechs, Sea suffered from a rapid slowdown in growth as its market emerged from the pandemic. Sea appears to have adapted quickly however, with positive surprises for shareholders on efficiency gains in 2H 2022 (Fiscal YoY, SE delivered 33% gross profit growth vs. 22% opex growth). Various: 13 companies in our total sample (50) delivered a Gross Profit Growth / Opex Growth ratio greater than 2 The Bad (select examples): Adyen: In its H2 release, Adyen posted 30% gross profit growth (HoH), but only 4% operating income growth. Shareholders understandably reacted negatively to the significant drop in efficiency. On the other hand, Adyen still delivered a robust 52% EBITDA margin in 2H ‘22. Management described a need to invest into future-proofing its people and technology, which is not unreasonable, so long as efficiency gains return. Block (Square) – Block’s top-line and efficiency suffered somewhat from the crash of the Crypto market in 2022 relative to 2021. Gross profit from crypto declined (28%) (noting that portion of total gross profit from crypto is small). Despite crypto’s decline, Block posted good gross profit growth of 36%, however opex increased at 55% from ’21 to ’22, leading to an erosion of Block’s EBITDA performance. Various: 4 companies in our total sample (50) delivered an Opex Growth / Gross Profit Growth ratio between 1.5 and 2.0 The Ugly: Various: 3 companies in our total sample (50) delivered negative gross profit growth and 7 companies in our total sample delivered an Opex Growth / Gross Profit Growth ratio greater than 2.0. People Costs Matter People costs are often the largest category of expense for fintechs. As shown in Figure 4, among a smaller subset of our fintech sample, people costs ranged from 41% to 69%. Virtually all of the companies in our people-cost-sample (subset of the 50 companies) continued to grow their teams during 2022, although overall operating costs generally grew at a faster rate than headcount. Several of our total sample companies already announced plans for workforce reductions in 2023. We also examined the average cost per person, which reveals a sharp contrast between the high-cost of U.S. high-growth fintechs vs. European and global peers. As shown in Figure 3, Square tops out sample with an average person cost of $284k in 2022. This compares to avg. person costs of only €71k at Nexi ($75k in USD) or an est. £50K at Wise ($60k in USD). The high cost of U.S. people is a major reason why many U.S. high-growth fintechs (e.g., Stripe, Shopify) are still striving for positive EBITDA results. U.S. fintech companies in particular should be focused on establishing substantive offshoring or nearshoring operations as an operating model where a vast-majority of people are paid at U.S. compensation levels appears to be a challenging hurdle for delivering strong profitability. Recent news on Stripe seems to indicate this challenge. Conclusions 2022 produced a reversal of fortune of sorts in fintech. High-growth fintechs focused on digital commerce and embedded finance, the darlings of pandemic investing, experienced surprising pressure on top-line growth. These same companies correspondingly delivered disappointing EBITDA performance in 2022, driven by opex growth outpacing gross profit growth, sometimes by orders of magnitude. These high-growth fintechs must now adapt to investor sentiment more-focused on bottom-line performance. In stark contrast, many mature fintechs such as diversified processors, delivered excellent bottom-line performance in 2022, propelled by strong scale/expense efficiencies. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.

The collapse of Silicon Valley Bank (“SVB”) is the latest blow for fintech in what is shaping up to be a very tough year. We won’t recap the entire SVB story, but a brief look at SVB’s investor relations materials is instructive for the industry as a whole: a significant spike in funding from investors (Figure 1 below), leading to a buildup in Fintech deposits (Figure 2), coupled with increasingly high burn rates (Figure 3) by portfolio companies as expenses got increasingly stretched, and misalignment of liabilities and assets. SVB, a bank, has significant differences from operating fintechs, but we see three key implications for the broader fintech industry: Focus on identifying and mitigating operating model risks More scrutiny of sponsors and settlement mechanics Additional funding challenges Implication #1: Focus on identifying and mitigating operating model risks A bank run is a strong reminder of the risk posed by concentrated supplier relationships. There were many examples of fintechs disclosing their deposit exposure to SVB over the weekend (Figure 4 below), and several who had concentrated their deposits at SVB would have been challenged to make payroll. After fintechs make the obvious first move of diversifying their deposits, many will take deeper looks at the enterprise-level risks inherent in their operating models. Similar to the lessons learned by retailers, manufacturers, and others during the pandemic on the need to mitigate risks in supply chains, fintechs need to think through the risks in their operating models, and begin mitigation. Common threads in fintech operating models include: Relying on only one party to provide regulatory and payment scheme sponsorship; Relying on only one provider for core tech or for an even broader range services (e.g., BaaS); The difficulty in moving complex payments tech and processes to new providers in the event of a crisis; Heavy concentration of revenues among a few blockbuster clients and/or verticals; Heavy use of distribution partners; Significant reliance on partners to enable the broader value chain, and a natural tendency to concentrate activities at a few vendors in order to achieve scale efficiencies; Among others We have seen some of this before (e.g., the collapse of Wirecard), but SVB is significantly bigger and touched a broader swath of the industry. While mitigating the types of risks listed above can be complex (e.g., mitigating reliance on a core technical processor is oftentimes impractical), SVB’s collapse serves as a strong reminder that fintechs typically have highly concentrated operating models clustered around a few key partners, and that this presents both systemic and idiosyncratic risks that need to be identified and at least partially mitigated. Implication #2: More scrutiny of sponsors and settlement mechanics SVB was a sponsor or settlement bank for several well-known PSPs and payment facilitators and maintained settlement accounts for several well-known marketplaces and PSPs. The prospect of a sponsor and settlement bank failing rightly caused a panicked scramble for payments providers to immediately source new sponsors and settlement banks. Etsy, a major marketplace, notified merchants on Friday of delays in settlement due to SVB, and by Monday had new settlement arrangements in place. 1 Anecdotal evidence from Europe, where e-money institutions and payment institutions have proliferated, indicates that regulators are placing greater demands on the activities of license and BIN sponsors. The fallout from SVB is likely to increase regulatory scrutiny of these relationships in Europe even further. We expect a similar impact in the US, where the sponsorship market is relatively large, and served primarily by small banks. The direct impact for fintechs could be fewer availability of sponsors (already relatively low in Europe), higher prices for sponsorship services, and increased regulatory burden as sponsors pass compliance requirements on to clients. More immediate will likely be more stringent examination of the risks posed by settlement banks, since in the strictest interpretation of deposit insurance mechanics, a bank failure could result in settlement account balances being uninsured, and therefore Visa and MasterCard could potentially be liable to settle with merchants due to their role as the ultimate backstops in the cards system. Such a risk could prompt card schemes to reexamine the risks associated with settlement accounts, which could result in more stringent requirements for ringfencing and record-keeping of payfac sub-accounts, increased reserve/collateral requirements, and increased requirements on acquirers, all of which could to increased costs and less flexibility for PSPs and payfacs. PSPs and payfacs will also be intrinsically motivated to diversify their settlement accounts in order to mitigate counterparty risk for settlement. This too will increase overall operational costs and complexity for these providers, some of which will likely be passed on to end customers. Implication #3: Additional funding challenges SVB’s failure further dents investors’ perception of fintech, has already hit regional bank stocks hard, and removed a major lender to fintechs from the market. Bloomberg reported that 190 firms are now on the hunt for a new lender. 2 This will likely reduce overall debt funding to the fintech sector, putting a further damper on growth. Although aggressive moves by regulators to make SVB’s depositors whole appear to have stemmed any risk of a broader contagion, all evidence points to 2023 being a shakeout. Fintechs enjoyed a bounty of funding in the immediate post-pandemic period, but many lost their way on expense management, resulting in growth in expenses far outpacing growth in revenues. While fintechs are currently trying to right-size their expense bases, some will not do so before they run into liquidity challenges, and we expect more failures ahead (e.g., Railsr). Therefore, we encourage fintechs to review their operating models with an eye towards mitigating potential risks generated by partners. SVB’s failure underscores the potential operating vulnerabilities to house and sponsor banks, and we expect that failures of fintechs (i.e., operating tech partners) will create a parallel set of risks to operating models. Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com with comments or questions. [1] Source: “Etsy begins processing seller payments via alternative partners after delays caused by SVB implosion”, Tech Crunch, 13 March 2023, Etsy begins processing seller payments via alternative partners after delays caused by SVB implosion | TechCrunch [2] Source: “190 Firms with SVB Loans May Hunt for New Lender”, Bloomberg, 14 march 2023, Silicon Valley Bank Collapse: 190 Firms With SVB Loans May Hunt for New Lender - Bloomberg

General Observations Card payments via point-of-sale bounced back in 2022 across the Benelux, experiencing the best performance yet, with year-over-year growth reaching ~20%. Conversely, e/m-commerce payments in the Benelux slowed noticeably. Local payments such as iDeal dropped below 10% in growth for the first time in its history. 30% of all in-store card payments in the Netherlands were contactless payments via smartphones & wearables in 2022, increasing the share by a whopping 10% in one year Continuing to ride the pandemic tailwinds, 58%+ of Belgians used their smartphones to make QR-based mobile payments with a Payconiq mobile payment scheme in 2022 Please do not hesitate to contact Yuriy Kostenko at Yuriy@FlagshipAP.com with comments or questions.

Not long ago pundits in Western markets questioned the prospects of digital wallets; though admittedly, wallets in Western markets had many false starts (MCX/CurrentC, Isis/Softcard, V.me, Google Wallet, and numerous other failed telco, merchant, or bank coalitions). There is no longer any basis to question the massive influence and potential of digital wallets, which we estimate powered $12 trillion of global consumer-to-business (C2B) payments volumes in 2022, including a majority of global digital commerce and 23% of all 2022 global consumer spend. Since 2015, digital wallet proliferated around the world, across commerce channels and verticals, stimulating a broad range of use cases, and powered by numerous technical innovations. Herein we examine the global state of digital wallets and what drives success. Digital Wallets Come in Many Forms Setting aside the universal importance of the mobile phone and related technologies, when we examine successful digital wallets, we see many different constructs. Figure 1 defines some of these constructs on the basis of the account type, foundational technology, payment rails, and acceptance footprint. We also estimate the global scale of each wallet construct, isolating (where possible) the C2B commerce volumes. Across all constructs, in total, these wallets power an amazing $12 trillion of estimated global C2B payment value in 2022. The world’s largest wallets are built on stored-value accounts, including Chinese leaders Alipay and WeChat Pay, as well as PayPal. Next largest by scale, are merchant accounts powered by vaulted cards. Most digital commerce in North America is powered by merchant ‘card on file’, a long-established form of digital wallet. Next are what we categorize as ‘big tech’ or ‘platform’ wallets, which are powered by mobile operating systems, social platforms, search platforms, and commerce platforms. The rise of real-time, account-to-account bank payment rails is powering a new family of wallets, often banking apps, powered by schemes such as UPI (India) and Pix (Brazil). Next, we categorize ‘vertical specialist’ wallets. In this category, we include wallets that focus on vertically-driven use cases such as mobility and gambling. African mobile money platforms, powered by apps but also basic mobile SIM technology, are already scale through still growing into C2B. Finally, we include crypto wallets, which obviously declined in size in 2022 along with the global value of crypto. Digital wallets are not a one-size fits all construct. Wallet accounts can be merely a conduit for straight-through payment flows or they can be the foundation for super-apps. Wallets can rely on cards rails, A2A rails, or non-traditional forms of on-ramps and off-ramps (cash, crypto, etc.). When achieving real scale, most wallets do look to expand their acceptance footprint, but there are also many successful case studies that remain closed-loop. Moving on from wallet construct, we next segment the digital wallet landscape by the core value proposition or utility of the wallet, illustrated in Figure 2. In China and SE Asia, ‘super apps’ are the most prevalent form of digital wallet value proposition. Super apps generally support payments across many use cases: e-comm, POS (via QR code), pay request, among others. Beyond omni-channel payments, super apps are designed to deliver broad utility to the mobile-first generation, for example: mobility, food ordering, travel, and gaming. These apps also often support broader banking services such as lending. Big tech wallets focus on enabling frictionless payments via phone HW/SW and by embedding their payment platforms into in-app commerce (i.e., content, app, or virtual goods). Google struggled for years to achieve success with a digital wallet beyond the Play store (in-app) payments foundation, but now seems to have better traction on the back of robust contactless acceptance and deeper Google Pay e-payment penetration. As we discuss in a separate article (Apple Fintech Ecosystem), we estimate that Apple controlled c. $800 billion of spend in 2022, most of which came from Apple Pay. We view Apple Pay as a major success across POS and digital commerce, though other of Apple’s fintech products are less successful to date, or just now coming to market. Meta Pay (formerly Facebook Pay) primarily supports payments on Meta’s own social platforms. Mobile apps powered by A2A (account-to-account) are growing rapidly in many European markets as well as India and Brazil. In both India and Brazil, usage of apps powered by A2A payment rails exploded in the last three years, driven by a push for financial inclusion, and inexpensive payments for merchants. India’s UPI network processed $1.5 trillion of volume in 2022 (c. 35-40% attributable to C2B commerce). These wallets are generally bundled into broader banking apps. Vertically specialized wallets are intriguingly diverse, driven by niche value propositions across many use cases and sectors of spend. Gambling is a vertical that adopted digital wallets early in its evolution towards digital commerce. These wallets offer payments for online gaming and betting, in-casino deposits and withdrawals (some), and can support loyalty and offers from operators. Employee benefits are another interesting use case where apps act as wallets for various prepaid use cases such as lunch vouchers, gym memberships, or public transport. Open-loop mobility apps often emerge from public transport, tolling, or parking, expanding into adjacent use cases. Vertical use case enablement is also a key value proposition for many merchant wallets, which are generally proprietary/closed-loop. Uber and similar apps enable a variety of mobility use cases such as ride sharing and food delivery (these merchant platforms often evolve into open-loop wallets such as GrabPay). Leading hotel merchant apps can support booking, but also check-in, room access, and room service. Wallets are also quite useful within café/restaurant to order @ table or to order to skip the queue. Auto wallets (i.e., smart cars) and fueling apps are still emerging, but will enable fueling/recharging and purchase of goods or service along a journey. For each of these apps, payment functionality, generally via a vaulted card, are mission critical to powering frictionless use cases. Loyalty benefits are also often a value-add to merchant digital wallets. In Figure 4, we highlight that payment use cases via wallets are at various stages of maturity depending on the country of reference. P2P payments and enabling of digital commerce are the most mature use cases, while QR payment at POS is either maturing (China or SE Asia), accelerating (India), or emerging (Europe). Wallets Propelled By Technology Innovation Wallet payments are accelerating on the back of ongoing technology innovation and penetration, for example: penetration of contactless technology, Android payments hardware, and app-to-app interoperability. In Figure 5, we use data from the U.K. to illustrate the dramatic shift from face-to-face plastic card transactions to digital commerce and to contactless payment (both catalysts for wallet-based payments). Point-of-sale (POS) payments HW/SW is also undergoing a technology innovation from proprietary systems to Android OS and API ecosystems where the POS SW communicates openly other app-based services (China again being well ahead of Western markets here). In Figure 6, which includes data for North America and Europe, we show the rapid acceleration of Android terminals and expected acceleration of SoftPOS, a POS solution ideally suited for app-to-app commerce. QR-code acceptance @ POS, a lynchpin of many wallets, is more readily available on Android or app-based POS (i.e., SoftPOS) relative to classic card terminals. On this more modern technology, digital wallet payments at the POS are more easily enabled and embedded. Conclusions Digital wallets are rapidly penetrating the market around the world and across use cases. While niche wallets are some of the most intriguing on the emerging/accelerating horizon, in the aggregate, wallets are no longer niche. We estimate that digital wallets will drive more than one-quarter of global consumer spend in 2023, growing to more than half of all consumer spend in the next decade. Fintech service providers, enterprise merchants, technology platforms, and other stakeholders all have a strategic imperative to leverage digital wallets to drive business growth and user experience improvement. Fortunately, the technology foundation for enabling wallets is now largely in place, and the sky is the limit for wallet innovation. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.

General Observations FIS recently announced plans to divest Worldpay. In contrast, Fiserv’s acquisition of First Data appears to be performing well based on our review of Fiserv’s 2022 results: Fiserv 2022 Performance Highlights Solid topline and bottom line (EBITDA) growth performance in 2022. Performance outshined FIS, but was matched (slightly exceeded) by peer Global Payments. Fiserv’s Merchant Acceptance business delivered strong results in 2022 (15% revenue CAGR). We consider it impressive to generate such strong results at scale in a mature U.S. acquiring market, and we admit that our own ‘challenging days for U.S. acquiring incumbents’ perspective may be outstretched. Merchant product strategy (Clover for SME, Carat for Enterprise) appears cohesive and part of this growth story. Impressive margin performance (absolute and growing) across units, with primary business lines delivering 32-45% gross margins, all of which expanded in 2022 (39.2% overall). Payments and Network business unit benefiting from growth in A2A payments, which holds intriguing future growth potential in the U.S. Financial technology is a mature segment, but Fiserv achieving solid growth via share wins. Business remains U.S.-centric, with domestic revenues (86%) far outpacing international. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com, Salvatore LoBiondo at Salvatore@FlagshipAP.com, or Simone Remba at Simone@FlagshipAP.com with comments or questions.

Fintech is full of acronyms and catch phrases, none more used and yet more confusing than ‘embedded finance’. Everyone seems to have a different definition and understanding of embedded finance. To some, it is something specific, to others, it effectively encompasses all fintech. We can all agree, however, that fintechs that master embedded finance as a product and go-to-market model are winning. Given our exposure to what we think are the many domains of embedded finance, we attempt to define and to explain exactly what embedded finance is within this article by pealing back the onion and illustrating its many layers with real-life examples. Embedded Finance At Its Core Before we get into defining embedded finance, let’s first agree that ‘fintech’ and ‘financial services’ are effectively synonymous for this discussion. The days of financial services without technology are over, at least if you want to be relevant as a provider within embedded finance, where embedding is technology driven. Throughout this article, we will refer to ‘fintech’ or ‘fintech services’ therefore, rather than ‘financial services’. We also acknowledge that leaders in embedded finance tend to be companies with technology DNA, rather than traditional financial institutions. “Embedded” is the operative word when defining embedded finance. Embedded finance, at its core, involves embedding fintech services into non-financial use cases, which in turn makes these use cases better and more lucrative. The deeper and more seamless the embedding, the more powerful the outcome. As shown in Figure 1, embedded finance revolves around three primary product categories of finance: payments, banking and cards, and lending. There are also use cases for embedded investments and insurance, but for this article, we focus on the former fintech domains. Figure 1 also attempts to illustrate the most relevant ‘platforms’ into which fintech services are embedded, and the relative size and depth of embedding in the market today. Embedded Finance Use Cases Now let’s begin peeling back the embedded finance onion, starting with real-life use cases that we observe in our daily lives. The most common embedded finance use cases focus on commerce enablement, for example, frictionless shopping or frictionless mobility (e.g. ,Uber). Beyond commerce, many use cases also focus on financial planning and business management. In figure 2, we provide a handful of examples of embedded finance use cases, separated those prevalent with consumers as the user and those prevalent with businesses as the user. Examining these use cases, the influence of technology becomes clearer. Embedded finance is far from new; seamless e-comm checkout has been around for nearly two decades, and retail cards and credit accounts have been around (in electronic form) since the 1980s. What is different today is the prevalence of software, which in many forms, is perfect for embedded finance. Embedded finance is hot stuff today principally because consumers and businesses use software (or apps) across all aspects of our lives and businesses. Software, in its many forms, is the key fundamental enabler for most embedded use cases, because software technology allows a fintech service to be frictionlessly embedded within a broader use case. In other words, a retailer selling me a loan at a separate desk in the back of the store is not seamless, nor embedded, but walking out of the store with no checkout at all via BNPL is a powerful embedding of shopping and finance. Embedded Finance ‘Clients’ Peeling back the next layer of the onion, we distinguish between users, clients, and suppliers of embedded finance. Users are all of us, who engage with embedded finance when using Uber or buying from Amazon. ‘Clients’ is the term we assign to the platform owners who design and distribute the embedded finance use cases (for example, Amazon who owns many embedded finance products such as branded cards, checkout service/wallet, and embedded lending to its sellers and suppliers … among others). Suppliers are the fintechs that provide the technical infrastructure and licensing that powers embedded finance. In the case of Amazon, embedded finance suppliers include companies such as JPM Chase, Synchrony, C2FO, and others. In Figure 3, we define a range of embedded finance client segments, which also tie back to the illustration shown earlier in Figure 1: Financial Services: A primary segment for many embedded finance suppliers is other financial services companies. In fact, some suppliers focus only on “wholesaling” their infrastructure services to other fintechs, for example, Mastercard, Banking Circle, and Clear Bank. We will circle back to this concept of operating models shortly. Technology Companies: The next client segment defined in Figure 3 is technology companies, whose DNA is founded on technology, including: mobility platforms, marketplaces, commerce software, business and financial management software, and ‘big tech’ platforms. Technology companies are in many ways the most powerful clients (aka platforms) driving the evolution of embedded finance. Technology platforms power the mobile commerce universe and help to automate many aspects of business. The most successful suppliers of embedded finance services are generally those that position well as partners to the technology client segment. Other Corporates: The final client segment within our embedded finance taxonomy, are corporations, where we include retailers, travel providers, automotive and petrol companies, among others. Within the corporate segment, there are some clear and powerful use cases (e.g., retail cards, smart vehicles), but also questions as to potential reach and scale of embedded finance. This is a question that we are frequently asked: “how far will embedded finance reach … will is extend to all forms of corporates and their respective use cases?” A complex question lacking a simple answer, but in general, we do not believe that embedded finance has limitless potential. There are practical limitations to the demand for embedded finance. Personalizing the question, I quite like my banks and I simply don’t need banking services from most of the corporates with whom I interact. Embedded Finance Business Models In the final layer of our embedded finance onion, we dive into the weeds to examine the myriad of business models visible in the market. These business models differ by product, client focus, and operating model. Before we parse through these business models (with no shortage of jargon), we first distinguish between the general operating models that we see, as shown in the table below. When presented this landscape of business models (shown in Figure 4), our investor clients often ask: “which business models are superior.” Again, not such a simple answer as we find great companies within each of these business model definitions. But we can identify certain underlying fundamentals. For example, market leaders in embedded merchant payments have clearly created massive value (e.g., Stripe as a supplier and Shopify as a client). Similarly, in the U.S. B2B fintech market, procure-to-pay, invoice-to-cash, and expense management use-cases created massive shareholder value for fintechs and software providers (e.g., bill.com, Coupa, Brex, etc.). However, some of these business models are less proven or still nascent, for example open banking and A2A payment specialists or B2B lending fintechs in Europe. The broad and complex universe of embedded finance is defining the future of fintech, and the many use cases into which fintech services are embedded. Embedded finance is multi-layered, touching all corners of fintech. While embedded finance is not easily defined, as the saying goes, “you know it when you see it.” We also know that if you want to be a winner in fintech, you need to master embedded finance. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.

US-to-Europe and Europe-to-US are popular corridors for fintechs seeking to expand geographically due to the huge size of the markets, regulatory uniformity with the region, cultural similarities, and market maturity levels. Roughly half of the top 50 European fintechs have expanded to the US, and Europe is typically the first stop for U.S. fintechs looking to broaden their geo footprint. Flagship frequently advises both European and American fintechs on global expansion, and therefore we summarize below the key differences between the regions and key considerations for fintechs seeking to expand from Europe to the US, and vice versa. A2A Significantly More Advanced in Europe Europe has significantly more modern, open, fast, secure, and efficient account-to-account bank payments/transfer network rails than the U.S. (which we abbreviate to “A2A”, although it is typically referred to as “ACH” in the U.S.). This pronounced difference is due in large part to intense efforts by European regulators and governments to create a robust payments infrastructure and open the market to competition by non-banks (and arguably, with the subtext of creating competition to Visa and MasterCard). This has several key implications: For US fintechs considering entering Europe: Approach European market entry with a more holistic mindset (namely, that payments does not equal just cards), and recognize that A2A payment rails are both meaningful competitors to cards, and that they introduce new, sizable growth opportunities; and, Learn from the European experience to identify domestic growth opportunities in the home (US) market as the US transitions to its own A2A instant payments infrastructure (e.g., FedNow). For European fintechs considering entering the US: Identify how to leverage experience and capabilities with A2A in Europe to penetrate and win in the massive US market, while the US is still in the early days of building out its A2A instant payments infrastructure. On the other hand, the US has a more developed cards market than Europe, buoyed by heavy usage of credit cards (due both to Americans’ affinity for borrowing on cards, coupled with generous rewards enabled by high, unregulated interchange rates) and commercial and virtual B2B cards (driven in part by the relatively lower quality of the US ACH infrastructure for B2B payments). This also has several key implications: For US fintechs considering entering Europe: Look for opportunities to leverage capabilities and expertise with credit cards into Europe (recognizing that interchange is significantly lower at 0.30%); and, Leverage commercial and virtual card capabilities in Europe to get out in front of the forthcoming growth wave in commercial and B2B virtual cards. For European fintechs considering entering the US: Build solutions (or partnerships) for credit cards to at least meet the table stakes for success in the US cards market. Other key differences are summarized in Figure 1 below, but also include: Paper checks are still a sizable means of payment in the US, particularly for B2B payments (therefore creating massive opportunities to shift these payments to A2A and commercial/virtual cards); and, Online Alternative Payment Methods (“APMs” such as iDeal in The Netherlands, etc.) are significant in Europe, and in many cases, stronger products than cards for remote commerce, whereas in the US, APMs primarily function as wallets that hold cards (e.g., PayPal). Credit and Interchange Drive a Vibrant Cards Market in the US The US is the second largest cards market in the world as measured by spend, with $9.6 trillion in card volume (2022), nearly double that of Europe. Card volumes have grown faster in the US than in Europe during the past 5 years, primarily driven by growth in e-commerce (see Figure 2). Americans are heavy users of credit cards (53% of total cards volume is on credit cards, vs. 22% in Europe). Part of this is due to a cultural affinity for using credit cards as a borrowing vehicle, whereas in many European countries, consumers perceive revolving credit as either confusing and/or less palatable than installment loans or overdrafts. Another contributor to the massive US credit card market is significantly higher interchange rates than in Europe, which issuers use to fund aggressive rewards and cashback propositions to encourage consumers to use their credit cards, which (from the issuers’ perspective) creates a virtuous “flywheel” effect. European regulators have been aggressive in seeking to reduce merchant acceptance costs, and via the Interchange Fee Regulation in 2015-2016, capped intra-EU consumer card interchange at 0.20% for debit and 0.30% for credit (with exclusions for commercial cards, three-party schemes, and closed loop schemes). Regulation of interchange effectively killed card-based reward schemes in Europe, leading to steep declines in many issuers’ credit card portfolios. Most have never recovered, and subsequently, European issuers have limited investment in credit cards (and in many respects, cards in general), leading to a lack of innovation in the cards market and creating openings for other payment and financing means, such as Buy Now, Pay Later (“BNPL”) to exploit. US debit card interchange is already somewhat regulated (summarized in Figure 8). Were US credit card interchange ever to be regulated, Europe serves as a highly relevant, cautionary case study for American issuers. There are other key differences in the US vs. European card markets with implications for fintechs considering entering either market, which we summarize below: For US fintechs considering entering Europe: As noted above, interchange rates are significantly lower, meaning US economic models that rely on high interchange (e.g., program management) will require other economic levers; Debit is much more relevant in Europe, and in many cases, leaning too heavy on a credit card-based proposition will effectively cut out large parts of the target market; European regulations (PSD2) require Strong Customer Authentication, typically implemented in the cards world as 3D Secure, which results in technical requirements and UX challenges in the online checkout; In several markets, domestic debit schemes are relevant, and to be successful on a broad basis, require localization and local switch connections, which is a big lift given fragmentation in the markets (although this localization is not always required, and is highly dependent on the target customer base and use cases); Cash usage is still highly relevant in key European markets (e.g., Italy, Germany), and many ATMs do not surcharge, but acquirer DCC is widespread, eating into issuers’ FX margins; European consumer credit, small business, and commercial card propositions are typically less sophisticated, creating significant opportunities to win via innovation. For European fintechs considering entering the US: While the US market is huge and the economics are massively attractive, the market also has large, highly sophisticated competitors, requiring EU fintechs to think deeply about product and GTM strategies that will create a right-to-win; Credit is a must-have for long-term success; Regulations require debit card issuers to co-badge cards with at least one domestic “PIN” debit scheme, which use single message transaction protocols (as opposed to the dual message used in Europe by regular Visa and MasterCard); 3D Secure is in many cases a non-starter for US customers from a UX perspective, therefore fraud detection and management capabilities may require significant upgrades; Contactless terminal penetration and therefore usage of Apple Pay and Google Pay is significantly lower; and, US cards verification at the POS for non-contactless transactions is “chip and signature” compared to “chip and PIN” in Europe. Online Payments: Cards in the US, APMs in Europe Cards (and card-funded wallets such as PayPal, Apple Pay, and Google Pay) are the dominant online payment method in the US due to speed (vs. ACH) and easy user experience (as 3D Secure is not mandated). Cards are well entrenched, but we do, however, anticipate some fintech disruption in the future, see this article. In Europe, we observe significant variation in preferred online payment methods across markets. Many account-to-account (A2A) based alternative payment methods (APMs) have gained significant traction in their home markets; iDeal in the Netherlands, Swish in Sweden, and Blik in Poland to name a few. These APMs offer a superior UX than cards in an online environment (since the PSD2 regulation in Europe requires the use of Strong Customer Authentication, and the 3D Secure implementations are typically clunky), which has been the primary driver for their widespread adoption. In markets like the Netherlands, Sweden and Poland, card penetration online is therefore low. In countries where no major APM has gained traction, cards and card-funded wallets remain the key online payment method (e.g., UK, France, and Spain). We illustrate the e-commerce payment mix in Figure 4 below. Significantly Higher Payment Acceptance Costs in the U.S. As interchange and scheme fees are passed by acquirers on to merchants (who then adjust pricing towards the end consumer), and as noted above, interchange rates in the US are far higher than in Europe, the cost of payment acceptance in the US is far above European averages (see Figure 5). As we discuss in this article, a winning strategy in the US for card schemes has long been to introduce new, more expensive interchange categories, and increase merchant acquiring scheme fees in order to fund incentives for issuers. Increased cost of acceptance in the US has given rise to some merchants implementing cash discounting (sticker price is ‘default’ credit card payment and consumer receives discount by paying in cash), and surcharging (sticker price is ‘default’ cash payment, and merchant charges additional fee for cards). In Europe, it was common for merchants to surcharge for more expensive payment methods (such as credit cards) to drive consumers to select a cheaper payment method prior to 2018, after which Europe ruled that no surcharges were allowed. Significantly different usage of payment methods and cost of acceptance has several implications: For US fintechs considering entering Europe: Cards are not the only game in town in e/m-commerce, and APMs are often more competitive from a UX and cost perspective; and, 3D Secure is effectively required for card issuers, and due to many links in the chain, points of failure are unfortunately common, requiring issuers to innovate to improve the UX, as we discuss in this article. For European fintechs considering entering the US: Cards are (for now) the only game in town in e/m-commerce, and due to lack of 3D Secure, issuers need sophisticated fraud management tools to manage risk; and, Leveraging European A2A and APM know-how coupled with nascent instant ACH payments in the US is likely to reach a receptive audience among US merchants, who have strong rationale to explore alternative, lower-cost payment methods that they can embed into their apps and loyalty programs. B2B Payments: Huge Upsides in Both Markets B2B payments in the US are characterized by the ongoing usage of paper checks and invoices; more than 40% of B2B payment volumes are via traditional checks. This is (again) mainly due to the legacy ACH system which has not yet been fully replaced/updated for real-time, rich-data payments. US businesses still issue and accept massive volumes of checks, making various forms of check digitization (typically via conversion to ACH transactions) and processing a critical service within the domain of B2B payments. Commercial and virtual cards have grown massively in the US, due to the ease of use, speed, control, and data richness that checks and ACH lack. In contrast, European A2A bank payments infrastructure is often real time, data-rich, and low cost. Virtually all European B2B transactions flow through these bank payment rails, with low usage of alternative payment networks or value-added services. We contrast these differences in payment mix in Figure 6 below. Key implications are: For US fintechs considering entering Europe: Europe will experience a similar wave of growth in commercial and virtual B2B cards as in the US, since despite the much better A2A infrastructure, it is still geographically fragmented, cards offer richer data, and there is no limit on the size of the transaction (some European A2A schemes are not instant above certain amount thresholds). European banks and issuers tend to have relatively less sophisticated commercial card offerings compared to their US counterparts (or none at all), creating an opportunity for US commercial card players to get ahead of the forthcoming growth wave in Europe. For European fintechs considering entering the US: The US B2B payments opportunity is huge. European players, with relatively more experience and capabilities in A2A and cross-border payments, can get ahead of the growth curve on the digitization of US B2B payments. However, physically doing so requires a bank sponsor (see below), which introduces complexity, time, and an extra layer of cost into the implementation process. Meaningful Differences in Licensing and Regulations Both Europe and the US are similar in the sense that there are some licensing aspects that impact the entire region, while individual state (US) and country (Europe) nuances remain. We summarize this in Figure 7 below, but at the risk of over-simplification, there are a few key takeaways: For US fintechs considering entering Europe: Unlike in the US, you do not need to literally be a bank to issue or accept payments. Europe has (relatively) easy-to-obtain non-bank licenses (although how easy varies by country) that can then be passported around the European Union. Picking the right country to obtain a license from is critical, as some national regulators are significantly more burdensome than others; The UK is no longer in the European Union, so separate licenses are required, although the structure is very similar; and, While this license passporting provides the ability to issue or accept payments in multiple countries, entities must still comply with local regulations in each country. These are mostly harmonized, but there can be meaningful variations; There is a relatively low supply of BIN/license sponsors compared to the US, but because they are not (typically) banks, the regulatory overhead burden is lower than in the US. For European fintechs considering entering the US: You literally need a bank license to issue or accept payments in the US. Generally, a “federal” bank license is preferred as it can passport regulation across states; Therefore, while some state regulations are relevant, such as in the credit space, using a federal bank license effectively allows providers to ignore individual state regulations. Therefore, the US regulatory environment can actually be much more uniform than in Europe. European fintechs should not be needlessly confused about state regulations if they are only processing payments since these federal bank charters make the issue largely irrelevant. State laws are however still relevant for data privacy and other issues outside of pure payments; There is a good supply of banks that offer BIN/license sponsorship, although the compliance work required from the entity being sponsored is significantly higher than in Europe (as US bank sponsors expect clients to staff a full compliance team and be very buttoned up). On the regulatory front, there are also significant differences: For US fintechs considering entering Europe: As noted above, interchange in Europe is far lower (capped at 0.2% for consumer debit and 0.3% for consumer credit), requiring different economic models for card issuing; The PSD2 regulation requires Strong Customer Authentication, which for cards is typically implemented by 3D Secure, which as noted above often results in a poor UX; and, PSD2 also requires various disclosures of FX rates that typically require technical development. For European fintechs considering entering the US: The Durbin Amendment regulation imposes interchange caps on debit and prepaid cards and is applicable for banks (as only banks can issue cards in the US) with assets over $10 billion. Companies who wish to issue cards and want to avoid interchange caps therefore must select a bank sponsor with assets of less than $10 billion; The Durbin Amendment also requires debit and prepaid card issuers to support a second non-Visa/MasterCard network, meaning in practice one of the US domestic “PIN” debit networks. As noted above, these networks use single rather than dual message transactions, and there are a variety of operational and technical considerations to supporting additional networks (e.g., additional settlement, reconciliation, and chargeback processes, new sets of mandates, etc.). Closing Remarks For many European and American fintechs, crossing the pond is a logical first step in a geographic expansion strategy. The markets are huge, with many similarities, and are (comparatively) relatively easier to enter than other regions such as APAC, LatAm, or MEA (although those regions have arguably higher growth). That said, there are also meaningful differences between the two regions, and several nuances that preclude a simple “take what we do here and also do it there” strategy. While most fintechs admirably seek to maintain a global, uniform platform, the degree of localization (both on the product, GTM, and technical fronts) should not be underestimated. In Flagship’s experience, none of these localization/market entry issues are insurmountable, and the market opportunity is often highly attractive, but the process (like most growth levers) requires careful construction of the vision and roadmap for entering the new market, along with careful planning and strong execution. Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com or Elisabeth Magnor at Elisabeth@FlagshipAP.com with comments or questions.

Image credits: Freepik Thoma Bravo continues to demonstrate an eagerness to invest in B2B SaaS and payments. On December 12, 2022, Thoma Bravo announced the acquisition of Coupa Software for $8 billion with the intention of taking the company private. Earlier last year, Thoma Bravo completed the acquisition of Bottomline Technologies for $2.6 billion. Both Coupa and Bottomline provide spend management software facilitating Accounts Receivable (“AR”) and Accounts Payable (“AP”) automation, cash management, and other business management capabilities with embedded payments. We expect Thoma Bravo to exploit product and portfolio synergies across the two enterprises and further leverage payments monetization to drive future growth. In this article, we highlight Coupa’s financial performance, examine the growth levers for the business, and highlight the relevance of these levers for the broader B2B SaaS community. Coupa’s Financial Performance Coupa is a global spend management software for mid-market merchants and enterprises specializing in procurement, supply chain, and treasury management. As illustrated in Figure 1, Coupa experienced strong growth in revenue and spend under management from 2019 to 2022 (we explain “spend under management” more in the following section”). Despite robust growth, like most other publicly-traded SaaS companies, Coupa’s stock performed poorly in 2022, with management citing lower-than-street expected revenues and slowing new business growth across North America and EMEA. FIGURE 1: Coupa’s Financial Performance Indicators (fiscal years 2019 – 2022 & FY2023 Q3 YTD: financial year ends Jan 31, growth rate 2019-2022) Upon announcement of the acquisition, Holden Spaht, Managing Partner at Thoma Bravo, stated that they “Look forward to partnering with (…) the (Coupa) management team to keep investing in the company's product strategy while driving growth both organically and through M&A.” We believe Thoma Bravo will look to pull several levers to stimulate growth including payments monetization, which many B2B SaaS companies in the U.S. leverage today. Payments Monetization and Coupa Pay as a Growth Lever Payments monetization for software companies means embedding payments functionality (including payment acceptance, card payments, account-to-account payments, and alternative payment methods) into other business management functions like accounting, working capital, and supplier management. We observe AP automation and spend management SaaS companies like Avidxchange and Bill.com effectively monetizing payments, with 67% and 37% of 2022 YTD revenue coming from payments, respectively (Figure 2). FIGURE 2: Payments Revenue of Select AP Automation & Spend Management SaaS Providers (2023; payments revenue as a share of total revenue, USD mil.) Coupa Pay, Coupa’s embedded payments service, allows buyers (Coupa’s customers) to efficiently pay suppliers using any payment method, including virtual cards. Virtual cards are especially attractive for SaaS companies and their customers in the U.S., as most of the supplier’s acceptance costs for virtual cards (upwards of 3%) are earned as revenue by the SaaS company and shared with the SaaS company’s customers via rebates. Other embedded payment methods like account-to-account (“A2A”) payments are less lucrative but still offer monetization opportunities for SaaS companies. Coupa does not report its payments-related revenue. However, in Coupa’s 2021 strategy presentation, management projected that Coupa Pay would achieve 10% penetration of total spend under management (“SUM”) by 2027. SUM (highlighted earlier in Figure 1) is the total payments that Coupa’s solution oversees/manages from buyers to suppliers. The more SaaS companies can penetrate their SUM with embedded payments products, the greater the payments monetization opportunity. For context and comparison purposes, Avidxchange’s SUM in 2021 was $180 billion, of which $52 billion (29%) was monetized as “payments spend.” By applying some key assumptions and management projections, we illustrate Coupa’s theoretical payments revenue in Figure 3. FIGURE 3: Theoretical Coupa Payments Revenue as a Share of Total Revenue (2023; theoretical estimation, USD mil.) Our theoretical payments revenue scenario above highlights Coupa’s runaway for growth via payments monetization. Several factors will impact Coupa’s actual payments revenue growth including: Geographic mix: integrated payments competition and business adoption vary globally, with more mature regions (e.g., North America and Europe) demonstrating higher digital payment volumes, but also relatively higher competitive intensity (although commercial interchange generally isn't regulated in Europe or the UK). Payment method mix: cards, A2A, checks, and other forms of B2B payments carry different commercial models and varying levels of monetization. Geography also plays a role, as B2B payments in regions like Europe are almost exclusively A2A while payments in the U.S. are more diverse across A2A, card, and checks. Merchant size mix: enterprise buyers and suppliers have greater influence over what payment methods are used and accepted than SMBs. Enterprise buyers will push suppliers to accept commercial/virtual cards while enterprise suppliers will often demand payment via lower-cost payment methods like A2A. Industry/Vertical mix: industries with smaller, more frequent payment transactions like travel will have different commercial implications from industries with higher value and less frequent transactions like freighting/logistics. Breadth and depth of value-added services: businesses utilize embedded payments when they offer a clear value proposition. Value-added services such as invoicing, data insights, supplier management, and other linked business management software modules increase the rationale for businesses to use embedded payments versus other payment enablers like business bank partners. Breadth and depth of value-added services (#5 above) is arguably the biggest contributing factor to unlocking payments (and software) revenue growth. To that end, we expect Thoma Bravo to exploit synergies across Coupa and Bottomline Technologies (acquired by Thoma Bravo on May 13, 2022) to improve the performance of both companies. Coupa & Bottomline Technologies Synergies Like Coupa, Bottomline is a global AP automation and cash management software provider. Figure 4 compares key metrics and select capabilities across the two enterprises. FIGURE 4: Coupa & Bottomline Technologies Select Key Metrics Comparison, 2023 Coupa and Bottomline offer similar, yet complimentary services. Coupa can create a more compelling solution for Treasurers in conjunction with Bottomline, offering a wider, more impactful business process automation solution. We observe potential synergies across four vectors: Enhanced front-end capabilities: back-offices utilize B2B SaaS front-end capabilities daily to manage payables, receivables, and the company’s overall cash position. These capabilities form the core of the B2B SaaS value proposition. Coupa can bring several front-end capabilities including supply chain management and strategic sourcing to Bottomline’s 10,000+ clients, creating a more comprehensive product and “one-stop-shop” for users. Superior fraud management: despite shifting to digital payment methods with inherently tighter spend controls and approval workflows, businesses are still battling B2B payment fraud. Bottomline’s fraud management specializations like “Record and Replay,” which allows businesses to record internal and external users in business applications, can bolster Coupa’s current offering. Expanded partner footprint: B2B SaaS partner networks create greater distribution reach and a more flexible product offering. For example, a robust bank partner/issuer network makes it (potentially) easier for clients with an existing commercial/virtual card relationship to adopt a B2B SaaS solution. Coupa and Bottomline partner with an extensive list of banks (e.g., Bank of America, JPMorgan Chase, Citizens, Citi, etc.) and complementary payment technology providers (e.g., Billtrust, Boost Payments, Transfermate, Stripe, etc.) that together can form a larger partner network to maximize top-of-the-funnel sales opportunities for both entities. Scaled buyer/supplier network: established buyer/supplier networks create instant value for new B2B SaaS customers by eliminating the need to self-onboard most (if not all) existing supplier relationships. Coupa’s and Bottomline’s combined customers (buyers) and supplier networks can create a larger network effect, allowing both companies to achieve critical mass across over 12,000 clients and 8 million suppliers globally. Conclusions Only time will tell if Thoma Bravo’s $10+ billion of M&A activity in B2B SaaS last year can deliver the growth and future exit multiples that such deals strive for. That said, we remain bullish on the power of B2B SaaS and embedded payments, particularly in the U.S., where profit margins on products like virtual cards remain high. Demand for B2B SaaS and embedded payments among customers continues, where early movers with global reach like Coupa are well positioned to profit. Looking forward, we expect continued deal flow in the B2B SaaS market as strategic and financial investors look to capitalize on modest valuations and strong industry tailwinds including the continued adoption of digital payment methods globally. Please do not hesitate to contact Rom Mascetti at Rom@FlagshipAP.com or Ryan Vincent at Ryan@FlagshipAp.com with comments or questions.

The B2B X-Border payments fintech opportunity is massive. Fintechs continue to win share from banks by differentiating on technology and product. Fintechs with strong GTM focus on B2B SaaS integrations and collaborations will clearly emerge as winners. In this article, we analyze this space and present our key takeaways. We advise downloading the slides via the "Download Article PDF" button in the upper right or view in full-screen mode. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com, Rom Mascetti at Rom@FlagshipAP.com, or Pedro Giesta at Pedro@FlagshipAP.com with comments or questions.

Apple effectively discloses no data on its fintech business, forcing us to speculate on the size and substance of this franchise. There are plenty of wacky numbers floating around as to Apple’s scale in fintech, including one widely quoted data point that Apple processes $6 trillion of payments volume annually (claiming to be more than Mastercard). This $6 trillion data point is just silly. We estimate that Apple “controlled” roughly $800 billion of payment flows in 2022. Though not close to the overly-hyped $6 trillion, our estimated $800 billion of annual flows is still impressive and leaves no question that Apple is a key actor in the global fintech industry. We estimate that Apple’s total payment flows will grow to $3.2 trillion by 2030. Within this article, we dissect the scope of the Apple fintech ecosystem and explain our approach to estimating its size. Scope of the Apple Fintech Ecosystem, Its Range of Services, and Customers Apple’s fintech ecosystem is an octopus with many tentacles across the fintech market from consumers to merchants. In Figure 1, we illustrate and describe these key touchpoints. FIGURE 1: Overview of Apple’s Fintech Ecosystem (2023) Some of these touchpoints are well-established and lucrative franchises, for example, the App Store. Other touchpoints are still in development, particularly within the suite of consumer fintech services. For example, Apple Pay Later has yet to launch, with the development recently delayed. Apple leverages its unique position as a leading global provider of mobile technology, application and content ecosystems, and a uniquely beloved consumer brand to offer a range of payments and financial services to consumers and businesses. Size of the Apple Fintech Ecosystem In Figure 2, we estimate the current and projected flows across the Apple ecosystem. We estimate that in 2022, Apple controlled c.$800 billion of payments volumes (noting that, for example, Apple does not literally process Apple Pay transactions as they flow from merchants to card issuing banks via Visa/Mastercard; though Apple is in the corresponding stream of data). FIGURE 2: Estimated Scale and Forecast Growth of Apple’s Fintech Ecosystem (2023, sized by volume of flows; in $ trillion) We expect these flows to grow to $3.2 trillion by 2030, a compounded annual growth rate of 19% from 2022 (noting that a material portion of this growth will come from services not in-market today). The distribution of these estimated flows across the range of apple touchpoints are illustrated in the figure below (Figure 3). Apple Pay is the largest source of Apple’s fintech flows. Apple publishes little data on Apple Pay (in July 2019 Tim Cook did quote that Apple Pay reached 1 billion transactions per month), but we estimate that Apple Pay in 2022 accounted for more than $500 billion of transaction value and c.30 billion transactions, representing rough penetration of c. 3% of total V/MC consumer card value and c.10-12% of V/MC consumer card transactions in North America and Europe (excluding rest of world in the denominator). Some have described this Apple Pay penetration as disappointing, but we see this as a huge success given the many roadblocks to achieve such results across many countries and payment use cases. Apple Pay is just under half the size of PayPal by volume of flows, present in the market for 8 years (vs. 24 years for PayPal). Apple Pay is successful both at the physical point-of-sale (POS) and online, though we see online as more successful in the U.S. (where NFC behaviors are less engrained), vs. the success of POS in U.K. and Europe (driven by engrained NFC behaviors and slower launch of Apple Pay online). If we had to guess, we believe that the U.K. is likely Apple Pay’s most penetrated market. FIGURE 3: Apple’s Estimated Fintech Ecosystem Volume Flows by Product & Service (2023) The second largest source of fintech flows are the payment volumes that Apple accepts as a merchant, including Apple’s own product/service sales channels (Apple stores, Apple.com, and Apple’s music/TV/video channels) and the App Store. We estimate that Apple accepted c.$242 billion of payments via its own channels in 2022 (i.e., as merchant of record). The App Store is Apple’s most lucrative fintech platform. We estimate that the App Store processed $100 billion of payments in 2022, generating c.$25 billion of revenue for Apple (assuming an average commission rate of 25%). Of course, not all of this commission is attributable to the payments function. Framing Apple as a merchant services fintech is a theoretical exercise (e.g., what App Store margin you apply). Depending on how you frame this, Apple is generating billions of merchant fintech revenue today, equivalent in size to some of the largest global PSPs. As shown in Figure 4, Apple has a rapidly developing consumer fintech franchise. Today, volumes arising from Apple Card and Apple Cash are modest (we estimate c.$30 billion of purchase and remittance flows in 2022). Apple is clearly focused on building out their portfolio of consumer services including Apple Pay Later (slated for launch in 2023), savings accounts (recently announced as an add-on to the Goldman Sachs issued Apple Card). We anticipate that Apple will continue to add banking services including digital bank accounts, plastic debit cards, and other products and services. Across this full range of consumer products, we project today’s $30 billion of annual volumes to grow at high rates to c.$350 billion by 2030. FIGURE 4: Apple’s Fintech Development Timeline (2023, Select Key Events) 2022 also brought the launch of Apple Tap-to-Pay, the tightly controlled Apple SoftPOS platform. Apple works with merchant payment service providers to deliver the service, for example, Stripe, Adyen, Chase, and others. We have bullish expectations on the growth of this platform, projecting more than c.$60B of flows via this platform by 2030 (based on our speculative estimations). Apple's Fintech Operating Model As shown in Figure 5, Apple relies on many partners today to enable its broad range of fintech services, including, Goldman Sachs, Green Dot, and JP Morgan Chase, etc. Visa and Mastercard play a central role and most of Apple’s fintech flows today are running over V/MC networks. We do expect an expansion of Apple infrastructure to include more non-card, A2A payments/rails in the future. FIGURE 5: Apple’s Fintech Operating Model (2023) Much has been made about Apple’s intentions to insource operations of its fintech ecosystem in the future. There is some evidence of this today for components of Apple Cash and Apple Pay Later. However, we are not convinced that Apple will subsume all or most of the value chain roles delivered by partners today. For example, we do not see a positive business case for Apple becoming a fully licensed bank or operating all aspects of V/MC processing. As a technology company, we see the collateral damage for becoming a fully licensed bank as too great vs. the option to partner with strong banking-as-a-service partners … a market that is increasingly well-supplied. Conclusions Apple controlled an estimated $800 billion of payment flows in 2022. We estimate Apple’s total fintech ecosystem flows to grow to $3.2 trillion by 2030. Apple, with its rich and expanding portfolio of unique fintech services, is a key actor in developing the global fintech industry. We are excited to see the developments to come out of Apple in the coming years … but also hope that Apple eventually publishes some data on its fintech franchise! Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com, Charlotte Al Usta at Charlotte@FlagshipAP.com, or Pedro Giesta at Pedro@FlagshipAp.com with comments or questions.

Flagship published insights across a diverse set of topics in 2022, including integrated payments, crypto, open banking, payfacs, M&A, neobanks, SoftPOS, Banking-as-a-Service (BaaS), the impact of inflation, B2B payments, spend management, and many others. Below we review and summarize our most popular articles of the past year. The rise of Banking-as-a-Service (BaaS), in parallel with our commentary on the muted adoption of open banking payments generated significant reaction and healthy debate. Other topics which captured our audience’s attention entailed our reporting on Stripe’s remarkable 2021 performance, the historical evolution of SoftPOS and its potential for growth in 2023, and our proprietary analysis on the shifting market dynamics in U.S. merchant payments. Links to our top-read articles here: 1. Banking-as-a-Service (BaaS) Fintechs Coming to Age to Fuel Integrated Finance Needs 2. European A2A Schemes Thriving, Not Yet Open Banking Payments 3. SoftPOS is Ready for Prime Time in 2023 4. Infographic: Stripe Setting the Performance Bar in Fintech 5. M&A No Longer the Key Driver of Consolidation in U.S. Merchant Payments 1. Banking-as-a-Service (BaaS) Fintechs Coming to Age to Fuel Integrated Finance Needs As the focus of our most-read article in 2022, Banking-as-a-Service (BaaS) enables any company to embed integrated financial services. The category came of age in 2022 with an influx of funding, the rapid proliferation of fintechs (including scaled players), and maturity in product setting the scene for widespread disruption of financial services distribution in 2023 and beyond. FIGURE 1: European Landscape of BaaS Providers (2022; select players, based on office locations and license approvals) 2. European A2A Schemes Thriving, Not Yet Open Banking Payments In parallel, our views on the unmet expectations European open banking payments generated healthy online debate. Open banking payment adoption remains muted and faces adoption challenges given the traction of A2A APM schemes in certain markets, and we went as far as calling open banking payments a solution in search of a problem. We do however remain optimistic that structural impediments will be removed, driving an ongoing expansion of PIS volumes, and that additional verticals and use cases will gain traction increasing its overall relevance. FIGURE 2: Landscape of Select European A2A APM Schemes (2022; select players) 3. SoftPOS is Ready for Prime Time in 2023 SoftPOS progressed slowly over the last decade, but is finally ready for the mass market with the launch of the most recent set of standards (MPoC). Our year-end article highlighted the importance of these new standards, which will address many historical constraints associated with SoftPOS giving rise to rapid scaling in the years to come. We believe that 2023 is the year SoftPOS takes off in earnest. FIGURE 3: Select Events & Key Milestones in SoftPOS Evolution (2022) 4. Stripe Setting the Performance Bar in Fintech Stripe remains a darling of the fintech ecosystem, and our infographic highlighted its remarkable performance in 2021. Stripe outperformed peers in volume growth (an impressive 100% since 2016), and according to press releases, claims to partner with 60% of technology companies that went public in 2021. In conjunction with an aggressive global expansion strategy, Stripe has expanded its product set along the value chain with the most recent add-ons including card issuing, identification, tax, and revenue recognition. FIGURE 4: Payments Volumes (2022; in $ bil. equivalent) 5. M&A No Longer the Key Driver of Consolidation in U.S. Merchant Payments Finally, our analysis of the dynamics of market consolidation and growth in the U.S. merchant payments market disproved the conventional wisdom stating that M&A is the key driver of consolidation in merchant payments. This is no longer true in the U.S. market. Disparate organic performance led by high-growth disrupters is now the driving force behind U.S. consolidation. FIGURE 5: Payments Volumes (2022; in $ bil. equivalent) We look forward to delving into more diverse topics that generate debate and challenge perspectives in the coming year. Should you have any questions, please do not hesitate to contact us at Info@FlagshipAP.com

SoftPOS, otherwise known as 'tap to pay' or 'pin on glass' was first conceptualized a decade ago. Since then, SoftPOS progressed slowly but steadily towards mass market readiness, and that time is now, or at least visible on the 2023 horizon. Several key events in 2022 catalyzed the momentum of SoftPOS, which is now clearly visible in the market. We expect rapid growth in usage and volumes starting next year as SoftPOS products find their footing across a number of use cases and segments. Within this article, we discuss these recent key events, the journey toward readiness, and expectations for future growth. Introduction to SoftPOS SoftPOS is a mobile application (and related solution set) that enables an approved smartphone to capture card data, encrypt that data, and then route that encrypted data in the form of a transaction request via the internet to a payment processor and services provider. SoftPOS is built for NFC-based contactless payments, not for physical card reading. FIGURE 1: The Basic Mechanics of SoftPOS A Decade to Readiness – The Evolution of SoftPOS As shown in Figure 2, SoftPOS started as a concept in c. 2012 with the founders of the first start-ups in the space including MyPinPad and Mobeewave. It took another half-decade for the market to establish technical standards for the safety and soundness of transacting via SoftPOS. The PCI Security Standards Council released its initial technical standards for SPoC (defining standards for PIN entry on mobile phones) and CPoC (standards for contactless payments on mobile phones) in 2018 and 2019. The establishment of these standards defined the technical legitimacy and certification requirements for trusted solutions. Major commercial launches then followed, for example First Data and Samsung (along with Visa), announced their first forays into SoftPOS in September 2019. Apple made its first big move into SoftPOS when it acquired Mobeewave in August 2020. Visa and Mastercard (V/MC) then announced advancements of their SoftPOS programs near the end of 2020. The year 2022 clearly established momentum with the launch of Apple's Tap to Pay program and the launch of numerous SoftPOS products from fintech leaders such as Stripe, Square, and PayPal. Most recently, the PCI Security Standards Council released its MPoC standards, which many see as the first truly mass-market-ready and scalable foundation for the technology. Under MPoC previous limitations around usability (e.g., PIN ready, phone ready, no transaction limitations, etc.) will fall away. FIGURE 2: Select Events & Key Milestones in SoftPOS Evolution SoftPOS standards (established by PCI) evolved as shown in Figure 3. The CPoC standard is limited by the lack of PIN enablement. CPoC certified SoftPOS solutions are therefore limited to NFC transactions that do not require a PIN (plastic initiated below transaction limits or NFC-based wallets). SPoC certification is effectively a stop-gap that allows PIN on glass but only with a separate card reader, and therefore no real value-add versus an mPOS solution. The MPoC standard announced last month merges the two prior standards and will allow market participants to be PCI compliant, and enable secure PIN entry directly on approved phones (aka a COTS devices). We see MPoC as effectively the first standard that is truly mass-market ready. Given the recent release of the new standards, certifications will come only later in 2023. FIGURE 3: Comparing the Basics of SoftPOS Certification Standards An Expanding Landscape of SoftPOS Solution Suppliers Today, there are c. 30 SoftPOS solution providers certified under SPoC or CPoC, and several dozen more approved by V/MC for pilots under certification exemptions. Many of these solution providers are specialists, but there are also a variety of established fintechs such as Square, Pine Labs, and several incumbent terminal OEMs. Figure 4 lists the Mastercard SPoC and CPoC certified solution providers. We observe many PSPs and acquirers currently working with SoftPOS solution partners on pilots, or at least engaging to select their solution partners as we head into 2023. There are few PSPs and acquirers actively pushing SoftPOS as a mass-market solution today, although Worldline appears to be pushing this proposition hard following its divestment of Ingenico. FIGURE 4: Mastercard Certified SoftPOS Solution Vendors Apple, long a roadblock to SoftPOS readiness, catalyzed the SoftPOS market earlier this year by announcing its Tap-to-Pay product with Stripe as its launch partner. Apple Tap-to-Pay is a closed system controlled by Apple with merchant propositions provided by Apple approved PSPs. Currently, there are several live partners (Stripe, Square, Adyen) with many more in the queue (as shown in Figure 5). SoftPOS solution vendors play no role in the Apple Tap to Pay ecosystem as Apple fills this role directly. FIGURE 5: ‘Tap to Pay’ on iPhone Apple-Approved Partners No Full Cannibalization of the Traditional Terminal SoftPOS (even with the new MPoC standard) is not a solution that will address all needs and we do not expect wholesale cannibalization of payment terminals given their robust utility and value. There are practical limitations to when SoftPOS is superior to payment terminals and when it is not (see Figure 6 for a high-level comparison). SoftPOS is ideal as a no/low cost, real-time deployed solution for enabling small numbers of transactors. SoftPOS is also ideal for mobility use cases where commerce is already driven by phones or tablets (for example, checking out on a tablet within a shop or at an unattended device). Payment terminals are still the best solution for higher volume needs given that payment terminals can support tens of thousands of transactions across a c. 5-year lifetime at a reasonably low cost (generally less expensive than a phone). FIGURE 6: Comparison of SoftPOS, mPOS & Traditional POS Scale Via Four Key Growth Vectors SoftPOS solutions that are card-ready and V/MC approved (i.e., excluding other forms of phone-to-phone payments) are tiny in scale today. It is hard to find a reliable data point, but we suspect that there are a few hundred thousand active users today. From 2023, we expect rapid acceleration of SoftPOS scale. We see four key growth vectors driving the scaling of SoftPOS usage: Leap-frog markets: Markets such as India, where QR-based payments are more prevalent than cards, and where phone-to-phone consumer-to-business payments are already common, are ripe for accelerated growth in card-enabled SoftPOS. SoftPOS allows a single app (e.g., Pine Lab's AllTap) to support both card acceptance and acceptance of alternative payment methods such as QR-based or BNPL. Micro merchants and infrequent transactors: Micro-merchants who trade infrequently want a payment proposition with no fixed cost. SoftPOS is perfect for this profile as reliance on a smartphone is not problematic (low volumes, no employees, etc.). SoftPOS can also be initiated near-instantaneously, an advantage over shipping hardware. Mobility use cases @ corporate merchants: There are many use cases for larger merchants to deploy SoftPOS outside of the traditional central POS, for example, consultative selling, kiosks and self-checkout, self-scanning, etc. Embedded SaaS: SaaS platforms such as Toast or Lightspeed benefit from SoftPOS as it dematerializes the hardware requirements of the proposition and makes it easier, and less costly to deploy and operate their software solutions. For example, if a café is already using a tablet for checkout, payments can simply be embedded into the tablet rather than requiring a separate device. Figure 7 provides a rough visualization of our scaling expectations as active B2C users grow from less than 1 million to tens of millions in the coming years. FIGURE 7: Illustrative SoftPOS User Scaling Conclusions It is hard to believe that the SoftPOS concept has been around for a decade. SoftPOS needed that decade to establish technical readiness. The MPoC certification, which will land in practice in 2023, now establishes this foundation. The historical constraints of SoftPOS (no PIN, transaction limits, only latest phone models, etc.) will fall away in 2023, giving rise to rapid scaling in the years to come. Starting next year, we expect rapid scaling of SoftPOS usage driven by a variety of use cases (e.g., mobility), across geos (particularly mobile-centric leapfrog geos) and merchant segments (micro and enterprise). Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com or Elisabeth Magnor Elisabeth@FlagshipAP.com with comments or questions.

Software-as-a-service (“SaaS”) providers and platforms play an increasingly significant role in the payments ecosystem. Payment facilitation, a term loosely describing how these providers and platforms enable payments for their customers, has several operating models, each with varying levels of control, liability, and revenue opportunity. SaaS providers and platforms should not think of facilitating payments as a single point in time but as an evolutionary journey to offer a more seamless customer experience, greater value-added services, and a jump-off point for future embedded financial services. For these software players, deploying a successful payment strategy depends on selecting the right payment partner(s) that will sit at the core of the service and, ideally, evolve alongside the software player’s broader business strategy. Introduction As described in Figure 1, the marketplace for North American payments has undergone a series of evolutionary waves. In the 1990s and early 2000s, businesses procured payment acceptance services as a distinct, standalone solution from other business management systems like accounting and ERP. Today, businesses prefer payment acceptance services and other financial services interwoven into their business management solutions. As a result, we are witnessing an explosion of SaaS providers integrating and commercializing payments within their broader business management solutions (broadly referred to as “payment facilitators” or “payfacs”). For SaaS providers and other hosted platforms, successfully integrating and commercializing payments is no small feat. Selecting the suitable operating model and payment service provider (“PSP”) partner is at the core of a payfac strategy. In this article, we explore various forms of payment facilitation, the commercial opportunity for payfacs, the maturation process of select payfac models, and the key features and functionalities to look for in PSPs/payfac enablers. FIGURE 1: Evolution of Payment Distribution Payment Facilitation Operating Models Payment facilitation and payfacs come in many forms. Visa and MasterCard define payment facilitators as “third-party agents that can sign a merchant acceptance agreement on behalf of a sponsoring acquirer and receive the settlement of proceeds on behalf of sub-merchant clients.” In a broader sense, payfacs are essentially any entity non-licensed party that enables and distributes payments, typically through a software solution. This can include independent sales agents (“ISOs”), booking engines, marketplaces, commerce platforms, and integrated software vendors (“ISVs” which are increasingly defined by their SaaS and cloud-based business models). As illustrated in Figure 2, there are various permutations of payment facilitation, each with its own operational and commercial implications. FIGURE 2: Different Payments Operating Models for SaaS & Platform Providers Software providers operating as ISOs or ISVs are often said to work under a referral model and are not registered payfacs. As the name implies, the software provider refers merchants to a payment processor partner and, in return, receives economic incentives. While the software provider bears no financial risk for the payment services (i.e., disputes), it has no control over customer onboarding and payment experiences. This can often lead to friction with the software provider’s customers and forces customers to search for alternative solutions where payments are integrated within the software. This gives software providers offering embedded payments a competitive advantage over competitors without it. Software providers have more control over the user onboarding and payments experience as a payfac. As a managed payfac, the software provider manages the onboarding (payment forms) and payout processes through APIs or pre-designed tools (e.g., Finix Flex, Stripe Connect, etc.). To address these operations, most software providers staff a customer support team responsible for reviewing, approving, and terminating merchants. Meanwhile, the payment service provider acts as the merchant of record and assumes the risk of losses from fraudulent merchants. However, it is important to note that the software provider still bears the chargeback risk and associated costs when initiated by their clients’ customers. Software providers looking to test integrated payments will typically start with this model. However, those looking for greater control over the customer-facing payment solution and visibility over day-to-day payment operations may consider engaging in a hybrid payfac. In a hybrid payfac, the software provider registers as a payfac with the networks and partners with payfac enablers like Finix, Infinicept, etc., for back-office tools (e.g., onboarding, payouts, disputes management, reporting, etc.). In this model, the software provider is responsible for staffing its own payments operations, such as underwriting and customer support, and uses its payfac enabler’s solutions to manage its sub-merchant (client) portfolio. This model allows the software provider to work with best-fitting PSPs for integrated payment services without the burden of building in-house payfac management tools or a complex integration into legacy processors. Payment Commercial Opportunity for Software Providers Software providers create significant client value by fully integrating/embedding payments. PSPs recognize that bundling business software and embedded payments is a superior distribution model compared to standalone payments (Figure 3), as the software buying decision is generally the leading decision merchants make (e.g., before selecting a financial institution). SMB merchants prefer software solutions with embedded payments, simplifying their operations and improving customer experiences. Particularly, the integration removes the headache of coordinating between two specialized solutions, and, as a result, the merchants evince lower acquisition costs, higher retention, and less price sensitivity for PSPs. FIGURE 3: SMB POS Software + Payments Integration Model (estimates for % new SMB merchants signed in 2022) From a revenue opportunity perspective, software providers (specifically payfacs) benefit from bringing better-bundled products to market and earning larger shares of payment processing revenues by owning more of the payment functions and respective operations/risks. This increase in economics requires both an initial up-front investment and ongoing maintenance costs, in addition to a targeted payments strategy, operational plan, and strong payments partner to optimize these expenditures as well as time to revenue. FIGURE 4: Payments Distribution Model Deployment Considerations Beyond commercial benefits (Figure 4), deep integration of software providers and payments/fintech services improves customer outcomes and unlocks a decisive go-to-market advantage (Figure 5). The figure below illustrates some of the benefits of integrated software and payments. FIGURE 5: Bundled Software + Payments Solution Advantages The payfac model is a logical starting point for software providers seeking to expand into broader financial services, creating a type of fintech flywheel. The core payfac digital ledger, with its pay-in / pay-out functionality, is foundational for other financial services such as merchant cash advance, lending, BNPL, card issuing, and spend management, to name a few. Cases Studies: Maturation of PayFac A software provider’s payfac model will adapt based on the development of the company’s go-to-market strategy, the availability of technical and operational resources, and the company’s vision for the user experience. As shown in Figure 6 below, providers can move fluidly across different maturation points with the right payment enablers. FIGURE 6: SaaS Provider & Platforms – Observed PayFac Model Progression Journeys While some software providers starting out as an ISO or referral partner may elect a managed payfac solution as the next logical tech enablement progression, other providers may not want to relinquish visibility and control to a third-party provider. As a result, these software providers may opt to develop a hybrid payfac model where they work directly with a PSP or payfac enabler to build their in-house payment capabilities. On the other end of the development spectrum, we observe custom build payfacs that convert their in-house operations to a hybrid payfac model to reduce the burden of technology upkeep/maintenance. Ultimately, we view all three payfac models as viable options for offering future embedded finance products, where payfacs can further monetize fintech services. In the following visual, we highlight several case studies of software providers moving along this maturation journey. FIGURE 7: SaaS Provider & Platforms Evolution Case Studies Working with PayFac Enablers Becoming a payfac is a journey made more manageable through partnerships with PSPs. Platforms looking for a payfac enabler should consider the following criteria when selecting a PSP partner (refer to Figure 8): FIGURE 8: Table Stakes & Differentiators When Selecting a PSP Partner FIGURE 9: Range of Services Offered by Select Managed & Hybrid PayFac Solution Providers Conclusion When considering which payfac model to pursue, software providers need to understand their customers' payment needs/use cases and envision the optimal internal and external payments experience. With integrated and embedded payments becoming the market standard and merchants continuing to prefer bundled financial services, the market will push SaaS and PSPs to interface not only as business management service providers but also as financial service providers. If not doing so already, software providers should examine how to expand their tech stack and partnerships to offer combined business management and fintech services. Please do not hesitate to contact Rom Mascetti Rom@FlagshipAP.com or Brittany Logan at Brittany@FlagshipAP.com with comments or questions.

Neobanks continue to be an important driver of innovation in financial services. In this article, we compare the offerings of the top neobanks in Europe and North America and investigate how they have evolved since our prior research last year. Fintechs and neobanks that receive funding from investors are expected to show positive growth outcomes, such as a growing client base. Having analyzed these two factors (funding and client base) we can summarize three key findings: Over half of the top neobanks managed to increase their client base after the influx of new capital. Three neobanks (Bunq, Aspiration, and Current) managed to increase their client base without a significant rise in funding. Bunq’s growth is likely driven by the recent acquisition of expense management fintech Tricount, whereas we believe Aspiration’s growth is driven by the popularity of its sustainable banking products. Two neobanks (Dave and Monese) did not experience any growth in their client base despite capital injection. FIGURE 1: Top Neobanks in Europe and North America by Client Base (in mil.) & Total Funding (in $ mil.) Most neobanks still struggle to achieve profitability (see examples in Figure 2), although there are a few winners such as Starling Bank, who reported profitability for the first time in 2021 (7 years after launch). Starling Bank offers a wide range of products and services (see Figure 3), targeting consumer and small business clients, and claims to represent ~8% of the UK small and medium enterprises market (+2.4% market share increase vs. 2021). Alongside strengthening its positioning within the SME segment, Starling allocates resources to grow its lending portfolio. During the pandemic, the challenger bank gave out £1.4 billion in bounce-back loans to SMEs. Starling illustrates the notion that serving SMEs and offering credit is a path to profitability. FIGURE 2: Select Neobanks in Europe and North America: Net Income (in $ mil), 2022 FIGURE 3: Starling Bank Products & Metrics In our previous analysis, we concluded that product expansion was the driving factor for neobank growth - a conclusion that still holds: Having examined the current products offered by the top neobanks (Figure 4 below) we can summarize the following trends: Most neobanks are still expanding their range of lending products The SME segment continues to be underserved by neobanks, although solutions around payment acceptance, B2B X-border payments, SME cash advance, and SME working capital have grown slightly vs. 2021 In terms of consumer transactional banking products, neobanks continue to focus on features that are optically attractive to consumers, such as cashback and roundups A few more neobanks have added saving accounts to their product suite Several neobanks have expanded their investment offer to include stocks and funds Despite the product expansions, the overall offer of insurance and investment products remains narrow compared to traditional banks FIGURE 4: Product Offering of Top Neobanks in Europe and North America (2022, by # of Neobanks) Although consumer transactional banking services remain the core business of neobanks, we observe a slow shift towards lending and SME products. As a logical next step, neobanks will likely continue to expand their range of lending products (e.g., credit cards, overdrafts, loans, etc.) to earn profits. We also foresee that the SME offering around accounting integrations, factoring, and other financing solutions will likely increase, given that small businesses are underserved by traditional banks. In addition, the expansion of fee-generating products like investments and insurance could be an additional monetization opportunity. Overall, we believe that neobanks will remain influential in shaping the banking space with innovation, although their path to profitability will remain challenging until they broaden their product set and expand their lending capabilities. Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com or Aigerim Assembayeva at Aigerim@FlagshipAP.com with comments or questions.

Recent data published by the U.S. Consumer Financial Protection Bureau illustrates how the U.S. Buy Now, Pay Later (BNPL) landscape is changing based on consumer behavior and shifting economics. In this article, we analyze their findings and present our key takeaways. We advise downloading the slides via the "Download Article PDF" button in the upper right or view in full-screen mode. Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com, Tobias Vink at Tobias@FlagshipAP.com, or Simone Remba at Simone@FlagshipAP.com with comments or questions.

Flagship Advisory Partners’ Executive Interview Series provides readers with exclusive insights from thought leaders in the payments and fintech industry. The series offers diverse perspectives on everything from market developments to strategy to commentary on developments in the industry. This edition puts the spotlight on open banking developments in Europe. Flagship Advisory Partners met with Wilko Klaassen, VP Business Development at Klarna Kosma, Klarna’s newly created open banking business unit, to learn more about Kosma’s perspective on developments in open banking and how Kosma is addressing the challenges in open banking payments and data services. Image: Wilko Klaassen, VP Business Development, Klarna Kosma 1. Four years since the open banking regulations were introduced in Europe, how would you assess the market has evolved so far? Open banking has been a revolutionary concept that has democratized the access of A2A payments and data services for regulated third parties. The PSD2 regulations introduced in 2018 provided the early push by setting up a new standard. Since then, the market has accelerated due to wider participation from banks and fintechs. For us at Klarna, open banking began as an exciting journey in 2004 with SOFORT payments. In the early days, SOFORT was in fact one of the early drivers of PSD2 allowing consumers to pay by using bank transfers. Over the years, we have further optimized the user experience, extended our product portfolio, and stayed at the forefront of open banking innovation by constantly improving our services. If you look around today, open banking API services are well established overall, though the quality of bank coverage does differ across markets. You’ll find the quality of APIs and associated data to be great in several Northern and Western European markets, for example, the Netherlands, the UK, and the Nordics. Banks provide good endpoints to access PIS (payment initiation services) and AIS (account information services) in these markets, and we have seen good market adoption here. There are still some markets that are still struggling with API standards and the general quality of data. Therefore, while the market has seen an overall good momentum, the real potential is yet to be realized. 2. Why has open banking payment initiation services (PIS) been slow to be adopted in mainstream e-commerce verticals? A2A bank transfers running through PIS infrastructure have existed successfully as an online payment method in several markets historically. For instance, in the Netherlands, iDEAL is the main online commerce payment method that works on a PIS infrastructure and has enjoyed great success over the last 15 years. In Germany, SOFORT is one of the most important payment methods (amongst the top 3), with an awareness of 94% among consumers. However, if you look at pure PIS services, the volumes in online commerce have been low. Part of this low adoption is the lack of innovation at the front end (where the checkout experiences are driven). A2A bank transfers already existed, and PSD2 which was originally launched to drive innovation failed to make incremental step changes. Also, most of the innovation came through at the backend (e.g., bank API access). We now see some emerging payment use cases that are innovative, for example, the variable recurring payments (VRP) in the UK. Hopefully, these kinds of innovations will drive higher adoption of PIS in online commerce in the future. 3. How has account information services (AIS) taken off? What problems does AIS solve today? AIS (account information services) has been way more interesting and innovative as a market development. AIS provisions data and insights to solve existing gaps across several use cases. For example, mortgage lenders, loan underwriters, and lease companies have traditionally relied on cumbersome paper-based processes to perform customer income and verification checks. Now, most of these parties can use AIS to get real-time data feeds and solve these inefficiencies. We see AIS being adopted in a big way across several industries today, for example, financial institutions, underwriters, credit bureaus, and banks. At Kosma, we have developed a proven AIS product to provision underwriting and account verification use cases for big techs, challenger banks, insurance firms, retailers, lenders, investors, and banks. We also utilize AIS for the underwriting and customer account verification for our flagship Klarna Buy-Now-Pay-Later (BNPL) product. 4. How do you see AIS and PIS evolving in the near future? PIS only allows the initiation of a payment, as such it is only a payment enabler today and not a complete payment solution. You would need to embed several enablers and value-added services (e.g., risk management, reconciliation services, fraud detection, and others) to be functional in online commerce.   I think we’ll see an evolution of such services on PIS going forward. I also anticipate some flexibility to come for PIS, e.g., expansion into recurring payments via variable recurring payments (VRP), and subscription based payments. AIS on the other hand has the potential to be more disruptive. Due to PSD2, you can integrate data from multiple banks into a single app. These data services can be combined and enriched with self-learning algorithms to offer predictive intelligence. Future AIS services can therefore be more advisory based. The real innovation in this space needs to come from fintechs that power front-end use cases; banks are not yet pushing for these services. 5. Who will emerge as the future market winners in open banking? Consumers and businesses will anticipate innovation to come from challenger banks (e.g., Revolut, N26, Monzo), and tech companies (e.g., Uber, Google, Airbnb). These firms have a lot of data and, have the technology in-house to build valuable applications on this data. I think open banking platform providers that offer the broadest and best bank connections will stand out from the rest of the pack. Everyone can offer an API connection, but providing the right value is often the tricky part. Providers with the largest connectivity will benefit from partnerships with Neobanks, tech companies, and power new use cases. Further innovation and product superiority are key factors in the open banking space. Klarna Kosma combines bank connectivity with innovation; therefore, I would say that we are set up for success in this space. Ultimately, I hope both businesses and consumers can be the actual benefactors from open banking. 6. The launch of Kosma seems to be Klarna’s first move into B2B infrastructure services. How is Kosma different from Klarna? Klarna and Kosma serve two different target groups. While Klarna provides consumers and retailers with branded plug-n-play BNPL products, Kosma offers open banking infrastructure services to anyone in need of customized open banking building blocks. Nevertheless, with Kosma, we’re building on the expertise and brand value of Klarna. Kosma might be a new name, but it is the engine that has been powering Klarna for all these years. Now we are making it available for other companies to help them scale their business with open banking. Kosma is not an end-to-end user brand in itself; the service is completely white-labeled for our licensed partners only. We have developed a single API that connects to a proprietary network of 15,000+ bank connections across 26 markets. Any business can use the same API to access open banking services across markets. Since all the connections are proprietary, we guarantee a high degree of data availability. On top of these connections, we also power the UX and AIS/PIS licensing for businesses.   7. Can you share some details of Kosma’s products and services in open banking? Kosma supports three main product lines: i. We offer a PIS payment product, a white-labeled offering that powers businesses to launch PIS and bank transfers. Given our SOFORT capabilities, we can power everything required for a bank transfer, e.g., account connections, UX, risk engine, and transaction flows. ii. Our AIS product provides customized data aggregation services to solve several use cases such as ID verification and income verification. iii. We also offer an account categorization product that provides unique insights from bank accounts/statements and can be supported across 200+ spend categories Next to these products, as Klarna, we also support our consumer-centric BNPL suite of products and SOFORT, our branded bank transfer payment method for online e-commerce. We are also fully licensed, and that license can be used by our partners, or they can utilize their own license and use us as a tech partner. 8. Can you share what’s next for Kosma on the horizon? We are currently developing new use cases by combining AIS and PIS products together. We are seeing that is the kind of innovation our clients are seeking. Further, our efforts go towards developing use cases for newer verticals, going beyond financial institutions to businesses that desire to embed financial products and services. Expanding to these verticals may also require us to get licensed. Therefore, we may plan to get additional licenses in the future. Beyond these initiatives, we’ll continue to utilize the power of Kosma infrastructure services to fuel our Klarna ecosystem of products (e.g., SOFORT bank connectivity and KYC, underwriting for Klarna BNPL products). Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com with comments or questions.

General Observations The Fintech landscape in MENA is developing rapidly including many start-ups and heavy investment in recent years. Payments, in particular merchant payment acceptance, is one of the largest verticals for investment activities. The MENA fintech sector attracted $519 mil. of fundraising and 92 newly launched fintech start-ups in 2021. Both external investors and banks are investing in fintech franchises. Some of the major banks in MENA started and spun-off card processing/merchant fintechs, for example Geidea in the Kingdom of Saudi Arabia (KSA) and Magnati in the United Arab Emirates (UAE). UAE, KSA, and Egypt are the largest markets by activity level. Several MENA countries are launching real-time payment and/or open banking initiatives (e.g., SARIE network in KSA and IPP network in UAE). The region remains mostly localized although some global fintechs such as Checkout, Stripe, and Adyen are investing and rapidly expanding their presence in the region. The UAE is often the first entry point for international fintech entering the MENA region. Adyen and Stripe both launched in UAE in 2021. Please do not hesitate to contact Simone Remba at Simone@FlagshipAP.com or Charlotte Al Usta at Charlotte@FlagshipAP.com with comments or questions.

While the European market waits for open banking payments to find a foundation, alternative payment schemes built on account-to-account (A2A) banking rails continue to thrive. In this article we examine the European landscape for A2A payment schemes and open banking A2A payments. Catalyzed By Mobile Commerce, A2A Schemes Thrive Across the EU As shown in Figure 1, there are many European alternative payment methods (APMs) that are built on A2A rails. Most of these schemes are owned by bank coalitions, but not all (Trustly and Sofort/Klarna being notable private examples). Some of these schemes date back to the relatively early days of e-commerce (c. 2005) and were founded to displace offline bank transfers (e.g., paper Giro payments). Other similar schemes were founded more recently (c. 2015), spurred by the development of mobile apps and mobile commerce. FIGURE 1: Landscape of Select European A2A APM Schemes As we discuss shortly, many of the European A2A schemes are thriving, but not all. Some have failed, notably PayM in the UK and Paylib in France. Other schemes such as GiroPay/PayDirekt in Germany and Bancomat Pay in Italy, struggle to find traction and scale. Each of these schemes had the backing of major banks (a catalyst for success) but failed to achieve uptake by consumers who are otherwise well-served by cards, PayPal, or invoicing/BNPL within those respective markets. FIGURE 2: Transaction Volumes of Top European A2A APMs (€ Bil.; A2A volumes; '20-’21 growth rates, select APMs) Ongoing growth in mobile commerce continues to drive accelerated growth for the most successful of these A2A schemes. As shown in Figure 2, for example, from 2020 to 2021, Blik volumes in Poland grew 81% while Twint volumes in Switzerland grew 89%. Even more tenured schemes such as iDEAL in the Netherlands grew 41% from ’20 to ’21, stimulated partly by COVID behaviors. There remains ample opportunity for ongoing growth. As shown in Figure 3, most of these APM schemes (with the exception of iDEAL) have less than 30% penetration of C2B e-commerce in their home markets (compared to iDEAL’s c.75%). Beyond C2B e-commerce, there remains significant room for these schemes to grow in B2B e-commerce as well. We estimate that c. 20% of iDEAL’s total EUR 99 billion of volume in 2021 was business-to-business. FIGURE 3: C2B e/m-Commerce Payment Mix in Select European Markets (% of e/m-commerce payment turnover; 2021 est.) The physical point-of-sale (POS) remains a source for ongoing growth. Virtually none of these A2A schemes have meaningful penetration of the POS opportunity. Blik leads the sample with an est. 15% of its volumes arising from POS commerce. None of the other A2A schemes have more than 10% of volumes coming from POS. Admittedly, many of these schemes have struggled to achieve a checkout experience that can rival the frictionless UX of Apple Pay or similar NFC payment methods at POS. While these A2A APMs may never rival contactless payments at the traditional POS checkout, the lines between traditional in-store checkout and mobile commerce are blurring. Thus, we fully expect high growth in the usage of A2A payments via their hybrid in-store/in-app experiences. These successful A2A schemes continue to get better. All of these schemes operate with real-time payments (based on checkout and approval), but many are now migrating onto real-time clearing rails (money movement). User experiences also continue to get better. For example, Bizum, launched in 2016 by a consortium of Spanish banks, uses Iberpay’s real time payment clearing rails. Consumers are generally quite happy with the quality of the mobile apps from these schemes. The schemes noted in Figure 2 that provide a mobile app (e.g., Swish, Twint, Vipps) have a combined average rating of 90% on the Apple AppStore. Open Banking Payments - a Solution in Search of a Problem None of the highly successful A2A payment schemes noted in Figure 2 (effectively all of the bank-owned A2A schemes) operate via Open Banking. Schemes such as Trustly and Sofort/Klarna are migrating into Open Banking-based user experiences, and away from their traditional ‘screen scraping’ UXs. Therefore, is there room for Open Banking payment initiation services (PIS)? The answer as of today is, ‘not much’. Volumes of PIS payments today are de minimis, accounting for far less than 1% of European e-commerce. This despite having complete market readiness in most of the major Western European markets and broad support by leading European e-comm PSPs. If a European merchant wants to offer PIS payments today, they can generally find the service. So why the lack of uptake, as shown in Figure 4? FIGURE 4: Penetration of Open Banking Payment Initiation Services PIS payments are a solution in search for a problem. Sitting in the Netherlands at this moment, we simply do not have major needs for PIS. We have iDEAL for e-commerce, Tikkie for P2P payments, Apple Pay or other NFC for POS, and robust internet banking that is effectively free for larger payments. We also observe PIS user experiences that are often still high in friction, a function of heavy reliance on issuing bank policies and infrastructure. Providers of PIS payments (branded PIS and white-labeled PIS), such as those shown in Figure 5, must work harder in their go-to-market strategies and execution to find unmet needs. Firstly, there is a clear, geographically oriented opportunity. While the Netherlands has little need for PIS, markets such as the U.K., France, and Ireland (along with others) still do, as these markets lack mainstream options beyond cards, PayPal, and BNPL. We do see room for PIS to find niches to supplant traditional bank payments (high conviction) and in some cases, to potentially cannibalize cards and PayPal (low conviction). Central Europe also presents an opportunity, given the ongoing prevalence of offline payment methods and the relative lack of successful mainstream A2A schemes. We also see specific vertical use cases where PIS can potentially thrive. For example, the real-time flows of PIS are highly relevant for improving the bespoke and manual flows of many B2B payment use cases. Most notably, small businesses are potentially ideal candidates to initiate and accept PIS payments to speed cash flows, reduce manual workflows, and eliminate exceptions. There are other more specific vertical use cases where we also see good opportunities for PIS (e.g., the first payment in a string of recurring Direct Debits, education payments, utility payments, email or chat-based payments, etc.). While many PSPs now support PIS, there is much work to be done to educate merchants as to the value of the PIS option (a process that won’t happen without effort). Similarly, consumers also need to be taught to recognize and trust the PIS experience. FIGURE 5: Provider Landscape for European Open Banking Payments In Conclusion European A2A schemes will continue to thrive and grow, expanding from their P2P and C2B e-commerce origins into other use cases such as B2B and POS. Those schemes that are today widely penetrated have already won the hearts of consumers and merchants alike, and their brands and user experiences will continue to improve and expand. Given the strong position of established A2A alternatives in many EU markets, we do not see a landslide of PIS volumes on the horizon. We also do not see widespread cannibalization of cards and wallet such as PayPal as some pundits prognosticated. But we do see an ongoing expansion of PIS volumes as a series of specific use cases are addressed over time. Successful providers of PIS services will achieve strategic focus on relevant geos, segments, and use cases and will successfully educate merchants and consumers to trust and use PIS. Please do not hesitate to contact Joel Van Arsdale Joel@FlagshipAP.com or Anupam Majumdar Anupam@FlagshipAP.com with comments or questions.

General Observations As of Oct. 2022, there are over 3,300 active fintechs in Europe (vs. 4,200+ in the US) More than 70% of all European fintechs specialize in investments, lending, and payment services; most B2B fintechs focus on addressing white space in the SME merchant segment Cross-border payments and spend management fintechs are up and coming 41% of European fintechs are based in the UK or Ireland The number of European fintech start-ups continues to decline steeply year on year Please do not hesitate to contact Anton Žoldák at Anton@FlagshipAP.com or Erik Howell at Erik@FlagshipAP.com with comments or questions.

B2B employee spend and expense management (‘spend management’) is often a complex workflow of interactions across multiple actors (employees, functional business departments, etc.) and several adjacent software services and vendors (travel booking, spend administration, expense management, procurement, etc.). The use of corporate and personal employee payment cards has remained a critical component of the B2B spend and expense management process, although these payment vehicles remain largely separated from adjacent software services. The emergence of a new breed of B2B spend management fintechs that integrate spend management software as a service (SaaS) with payment capabilities is disrupting this space. Current Pain Points in Employee Spend Management Companies have historically relied on different software or SaaS platforms to manage employee spend and expenses at different points in the value chain. For example, specialized travel and expense (T&E) booking software for reconciling company T&E expenses, expense administration software for managing employee expense claims and reimbursements, HR software for managing employee spend policies, and accounts payables software for managing procurement. Different departments within larger organizations have traditionally managed these disparate software packages (e.g., procurement and expense management managed by finance, spend policies by H.R., travel booking approvals by respective employee managers, etc.). Consequently, fragmented departmental workflows, software, and a lack of true visibility into spend have made spend management a slow and burdensome process, creating pain points and missed opportunities for efficiency and cost optimization (illustrated in Figure 1). Additionally, the lack of data integrations across these software packages ultimately hinders the organization from obtaining clear visibility and oversight of company expenditures. FIGURE 1: Spend Management Pain Points Historically, payments has been a separate and disjointed process from the spend management value chain. Companies have typically relied on corporate and personal cards as employee spend tools, and very often, these purchase flows remain decoupled from spend management SaaS. As illustrated in Figure 2, most SaaS providers do not offer integrated payout products (note that we exclude large T&E SaaS such as Emburse, SAP Concur, and Travel Bank that power virtual card payouts to support employee spend use cases). Spend management SaaS have built direct data feeds from corporate card issuers to drive data reconciliation; however, most of these integrations lack deeper benefits such as in-depth spend visibility, enhanced spend administration, and real-time spend controls. FIGURE 2: Maturity of Integrated Fintech Across Spend Management SaaS Providers (select vendors, U.S. & EU) Spend Management Fintechs Gain Traction by Providing Integrated Solutions In the last few years, a new breed of fintechs has emerged that offer spend management, payments, and expense administration in a single solution (see Figure 3). Fintechs like Brex, Divvy, Ramp, Pleo, Spendesk, and others offer a unified platform that allows companies to configure spend management (e.g., manage employee spend policies, create automated approval workflows), define and create spend control rules (granular rules for employee and departmental spend), provide the payment form factors for employees to spend (physical or virtual cards), deliver greater visibility of employee spend (through real-time visibility), and simplify the expense administration process for employees (through digital capture and automated workflows). Such platforms can unify and rectify several spend management pain points whilst offering additional value-adds such as consolidation and reimbursement of expenses, invoice management, and budgeting. FIGURE 3: Value Proposition of Spend Management Fintechs Spend management fintechs’ first adopters were U.S. tech-savvy start-ups and early-stage SMBs operating in legal, media, and healthcare verticals. These verticals were traditionally underserved by large corporate card issuers, creating a clear entry point for fintech challengers. Fintechs such as Brex, Airbase, and Ramp have penetrated these underserved verticals by offering corporate card products integrated with spend management SaaS. While the SaaS toolkit is native to these fintechs, most work with next-generation card issuing processors such as Marqeta, Galileo, and i2c for technical card processing capabilities and/or program management. Recently we have seen a rapid proliferation and capital injection into European spend management fintechs such as Pleo, Spendesk, Soldo, Moss, and Payhawk who followed the U.S. lead by initially targeting SMBs and fast-moving start-up ecosystems (see Figure 4). FIGURE 4: Recent Funding for Spend Management Fintechs (select providers, USD Mil.) The functionality offered by these fintechs is becoming increasingly sophisticated compared to traditional corporate cards from global issuers. As we illustrate in Figure 5, spend management fintechs’ unique selling points are built on a higher degree of employee spend controls, vendor-level spend controls, real-time restrictions on purchase amounts, real-time transaction velocity checks, limits on purchases against merchant categories, and custom spend rules at an employee and departmental level. FIGURE 5: Traditional Commercial Card Issuers vs. Spend Management Fintech Providers Spend management fintechs also offer deeper integrations with accounting and ERP systems for automated reconciliations (often in real-time) compared to traditional commercial card issuers, which facilitates easier expense tracking across departments. Businesses can therefore administer and monitor employee spend in real time, reconcile data across systems and gain clear visibility over company spend from a single unified source. Additional value-adding SaaS capabilities provided by these fintechs include fuel/mileage reporting, VAT assistance, and invoice processing (shown in Figure 6). FIGURE 6: Overview of Select U.S. and EU Spend Management Fintech Capabilities Key Growth Areas Looking at the early and continued success of spend management fintechs, we outline below a few forward-thinking themes where we predict the next phases of growth. Expanding from serving SMBs to larger corporates While start-ups and SMBs were the first clients in this space, spend management fintechs are now developing to serve mid-market and enterprise clients. For example, in June 2022, U.S. spend management fintech Brex announced that they are pivoting away from their historical sweet spot of servicing start-ups and SMBs to prioritize larger enterprise clients. In the same period, fellow U.S. fintech Ramp reported that most of their recent growth generates from mid-market and enterprise segments as opposed to SMBs. The shift towards serving larger corporates is a logical evolutionary step, given the revenue potential from large spend volumes. However, larger corporates come with more complex hierarchical spend management needs that only bigger players with sophisticated product sets can meet (e.g., SAP Concur), in contrast to smaller fintech solutions. Convergence across spend management, procurement, and cash management SaaS While businesses (mainly mid-sized or enterprises) primarily rely on separate SaaS for spend management, procurement, and treasury/cash management functions, we observe a convergence in software needs across these functions. For example, global procurement and spend management software Coupa recently expanded into treasury, allowing its clients to manage accounts payables, spend management, and cash management/liquidity from the same platform. In the SMB segment, we also see a similar trend with U.S. AP/AR and procurement fintech Bill.com acquiring employee spend management fintech Divvy in May 2021 for $2.5 billion. This convergence of needs across such software adjacencies opens the playing field for spend management fintechs to expand into new products and verticals. Fintech product expansion from cards to bank payments, payment acceptance, and lending Spend management fintechs are expanding into new areas to power businesses outside of just employee spend through cards. In 2021, European fintech Payhawk launched a one-click bill payment and reimbursement product in partnership with fintech infrastructure provider Railsr. Another example is Jeeves, a global expense management fintech that has expanded into B2B x-border payments, working capital loans, and revenue-based financing. Spend management fintechs have gained relevancy by unifying propositions across spend management SaaS and payments in the historically underserved in the SMB segment. While early success has been promising, most of these fintechs have yet to operate at scale. With visible tailwinds towards serving new client needs and expansion into new product sets, we remain bullish on these fintechs gaining scale and driving success in the B2B payments marketplace. Please do not hesitate to contact Anupam Majumdar Anupam@FlagshipAP.com, Brittany Logan at Brittany@FlagshipAP.com, or Simone Remba at Simone@FlagshipAP.com with comments or questions.

Observations on Crypto Global crypto markets, which boomed during the COVID-19 pandemic, rapidly crashed during the last 6 months (55% erosion of market cap) The current macroeconomic environment of rising interest rates, changes in crypto regulations, rising energy prices, and recent failures of stablecoins (Luna-Terra crash) have collectively contributed to a rapid erosion of the crypto market cap On the flip side, we continue to see several global merchants and financial services firms testing markets with new crypto commerce use cases and pilots CBDCs continue to stay relevant as disruptive form factors for digital commerce Metaverse and Web 3.0 platforms are gaining prominence with leading brands, and crypto is the preferred payment method in these two environments Despite near-term challenges, payments and fintech players continue to invest in crypto due to its long-term strategic importance Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com or Pedro Giesta at Pedro@FlagshipAP.com with comments or questions.

Conventional wisdom suggests that consolidation within merchant payments is principally driven by M&A. From c.1995 to 2015, this conventional wisdom was indeed accurate. As the U.S. market matured over the last five years, the dynamics of market consolidation shifted. From 2016 to 2021, our analysis suggests that organic share movement was more impactful than M&A as a force of consolidation within the U.S. merchant payments market. Merchant payments (isolating C2B) is a lucrative but fragmented global industry. In 2021, providers of merchant payment services earned c. $65 bil. in revenue globally (excluding China) and c. $25 bil. in net revenue in the U.S*. No provider owns more than c. 12% of the global revenue pool, and no provider owns more than c. 22% of the U.S. revenue pool. FIGURE 1: Global Merchant Services* Net Revenue by Region (2021, $BN) FIGURE 2: Largest Merchant Payments Providers by Estimated Net Revenue (2021, $BN, Global and U.S.) Consolidation of this fragmented business is ongoing, as it has been for decades, and will continue for the decades to come. We commonly think of M&A as the primary driver of consolidation in merchant payments, as it was in U.S. merchant payments from 1995 until 2015. Companies such as Fiserv, Global Payments, FIS, Worldline, Nexi, and others used M&A to drive their presently leading global scale. However, in recent years, differential organic growth outcomes and the resulting share shifts have become more impactful than M&A in consolidating the U.S. merchant payments market. Flagship Advisory Partners recently conducted an analysis to measure the relative impacts of organic share movement and M&A on the consolidation within U.S. merchant payments. The results are shown in Figure 3 (M&A consolidation) and Figure 4 (organic consolidation). FIGURE 3: Revenue Share Consolidation Impact of Top 10 M&A Events in U.S. Merchant Payments (2016-2021) For the M&A consolidation impact, we estimated 10 deals in total from 2016-2021 that consolidated at least $100 mil. of net revenue. Limiting the M&A consolidation impact to only the top 10 deals does underestimate the total impact of M&A, but not significantly (and the same limitation of sample exists in our organic sample). As illustrated in Figure 4, M&A consolidated approximately 22.5% net revenue market share across the five years measured. FIGURE 4: Revenue Share Consolidation Impact of Top Organic Disrupters in U.S. Merchant Payments (2016-2021) For the organic consolidation impact, we isolated four individual disruptive companies (PayPal, Stripe, Square, and Adyen) and, collectively, the SaaS community as a general disruption segment. As shown in Figure 4, the organic impacts of share wins by Stripe, Square, and SaaS providers were significant. In total, our organic disrupter sample gained 26.2% market share from 2016 to 2021. This market share consolidation was a function of significantly higher growth for these winners than the net revenue pool. As with the M&A disruption sample, we only measure a sample of the overall organic disruption population; other smaller providers also achieve high organic growth rates. Admittedly, we also recognize that considering SaaS as a singular consolidating group is misleading as hundreds of different companies exist within this group. However, it is also the case that a relatively small number of companies, most notably Shopify, account for the majority of this share movement. In summary, based on our approach and samples utilized, organic growth disruption drove the consolidation of 26.2% of the market share, while M&A accounted for 22.5%. In a mature market such as the U.S., we may now be past the days in which M&A is the primary source of market consolidation. The same analysis (2016 to 2021) in Europe would have produced a different conclusion, but we also expect organic forces to become more impactful in the coming years relative to M&A. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com or Sameer Verma at Sameer@FlagshipAP.com with comments or questions.

INFOGRAPHIC: Traditional vs. Neobank Product Sets in North America Contact Rom Mascetti at Rom@FlagshipAP.com or Erik Howell at Erik@FlagshipAP.com for comments or questions.

Last week we attended Infinicept’s Ignite “Unconference” Conference in Denver, Colorado. Ignite featured payments and fintech experts discussing trends surrounding embedded finance and payment facilitation in the US. We summarize some of the key themes we heard at the conference below. Embedded Finance & Payments Payment Facilitation Please do not hesitate to contact Rom Mascetti Rom@FlagshipAP.com with comments or questions. Note that the views expressed above are those of conference participants, and do not necessarily reflect those of Flagship Advisory Partners.

Banking as a Service (BaaS), an innovative fintech model of powering fintechs and corporates with ”integrated financial services” (white label provision of a full stack of financial services products and supporting infrastructure and back office capabilities), has rapidly evolved as a disruptive theme in Europe. As we observed previously, SaaS (Software as a Service) and ISVs (Independent Software Vendors) saw massive upsides in integrating financial services starting with payments, a theme that investors loved. Integrated payment services matured due to Adyen, Stripe, and other PSPs offering the tech and enabling infrastructure for SaaS to embed payment services across use cases. Heavy interest from investors also supported high valuations for PSPs such as Stripe and Checkout, amongst others. Now, with the rapid proliferation of BaaS fintechs (see figure 1), we are seeing the expansion of integrated financial services beyond payments to fuel the broader needs of fintechs, corporates, and SaaS. FIGURE 1: European Landscape of BaaS Providers (2022; select players, based on office locations and license approvals) Defining BaaS BaaS has reshaped how financial products and services are accessed and distributed. BaaS fintechs offer white-labeled plug-and-play licensed financial products that enable fintechs (e.g., neobanks, lending, wallets, PSPs, etc.) and corporates (e.g., fuel, insurance, retailers, etc.) to embed these products into their own customer journeys. As we illustrate in figure 2, BaaS fintechs are equipped with modern tech and platform capabilities that enable them to layer financial products on top of the underlying licensing and back-office infrastructure. In contrast to traditional banks (which are monolithic and control the brand), core banking software (which only provide technical enablement for some products), or open banking fintechs (which mainly provide infrastructure), the multi-layered architecture used by BaaS providers allows them to offer decoupled or integrated financial products to brands on a relatively flexible basis. FIGURE 2: BaaS Platform Stack and Value Chain Comparison by Business Model Baas Gained Relevancy Serving Untapped Fintech Needs BaaS providers gained early traction by addressing the needs of fintechs and select Big Techs. BaaS offers fintechs a rapid path to market with significant technical and business case advantages over building everything in-house or assembling legacy components and partnerships. Neobanks in particular benefitted by leveraging BaaS partners and focusing on customer-facing products and customer acquisition, rather than building plumbing. As we illustrate in figure 3, several fintechs and Big Techs have entered into partnerships with BaaS providers to offer branded financial services products to their end customers. For example, Uber partnered with Green Dot Bank to issue Uber debit cards to its drivers, enabling faster disbursements, cashback rewards, and discounts for gas and car maintenance services. In another example, Revolut works with Modulr Finance in the UK to power its consumers and businesses with current accounts and payment services. FIGURE 3: Example Integrated Finance Use Cases Powered by BaaS The increasing demand for integrated financial products is also evident in the recent financial performance of BaaS fintechs, as we illustrate in figure 4, which are growing at double to triple-digit topline growth. At the same time, these fintechs are also receiving a massive injection of capital from investors to drive international expansion, product expansion, and address the needs of new corporate/SaaS verticals. FIGURE 4: BaaS Financials (Select players) Expanding from serving fintechs to corporates and SaaS Fintechs were clearly the early drivers of demand for BaaS, but large corporates (Amazon, Samsung, Ikea) are now using BaaS services. These corporates aspire to integrate fintech products into their customer user journeys to increase customer stickiness, drive brand loyalty, and benefit from new fintech revenue streams. Today, leading BaaS providers offer a broad product suite that caters to a variety of fintech and corporate needs, as we illustrate in figure 5. Corporates and SaaS providers see value in using a single provider for all their financial infrastructure needs, instead of using separate providers for payments, banking, lending, investments, and others. Not all BaaS have the same product portfolio, however. The underlying BaaS license is a key determinant of the products that can be offered. For example, having a banking license offers the possibility of offering deposit accounts, and a range of credit products. In contrast, an electronic money institution (EMI) or payments institution (PI) license enables several payment products, but not deposit accounts or lending. BaaS providers also differentiate via breadth and depth of product coverage. Solarisbank and Railsr are examples of BaaS providers with broad product coverage. Banking Circle and Modulr Finance are more focused on bank payments and virtual IBANs (though Banking Circle also enables merchant and B2B lending). FIGURE 5: BaaS Products by Verticals (non-exhaustive) BaaS fintechs are likely to power next-generation SaaS models in the near future. As illustrated in figure 6, SaaS saw massive upsides in evolving from being purely software native to specialized integrated payment players in the last few years. Stripe, Adyen, Square, and others enabled the payment infrastructure to integrate payment services. Leading SaaS players also adapted their operating models to take more ownership of payments (e.g., through a payfac license). With Stripe and Adyen expanding into broader BaaS products, and the proliferation of newer BaaS fintechs, we anticipate an evolution towards next-generation SaaS models that will drive broader integration of fintech services into their core software. We already see examples of such next-generation SaaS, for example, Shopify working with Stripe to power their merchants with money management accounts, spending cards, rewards, and payments. FIGURE 6: BaaS to Power Next Generation SaaS Please do not hesitate to contact Anupam Majumdar Anupam@FlagshipAP.com, Elisabeth Magnor Elisabeth@FlagshipAP.com or Anton Zoldak Anton@FlagshipAP.com with comments or questions.

Global Payments (“Global”), a historically acquisitive company, has recently foregone M&A in favor of using available capital for share repurchases (~$1.25B in equity repurchased to date in 2022). On Monday, August 1, Global marked a return to form with three announcements: Entered into a definitive agreement to acquire EVO Payments for $4 billion ($34 per share) Entered into a definitive agreement to sell Netspend’s consumer assets to Searchlight Capital and Rêv Worldwide for $1 billion Private equity investor Silver Lake committed a $1.5 billion investment in Global Payments in the form of convertible senior notes(1) The EVO announcement marks Global Payments’ first acquisition since its acquisition of MineralTree in October 2021. (1) Convertible note will have a cash coupon of 1%, 7-year term, and conversion price of $140.66; Global Payments intends to execute a call spread overlay to raise the effective conversion premium significantly Strategic Fundamentals of EVO Acquisition The strategic fundamentals of the EVO acquisition are strong. Namely, EVO brings scale to Global’s merchant payments acceptance business with a largely complementary geographic, customer, and distribution footprint, as well as accounts receivable (“AR”) automation software and ERP integrations that augment Global’s existing B2B solution set. As shown in Figure 1 below, EVO complements all four of the growth pillars that Global has communicated to the investment community. FIGURE 1: Complements of EVO Acquisition Across Global Payments’ Stated Growth Pillars Moreover, as shown in Figure 2, the future business (post-EVO acquisition and Netspend disposition) will be more strategically aligned with Global’s target customer sets (businesses, FIs, and intermediaries, not consumers). FIGURE 2: Global Payments Pro-Forma Revenue Mix (2022E Adjusted Net Revenue) Strategic Benefits to Growth Pillar #1: Software-Driven Focus The EVO acquisition brings ~1,500 technology partnerships and integrations that complement Global’s 6,000 ISV relationships and integrated payments assets (e.g., EVO Snap* and ClearONE) that will bolster Global’s already strong ISV enablement capabilities. Given EVO's partner-based ISV distribution model, Global should also expect little to no channel conflict with its owned assets. Strategic Benefits to Growth Pillar #2: eCommerce and Omnichannel Solutions EVO’s capabilities in foreign markets (e.g., support for 150+ currencies, European acquiring platform, dynamic currency conversion capabilities, and foreign market gateways) will improve Global’s multinational offerings. Additionally, Global Payments’ management has stated that EVO’s enterprise merchant base presents an up-sell opportunity for its Unified Commerce Platform (Global’s multinational eCommerce and omnichannel solution). Strategic Benefits to Growth Pillar #3: Exposure to Faster Growth Markets EVO has been successfully pursuing geographic expansion since c. 2012. It currently does business in 50+ geographic markets, and its international operations contribute ~60% of revenue (2021). For comparison, Global generated more than 80% of its revenue from the Americas in 2021. EVO’s footprint will significantly expand Global’s presence in international markets. Specifically, EVO will establish Global’s presence in Chile, Poland, Germany, and Greece and add to its footprint in markets such as Mexico, Spain, the UK, and the Czech Republic. As shown in Figure 3, EVO’s bank partnerships (a key tenet of its distribution strategy abroad) will support distribution in foreign markets. FIGURE 3: Headquarters of EVO’s Bank Partners Strategic Benefits to Growth Pillar #4: Business-to-Business (B2B) Payments Last year, Global announced B2B payments as a fourth growth pillar; shortly thereafter, it acquired MineralTree in October 2021, adding AP automation software to its existing B2B assets (virtual card and commercial card processing, as well as B2B software and other solutions including expense management, ePayables, payroll, paycard, and earned wage access). EVO’s AR automation solution is a natural complement, combining solutions on both sides of the buyer-supplier network. EVO’s integrations with several leading ERPs (including Microsoft Dynamics, SAP, Oracle, Acumatica, and Sage) will bolster several of Global’s B2B offerings and expose a large distribution opportunity in ERP software dealers and resellers. Market Impacts The announced transactions will have varying degrees of impact across markets and stakeholders: US Merchant Services While it is arguably the largest strategic acquisition in US merchant services since the string of mega-deals in 2019, as shown in Figure 4, the combination of Global Payments and EVO’s relatively small US portfolio does not materially shift the leaderboard. The larger consideration is Global Payments improved position for multinational merchants. FIGURE 4: Competitive Rankings of US Merchant Acquiring Leaders European and Global Merchant Services The impacts of the EVO acquisition are more pronounced in European merchant services. As shown in figure 5, the combined entity will become the 9th largest European merchant acquirer, based on 2021 European Visa and MasterCard transactions. Separately, EVO and Global Payments ranked 13th and 21st based on the same criteria. From a global perspective, the EVO portfolio adds approximately 3.5 billion total purchase transactions. Global Payments is expected to remain the 5th largest global acquirer based on purchase transactions. FIGURE 5: Competitive Rankings of EU Merchant Acquiring Leaders Issuer Processing The impacts on the issuer processing competitive landscape are minimal. Global Payments management has stated that EVO’s European bank partners present opportunities to cross-sell issuing solutions, but we view this strategy as opportunistic at best. B2B Payments We have seen a general maturation of B2B payments providers evolving their product portfolios away from point solutions toward full suite solutions. The addition of EVO’s AR capabilities fits well into Global’s growing suite of B2B solutions. That said, digital B2B payments are still a large a greenfield opportunity. EVO’s Bank Partners EVO’s bank partners (particularly those operating in regions where Global Payments already has a footprint) should consider if the pending merger presents potential channel conflicts or competitive concerns, although in our experience, in reality, there is no negative impact to a bank if its acquiring partner has well established “Chinese Walls” to separate management of its different bank alliance partners. There is also an argument that having greater scale and presence in a market via multiple bank partners adds to the acquirer’s overall capabilities and commitment to a market, which benefits its bank partners. Global Payments Shareholders The public equity market has reacted positively to Global’s announcements; Global’s stock price jumped 7% on the day of the announcement and remained positive throughout the subsequent week. Over the near term, shareholders should of course, pay keen attention to regulatory and EVO shareholder approval of the acquisition, as well as to Global’s ability to meet 2022 earnings projections amid the Netspend disposition (and exit from Russia). Longer-term, shareholders should be mindful of Global’s ability to: Manage increased leverage (net leverage is expected to be approximately 3.9 times EBITDA after the close of both transactions) Realize synergies (Global is forecasting to generate $125M in run-rate EBITDA synergies within two years of the EVO transaction) Continue to realize scale benefits given additional platform and gateway complexity, post-EVO acquisition That said, the Global Payments management team has a successful track record of managing integrations of this size (and bigger). EVO Deal Commentary and Outlook Only time will tell if Global Payments can deliver the $125M in run-rate EBITDA synergies that it is forecasting. Still, overall, we are bullish on the strategic fundamentals of the EVO deal. Additionally, Global Payments appears to have achieved a favorable price (the 10x Enterprise Value / 2023 Calendar EBITDA multiple is modest compared to past comparable scale acquisitions) presenting a moderate hurdle rate to positive ROI. Looking forward, the investment from Silver Lake also provides ample dry powder. We expect Global to be an active participant in future M&A. Please do not hesitate to contact Peter Taylor at Peter@FlagshipAP.com or Erik Howell at Erik@FlagshipAP.com with comments or questions.

INFOGRAPHIC: PayPal Q2 '22 - Strong Results from a Maturing Business Contact Pedro Giesta at Pedro@FlagshipAP.com or Erik Howell at Erik@FlagshipAP.com for comments or questions.

This article is adapted from the downloadable guide in slide format. We suggest downloading the slides via the "Download Article PDF" button in the upper right. 3D Secure has been on the market for some time, but PSD II regulation brought significant updates which provide optionality for issuers. FIGURE 1: Summary of 3D Secure Source: Flagship Advisory Partners Research Adoption of 3DS 2.X is low across many European countries and many 3DS 2.X UXs are clunky, resulting in low authentication success rates. FIGURE 2: Transactions Using 3D Secure Version 1.0 & 2.x (2022; % of transactions) Source: Ravelin PSD2 and global payment regulation map 2022 FIGURE 3: Authentication Success Rate by European Country (2022; % of 3DS 2.x transactions) Source: Ravelin PSD2 and global payment regulation map 2022 SCA requirements can partially help explain some observed downturns in card usage online between 2019 and 2020. FIGURE 4: Online EU Payment Tool Usage (weighted average, in %) Note: Other consists of Invoice payments, Cash-based payments. Weighted Average Payment Tools consists of Belgium, Denmark, France, Germany, Italy, Netherlands, Norway, Poland, Spain, Sweden, UK. Source: Global Data Survey FIGURE 5: Total EU e-Commerce Turnover (2016-2020; in € mil.) Source: Global Data Survey Issuers can significantly reduce abandonment and boost e-commerce volume by setting up SCA and UX properly. FIGURE 6: Issuers and Acquirers Benefits from Proper Setting of 3D Secure Rules Source: Flagship Advisory Partners Issuers can drastically reduce the number of SCA-required transactions by setting up detection of out-of-scope transactions and by using exemptions. FIGURE 7: Illustrative Moderately-Optimistic Scenario of % of Transactions Requiring SCA Source: Visa, Flagship Advisory Partners analysis The first step to improving UX is to identify out-of-scope transactions and decrease the rate of failed or abandoned transactions. FIGURE 8: Out of Scope Transaction Types Source: Flagship Advisory Partners After flagging out-of-scope transactions, the second step to improving 3DS UX is to determine 3DS exemption protocols. FIGURE 9: Exemptions for Strong Customer Authentication Source: Flagship Advisory Partners Issuers should invest in 3DS UX to improve the authentication process for customers. FIGURE 10: Summary of Recommendations for Better 3DS UX Source: Flagship Advisory Partners Recurring transactions are out of PSD2 scope, but issuers and acquirers need to adapt their systems to support these types of transactions, otherwise all of them will fail. FIGURE 11: Recommendation #1 - Support Recurring Transactions Source: Flagship Advisory Partners Issuers and acquirers can exempt ‘Low Value Transactions’ <€30. Issuers are better positioned for this type of exemption as they have a velocity limit tracker. FIGURE 12: Recommendation #2 - Low Value Exemption Source: Flagship Advisory Partners Only Issuers can apply trusted beneficiary exemptions based on fraud exposure. It is an easy, effective, and safe exemption which will ensure a higher approval rate and reduce the authentication costs. FIGURE 13: Recommendation #3 - Support Trusted Beneficiaries Source: Flagship Advisory Partners Rules for transaction risk analysis are difficult to set up and require long-term analysis, but can significantly decrease abandonment and improve the customer experience. FIGURE 14: Recommendation #4 - Support Transaction Risk Analysis Source: Flagship Advisory Partners Transaction Risk Analysis is an efficient tool to save authentication cost and avoid the need for SCA. With more data, issuers can improve decisioning. FIGURE 15: Recommendation #5 - Combine Payment and Card Databases for TRA Source: Flagship Advisory Partners Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com or Stanislav Dubsky at Stanislav@FlagshipAP.com with comments or questions.

Flagship Advisory Partners’ Executive Interview Series provides readers with exclusive insights from thought leaders in the payments and fintech industry. The series offers diverse perspectives on everything from market developments to strategy to commentary on developments in the industry. This edition puts the spotlight on open banking developments in Europe. Flagship Advisory Partners met with Todd Clyde, CEO of Token, a leading open banking fintech, to learn more about Token’s perspective on developments in open banking and how Token is addressing some of the challenges in open banking payments and data services. 1. It has been four years since the open banking regulations were introduced in Europe. How would you assess the market adoption of PIS (payment initiation services) today? It has taken quite a bit of time, but PIS is finally picking up now. The initial adoption was slow, mainly because the regulations were implemented slowly. For instance, PSD2 regulations were postponed twice in Europe. Secondly, until the first half of 2020, banks were still not ready with their API implementations and therefore, the early open banking APIs were very basic and not usable. If you look at the adoption levels today, the UK has stayed at the front. The UK’s OBIE [ed. Open Banking Implementation Entity, a standards setting body] standardized access to banking rails and this has accelerated the growth of fintechs that can offer PIS services. Adoption in Europe has been good so far but is still a developing story. Markets like the Nordics, the Netherlands, Germany, Poland have remained at the forefront with higher open banking payment volumes. In the last 12 months at Token, we also saw a 10x growth in PIS payment volumes across these markets. I don’t think anyone is questioning the viability of open banking payments anymore; however, there is still room for market adoption to develop further. 2. What are some of the industries where open banking PIS has taken off / been widely adopted? What are some of the use cases that PIS is addressing today? Merchants like open banking payments because they offer great UX at the checkout, come at economical acceptance cost points, and generally offer higher conversion rates with low risk of fraud and chargebacks. Early adopters of open banking payments have been fintechs, challenger banks, and merchants in the high-risk verticals, for example, gaming and crypto. Over the last few years, we have seen more traditional industries such as utilities, public sector, non-profit and fund-raising platforms also adopting PIS across use cases. Several wallet providers offer open banking payments as a payment method for wallet top-ups. According to our estimates, half of wallet top-up volumes are via open banking enabled A2A payments. Today, a kind of herd mentality has kicked in where every merchant wants to offer a ‘pay by bank’ button at the checkout. It is not surprising that we see leading PSPs such as Stripe, Adyen, and others offering an open banking payment method, next to cards and other alternative payment methods (APMs) in traditional e-commerce verticals. Much of the success in open banking payments will come from general e-commerce merchants who are able to embed open banking as part of their checkouts. 3. Open banking payments been slow to be adopted in other mainstream e-commerce verticals. Would you agree with this statement? I think adoption of A2A payments in e-commerce environments varies across markets. For example, in India, the Universal Payments Interface (UPI) has been a huge success, powering open banking payments in traditional ecommerce. We see a similar trend in Brazil as well. According to a recent study by Token[1], 81% European consumers are quite open to using open banking as a payment method in online commerce, and 46% have made an A2A payment in the last 3 months. In the same study, we also discovered that instant bank transfers are a top 5 payment method across European markets. Therefore, there is an ample demand. Perhaps the issue lies on the supply side. Banks still control the UX for open banking payments, and European banks have followed their own paths and standards to open banking access. This can at times impact the quality of the user experience. 4. How has AIS (account information services) taken-off? What problems does AIS solve today? AIS took off much faster than PIS. The initial use cases supported were oriented towards data aggregation, usually around personal financial management (PFM) or cash management tools. Every high street bank built a PFM tool for consumers and businesses to keep record of all their financials in one place. Several fintechs such as Tink, MoneyHub, Yolt, and others emerged that offered white-label PFM capabilities. Today, PFM is an oversupplied market and kind of dead. The main use cases we see around AIS today are income checks (for lending), credit assessment (for investments, mortgages), KYC and onboarding (getting insights from credit scores, gambling history, others). We also see AIS being used in support of payments (e.g., credit assessment when applying for a credit card). Identity verification is another example of a great use case that will soon become hot. There is a white space in identity verification services, which is different to KYC/KYB services. 5. As open banking is still emerging and the potential is not yet fully fleshed out, what is needed to ‘crack the code’? I think we need a combination of regulatory forces and market innovations to solve the current limitations of open banking. On the regulatory side, the regulators have a role to play to fix some of the gaps left by PSD2 and ensure that regulations are enforced and implemented consistently across the markets. At the same time, open finance[2][3], the next step in open banking regulations, can act as a catalyst for market participants to create an ecosystem of financial access and solve the current limitations of API access standardization, IBAN discrimination and consumer/business identity. I also anticipate that market participants like ourselves would play an important role in contributing to such an ecosystem. 6. How is Token trying to be at the forefront of open banking? Could you walk us some of your products and services and the type of problems you are solving today? We want to be pioneers in solving the existing pain points in A2A payments via the latest payments technology and innovation. A2A payments have existed in the past but the barriers to adoption have been high. Now, with open banking APIs, we have the toolkit to make access to inter-bank networks accessible across the markets. For the first time, we are able to offer universal reach and great UX at lower costs through a single API. Token powers the underlying infrastructure for open banking payments. We offer broad connectivity to banks in the UK & Europe, and our platform powers businesses to launch and manage A2A payment capabilities. We are not trying to create an acceptance payment mark (e.g. like Trustly). We are not selling directly to merchants, but rather to PSPs who would like to benefit from our white-labeled proposition. In fact, many PSPs (e.g. Paysafe, Nuvei) are our clients. Token also offers AIS and data aggregation services with broad coverage for multiple use cases. For instance, a large credit scoring company uses Token’s AIS for their credit assessments. 7. Token recently received funding from several investors. What are your plans for the future? Any themes that you have been prioritizing (geo expansion, product expansion, others)? Indeed, we have just raised our Series C funding earlier this year, supported by both existing and new investors. We are looking for efficient growth, but not growth at all costs. Therefore, we are not making any drastic changes to our business model or current strategy. Our immediate priorities are to continue to build our platform; we’ll soon be adding premium products and functionality. There is a long tail of banks that we have on our radar, and we will continue building connectivity. At the same time, our teams continue to hire the best talent in the market to help us grow. We are also looking to expand beyond our existing markets and have plans to expand outside of Europe next year. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com with comments or questions. [1] Research reference: Who will pay by bank? Token and Open Banking Expo link: https://token.io/blog/who-will-pay-by-bank [2]fhttps://www.ukfinance.org.uk/policy-and-guidance/reports-and-publications/exploring-open-financehf [3]fhttps://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13241-Open-finance-framework-enabling-data-sharing-and-third-party-access-in-the-financial-sector_en

We summarize below some of the key themes discussed during the MPE conference in Berlin. Core Payments Broader Fintech Crypto and the Metaverse Please do not hesitate to contact: Erik Howell (Erik@FlagshipAP.com), Yuriy Kostenko (Yuriy@FlagshipAP.com), Anupam Majumdar (Anupam@FlagshipAP.com), Charlotte Al Usta (Charlotte@FlagshipAP.com), or Dan Carr (Dan@FlagshipAP.com) with comments or questions.

Russia launched a full-scale military invasion of Ukraine on 24 February 2022 and with it triggered a new era of geopolitical tensions and economic repercussions. In response to Russia’s aggression, the West slapped Russian entities and individuals with a number of sanctions with unprecedented scope and speed. The payments sector became a tool used to punish Russia for its invasion of Ukraine. Russia’s exclusion from SWIFT and the suspension of operations by international card schemes have become a cautionary tale for the rest of the world. This event inevitably impacted the payment provider industry, yet not necessarily in obvious ways. In this briefing, we summarize the effect the War in Ukraine has had on the payments industry in Russia and across the globe. Russia’s Exclusion from SWIFT The first major payments tool used against Russia came in a form of exclusion from the global payment system SWIFT, cutting off Russia’s ability to trade in the international market. Prior attempts by the Russian Central Bank to create its own alternative to SWIFT, a transfer system called SPFS, has largely failed, with this network assembling only a small list of mainly Russian banks. Although Russia is working on a new blockchain payments system to replace SWIFT and attempting to establish a lifeline to China’s own SWIFT copycat, CIPS, there are no short-term solutions for the Russian government. Crypto currency could eventually be an alternative to circumvent SWIFT. Crypto, however, is volatile (see latest bitcoin performance in the figure 1 below), and the Kremlin is unlikely to rely on a payment form that it cannot directly control. Other markets hit by high inflation or currency devaluations, such as Nigeria, have been seen to turn to crypto, although consumers are often risk-averse, crypto acceptance is still limited, and physically paying with crypto can be challenging. FIGURE 1: Bitcoin to US Dollar Price (USD) Suspension of International Payment Schemes in Russia To comply with the sanctions imposed on Russian financial system, most international card networks suspended their operations in Russia. Giants including Visa, MasterCard and American Express no longer offer payment processing and support to Russian banks, and halted processing of transactions by Russian-issued cards, effectively disabling cross-border operations. The Russian Central Bank is now leaning on a politically friendly Chinese alternative, UnionPay, to help close the gap in international card payments. UnionPay would need to approach this relationship with caution, however, given that its system uses US dollars in its operations and its cooperation with Russian banks could be threatened with fines or worse. Domestically, the impact of suspended international schemes is limited as many Russian cardholders can simply shift to a local card scheme, MIR. This scheme was introduced by the Russia’s National Payment Card System following sanctions post Kremlin’s annexation of Crimea back in 2014. MIR is already the second largest card issuer in Russia and even before the war with Ukraine accounted for c. 37% of all card payments in the market (see Figure 2 below). The Russian Central Bank was ultimately successful in defending domestic digital payments, although outside of Russia, MIR has limited acceptance in only a handful of small neighboring markets such as Belarus and Armenia. Few Russians considered opening a card account in neighboring Asian countries to be able to continue making payments internationally, but for most this capability has been blocked. FIGURE 2: Select Pre-War Card Payment Statistics in Russia The magnitude and velocity of sanctions on the Russian payments system has left many nations concerned. Albeit not always politically motivated, many nations previously established local debit card schemes and interbank networks with local data autonomy and control (see Figure 3 below). Such a position de-risks dependency on global card networks, especially US-based international schemes including Visa and MasterCard. As result of sanctions on Russia and the relative success of Russia’s domestic card scheme, other governments, especially those unfriendly to the West, are likely to consider developing their own domestic payment systems. The emergence and development of local schemes and data sovereignty rules will certainly add complexity for multi-national payment providers. FIGURE 3: Select Key Local Debit Card Schemes Impact on International Payment Service Providers With the suspension of Visa/MasterCard, the Russian payments market became inaccessible to cross-border payment service providers (“PSPs”), however, the damage to the international PSP community has been minimal. Even before the war, Russia accounted for only 1% of global digital payments. Restrictive local regulatory requirements and a long list of local alternative payment methods have also kept over 95% of Russian payments in the hands of home-grown providers. Furthermore, the Russian payments market lost appeal to multi-national PSPs due to the departure of many multi-national merchants, who were pressured by consumers and investors to unwind operations in Russia. The challenges facing payment providers are not as obvious as they may seem. Not all PSPs have the necessary technical capabilities to react promptly when national governments call for action to enforce their sanctions. A large hidden impact is the increased prominence of rigid Know-Your-Customer (“KYC”) and Know-Your-Business (“KYB”) monitoring tools that many players do not have in place. As Western sanctions continue to expand, regulatory oversight will intensify, with a particular focus on Russian Ultimate Beneficiaries. These developments are likely to prompt adoption of digital KYC and KYB tools that many PSPs have yet to put on an investment agenda. A more obvious impact the War in Ukraine will have on the PSP community is the deceleration of payments volumes, particularly in European markets. As Russia continues to use its energy supplies to apply pressure on Brussels, consumers throughout the European Union face rising energy bills and their confidence continues to decline (see figure 4 below). Many consumers are expected to cut down on spending in the near-term. Coupled with the recent rupture of the Covid e-commerce bubble (see Flagship’s infographic: COVID e-Commerce Bubble Has Officially Burst), payment providers are unlikely to see stellar performance in the coming months. FIGURE 4: Consumer Confidence Index in the European Union Key Observations The most immediate impact on multinational payment providers from Russian’s war on Ukraine will be the resulting economic uncertainty and direct impacts on Western consumers and businesses. In the near-term, multinational payments providers are likely to speed adoption of more robust digital KYC and KYB tools to enable them to better comply with sanctions and track ultimate beneficiaries. Additionally, despite the current challenges in the crypto market, PSPs are likely to increasingly consider adding crypto acceptance to meet growing consumer demand. The longer-term impacts of Russia’s invasion of Ukraine are likely to be the most meaningful. Russia’s rapid exclusion from the international payment system will prompt many governments and national banks to assess the extent of their dependency on global financial networks, particularly those that can be influenced by the US, and to reconsider the associated risks. The knock-on effect of domestic payments data sovereignty has already become a key discussion topic, and many national authorities are likely to build and promote the use of their own local card schemes and inter-bank networks, mandate connectivity to domestic switches, and increase data sovereignty requirements. As a result, international payment providers will face increased complexity demands on their product development roadmaps. Please do not hesitate to contact Yuriy Kostenko Yuriy@FlagshipAP.com with comments or questions.

It is a fool’s errand to forecast inflation under the uncertainty of today. But we will go out on a limb and predict that elevated inflation is going to persist for quite some time and likely will contribute to a recession. Payments and fintech executives are in for a crash course on the challenges of inflation, even stagflation, a challenge not seen in Western markets in 40 years. Inflation is Here, Not Going Away Soon There are many reasons to expect inflation to continue. Notwithstanding the recent actions of the Fed and other central bankers, demand still seems quite robust. Even considering the recent dip, retail sales have held up nicely on the year, and this despite a year of negative real wage growth (see figures 1,and 7 below). The negative performance results announced on major retailer earnings calls (Walmart, Target), of late, were not driven by declining sales but by high inventories, staffing issues, and inflation particularly in transportation. FIGURE 1: U.S. Retail Sales Growth vs. Inflation (quarterly, 2017- May 2022) US consumer savings, bulked up by government transfer payments and pandemic buying behavior, are still high relative to historical norms. Consumer real earnings, as shown in figure 7 are also healthy on a historical basis, although trending down given the impact of inflation. The negative US GDP figure in the first quarter was heavily driven by an increased trade deficit: imports were up dramatically over exports, a phenomenon driven by strong consumer demand in the US. It is also important to note that despite the rate increases at the Fed, US real interest rates are still dramatically negative. As we write this, the 10 year T-note yield sits at 3.3% which, depending on which inflation measure you like, is c. 500 basis points underwater. Plus, the very recent reversal of the expansion of the Fed’s balance sheet (see figure 2) has an extraordinarily long way to go. The Fed is still stimulating the stuffing out of the economy. FIGURE 2: U.S. Federal Reserve Balance Sheet (USD in trillions, 2017-2022) The macro-economic supply side remains constrained with no clear break on the horizon from current geopolitical risks and commodities disruption arising from the conflict in Ukraine and COVID lockdowns in China. Many non-US markets are facing some variant of the same set of issues. The UK, for example, is sporting the highest inflation rate that nation has seen in 40 years (see figure 4). There’s every reason to be a little reflective about inflation and its impact on the payment acceptance market. FIGURE 3: U.S. Annual Inflation Rate (1980-2022) FIGURE 4: U.K. Annual Inflation Rate (1980-2022) If Sustained, Inflation a Major Challenge As shown in figures 3 and 4, it has been 40 years since we last saw today’s inflation rates. This means that virtually all fintech executives in western markets have never had to manage inflationary pressures. We expect inflation to impact the payments industry in several ways. Most fundamentally, buoyant consumer spending cannot persist in a protracted period of declining real incomes, even if we avoid a recession. We are likely to see all sorts of distortions starting with a substitution in what consumers buy, impacting discretionary categories and premium categories to the greatest degree. We will start to see the impact of declining consumer buying power in portfolios overweighted in these categories. Of course, the bigger risk is simply that consumers pull back, a possibility also tied to the actions of the Fed (and more on that later). Despite a 30-year track record of declining unit expenses from scale and technology-related efficiency, payment processors will not be immune to the expense push of inflation, particularly as it relates to staff expense. On the revenue side, fee-based pricing and transactional pricing does not have the automatically adjusting quality of ad valorem pricing as dollar volumes rise artificially due to inflation, and fee and transaction pricing now represents a strong majority of revenue in the industry, vastly unlike the last time the economy had appreciable inflation (issuers characteristically remain well protected due to the high ad valorem components of interchange.) Given this dynamic between ad valorem and transactional/fee pricing schemes, the purchasing power of revenue is roughly eroding at the rate of 4% a year at current inflation levels, which combined with inflation of, let’s say, 6% on the operating expense line, may equal a margin issue that will need attention in a few quarters. It will take a few quarters, though, for these downsides to be impactful. Ever the innovators in pricing, acquirers may have a shift in pricing strategy or structure if inflation does persist at or near current levels. In order to illustrate the potential business impacts of inflation or stagflation, we created a theoretical payment processing P&L. Across figures 5a, 5b, and 5c, we walk through this business as it experiences hypothetical shocks of first inflation, and then secondly recession. This is admittedly an overly dramatic and overly simplistic analysis. We assume no ad valorem pricing with zero pricing leverage to pass on cost increase. We also assume no control or expense actionability. The theoretical executive of this business is purely along for a bumpy macroeconomic ride. Figure 5a introduces our illustrative business, who is benefiting from scale economies resulting in high-single-digit EBITDA growth. Inflation is low, so real money returns are not substantially different from nominal returns (5% vs 4%). FIGURE 5a: Illustrative Payment Processor P&L – Forecast, No Macroeconomic Disruptions In figure 5b, we model our processor suffering from the impacts of 8% inflation. Our business is imagined to be locked-in on revenue with no ad valorem pricing upsides and no pricing leverage to renegotiate higher prices (-2% annual price pressure continues). Our analysis assumes that half of the processors’ costs are subject to inflation (growing at 12% after inflation), and half of the costs are not subject to inflation. EBITDA expressed in 2021 dollars are now negative with a -5% CAGR. FIGURE 5b:Illustrative Payment Processor P&L – Inflation Impact Finally, in figure 5c, the wheels are coming off the business now impacted by both 8% inflation and a reduction by half of topline growth due to headwinds from a recession. Again, our illustration simplistically assumes no way to improve the circumstances, for example, by taking fixed cost out of the business. Real-money EBITDA growth is now an ugly -14%. FIGURE 5c:Illustrative Payment Processor P&L – Inflation & Recession Impact While our hypothetical example is just that; this simple example illustrates the potentially dramatic impacts of inflation and recession, particularly without appropriate management actions. Recession a Likely Result of Dramatic Interest Rate Increases Many of the more significant risks arise from possible unintended side effects of the Fed’s actions. Let’s take the Fed at its word, assume other central banks around the world have a similar resolve, and assume that we’re in for a round of interest rate actions with the intent of throwing a wet blanket on demand. In business as in life, corrections are frequently over-corrections, and a recession in late 2022 or 2023 is a rising risk. We have ways to go before we are in real recession, but the probability of a downturn is certainly higher than it was in February before the current cycle of interest rate actions. Payment card volumes in the 1990’s was relatively uncorrelated to the macro-economy given the heavy displacement of cash and check means of payment. Today, consumer electronic payment volumes are highly correlated to macro-economic consumption measures. If central banks crash- land their economies, consumer spending and payment card volumes will follow, impacting all in the industry to varying degrees. Other economic ills caused by the Fed’s cure are already apparent. Asset values are repricing, clearly, and not just in equities markets (see ‘Infographic: COVID E-Commerce Bubble Has Officially Burst’). A fair valuation of an asset in a negative 800 basis point real interest rate environment is going to be worlds different if and when interest rates approach par. Investors are also clearly rebalancing their investments away from risk assets and look no farther than Nasdaq for evidence. Cryptocurrencies are proving not only that they are correlated to other risk asset categories but also that they have a high Beta. Of course, we also expect to see a pretty direct and observable impact on valuations in the private market, impacting mergers & acquisitions in our industry and adjacent businesses. As in past recessions, the biggest manifestation of this change in valuation may just be the deals that don’t get done, as buyers and sellers fail a meeting of the minds on value - failed acquisitions and transactions that don’t get to the starting gate. However, we may see transactions clear simply at less lucrative levels, from the seller’s point of view, than in recent years. Another big impact on the acceptance industry of changing valuation and investor risk appetite will be in the funding environment, which is the life blood of so many of the fintechs who have been central to innovation and competition in recent years. Might we see a return to the vocabulary of the early 2000’s – cash balances and burn rates and all the rest? Credit Backdraft an Inevitable Outcome of Recession If we do arrive in a recession a few quarters from now, credit losses will follow. As shown in figure 6, consumers are not in an unreasonably bad position today, but this could change quickly with declining real wages as shown in figure 7. Credit risk already appears to be deteriorating by some measures, and a sustained decline in real wages will surely worsen the problem in coming quarters. It will be interesting to see how BNPL performs in a downturn; given that not all of these companies have experienced recessions in the past. Klarna’s announced 10% staffing reduction is evidence of hawkish expectations. FIGURE 6: U.S. Consumer Debt as a Percentage of Disposable Income (1990-2021) FIGURE 7: U.S. Median Weekly Real Earnings* We will see elevated losses in small business lending as well, where fintechs have been gradually escalating scale since the massive pullback seen in 2008. Hereto, many of these companies have not been properly stressed having started business after 2008. Acquirers are also likely to experience elevated losses as recessionary and inflationary pressures drive increased business failures. Our last recession was 14 years ago, and in the past 14 years, a few things have changed. For example, the payfac phenomenon has created a material increase in settlement intermediaries and therefore, points of possible settlement failure. In a bad recession, it would be prudent to assume that some of these businesses go down (it is dead easy to find non-compliant settlement environments in the payfac world.) Brace Yourself Some of these risks feel common to recessions weathered in recent decades. The phenomenon that nearly none of us have seen, though, is the coincidence of high inflation, a truly wacko interest rate environment, and a recession. As with most stressors in business, by the time you can see the impact on your numbers, it will likely have been too late to take the easier corrective actions. Please do not hesitate to contact Joel Van Arsdale Joel@FlagshipAP.com with comments or questions.

We summarize below some of the key themes discussed during the Money20/20 Europe conference. Key Themes & Insights Please do not hesitate to contact: Joel Van Arsdale (Joel@FlagshipAP.com), Erik Howell (Erik@FlagshipAP.com), Yuriy Kostenko (Yuriy@FlagshipAP.com), Anupam Majumdar (Anupam@FlagshipAP.com), or Charlotte Al Usta (Charlotte@FlagshipAP.com) with comments or questions.

Unless you are Stripe, successful ISV/SaaS channel strategies require focus. ISVs are vertically or functionally specialized, resulting in a broad array of market segments. Flagship developed a simple framework to focus an ISV channel strategy, which we describe below. ISV Partner Targeting – Flagship’s Framework Flagship’s ISV partner targeting framework is founded on two principles: ISVs can be categorized by payments maturity/size (3 categories: y-axis on the below figures) PSPs can be categorized by competitive positioning (3 categories: x-axis on the below figures) The first step in developing an ISV partnership strategy is selecting a vertical and/or horizontal target market. This is an important strategic decision that needs to consider multiple factors, such as merchant market characteristics, card usage trends, PSP competition, ISV competition, merchants’ needs, ISVs’ needs, and a PSP’s own capabilities, among others. Selecting a target market broadly defines the “who” of a PSP’s ISV partnership strategy. “Who” could include potential partners, end-user merchants, and relevant payments competitors. The next step is refining the “who”: which ISVs to target, specifically, and determining “how”: key positioning statements and execution actions. PSPs should closely examine ISV and PSP competitive landscapes when forming ISV partnership strategies. FIGURE 1: ISV Partner Targeting – Flagship’s Strategic Framework, ISV Maturity & Size Explanation 9-Cell Matrix: Refine the “Who” & Define the “How” We visualize our simple framework as a 9-cell matrix, as shown in Figure 2. Each cell represents a combination of ISV typology and behavior and the nature of the PSP competition. Flagship uses the framework to segment the market into distinct groups of ISVs requiring different sales approaches and to estimate where the largest market opportunities exist. Forming a deep understanding of the ISVs and competitors in each cell enables PSPs to understand their customer needs and how to position to win ISV deals. For instance, the sales approach a PSP would use to target an ISV in cell “C” of Figure 2 below (i.e., a relatively immature ISV partnered with a Tier 3 PSP) should differ from the approach used for an ISV in cell “G” (i.e., a payments-savvy ISV partnered with a market-leading PSP). FIGURE 2: IISV Partner Targeting – Flagship’s Strategic Framework, Competitive Mapping Refining the “who” and determining the “how” requires the investigation of these questions: ISV Partner Availability 1. Who are the ISVs at various stages of payments maturity? 2. How large are the ISV populations at the various stages of maturity? 3. Are there ISVs with meaningful market shares or is the market fragmented? 4. What type(s) of ISVs can you serve now? 5. What type(s) of ISVs do you aspire to serve? What do you need to achieve this goal? 6. How quickly will less-payments-mature ISVs become more mature? PSP Competition 1. Which competitor types (e.g., Tier 2) are targeting different types of ISVs? 2. Are there competitors with a large share of a specific type of ISV? 3. How did Market Leaders attain success? Can the winning model(s) be replicated and/or improved? 4. Which competitors may not be adequately serving the needs of existing ISV partners (e.g., are Market Leaders neglecting small ISVs?)? 5. Where can you logically displace existing PSP partners and why? Greenfield ISV Opportunities 1. How large is the greenfield ISV opportunity? 2. How many new ISVs are entering the market annually? 3. Are PSPs actively targeting the greenfield opportunities? If so, how? If not, why? 4. How can you best approach the greenfield opportunity? We illustrate how our framework can be leveraged in the Restaurant vertical here: FIGURE 3: ISV Partner Targeting – Flagship’s Strategic Framework, Restaurant Example In the Restaurant market, Tier 3 PSPs (with few exceptions) generally seek out less-payments-savvy ISVs (i.e., those in cells “B” and/or “C” rather than the orange-shaded cell “A” in Figure 3 above). Larger ISVs tend to partner with larger PSPs that provide broader capabilities and scale efficiencies. Additionally, a strategy targeted to the long-tail of small ISVs (like the yellow-shaded cell “C”) is challenging given the low lifetime value of these partner relationships. Competition focuses on larger deals, although switching rates are low with scaled ISVs (adding incrementally new payment partners is far more common). There is an interesting middle-market for ISVs (“somewhat payments-savvy”; green-shaded cell “B” in Figure 3) that tends to be overlooked by the leading PSPs but is capable of driving good profitability. This segment of the market can be won via verticalized one-to-one sales focused on driving higher payments revenue generation for partners. In Summary PSPs that invest time into targeting and deeply understanding their core ISV market segments are better armed to win deals in the ISV channel. Flagship has extensive experience supporting PSPs with developing vertical and horizontal market strategies as well as ISV partner targeting strategies. We would welcome the opportunity to discuss your unique market positioning and opportunity. Please do not hesitate to contact Scott DeHaven Scott@FlagshipAP.com or Stephen Ford Stephen@FlagshipAP.com with comments or questions.

INFOGRAPHIC: Strong ’22 Growth Momentum in B2B Card Spend Please do not hesitate to contact Frank Martien (Windward Strategy) frank@windward-strategy.com or Pedro Giesta Pedro@FlagshipAP.com with comments or questions.

INFOGRAPHIC: COVID e-Commerce Bubble Has Officially Burst Please do not hesitate to contact Joel Van Arsdale Joel@FlagshipAP.com or Pedro Giesta Pedro@FlagshipAP.com with comments or questions.

INFOGRAPHIC: Regulatory Headwinds for BNPL Please do not hesitate to contact Erik Howell Erik@FlagshipAP.com or Elisabeth Magnor Elisabeth@FlagshipAP.com with comments or questions.

Technology breeds efficiency, at least under normal circumstances. U.S. card acceptance falls into the unusual circumstances category. Despite having the world’s second largest digital economy (behind China), the U.S. has the highest costs of payments (as shown in Figure 1) among developed global markets driven primarily by the high cost of cards. There is a long history behind the high cost of cards in the U.S., and a lot of atrophy towards change. However, we do not see this lasting forever. We believe that market forces will eventually disrupt the cards ecosystem that drives the high costs of payments. In fact, we can already see some of this disruption writing on the wall. FIGURE 1: Average Credit & Debit Card Acceptance Costs in Select Regions 1Estimated market average for U.S. V/MC cost allocation Source: Flagship Advisory Partners estimates How Did the U.S. Get to Such Persistent High Cost of Payments? U.S. interchange and scheme fees have increased for many years. Visa and MasterCard compete for issuing business in part, based on price. Introducing new, more expensive interchange categories, and increasing merchant acquiring scheme fees in order to fund incentives for issuers has been a winning strategy for many years. The price-taking merchant acceptance side of the ecosystem has no real means of defense; deciding not to accept Visa or Mastercard is not practical. Regulators appear to have little appetite to re-engage on further regulation of interchange following the Durbin amendment that regulated certain categories of debit card interchange more than a decade ago. Such government price setting is generally frowned upon in the U.S. and some saw the Durbin amendment as questionable public policy (i.e., simply a transfer of wealth from one powerful set of companies to another with little benefit to consumers or small businesses). Seeking Out Alternative Payment Methods U.S. merchants are constantly on the lookout for tactics to reduce the high costs of card acceptance. Finding and supporting lower cost alternative payment methods is the easiest way offset the cost of cards. Figure 2 illustrates the landscape for U.S. payment methods illustrating relative cost and range of usability. FIGURE 2: U.S. Payment Method Landscape Source: Flagship Advisory Partners market observations The challenge today is that there simply is no silver bullet alternative payment method (‘APM’) that provides low costs, robust acceptance enablement, strong UX, and controlled risk. Many U.S. APMs are used today for a narrow set of use cases (depicted as the range on Figure 2) or have other flaws. • ACH and e-checks can be lower cost but lack broad acceptance coverage. • Real-time banking rails have yet to translate into mass acceptance of bank payments (Zelle, which rides the RTP rails, can be used for C2B, but is driving little to no C2B volumes today). • PayPal has not yet pushed to compete on price with cards, for example by enabling Venmo linked to bank payments for merchant acceptance. In fact, PayPal maintains a symbiosis of sorts with the card schemes, including strategic partnerships with Visa and MasterCard. • Cryptocurrency payment acceptance is still nascent with a fairly broad range of costs (1%-2.5%), but we expect major acceleration in crypto payments (we illustrate the growth of C2B crypto commerce here). • BNPL is one of the most expensive payment methods for merchants to accept, but it demonstrates its utility by reducing consumer purchasing burden for high-value transactions. • Lastly, other mobile wallets and payment methods also rely primarily on card funding, which makes them as costly or more costly than cards to accept. While no one of these APMs is a threat to the cards ecosystem today, each is nibbling at the edges with a potential for longer-term disruption. At the heart of disruption potential is the evolution of real-time banking infrastructure. Real-time bank payment rails are an ideal foundation for development of APMs as seen throughout the rest of the world. Any number of scaled mobile apps/wallets (PayPal, CashApp, Dunkin, etc.) could use such rails to displace the costs of cards. The viability of real-time payments in the U.S. is still challenging, however. The core infrastructure is now largely in place. RTP, operated by The Clearing House that also enables much of the U.S. ACH system arrived in market five years ago and in 2021 processed more than 1.8 billion transactions. FedNow, operated by the Federal Reserve, is a newer infrastructure set for go-live in 2023. U.S. banking remains highly fragmented however (there are more than 4,000 FDIC insured banks), which limits the pace of any form of banking rails rollout. In a recent study by Volante Technologies, only 15% of 160 surveyed banks and credit unions were connected to The Clearing House’s RTP network, citing that a new payment type was a complex proposition to implement and/or caused fraud/security concerns since RTP transactions are irrevocable after settlement. Note however that a majority (70%+) of deposit accounts (via the largest banks) reside with banks that are technically positioned to support RTP. RTP is also only a bank clearing network and not a full payment scheme. Others will need to deliver the full proposition that is an RTP-based payment scheme (brand, acceptance infrastructure, rules, risk management, etc.). The banks themselves are generally reluctant to challenge the cards ecosystem with their own RTP-based scheme (we all know the golden goose fable after all). However, there is at least a debate ongoing as noted in this WSJ article. According to the Wall Street Journal, Wells Fargo and Bank of America are in favor of pushing Zelle towards C2B payments while JP Morgan is concerned about moving too fast given the need for supporting fraud management infrastructure, with other major banks undecided. Zelle is already used on a limited basis for consumer payments to small businesses, with these volumes growing 162% in 2021 (according to the WSJ). Considering that banks are no longer shareholders of V/MC, there is a prize to pursue (V/MC’s scheme fees in the U.S. are extra juicy). However, we are skeptics of any coalition relying on many banks as a force of disruption. For decades in fintech, we observe a clear pattern whereby the more parties involved in a coalition action, the less impactful and disruptive the coalition. FIGURE 3: Select U.S. Alternative Payment Method Examples Source: Company websites, Flagship Advisory Partners market observations In Figure 3, we summarize a handful of the models that we see as potentially most disruptive in the long-run in the U.S. Block is positioned to drive long-term disruption of the cost of cards. Both Cash App and Square have a significant market share of consumers and SMB’s respectively. Combining this on-us potential (including growth in the coming years) with the ability to also leverage BNPL, crypto payments, and payments backed by RTP fundings and the disruption potential becomes compelling. The potential could accelerate with partnerships within the enterprise merchant segment to leverage Block’s ecosystem. Merchant in-app wallets (leveraging stored value) such as Dunkin’ can also reduce card acceptance costs by expanding the magnitude of stored value retained within their ecosystems and by shifting from linked cards to linked bank accounts. Merchants such as Dunkin’ are unlikely to solve the gaps of RTP (i.e., rules and risk mgmt.) on their own, but working with partners such as Plaid, the scenario become more interesting. Klarna and BNPL are premium priced payment methods given the risk they take, and the sales conversion delivered. But in Europe, Klarna also delivers Pay-Now via real-time bank transfer. Noting the gaps in RTP infrastructure mentioned previously, we would expect Klarna to ultimately introduce a bank-powered Pay-Now option at some point. Crypto payments are years away from mainstream scale, but the disruption potential becomes interesting if key actors are able to deliver low-cost payments such as those marketed by Bitpay (1.0% acceptance). Cash Discounting: An Oddly Common Tactic in the U.S. As merchants await more viable, cost-efficient alternative payment methods, many merchants today actively steer POS customers towards cash using cash discounting (an interesting oddity in what is otherwise a modern digital economy). Cash discounting is heavily marketed by PSPs and merchant acquirers in the U.S. Often used synonymously (and incorrectly, as we clarify in Figure 3) with surcharging, merchants using cash discounting by posting the price of goods and services as the “card rate” while offering a lower price from the posted (card) price to customers that are paying with cash. For some U.S. ISOs, half of new POS merchants implement cash discounting. These companies push cash discounting programs as a means of “protecting” merchants from excess card fees, while driving value-added services revenues for themselves. FIGURE 4: Cash Discounting vs. Surcharging Source: Payment Cloud, CardFellow, VizyPay, Flagship market research and observations Looking Forward: Fintech Disruption of Consumer Payments The U.S. cards ecosystem is amazingly effective as a driver of U.S. commerce and a huge revenue pool benefiting thousands of financial services providers. Visa, Mastercard, Amex, Discover, and their broad network of partners, did an amazing job of solving payments in the highly fragmented U.S. banking market. The staying power of this ecosystem cannot be underestimated, as many potential disruptions have come and gone (decoupled debit, merchant coalitions, etc.). But the fact remains that the U.S. cards ecosystem is unusually expensive considering the scale and digitization of the economy (the majority of U.S. card payments volume is remote commerce, not physical commerce). We believe that disruption of this high cost of payments will come. The size of the prize is simply too big to go untouched, especially considering the availability of disruptive technologies. We expect the legacy control of the market by incumbents, which drives the current commercial stasis on cards, to be threatened by new models driven by mobile commerce, real-time banking, and crypto currencies. Just don’t quote us on when. Please do not hesitate to contact Rom Mascetti at Rom@FlagshipAP.com or Joel Van Arsdale Joel@FlagshipAP.com with comments or questions.

INFOGRAPHIC: Stripe Setting the Performance Bar in Fintech Please do not hesitate to contact Charlotte Al Usta Charlotte@FlagshipAP.com or Aigerim Assembayeva Aigerim@FlagshipAP.com with comments or questions.

INFOGRAPHIC: Evolution of North American Payfacs Please do not hesitate to contact Joel Van Arsdale Joel@FlagshipAP.com with comments or questions.

Accounting software platforms that power SME financial and business administration offer massive potential for integrating fintech services. The power lies in the many touchpoints that accounting software offers for integrating a broad array of fintech services from various payment services to lending, card issuing, FX, and core banking services. Payouts to suppliers is the most closely adjacent among this broad array of integrable fintech services. We recently analyzed 100+ European accounting platforms to assess the maturity of embedded payouts. We share some of our key observations below. SME Accounting Platforms, Positioning for Fintech As we illustrate in figure 1, accounting software is increasingly positioned as business management platforms with a variety of software-enabled business services: financial accounting, payables management, receivables management, purchasing and expense, working capital and treasury management, payroll, and others. The ability to touch so many customer journeys allow these platforms to also embed and monetize an array of financial services: payment acceptance, lending and financing, cards issuing, transaction banking, and payouts (to name a few). Payouts to suppliers (the focus of our analysis) through domestic or x-border payments is the fintech services we consider to be most easily integrated into accounting software. FIGURE 1: Value Chain of Key Software and Fintech Services Embedded in Accounting Platforms Source: Flagship Advisory Partners Research Accounting Platform Landscape in Europe EU accounting platforms operate in a relatively fragmented market, as we illustrate in figure 2. A handful of global and regional platforms compete with many local providers. The U.K. is typified by more concentrated market share among global providers such as Sage, Xero, Intuit QuickBooks. Nordics is also somewhat more concentrated via regional providers such as Visma. France, Germany, Spain and Benelux however, are characterized by more fragmented among more local accounting software providers. FIGURE 2: Overview of Accounting Platform Landscape in Europe Source: Flagship Advisory Partners Research, Based on analysis of 100+ providers; March ‘22; as marketed on website; SME focus Maturity of Integrated Payouts Accounting software integrated payouts are not deeply penetrated today in Europe. As we illustrate in figure 3, integrated payouts with European accounting platforms, on average, are significantly less mature when compared to the U.S., where accounting software with integrated payments is a common market practice. Accounting software integrated payouts are comparatively more mature in the Nordics, due to better integrations with real time A2A payment networks (e.g., P27 will offer real time payment APIs) and closer partnerships with banks. France, Spain and Benelux tend to be more domestic provider led and integrated payouts are significantly less mature today. FIGURE 3: Maturity of Integrated Payouts with Accounting Platforms by Market Methodology: Analyzed 100+ accounting platforms across 10 European markets; Maturity of integrated payouts per market is determined by the % of platforms that integrate payouts (as a product) compared to the total platforms analyzed Source: Flagship Advisory Partners Research As illustrated in figure 4, the accounting platforms that offer integrated payouts predominantly rely on banks to power these payouts. Banks often underserve SaaS platform needs as they too often lack the technical sophistication for easy integration, customer onboarding, and ongoing feature enhancement. We see a clear shift towards specialized payout fintechs as integrated payment partners for accounting software. Winning fintechs offer more feature rich use case enablement: Wise that offers cross border payments, Modulr powers domestic A2A payouts, and Tipalti, Pleo provide virtual card-based payouts. These fintechs also provide increasingly rich value-added services to wrap around the core payout function such as workflow automation and automated reconciliation. FIGURE 4: Payouts Partners: Accounting Platforms Offering Integrated Payouts Source: Flagship Advisory Partners Research; % of platforms that offer integrated payouts; analysis of 100+ providers; March ‘22; as marketed on website As SMEs start realizing the convenience and value of integrated payments, we are likely to see an increasing roll-out of embedded payments propositions with European accounting software solutions in the years to come, providing a huge addressable opportunity for payout fintechs. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com or Niko Beranek at Niko@FlagshipAP.com with comments or questions.

Payments use cases and services adapt to life and our changing commerce experiences. In the late 90’s and early 2000’s, payments evolved to meet the needs of e-commerce. In the 2010’s, payments evolved for mobile commerce. The next horizon of payments evolution is the Metaverse. In this article, we discuss the reality of nascent payments in the Metaverse today and our expectations for evolution towards a more frictionless user experience. What is the Metaverse? The Metaverse refers to an online, virtual, 3D universe that users can access via PC, virtual reality (VR) / augmented reality (AR) hardware, and/or mobile application, where the virtual and physical world converge. Users can play, work, transact, meet, and socialize within a virtual community. Video gaming worlds (e.g., World of Warcraft, Fortnite) or video game platforms (e.g., Roblox) are the closest analogies to the Metaverse. However, there are fundamental differences between video gaming worlds which are fundamentally proprietary and the vision of the Metaverse which is intended to be interconnected and open. Both video gaming worlds and the Metaverse are built for virtual goods and commerce. Virtual goods in video gaming are rarely useable across platforms, however, the Metaverse assets are built to be shareable. The vision of the Metaverse is open and community governed, where users are the ultimate owners and contributors based on community, openness, and distributed ownership of virtual assets, The Metaverse is built on blockchain where virtual assets are owned through non-fungible tokens (NFTs) and transferrable across platforms. Video gaming payments are generally achieved via more mainstream rails (cards, wallets), while payments in the Metaverse are (today) driven by crypto and blockchain. Roblox illustrates the closed nature of today’s video gaming worlds. As shown in Figure 1, Roblox, a leading online gaming platform, allows players to purchase upgrades for avatars (e.g., clothing, accessories) or buy experiences on its website. It has its own in-game currency (Robux) which users can purchase on their website using traditional payment rails (credit/debit cards, PayPal, gift cards). Roblox issued a statement on its blog in November 2021, re-emphasizing that it does not allow off-platform auctions: “When off-platform transactions occur that are tied to on-platform items or experiences, it is impossible for us to monitor the details of that event and it blocks our ability to validate or mediate any claims.” FIGURE 1:Illustrative Transaction Process on Roblox, a Leading Online Video Gaming Platform (screenshots) Source: Flagship Advisory Partners, Roblox The Metaverse is still in its infancy as most platforms are alpha or beta versions and not yet fully formed. There is no single virtual ‘world’ in the Metaverse, but a combination of many different worlds. Today, the two largest virtual worlds are The Sandbox (500k+ registered wallets) and Decentraland (c.300k monthly active users). Both worlds are built on the Ethereum blockchain. The Sandbox was founded in 2011 and owned by Hong-Kong-headquartered game software company Animoca Brands. Despite this, the company has made it clear that the virtual world is 100% owned by the players and fully decentralized, leveraging the blockchain technology and NFTs. “The Sandbox is a virtual world where players can build, own, and monetize their gaming experiences in the Ethereum blockchain. […] The goal: disrupt existing game makers like Minecraft and Roblox by providing creators with true ownership of their creations as non-fungible tokens (NFTs) and reward them for their participation in the ecosystem.” The Sandbox Blog, Published 30 June 2020 Unlimited commerce use cases The Metaverse is envisioned as an alternative reality where virtually anything is possible. The possibilities for commerce use cases are therefore vast. The most common use cases today include buying virtual land, avatars, and play-to-earn games. Emerging use cases include wearables/clothing, experiences, business meetings, education, and much more. The meta-economy will also cover all forms of commerce transactions: P2P: Users can trade land or other types of assets among them B2C: Retailers can showcase their latest clothing collection, users can buy the clothing in the virtual world, and get it delivered at home B2B: Manufacturers can showcase newly developed equipment, build a mirroring version of their ‘real-life’ factory, and hold business meetings across multiple parties The Metaverse could revolutionize the way businesses interact with potential customers. It creates new immersive experiences where corporates can offer support, onboard customers, present newly launched products, organize games, and essentially change how you reach out to end-customers. FIGURE 2: The Decentralized Metaverse Ecosystem (select examples) Source: Flagship Advisory Partners Blockchain, cryptocurrency, and NFT act as key commerce enablers today Cryptocurrencies (wallets and exchanges), blockchain technologies, and NFTs play the central role in enabling the Metaverse commerce today. There is no obligation to set up a Metaverse world on the blockchain, but today the largest platforms are leveraging blockchain technologies as it provides a decentralized and transparent way of transacting. Because the Metaverse is built on blockchain, transacting is almost always via cryptocurrencies. As illustrated in Figure 2, most platforms have created their own utility token (e.g., SAND used in The Sandbox, MANA used in Decentraland) which can be bought or swapped on most crypto exchanges. Metaverse users must set up a crypto-based wallet to hold digital custody and enable crypto payments. For example, Metamask, one of the largest crypto wallets, allows players to send and receive Ethereum-based currencies and tokens, store and manage account keys, and connect to decentralized platforms (e.g., The Sandbox). Payments user experiences in the Metaverse are clunky today The Metaverse payment experience of today is clunky, with many steps required to complete a transaction. We analyzed several commerce and payment use cases within The Sandbox and illustrated select results in Figure 3. It takes approx. 19 steps across 3 different websites/apps to buy SAND for a first-time user. This process could involve more steps using a different provider such as Transak, as Wyre offers a KYC exemption for amounts under $25k per week. Similarly, existing users willing to swap ETH into SAND still need to complete approx. 7 steps across 3 websites/apps before holding SAND. FIGURE 3: Today’s Pay-in Use Cases in the Metaverse (examples based on The Sandbox) Source: Flagship Advisory Partners As shown in Figure 4, users then have multiple options to withdraw their funds, with most common use cases including bank account transfers or a card which is linked to the user’s crypto wallet. Again, the process of transferring the funds to the user’s bank account is painful; on average 21 steps across two apps/wallets. A more user-friendly experience is the second use case shown below, where the user can spend or withdraw funds at an ATM using the Coinbase Visa-branded debit card, directly linked to the user’s Coinbase wallet. However, this involves approx. 15 steps. FIGURE 4: Today’s Pay-out Use Cases in the Metaverse (examples based on The Sandbox) Source: Flagship Advisory Partners Enhanced user experience will define winners in Metaverse payments Blockchain tech and cryptocurrencies are well built for virtual and decentralized ownership, but not yet well-enabled for frictionless commerce. We expect rapid evolution of crypto commerce payments in the next several years, and these improved experiences will also help to drive UX improvement in the Metaverse. Payments providers that crack the code on frictionless experiences across the Metaverse have massive long-term upside. Traditional payments providers (card networks, mainstream wallets, PSPs, etc.) play little role in today’s Metaverse commerce and payments. There is rapid convergence of mainstream digital payments and cryptocurrency payments (e.g., FTX’s partnership with Nuvei and Stripe, Binance launching Bifinity), but this is not yet visible in the Metaverse. We expect this to change in the next two years when mainstream wallets, neobanks, and PSPs increase investment into establishing use cases and propositions in the Metaverse. In the long run, the Metaverse will become an alternative channel for customer acquisition and servicing for general financial services providers, including traditional banks. Traditional wallets and digital commerce platforms have the potential for a strong right-to-win in the Metaverse as enablers of more frictionless commerce. Comparing the number of registered users across select wallets, PayPal has 36x more users than Metamask today. In Figure 5 below, we present two theoretical P2P and B2C use cases leveraging mainstream wallets and payment services rails. Scenario 1 depicts if platform users could transact through a simple virtual handshake using their existing PayPal wallets, without the need to create an additional blockchain wallet (e.g., Metamask), nor the need to click through various apps/websites. Alternatively, scenario 2 depicts if merchants could sell assets in both the physical and virtual world through the same partner, using the same PSP. FIGURE 5: Tomorrow’s Potential P2P and B2C Payments Use Case in the Metaverse (theoretical illustrations) Source: Flagship Advisory Partners The Metaverse is infant but foreshadows the generational future of commerce The Metaverse is in a state of infancy today and with far more vision than reality. But the long-term impact of the Metaverse for todays’ younger generation is limitless. The Metaverse commerce will be vast as a broad array of use cases shift into the virtual worlds of the Metaverse. Commerce and payments within the Metaverse are not an extension of e-commerce or m-commerce; the Metaverse is the first commerce environment built natively for blockchain and cryptocurrency. Unfortunately, these foundations cause commerce and payment use cases today to be full of friction. We expect these use cases to become more frictionless based on the broader convergence of cryptocurrency ecosystems and mainstream payments. But while we fully expect mainstream commerce and payments providers to embrace the Metaverse, we do not expect disruption of today’s foundational role for cryptocurrencies-and-blockchain-based payments infrastructure. Even as the Metaverse commerce scales into the billions and beyond, we believe blockchain-based payments and providers will rule the day. Please do not hesitate to contact Charlotte Al Usta Charlotte@FlagshipAP.com with comments or questions.

The fintech equity markets, public and private, have been sellers’ markets for years. Particularly during the pandemic, the premium placed on high growth fintechs reached stratospheric levels. Those days could be ending. The sunset of the pandemic, rise of inflation, and war in Ukraine have public investors shifting towards alternative asset classes and away from tech and high-growth equities. Hedge funds that piled into fintech and software growing during the pandemic were recently shorting these same equities (though these shorts appear to be unwinding quickly this week). Absent a dramatic turnaround in the coming weeks, we anticipate a wave of public to private equity transactions in the remainder of 2022. Several high-profile fintech IPOs, most notably Stripe, were on the horizon for 2022, but now may be postponed. FIGURE 1: Share Performance of Select Fintech Public Equities (indexed to 100 from 2 March 2020; based on closing 17 March 2022) Note: Indexed to 2 Mar 2022, Shift4 started trading 5 Jun 2020, Paysafe started trading 09 Oct 2020, Nuvei started trading 16 Mar 2021, d-Local started trading 3 Jun 2021 Source: Flagship Advisory Partners, Yahoo Finance While there has clearly been a valuation crunch, many fintech public equities are far from cheap (Adyen still trades at 73x trailing EBITDA). What has emerged is a separation of the pack, to some extent, between companies that have retained value (<40% reduction in share price from peak to today) and companies being punished under current market conditions (>60% reduction in share price from peak to today). As shown in Figure 2, Fintechs that have retained value are generally those that are highly cash generative and less likely to be valued based on lofty growth expectations. FIGURE 2: Current Trading vs Peak Value of Select Fintech Public Equities (select examples; based on closing 17 March 2022) Source: Flagship Advisory Partners, Yahoo Finance We are starting to see the impacts of public valuation pressure also in the private equity and M&A markets, and we expect an acceleration of this pressure if public valuations remain as is. As shown in Figure 3, growth private equity funding activity has been exceptional in the last two years, often at valuations of 30-60x revenue. Klarna was last funded at 28x 2021 operating income, Brex at an estimated 38x 2021 revenue, and Revolut at an estimated 50-60x est. 2021 revenue. By comparison, in the public equity markets, Block (Square) now trades at 3.2x 2021 gross revenue and 12.8x 2021 gross profit and Adyen trades at 7.6x gross revenue and 46x gross profit. FIGURE 3: Select, Recent, Fintech Private Growth Equity Funding Rounds Source: Flagship Advisory Partners, press releases These types of valuations are supported, in part, by expectations for future IPO values. As public market valuations recalibrate (which certainly seems to be the case at present), valuations on private equity will similarly decline. There remain massive amounts of private capital in search of returns, so we do not foresee a major drop-off in deal activity. However, we do expect both venture and growth equity investors to focus more on cashflow generation fundamentals and seeing a clearer path to EBITDA positive, not just topline growth ad infinitum. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.

General Obesrvations We see an acceleration of crypto currency usage in mainstream digital commerce (which we refer to here as crypto commerce). As shown in Figure 2, 95%+ of crypto commerce volumes today are attributable to the crypto exchanges and wallets themselves (on-ramping and off-ramping into and from the crypto exchanges). But now we see rapid expansion into more traditional areas of commerce such as digital entertainment and services. New merchant segments are emerging (e.g., NFT marketplaces, DeFi), further expanding opportunities to use crypto currencies for commerce. The addressable opportunity in C2B crypto payments is driving the emergence of new fintech business models. These fintechs are bridging the gap between fiat and crypto ecosystems, helping crypto companies to enable fiat payments and helping mainstream fiat commerce companies to accept crypto currencies. For example, Binance recently launched its subsidiary Bifinity, which will independently empower its clients (wallets, merchants, exchanges, etc.) to participate in the crypto economy and to enable fiat-crypto/ crypto-fiat payment use cases. These fintechs are attracting significant funding and M&A activity as shown in Figure 4. What's Next? Excluding exchange on-ramping and off-ramping volumes, crypto payment volumes are only 0.2% of global digital commerce today, though we estimate that these crypto commerce payments are growing at rates well in excess of 100% (possibly even 200-300%). We expect this rate of growth in crypto commerce to continue. Leading e-commerce PSPs (e.g., Nuvei, Worldpay, Checkout) are positioning to benefit from this growth by acquiring and building capabilities beyond just enabling fiat purchases of crypto currencies. Other payments ecosystem actors such as Square, PayPal, Visa, and MasterCard are also playing large bets to benefit from the growth in crypto commerce. We expect continue investment and M&A into crypto-focused fintechs, despite the markets native valuation volatility. INFOGRAPHIC: Development of C2B Crypto Commerce Please do not hesitate to contact Rom Mascetti Rom@FlagshipAP.com, or Anupam Majumdar Anupam@FlagshipAP.com with comments or questions.

Contact Erik Howell at Erik@FlagshipAP.com or Elisabeth Magnor at Elisabeth@FlagshipAP.com for comments or questions.

Crypto’s Evolution From a ‘Store Of Value’ to a ‘Medium Of Exchange’ Despite its recent dip, 2021 was a breakthrough year for crypto, with its market capitalization rising by 188% to reach ~$3 trillion in November 2021. Crypto’s profile and growth to date has derived from its utility as a store of value, but we are finally starting to see its potential as a ‘medium of exchange’. In this article, we examine how crypto payments are gaining relevancy in mainstream commerce, illustrate the current payments use cases, and evaluate their growth outlook. Bitcoin, the first cryptocurrency, was introduced in 2009 as an alternative medium of exchange to fiat-based currencies. This first generation of cryptocurrencies (bitcoin then others) never gained meaningful traction as payment methods due to their high volatility, low transaction processing speeds, and lack of acceptance. Bitcoin was highly successful as a validation of blockchain technology, which subsequently inspired the development of new generations of crypto across a wide range of applications (as shown in figure 1). Today, select cryptocurrencies (e.g., Solano) and next generation crypto innovations such as stablecoins (e.g., Tether, USDC, Dai) and central bank digital currencies (CBDCs) are driving a radical shift in consumer and merchant perceptions and accelerating usage of crypto payments. FIGURE 1: Evolution of Crypto & Relevance as a Medium of Exchange Source: Flagship market observations Drivers of Crypto as a 'Medium of Exchange’ As we outline in figure 2, crypto currencies are evolving beyond a ‘store of value’ to relevance as a ‘medium of exchange’. Emergence of new technological innovations such as stablecoins, NFTs (non-fungible tokens, which are essentially digitized tokens of ownership against digital assets) and DeFi (decentralized finance, a new breed of financial securities and investment vehicles built on the blockchain network) have accelerated consumer curiosity and adoption. Traditional PSPs have invested in crypto as a growth vertical and have further invested in strategic M&A. Visa and Mastercard have also adapted their rails to settle select crypto directly. Lastly, while regulations continue to be a double-edged sword, greater clarity in some markets is encouraging adoption by traditional actors. FIGURE 2: Building Blocks of Crypto Payments Adoption *Non-fungible Tokens (NFTs) and Decentralized Finance (DeFi) Source: Theblockcrypto.com, Chainanalysis.com, Flagship Advisory Partners analysis Current State of Crypto Payments As illustrated in figure 3, crypto payments primary use case today is on-ramping and off-ramping fiat to crypto via exchanges (where volumes are huge). Several specialized fintechs that offer fiat on-ramps (buying crypto in exchange for fiat currency) have emerged on this basis (e.g., Ramp, MoonPay, Wyre), and many traditional PSPs have also thrived supporting these volumes (e.g., Checkout.com, Nuvei, Worldpay). New merchant segments, beyond exchanges, have also emerged (e.g., NFT marketplaces, GameFi, DeFi) accelerating the opportunity for C2B crypto acceptance. In traditional ecommerce, we have seen an acceleration of crypto acceptance as a payment method by merchants in select verticals such as online gaming, luxury travel, digital and adult services. In the last 12 months, Visa and Mastercard have partnered with over 80 crypto exchanges, enabling these exchanges to issue branded cards. These cards have accelerated the acceptance of crypto towards C2B online commerce. Visa recently announced the total card volumes exceeded $2.5 billion in its fiscal Q1 of 2022, already accounting for 70% from last year’s volumes. Select businesses are also facilitating B2C and B2B payouts using crypto, though this is specific to select verticals, mainly addressing payouts to contract and gig workers (independent, online platform contractors). Crypto payments are also evident in C2C remittances today, providing an economical way to remit payments especially for consumers in emerging markets. FIGURE 3: Crypto Payments Proposition Models Overview Source: Flagship market observations As we illustrate in figure 4, we estimate crypto payment volumes at €0.5 trillion today, a tiny fraction compared to the global aggregated C2B, B2B and B2C payments turnover. C2B Fiat on/off ramps account for 95% of this share, so general purchasing and other use cases remain small. FIGURE 4: Global Volumes: Traditional Payments vs. Crypto Payments (USD trn.; 2021) Global includes payment volumes in B2B, B2C, C2B and C2C services Source: Visa, Flagship analysis While crypto payments are small today, we expect volumes to accelerate and grow rapidly in the next 12-18 months. As illustrated in figure 5, C2B crypto payment adoption will continue to grow as newer generations of crypto mature with the ability to support rapid, simple and low cost means of payment in everyday life. We consider cross-border C2C to be potentially disruptive to traditional fiat remittance payments, as consumers are likely to benefit from economical price points and to be able to remit money in real time. B2C and B2B may take a little longer to mature, as traditional businesses will take time to embrace crypto. FIGURE 5: Crypto Payments Maturity by Use Case Source: Flagship market observations Our expectation for acceleration of crypto use cases is based on the growth drivers that we outline in figure 6. In the near term, we anticipate mainstream PSPs to play a central role in driving consumerization of crypto. New blockchain applications in the form of NFTs will gain momentum and be accessible through fiat rails. We anticipate card schemes and regulators to play an important role in creating the network and the rules for direct crypto settlement. In the medium term, we do expect a tipping point when crypto becomes more mainstream, due to 1) regulatory clarity and sovereign, acceleration of CBDCs, and 2) acceleration of new commerce activity in platforms such as Metaverses and platforms built on Web 3.0. FIGURE 6: Growth Drivers Source: Flagship market observations Conclusion Payments has been an elusive aspiration of the cryptocurrency ecosystem since its inception many years ago. However, the key building blocks are now in place and a series of growth drivers are coming that we expect will accelerate the digital enablement of crypto payments in everyday commerce. We remain optimistic of the upsides in crypto and its appeal to both consumers and merchants as a long-term vehicle of commerce. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com or Dan Carr at Dan@FlagshipAP.com with comments or questions

Observations on BNPL Valuations The market space for BNPL providers is increasingly crowded BNPL providers that have gained traction locally typically execute geo expansion strategies Klarna and PayPal Credit are the most global, followed by Afterpay (called Clearpay in Europe) and Sezzle Valuations correlate to geographic reach and size of the user base Valuations are attractive and are increasing (e.g. UK-based Zilch’s valuation rose from $500M to $2BN in just eight months) Australian-listed BNPL providers (e.g. Sezzle, OpenPay and Laybuy) have lower valuations compared to peers, likely driven by a combination of a boom of publicly listed BNPL companies, weaker than expected revenue performance, and a less favorable regulatory outlook Outlook on Valuations Investors will closely monitor regulatory developments for revenue impacts (which we will explore in a subsequent article) We can expect further IPOs and M&A in the space INFOGRAPHIC: Open Banking Tech Platforms Please do not hesitate to contact Erik Howell Erik@FlagshipAP.com or Elisabeth Magnor Elisabeth@FlagshipAP.com with comments or questions.

On 9 December 2021, Brazil-headquartered neobank Nubank made an impressive debut on Wall Street, raising $2.6 bil. on the NYSE, with an implied market capitalization of $50 bil. at IPO (now down to $43 bil.). Nubank is now the third-largest company by market capitalization in Brazil. Although the company is still unprofitable, it has a higher valuation than Brazil’s largest bank, Itaú Unibanco. FIGURE 1: Market Capitalization of Nubank vs. Incumbent Brazilian Banks (in $ bil.; close Tuesday 21st December 2021) Note: Market capitalization calculated using 21/12 closing FX rate and stock price. Revenue figures translated from R$ to $ using 2020 average FX rate. P/E calculated using trailing EPS. Nubank has a negative P/E. Source: Bloomberg, Yahoo finance FIGURE 2: Nubank's Historical Performance Sources: Nu Holdings Ltd. IPO prospectus (Link), Flagship Advisory Partners The addressable market in LatAm is huge and Nubank has proven that emerging markets represent a massive yet largely untapped opportunity. Nubank has the largest customer base among neobanks globally (e.g., 3.2x than its European peer, Revolut!). Unlike other fintechs, Nubank took a “reverse” product path to market, as it started acquiring customers via lending (credit cards) and then expanded three years later into transactional banking, vs. most neobanks, which lead with transactional banking and then add credit products over time. The company has now a fuller product catalog than European and North American neobank peers, yet most products (e.g., lending, investments, SME products) have been launched recently and are still at the beginning of their development journey. In parallel with expanding via products, Nubank expanded geographically into Argentina, Mexico, and Colombia, although c.98% of its revenues are still generated in Brazil. FIGURE 3: Nubank’s Product Offering vs. Select NA & EU Players Sources: Nu Holdings Ltd. IPO prospectus (Link), Flagship Advisory Partners research, company’s websites FIGURE 4: Nubank's KPIs vs. Select Neobanks Note: Neon started disclosing customer numbers in 2021 Sources: Nu Holdings Ltd. IPO prospectus (Link), Flagship Advisory Partners, company’s press releases, Bloomberg, Brazilian central bank Nubank’s IPO illustrates that LatAm has a huge market potential and that there is still room for new entrants, and that fintechs can successfully build on a credit offering prior to expanding into transactional products. Ultimately, other fintechs and neobanks need to think about reinforcing their credit strategy, as we discuss in a prior article here. Please do not hesitate to contact Erik Howell Erik@FlagshipAP.com, Charlotte Al Usta Charlotte@FlagshipAP.com or Pedro Giesta Pedro@FlagshipAP.com with comments or questions.

Payment stocks were the darling of global public equity markets during the height of the pandemic in 2020. Payment companies, particularly those oriented to digital commerce, proved resilient, even during a pandemic. This wave of momentum in public equity valuations peaked earlier this year, however. Since then, most (not all) payments stocks have declined materially in value (noting that fortunes have improved for the sector in recent days). As shown in Figure 1, on average payment stocks declined -20% from 1 Jun until 7 December 2021. Only three of the 18 stocks in our sample, Adyen, Nuvei, and d-Local increased in share value between 1 June and 7 December (although d-Local shares had a rough recent month). The remaining payment stocks in our sample declined at a weighted average rate of -23% from 1 June to 7 December. This compares to a +11% increase for the S&P 500 and +14% increase for the Nasdaq indexes. As highlighted in Figure 2, valuation multiples for many payment companies have come back to Earth and some can even now be considered good value relative to the S&P 500 (with a forward P/E of 21.4). As shown in Figure 2, a handful of payment companies continue to outperform and benefit from growth-driven multiples and strong profitability. It seems that the days of a ‘rising tide floating all boats’ in payment equities is over, but top performers continue to be rewarded with high valuations from public shareholders. FIGURE 1: Share Performance of Individual Equities (indexed to 100 from 1 Jan 2021) Note: Indexed to 100 on 4 Jan 2021, d-Local started trading 3 June 2021 Source: Yahoo! Finance FIGURE 2: Price to Sales and Forward P/E Ratio (bubble size = market cap) Note: Price to sales ratio for trailing twelve months Source: Yahoo! Finance, Wall Street Journal (forward P/E for S&P 500) Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.

This article was originally published by The Paypers. Introduction Winning in the payments industry increasingly depends on having high-quality, agile technology. In parallel, growth in payments is often driven by M&A. Executing ongoing integration projects while maintaining high availability and reliability and avoiding platform fragmentation is a challenge for even the most seasoned payments companies. Platform fragmentation can stifle product innovation and limit EBITDA potential. In the last five years, we observed a consensus vision emerge on how payments companies can rationalize platforms without disrupting business growth. We summarize this vision below, noting that this is a simplified, business-level perspective. Many global payments companies are in the situation of having many acquired platforms as illustrated in Figure 1. Despite best intentions, most of these tech stacks remain in relative isolation for years. But having many siloed platforms is not sustainable - they block scale benefits, encourage technical debt, and often lead to negative customer impacts and satisfaction. FIGURE 1: M&A Drives Platform Fragmentation Source: Flagship Advisory Partners An Emerging Industry Consensus The first step in effective platform rationalization is to establish a clear strategic vision, where we can see an emerging market consensus around orchestration (as simply illustrated in Figure 2). A strategy to rapidly force-migrate everything onto a singular tech stack is impractical. Given the luxury of a complete business freeze, this vision could be achieved, but payments businesses are highly dynamic. Customer needs/impacts and revenue growth trump technical purity and operating efficiencies. Even with strong rationalization strategy and execution, acquisitive payments companies never achieve platform singularity. Ongoing support for siloed, acquired platforms is also clearly sub-optimal. Many companies will likely compromise here along the journey to full consistency. Other than being an acceptable interim vision, a siloed approach destroys value and is not long-term feasible. The consensus vision that we see in the market is one centered around orchestration, in which the various front-end integration layers and the various back-end services are integrated via common data and services hub. While we describe Figure 2 as alternatives, it is more practical to see these as rather milestones along a platform journey. In the first step on the journey, platforms stubbornly persist in silos. An achievable mid-point is orchestration. Finally, as a financial objective, a one platform vision can be a business wish. However, few businesses achieve this final state as the pressures of feature development and further acquisitions are brought to bear. Instead, a constant state of pruning redundant services as new ones are introduced becomes a pragmatic compromise. FIGURE 2: Platform Rationalization Alternatives Source: Flagship Advisory Partners Orchestration (many-to-many architecture as illustrated in Figure 3) offers a number of advantages vs. singular/linear platform architecture: 1. Orchestration allows for services access and interoperability across a company while avoiding the duplication of every application/service needing to collect 1-to-1 with every other application/service. 2. If well engineered orchestration can be largely behind-the-scenes and opaque to customers. 3. A well-build orchestration hub is built to manage a range of service requests. 4. API based applications/services naturally lend themselves to being orchestrated. FIGURE 3: Orchestration Led Platform Rationalization Source: Flagship Advisory Partners The challenge with orchestration is establishing the target services hub and related data architecture. If you are lucky, one of your acquired platforms is natively adapted to orchestration. Unfortunately, this is rarely the case with platforms that were built 10+ years ago. Building or buying the hub is often required. An orchestration hub must be married to a data architecture that can provide consolidated reporting and a foundation for migration of the various datastores in the donor platforms. A Journey Towards Platform Rationalization With the vision established, the next step is to develop a plan to guide the execution journey. Figure 4 illustrates one possible high-level roadmap, noting that there are many limitations and dependencies that drive the right sequencing and prioritization. While our vision defines discrete staging, a real journey is always more complicated with many workstreams running in parallel. FIGURE 4: Platform Rationalization Journey Source: Flagship Advisory Partners Stage 1 As an initial priority in rationalizing fragmented platforms, companies often prioritize quick wins, such as enabling product access across the platforms for improved customer offerings (e.g., the ability to access payment methods available on platform #2 from platform #1). Shared access to service does not necessitate disruption of customer/partner interfaces. APIs can be layered using converters/emulators to ensure ongoing API compatibility, with recent developments in API gateways and innovations like GraphQL facilitating this. In Stage 1, we strongly recommend the creation of a common culture and ways-of-working across the technology organization (which can still allow for different teams to be leveraging different coding foundations). Successfully uniting multiple business cultures is difficult and has the potential to destroy value quickly if done badly. In addition, for legacy on-prem infrastructure organizations, moving to a cloud set-up can exacerbate these cultural challenges. Finally, but most importantly, we recommend establishing the target data infrastructure as soon as possible and then working to migrate data stores. Siloed data is a major roadblock to driving later stages of platform rationalization; conversely data integration enables a consistent customer view, driving better, easier customer experiences. Stage 2 In Stage 2 of the rationalization journey, we generally see migration of services/applications which are easier to move, and where standardization enhances operational and product continuity, for example, implementing a common tokenization service, ID management or fraud management. At this stage, we often see companies focus on moving to a common accounting (and possibly billing) systems, improving customer experience and executive management of the business (measuring performance, etc.). Migrating to a common billing system can provide revenue upsides via broad execution of pricing strategy. Finally, migrating to a common hosting infrastructure often occurs in this stage given the natural cost savings; noting that migration from physical data centers can introduce roadblocks that extend this timing (for example, if the organization is not yet cloud ready but where the target infrastructure is in the cloud). Stage 3 Stage 3 of the journey often involves heavy lifting of the more challenging systems to move. For example, we might see migration of core processing (e.g., V/MC auth and clearing), which can offer significant cost savings. Also, at this stage of the journey, we often see migration to a common treasury and settlement infrastructure as well as migration to a common customer onboarding and compliance systems. Standardizing onboarding and compliance systems can be difficult if your business operates across many countries, but fragmentation of this function creates compliance risk and fragmentation of onboarding services becomes expensive. Stage 4 The final stage of the rationalization journey then involves the sunsetting of legacy customer interfaces and migration of payments connectivity. Interface migration impacts customers, which is why this tends to come late in the process. At this stage, companies can offer clear customer benefit through improved product functionality, helping to ease the burden of customers having to migrate to new interfaces, new data services, and new servicing environments. Payments connectivity migration is painful (driven principally by the need for recertification) and almost always comes last. In fact, it can even be practical to effectively never migrate connections, but rather to simple rebuild them in the natural course of the dreaded compliance or “card scheme mandatory” releases. A Long Journey As a CEO or CFO, our vision for platform rationalization as a journey taking years can feel uncompelling. As illustrated in Figure 5, most of the cost sy nergies are delivered at the later stages of the journey. We view these backloading of cost savings as often unavoidable given their dependency on retirement of systems which are also the most challenging to migrate. When formulating a platform rationalization strategy, we like to prioritize continuous progress and pace along the journey while also avoiding pitfalls such as customer disruption. Financial results always matter, but patience is required when delivering platform synergies. FIGURE 5: Value Creation via Platform Rationalization Source: Flagship Advisory Partners For payments companies fueling growth with M&A, platform fragmentation is an unavoidable challenge. Business leaders must attack this challenge head on; platform fragmentation cannot be kicked down the road. Our vision for platform rationalization, informed by a growing market consensus on the topic, is centered around orchestration: a many-to-many architecture, wedded to a well-planned roadmap with steady, realistic executional progress, and underpinned by a coherent integration of people, teams, and culture. Please do not hesitate to contact Joel Van Arsdale Joel@FlagshipAP.com with comments or questions.

General Observations Open banking technology platforms exhibit double and triple-digit revenue growth (figure 1) These platforms showcase triple-digit revenue multiples: Truelayer, Railsbank and Tink have valuations of more than 100x revenue (figure 2) High M&A and funding activity drives growth and valuation, and the cards schemes are also in the game (figure 2) Data aggregation and payments are the most common use cases, followed by personal finance, credit scoring, and business management (figure 3) Open banking platform services largely address banks and select verticals such as iGaming, insurance, and property management today. Payments and credit scoring are the most applied services across many verticals (figure 4) What's Next? Open banking technology platform providers currently target banks, but will increase their focus on vertical-specialized use cases Penetration of payments via open banking in online commerce (i.e. pay for goods and services initiated directly via end user’s bank account) is likely to increase Platform providers will extend their geographic reach and develop services that are interoperable across multiple countries and continents M&A activity will continue, leading to further consolidation and sustaining high revenue multiples INFOGRAPHIC: Open Banking Tech Platforms Please do not hesitate to contact Anupam Majumdar Anupam@FlagshipAP.com, Pedro Giesta Pedro@FlagshipAP.com or Elisabeth Magnor Elisabeth@FlagshipAP.com with comments or questions.

For the first time since its launch in 2008, Apple’s control over its App Store and its lucrative payment volumes, ~$72 billion in 2020, are under threat from regulatory interventions. Recent rulings have set the stage for developers to accept payments directly from users via “out-of-app” flows circumventing the 30% “Apple tax”. The App Store thrives on gaming transactions, accounting for ~75% of total revenue, and ~98% of in-app purchases with spending concentrated within a small number of large developers and the high-frequency customer segment. Changes to Apple’s in-app marketplace exclusivity rules expand the addressable market for PSPs that can best address out-of-app use cases. Within this article we describe the App Store model, explain recent events and market changes, size the new prize for PSPs, and explore the capabilities required to capture this newly addressable segment. Apple App Store and In-app Payments (IAP) System The App Store was revolutionary, kickstarting the post-PC era, spawning a prosperous app economy and fueling Apple’s meteoric growth. It is a symbiotic ecosystem for users to select from more than 2 million third-party apps and for developers to distribute to ~1 billion iPhone users globally. Figure 1 highlights the scale of its success with Apple collecting an estimated ~$18 billion in revenues in 2020 (~7% of overall revenues). FIGURE 1: Global Consumer Spending in Mobile Apps & Games ($ billion) Estimated spending on the App Store and Google Play between Jan. 1 and Sep. 30, 2021. 1Court disclosures put Apple’s average commission rate in 2019 at ~25%, due to the various discounts available. 22021 full year forecast based on extrapolation of year-to-date growth. Source: Sensor Tower Store Intelligence, Flagship Advisory Partners analysis Much of its success is attributable to the "walled garden" model cultivated by Apple, a vice-like grip on rules and underlying infrastructure that preserve security and the user experience within the iOS ecosystem. Figure 2 highlights the rules that developers distributing via Apple or Google must abide by. FIGURE 2: Apple & Google Rules Source: Flagship market observations In the App Store, all digital purchases, whether an initial download or an in-app purchase, must be processed by IAP, Apple’s "in-app purchasing" system which facilitates payments and manages transactions within its ecosystem. Apple collects all commissions via IAP and strictly enforces a range of provisions to ensure compliance, including an "anti-steering" rule prohibiting developers from directing users to third-party payment options. Google has similar rules but has generally been more lenient on steering or similar circumventions, although in recent years Google has begun to align more closely with Apple. Digital purchases made via the Play Store must use its billing system but unlike Apple it supports third-party app stores. The stakes are lower for Google as its business model is built on monetizing apps indirectly via advertising and its user base is less affluent than Apple’s (figure 3 below). FIGURE 3: Apple vs. Google App Store Revenue Split Source: Sensor Tower Store Intelligence Apple levies a 30% (or 15% as shown in Figure 4) commission, known as the “Apple tax” on all digital purchases including subscriptions to music or dating apps and in-app purchases. Purchases which are not digitally confirmed, such as those related to physical goods and services, (e.g., Uber rides, Amazon orders) are not included. Apple only recently instituted exceptions with the Small Business Program reducing the commission for developers making less than $1 million dollars annually. FIGURE 4: Apple App Store Commission Structure 1For developers participating in Apple’s “Small Business Program” Source: Apple Store Guidelines (as of 28th of October 2021) Developer Pushback & Regulatory Activity Developers view the Apple tax as excessive and App Store rules as overly burdensome. The App Store is top heavy, ~1% of all developers generate 93% of all revenue, and a small number of large developers are disproportionately impacted. Digital content publishers with marginal costs are particularly affected, with several (including Spotify and Netflix) no longer offering subscriptions through the App Store. Major developers such as Epic Games, Match Group, and Tencent Holdings do not have the power to leave due to their reliance on in-app purchases. They have been crying foul over restrictive App Store practices culminating in a recent wave of cases challenging the legality of the App Store model on competition grounds. As intended, these high-profile cases have attracted regulatory scrutiny amidst a broader "BigTech" backlash. Figure 5 maps global legislation, court order and regulatory activity. FIGURE 5: Regulatory Investigations into Apple App Store (in-flight and closed) Source: Flagship market observations Figure 6 (below) outlines the potential spectrum of regulatory levers that could be used for ongoing regulation of the App Store. FIGURE 6: Spectrum of Potential Regulatory Levers *Verdict being appealed Source: Flagship market observations Disruption to Apple’s exclusive model can already be seen in recent outcomes, which have significant implications for the App Store. In Japan, Apple settled to allow reader apps (e.g., magazines, newspapers, books, music, etc.) to include an external payment link. The ruling was specific to the Japanese market, but Apple is applying it globally, highlighting the jurisdictional complexity of cases. In August, South Korea prohibited Google and Apple from forcing their payment system for all in-app purchases. The recent "Epic Games vs. Apple" case highlights the impact that even seemingly small regulatory interventions can have. Epic, a multi-billion-dollar game publisher, vocally challenged Apple's App Store model since 2015. In 2020 it launched a payment system to collect in-app purchases directly from Fortnite users, circumventing IAP. Apple immediately removed Epic from the App Stores, prompting Epic to sue on antitrust grounds. “Epic Games vs. Apple” concluded in September 2021, with the court ruling in Apple's favor on nine out of ten counts. The court ruled against Apple on a single count relating to the "anti-steering" rule. The tech giant was ordered to let developers advertise alternative, cheaper payment methods outside the app store, representing the most significant change to the App Store since its launch. Apple has until December to implement the order but has appealed, with a hearing scheduled for mid-November. Opportunities to circumvent the "Apple tax" and accept payments directly from consumers outside of Apple’s domain are becoming clear. Billions of dollars are at stake for app developers and their payments partners with the threat of further lawsuits against Apple already emboldening Facebook to trial payment flows which bypass IAP. In the next section, we examine the size and composition of the app-store purchases segment. Value at Stake: App Store Revenues from Mobile Gaming Data disclosed in the Epic Games case highlights that the App Store’s revenue foundation is gaming, accounting for ~75% of total revenue, and ~98% of in-app purchase revenue. Apple’s operating margins are extraordinarily high, estimated at ~75%. To put this in context Apple earned more profits from games in 2019 than Xbox Microsoft Corp., Nintendo Co., Activision Blizzard Inc., and Sony Corp combined. FIGURE 7: App Store Sales Source: Court documents, Apple, Flagship analysis Figure 8 (below) provides a snapshot of App Store sales by region and category in 2016, which is unlikely to have changed significantly. Despite game apps only accounting for ~33% of all app downloads, they accounted for 81% of sales in that year. FIGURE 8: App Store Sales Source: Court documents, Apple, Flagship analysis Consumer spend is heavily concentrated on the high-frequency segment. Figure 9 highlights that in Q2’17 high-spenders, accounting for 0.5% of all Apple accounts, generated 53.7% of all App Store sales. This trend is also visible in gaming. In 2017, just 6% of App Store game customers accounted for 88% of game sales for the year. High spenders, who made up 1% of Apple gamers, generated 64% of revenue and spent on average $2,694 annually. FIGURE 9: App Store Spend Segments Source: Court documents, Apple, Flagship analysis Out-of-app Payment Flows The expected prohibition of anti-steering gives rise to a new App Store payment flow we term “out-of-app”, visualized in figure 10. This flow will require redirects to web pages via links/buttons. An important question is how many users will switch given the extra clicks necessary to transact outside of IAP? Out-of-app top-ups are prevalent in mobile gaming in Southeast Asia (more concentrated on Google), where developers provide loyalty and value incentives for transaction via other platforms. FIGURE 10: Out-of-app Payment Flow vs. IAP (illustrative) 1Flagship estimate. Exact fee will depend on market, vertical and payment method. Source: Flagship market observations Out-of-app payment flows give rise to clear winners and losers: Winners PSPs: Most app store volume ($72 billion in 2020) will continue via IAP. However, a proportion is now addressable for PSPs particularly within the gaming industry where high spenders can be targeted. Developers / Publishers: Will benefit from reduced payments/marketplace expenses (Match Group has highlighted in recent guidance that any change to App Store rules would “represent material upside”.) Must, however, be mindful of the increased burden to deliver a safe and frictionless out-of-app payment experience. Emerging Business Models: Out-of-app flows will stimulate and encourage emerging business models which are not feasible with existing App Store rules including NFT marketplaces, top-up schemes, subscription models, advanced in-game economies, and the nascent metaverse offerings being developed by Epic and Facebook. Consumers: Could be rewarded with value-in-kind from developers when transacting out-of-app. Losers Apple: Removal of the “anti-steering” rule will impact revenue and sets the stage for potentially broader regulatory interventions. IAP remains a powerful solution in terms of ease and experience but comes with a huge price premium to normal payment process economics. Consumers: IAP consumer experience is best-in-class. Deviations from the model have the potential to cause confusion or introduce risk. Small Developers: The app store model provided a level playing field for developers of all sizes. More prominent developers will be more successful in diverting consumers to out-of-app payments. PSPs vs. Apple/IAP We expect PSPs to rush to serve the expanded out-of-app segment. Paddle, for example, recently announced, an IAP alternative which offers cost savings, more flexible subscriptions, additional payment methods, and the choice of more billing models. PSPs potentially well positioned to benefit include digital commerce leaders such as Stripe, Adyen, Nuvei, PayPal, and gaming-focused PSPs with existing publisher relationships such as Xsolla, Paysafe, Coda Payments, UniPin, and Razer. Mobile gaming specialists such as Coda, UniPin and Razer already thrive with out-of-app mobile gaming payments across Southeast Asia. The strength of the IAP system will remain the primary barrier to shifting users to new use cases. It provides a consistent and trusted payment experience, tailored for card-centric developed markets, and optimized for frictionless spending. Via a single integration Apple provides merchants with global acceptance, acting as merchant of record and handling operational complexity and localization (e.g., taxes, risk, chargebacks, etc.). However, IAP does have limitations related to non-card payment method support, maturity of fraud management, refund support, and subscription and pricing inflexibility. In Summary Regulatory disruption of Apple’s exclusive in-app payments model is underway, with an initial move to prohibit Apple’s anti-steering provisions (thus allowing out-of-app payments for digital goods and services). App developers will clearly benefit from lower-cost, out-of-app payments as will PSPs who have the capabilities to deliver flexible and frictionless out-of-app payments to large publishers and high-frequency gamers. Apple will retain payments volume given the natural convenience of IAP, but the success of out-of-app payments in Southeast Asia suggests massive potential to shift payment behaviors and volumes off of Apple. Please do not hesitate to contact Dan Carr at Dan@FlagshipAP.com with comments or questions.

Brazil has evolved from a cash-centric society to one of the most dynamic digital payments markets in the world and a clear bellwether for fintech in the Latin American region. Digitization of Brazilian commerce, payments, and banking accelerated during the pandemic coupled with the government’s efforts to drive financial inclusion. The magnitude of the Brazilian economy and population, paired with the rapid evolution of its payments industry, makes Brazil one of the most attractive payments marketplaces in the world for payment service providers. However, success in the intensely competitive Brazilian payments market requires cutting-edge innovation and deep localization to compete with capable local vendors. High Growth in Electronic Payments Brazil is a high growth payments market. From 2016 to 2020, card payments at POS grew at 14% while card-not-present volumes grew at 23% (see Figure 1). The value of payments via cards has already surpassed cash and is on pace to reach ~2x cash payments by 2025. FIGURE 1: Card Payments in Brazil ($R trillions) Sources: Central Bank of Brazil, ABECS (Brazilian Association of Credit Card Companies and Services) Brazil is the most terminalized market in the world, as measured by per-capita penetration. As shown in Figure 2, Brazil has more than 1 terminal for every 10 people, which is more than double the terminalization rate seen in mature cards markets such as the U.S. and U.K. One reason for this leading global terminalization rate is the incredible success of mPOS in Brazil. Almost half of the terminal installed base in Brazil are mPOS devices, which are low cost and well-suited for micro-merchants and rural environments. The card terminal installed base in Brazil grew an impressive 42% from 2016 to 2020, compared to global growth of 15%. FIGURE 2: POS Terminal Statistics Source: Central Bank of Brazil, Flagship estimates Both consumers and the long tail of merchants are rapidly migrating to digital payments. Consumers have long favored credit cards in Brazil due to their enablement of installments. Merchants in turn must also support installments. This, along with the deep penetration of mPOS, results in broad acceptance of cards, even among micro-merchants. The pandemic has driven digital payments further into the under-banked population (who do not have credit cards). According to the survey carried out by the National Bank of Brazil, over 36% of Brazilians stated that they opened some form of a digital bank account during the pandemic. To access ‘coronavoucher’ aid program in Brazil, low-income members of the society had to open a digital bank account with an attached virtual debit card. The acceleration of financial inclusion post the pandemic in Brazil is expected spur a new wave of digital payments adoption among traditional cash users. Shifting Payment Behaviors and Payment Schemes The landscape of Brazilian payments is a complex network of both local and global payment methods, which is constantly changing. Local debit card scheme Elo has 21% of the cards market and shows no signs of losing share to international schemes (see Figure 2). Installment payments via cards are ingrained in the Brazilian consumer payments culture. Brazil has several local digital wallets as well as a paper-based local scheme, Boleto, that is still popular among older online consumers (see Figure 3). FIGURE 3: Payments Mix Source: Global Data (2020 est.), Flagship Advisory Partners (2021 est.) In parallel with the roll-out of open banking and a push for financial inclusion, recently launched real-time bank transfer payment scheme PIX is the new face of Brazilian payments. PIX offers merchants lower processing costs than cards, and is free for end customers. Heavily promoted by the Central Bank of Brazil, adoption of PIX is rapidly growing for both person-to-person transfers and person-to-business payments and has gained early traction (see Figure 4) by actively displacing cash and the legacy Boleto payments scheme. PIX could disrupt aspects of the traditionally lucrative cards market, while continuing to stimulate high growth in the total base of digital payments. The plethora of local payment methods means that merchant payment service providers must be highly localized to succeed. FIGURE 4: PIX Payments in Brazil (millions of transactions) Source: Central Bank of Brazil Intensifying Competition Among Payment Acceptance Providers The Brazilian market for merchant payment services is intensely competitive. Traditional market leaders Cielo and Rede have lost market share as a result of fintech innovators better positioning for small merchants and digital commerce (see Figure 5). Fintechs including Stone and PagSeguro initially gained traction in the small merchant segment with inexpensive and easy-to-use mPOS products and are now moving up market and thriving in e-commerce and SaaS-integrated payments. FIGURE 5: Top Card Merchant Payment Providers (% card payment turnover) Source: Company Quarterly Earnings, Cielo Management Presentations Profitability in Brazilian merchant payments has traditionally been one of the highest in the world. However, ongoing price competition is eroding gross margins. Cielo’s and PagSeguro’s net revenue margins, for example, compressed at a consistent rate of ~15% per annum in the last five years. Past reductions in interchange by the Central Bank of Brazil did not offer much breathing room to these providers with most of the surplus revenue quickly passing through into lower merchant pricing. Providers such as Stone are not shy in applying aggressive pricing strategies to move up-market, and with competition from PIX as a new low-cost payment method, the pricing pressure faced by Brazilian payment acceptance providers is far from over. To offset core payments price pressure, fintechs are increasingly expanding into broader digital banking services. Stone, dubbed by many as the “Square of Brazil”, offers a full suite of money management products to its small merchant segment, including digital bank accounts, cash advances, and insurance products. PagSeguro’s PagBank has ambitions to be the next digital banking leader and is attempting to become an Alipay-style super app with its own digital wallet, lending products, softPOS, and even payments via Tiktok. Outlook on Brazilian Payments Brazil is and will continue to be a high-growth market for digital payments. The already deep penetration of cards and card acceptance is now being augmented by acceleration of e/m-commerce. The next wave of growth and fintech innovators are digital commerce specialists such as d-local and Ebanx. Along with being a massive, lucrative, and innovative domestic market, Brazil also acts as a launching pad for global payment service providers keen to enter and expand across Latin America. Global providers such as Nuvei, Paysafe, Adyen, FIS, Global Payments, and others are investing to become more relevant across the region, although they face stiff competition from global-class Brazilian fintechs. Please do not hesitate to contact Yuriy Kostenko at Yuriy@FlagshipAP.com with comments or questions

Europe saw a proliferation of new alternative payment methods (“APMs”) during the past decade which accelerated during COVID. APMs including mobile wallets, account-to-account payments, “Buy Now, Pay Later” schemes, and other forms are thriving across Europe. The European Payments Initiative (EPI), is an ambitious initiative to create a Pan-European payment scheme to compete with Visa/Mastercard. Along with the fundamental challenges of such a broad coalition effort, EPI is quite late to the European APM game. As we discuss in this article, many APMs across Europe are already well-established, filling the market needs and opportunities arising from digital commerce with rich propositions. APMs are Major Players in Europe The rise of e-commerce in the early 2000’s gave rise to many non-card payment methods, including PayPal, PaySafe (various schemes), iDeal, Sofort, Trustly, and Klarna, among others. Some of these alternatives were wallets that leveraged existing card rails (e.g., PayPal), while others were entirely new frameworks built on account-to-account (“A2A”) bank transfer rails (e.g., iDeal, Blik). The number of APMs in Europe continues to proliferate; most EU countries have at least one thriving APM (see Figure 1). FIGURE 1: Key Local Alternative Payments Methods in Europe (selected examples) Sources: Flagship market observations Several APMs have gained significant traction in their home markets: over 70% of the Dutch population use iDeal for online shopping, and nearly 80% of the Swedish population use local mobile payment scheme Swish (see Figure 2). FIGURE 2: Number of Users and % Penetration of Population in Home Market (in mil, selected non-cards based alternative payment methods in Europe) Source: Company websites, Flagship market observations European APMs have significant penetration in e-commerce, accounting for over 60% of volume in many major continental European markets such as Germany (see Figure 3). FIGURE 3: e/m-Commerce Payment Mix in Europe (select markets; % of e-commerce payment volume; 2020) Source: Local e-commerce associations, Global Data, Flagship market observations Rich Digital Product Orientation Many popular European APMs originated as peer-to-peer (P2P) digital payment propositions before expanding into consumer to business (C2B) payments. Many APMs also added value-added services (VAS) to increase customer usage and stickiness, including invoicing, loyalty, mobile phone subscriptions, parking payments, and payouts, among others. Figure 4 compares the breadth of features of selected APMs vs. traditional cards. In general, European APMs: Are oriented towards remote payments; Have a strong focus on P2P; Have limited support or traction for POS payments and cash withdrawals (QR code POS payments have limited traction in Europe); Have mixed form factors, with a “bank button”-style button at checkout being the most common; Use A2A (bank transfer) rails; and, Have a variety of VAS bolted on to the original payments proposition. FIGURE 4: Comparison of Payment Methods Source: Flagship market observations Drivers of APM Adoption in Europe The growth of APMs in Europe is attributable to a variety of factors. Drivers of consumer adoption include: Easier and faster e-commerce user experience than cards; More convenient P2P functionality than traditional account-to-account bank transfers; Better coverage of specific use cases (e.g., real-time money movement for gaming merchants); Consumer concerns about security and fraud risk online; and, Generational shift in perception and brand affiliation (which favors more digitally-oriented payment methods over “old school” cards). Drivers of merchant adoption include: Lower cost of acceptance vs. cards (often not the case following interchange regulation in Europe; many wallets or cash to digital APMs are priced at a premium); Enabled for PSP collecting, often with superior gross margins that incentivize PSPs to drive acceptance; Low effort to add additional payment methods in e-commerce due to the “plug and play” model of many collecting Payment Service Providers (PSPs); and, Desire to meet the preferences of digital consumers by offering a wide variety of payment methods. External structural influences have also played a key role in driving the growth of APMs: Regulatory focus on reducing barriers to entry into payments, deregulation of cross-border payments, reducing the cost of payments acceptance, and harmonizing payments in Euro (e.g., PSDII, interchange regulation); Convergence of digital identity and payment schemes; and Proactive political and regulatory focus on promoting alternatives to Visa and MasterCard, such as the European Payment Initiative (EPI) as shown in Figure 5. In today’s market, APMs are benefitting from the ample supply of capital. Even earlier stage APMs are often well funded by VCs. FIGURE 5: EPI – the Biggest APM of Them All? Source: Flagship market observations Imperatives for APM Growth APMs have ample opportunity to continue displacing cash, cards, and legacy bank transfer payment methods: International expansion: Today, most popular APMs are domestic by nature, which is particularly true for bank-backed solutions. Initiatives such as P27 (an account-to-account scheme in the Nordics) illustrate the need for common payment infrastructures across countries, and the recently announced merger between Vipps, MobilePay and Pivo demonstrates that APMs are actively collaborating to reach a state of cross-border interoperability. Continued expansion of merchant acceptance: Given the sometimes-difficult integration of APMs into an online checkout process, some small merchants are left with limited choices. Plug-and play providers (i.e. SaaS platforms) increasingly allow even the smallest web shops to easily add local alternative payment methods into their online checkout process, which helps with conversion and eases the process of selling abroad. Furthermore, the APMs themselves have significantly improved their developer portals, which simplifies adoption by payment intermediaries who serve the small business segment. Cracking the code at the physical POS: Acceptance of APMs in-store has a track record of failure in most Western markets (e.g. MobilePay’s Bluetooth beacons) due to technical and physical integration challenges, clunky user experience vs. contactless cards or Apple Pay/Google Pay, and difficulty in changing customer behavior. Some APMs are focusing on using proven in-store wallets such as Google Pay to effect in-store NFC transactions (e.g., Blik in Poland), which initially appears to be promising. QR-code based payments are thriving in many other global markets including China, India, Russia, and others. We expect QR-based payments to accelerate as well in Western markets as POS hardware shifts towards more flexible Android and integrated devices. Conclusion APMs are thriving and proliferating across Europe, and globally. APMs thrive by addressing unmet needs in digital commerce, by adapting to local market opportunities, by enriching their apps with value-added services, and by enabling specific use cases or verticals that are otherwise underserved. APMs, energized by aggressive capital backing, will continue to evolve and grow. This evolution will include ongoing geographic expansion (e.g., AfterPay and Klarna), expansion into the POS environment, and evolution towards super-apps with broad based financial and commerce services. EPI has the intention of becoming the leading pan-Europe APM. While this goal is appropriately ambitious, it is also potentially too late considering the success of other APMs and the vast acceptance and usage ecosystems now built around existing APMs. Please do not hesitate to contact Erik Erik@FlagshipAP.com, Simone Simone@FlagshipAP.com or Elisabeth Elisabeth@FlagshipAP.com with comments or questions.

Almost 20 years ago, eBay acquired PayPal for $1.5 billion. PayPal was subsequently spun-off from eBay while growing into the leading global e-commerce payment service provider (“PSP”), worth more than $300 billion. On Wednesday, October 20th, PayPal signaled a potential acquisition of Pinterest, a $40 billion digital marketplace and visual discovery engine. Where eBay and PayPal saw brighter futures as separate companies (and subsequently split in 2015), PayPal’s strategy six years later appears to have come full circle. FIGURE 1: PayPal Product Expansion (selected examples; graphic = active user accounts in millions) Sources:PayPal filings, GlobalData, Flagship market observations In recent years, PayPal demonstrated increasingly willingness to expand into commerce services including its $4 billion acquisition of Honey in 2019 (as illustrated in Figure 1). Shareholders are less enthusiastic; PayPal’s stock price dropped more than 10% on the news of the potential acquisition of Pinterest. It appears that the market is drawing parallels between PayPal’s past with eBay and views the potential acquisition of Pinterest as a reversal of that decision. We see PayPal’s potential acquisition of Pinterest as a high-profile example of the broader trend toward convergence of commerce and payment services. In Figure 2 we illustrate this convergence by depicting the vertical integration of select platform providers into payments and payments providers into platform services. FIGURE 2: Vertical Integration of Payments and Commerce Specialists Source: Flagship market observations As PayPal – eBay case study illustrates, integrating payments services and commerce platform services can be challenging. Payments companies are fundamentally financial services operators while commerce platforms are built on software and digital marketing foundations. Combining these different DNAs and cultures is not easy, although PSPs themselves (e.g., Square, SumUp, Stripe) are also increasingly tech-centric and marketing-centric, which acts as a common thread. Merging commerce services into a payments franchise can also create channel conflict as PSPs increasingly rely on software/platform partners for distribution. PSPs must carefully prioritize their partnership strategies vs. the option to expand into commerce. In Figure 3 we list some of these challenges along with examples of synergies when merging payment services providers and commerce marketplaces and platforms. FIGURE 3: Synergies and Challenges of Owning In-House e-Commerce Marketplace or ISV Capabilities Source: Flagship market observations PayPal’s potential acquisition of Pinterest is another high-profile example of the convergence of payment services and commerce platforms (and SaaS). There is no doubt that payments services and commerce services are converging at product level globally. But this does not mean that all PSPs should own commerce platforms, as partnership (and conflict avoidance) can be the higher priority. Both strategies (partnership-based and in-house owned commerce services) are successful strategies as long PSPs dedicate the right level of resources to maintain partner relationships and learn to successfully market a broad services bundle. Flagship Advisory Partners has extensive experience working with global PSPs in developing their software/commerce channel and M&A strategies. Please do not hesitate to contact Rom Mascetti Rom@FlagshipAP.com or Scott DeHaven Scott@FlagshipAP.com with comments or questions.

The growth of e-commerce and the gig-economy transformed businesses and gave rise to marketplaces and aggregators like Amazon, AirBnB, Upwork, and more. Global payout providers support marketplaces and aggregators, enabling merchant payment disbursements and cross-border money transfers to pay sellers, employees, agents, and/or consumers (‘payees’). These global payout providers are bridging the gap between traditional B2B and B2C payment disbursements and modern digital payments experiences. This article discusses the growth of global payouts, using Payoneer’s recent IPO for illustration. Payoneer IPO Payoneer is a leading global payout provider that recently IPO’ed on the US Nasdaq. Payoneer’s IPO provides evidence of investors’ keen interest in global disbursements, marketplace enablement, and SaaS and integrated payments opportunities. The rise of marketplaces and the gig economy created demand for a new form of agile, modern global payouts, which is powered Payoneer and other payout specialists’ rapid growth. Payoneer went public on June 28, 2021 and, as of the date of this article, is trading at 6.3x EV/revenue multiple. As highlighted in Figure 1, Payoneer demonstrated impressive revenue and volume growth from its mass payment / payment disbursement proposition suite. Its primary geographies include China and the United States, accounting for 37% and 10% of revenues respectively for the six months ending June 30, 2021. The remaining 53% of revenue is split among more than 190 other countries. However, Payoneer is still in an early-stage growth phase and has an operating loss of 10% for the six months ending June 30, 2021. FIGURE 1: Payoneer Quarterly Revenues and Volume Growth (volume and revenues in $ mil.) Volume: Total dollar value of transactions successfully enabled by Payoneer’s platform, not including payment orchestration Take Rate: Percentage of Volume earned as revenue Sources: Payoneer, Flagship Analysis Growing Demand for Global Payout Solutions The continued evolution of commerce and payments technology is spurring demand for global payouts and disbursements. Mastercard estimates that the gig-economy alone will generate more than $450 billion in payments volume globally in 2023, growing at an estimated 17% CAGR during that time (Mastercard’s 2019 whitepaper is published here). Payees also demand more customized options for receiving payouts. According to a recent survey conducted by PYMNTS and Tango Card in the U.S., 49% of payment recipients would prefer to receive payments via a digital wallet or direct deposit and more than half of recipients would be willing to pay part of the payment values to receive payments in their preferred method (PYMNTS’s study is available here). Figure 2 illustrates how global payout providers are enabling merchants to fulfill a variety of global payout use cases. Payout specialists connect merchants’ legacy financial institutions and enterprise solutions to a separate bank account established by the payout specialist with one of its various bank partners. The payout provider disburses payments from this account to white-labeled mobile wallets or pre-paid card solutions through which payees can access their funds directly. Merchants capitalize on payees’ willingness to pay for customized disbursements by offering various payout options such as virtual and physical card payments, local bank deposits, and paper checks within user-friendly digital interfaces. FIGURE 2: Illustrative Global Payout Disbursement Solution Illustrative and not indicative of Payoneer or any specific global payment provider’s current processes or capabilities Source: Flagship market observations Winning in Global Payment Disbursements Today’s leading global payout providers are enabling domestic and cross-border/cross-currency disbursements along with value-added services, like accounts-payable automation and prepaid/virtual card issuance (Figure 3 lists commonly observed global payment disbursement capabilities). The keys to success in the global payment disbursements space include: 1. Progressing multi-rail enablement: Enabling payments via payees’ preferred form factor is fundamental to global payout providers’ value proposition. E-wallets, virtual cards, physical cards, cross border money movement, OCT, and traditional bank transfers are just some of the methods for payout providers to consider. These methods serve not only diverse payout segments but also industry vertical needs (explained further in #3 below). 2. Expanding into value-added services: Global payout providers are investing in unique value-added services to differentiate themselves. Payoneer has demonstrated a willingness to invest in VAS including multi-currency virtual accounts and payments orchestration. In fact, Payoneer acquired Optile in 2019, a payments orchestration platform designed to simplify enterprise payments infrastructure for merchants by abstracting the complexities of managing multiple payments service providers and value-added service relationships (Flagship discusses payment orchestrators in more detail here). 3. Developing industry/vertical specialization: Merchants are no longer looking for cookie-cutter business and payments solutions but rather integrated solutions that address niche industry challenges. For this to happen, PSPs need ISV integrations and/or in-house business solutions. Two such examples include Greenphire (clinical trials) and Vpay (insurance) which embed payout capabilities within other vertical-specific business solutions (e.g., trial budget development, participant travel booking, mobile insurance claims, tax compliance, etc.). 4. Enabling B2B payments capabilities: Disbursements and payouts offer a new source of value for traditional B2B payments enablers. While many B2B solutions strictly offer domestic payment capabilities, global payout providers offer cross-border solutions that are critical for multi-national enterprises. As such, successful payout providers need to sharpen their own B2B focus to capture the addressable market opportunity. Tipalti does this well by wrapping in-house smart payables, supplier management tools, and procure-to-pay capabilities around its own global payout solution. Global payouts require unique capabilities, which have allowed specialists like Payoneer to thrive. As payout demand scales and ‘goes mainstream’, we expect other fintechs to expand their capabilities for and focus on this segment of the market. FIGURE 3: Commonly Observed Global Payment Disbursement Capabilities Source: Flagship market observations Payoneer’s recent valuation spotlights the value of global payouts as a payments domain with rapid growth and innovation. With the ongoing expansion of the gig-economy and marketplaces, we expect strong growth for payout demand and an ongoing mainstreaming of global payouts as a core capability for a variety of fintech segments. Please do not hesitate to contact Rom Mascetti Rom@FlagshipAP.com or Scott DeHaven Scott@FlagshipAP.com with comments or questions.

Buy now, pay later (“BNPL”) is experiencing huge growth in awareness, uptake, and press coverage. Klarna is the largest and most visible standard-bearer, showcasing a 33% revenue growth rate and a $46 billion valuation in its last funding round in June 2021 implying a 30x revenue multiple. Fintech incumbents have issued a slew of BNPL press releases in Q3: Square acquiring Afterpay for 42x revenue, PayPal acquiring Paidy for 153x revenue, and PayPal, Revolut, Monzo, and Curve all announcing new BNPL offerings (see Figure 1). FIGURE 1: Examples of BNPL Traction in the Marketplace Source: Company reports and press releases EU Banks BNPL Offerings Based on the market activity levels in BNPL, the fact that BNPL was (arguably) born in Europe, and that many European markets traditionally are averse to revolving credit cards, we would expect European banks to be rushing to defend short-term lending and to capitalize on the growth of the new product category. We therefore analyzed the offerings of the top 5 banks (ranked by assets) in 10 leading European markets (50 banks in total), and were somewhat shocked with the results (see Figure 2): Only 2 EU banks (4% of the total), Barclays in the UK and Santander in Poland, offer full BNPL propositions; 17 EU banks (34% of the total) offered some sort of installments on credit cards, primarily via non-digital channels; and, The remaining 31 EU banks (62% of the total) only marketed traditional credit cards. FIGURE 2: Transactional Credit Offerings Marketed by 50 Leading EU Banks Source: Flagship Advisory Partners research We also found that bank transactional credit offerings tend to cluster by country (see Figure 3): French banks offer installments at the POS; UK, Spanish, Italian, and Polish banks offer post-purchase installments via mobile/online banking; Several banks in CEE offer post-purchase installments via offline channels: branches, call center, and/or SMS; Most banks in Germany, Sweden, Italy, and Czech Republic simply do not market installments. FIGURE 3: EU Bank Credit Card Installment Offerings by Country Source: Flagship Advisory Partners research Pricing and terms of the installments offered vary widely, as summarized in Figure 4. Most installment options are lower priced than credit cards, and most banks utilize interest rates (APRs) rather than ad valorem fees. FIGURE 4: Pricing and Terms of EU Bank Credit Card Installment Offerings Source: Flagship Advisory Partners research Reasons Behind the Lack of EU Bank BNPL Adoption While a handful of EU banks have relatively strong digital installment offerings, most appear to have missed the boat on the BNPL wave. There are likely several drivers of this counter-intuitive behavior: Lack of natural channels to distribute pre-purchase BNPL, which in its most prevalent form requires a strong e/m-commerce PSP solution; Valid arguments that banks should rather focus on post-purchase installments where there is a more natural fit (since the transaction shows up in mobile/online banking); Conservative risk appetite; Higher regulatory scrutiny of banks than of fintechs; Operating model challenges: higher cost to process full “new to bank” credit applications, process overhead due to regulation, and legacy technical and operational infrastructures; Difficulty reconciling the internal business case for investment (domestic nature of European banking limits scale, higher investment requirements to digitize, etc.); and, Financing small ticket transactions loses out in the overall bank investment prioritization process vs. larger initiatives such as overall digitization, or against “safe bets” like investing into mortgages and personal loans. The Path Forward While EU banks have missed out on the first wave of BNPL, they still have many opportunities to grow via transactional credit. Partnering is arguably easier for banks than building organically. Example partnership options could include: Distribution of other BNPL providers’ products to the bank customer base (e.g., direct marketing to bank lists to sign up, etc.); Integrating bank-funded installments into the banks’ existing merchant acquiring alliance partners; Partnering with PSPs to distribute bank sales finance installments; Creating partnerships with fintechs to underwrite and fund fintech-originated installments Among others. Those banks seeking to own the full product also have many options, such as: Starting out simple: use credit card back-ends to hold “swipe to put on installments” transactions from current accounts in mobile banking apps; More advanced lines of credit that enable slicing and combining transactions from multiple products into configurable installments; Building a BNPL “bank button” that can be distributed by PSPs; Among others. Other players in the ecosystem can also work with banks for mutual benefit: card schemes can facilitate BNPL infrastructure and distribution on behalf of banks, acquirers and PSPs can distribute bank BNPL and installments (thereby obtaining the benefits of banks’ balance sheets), and vendors to banks, particularly card issuer processors, can provide white label solutions. Banks may also realize some benefits from staying on the sidelines: increased regulatory scrutiny as BNPL grows will level the playing field vs. fintechs, banks could benefit from others paving the way for consumer awareness and then market post-purchase installments that fit naturally into a mobile banking proposition. Besides, banks will always have a significant cost of funding advantage over fintechs. While EU banks have clearly missed out on the first BNPL gold-rush, they still have good opportunities, and if they are creative, are not completely out of the game. To share your views or discuss those above, please contact Erik Howell at Erik@FlagshipAP.com or Zuzana Krulišová at Zuzana@FlagshipAP.com

As we explored previously in this article, the integration of software and payment services in European B2B/corporate payments is relatively immature compared to the US. There is, however, great potential for this trend given Europe’s robust bank payments infrastructure and shift towards open banking. Most of the early adoption of open banking has focused on information aggregation and digital identity services rather than payments. Figure 1 illustrates that c.75% of all B2B ISVs (software providers) are AIS licensed (Account Information Services) only, not licensed for payments. ISVs that have a PIS license (Payment Initiation Services) are limited in number and often offer somewhat-immature integrated payment services. FIGURE 1: European TPPs: B2B ISVs Licensing by Business (total European B2B ISVs=65) Note: 59 of the TPPs (Third Payment Providers [of PSD2 services]) are in the business segment only, 6 TPPs are in the consumer and business segment. Other business lines include debt management and hosting ISV. Other geographies include Estonia, Italy, Norway, Finland, France, Ireland, Poland and Czech Republic with one B2B ISV in each market. Source: Flagship market research Serrala, a leading SaaS based AP (accounts payables) and AR (accounts receivables) automation platform recently announced a partnership with Tink that illustrates the tremendous market potential for integration of corporate AR/AP automation and corporate payments, enabled by cloud-based open banking technology. Tink is an open banking fintech unicorn that provides open banking connectivity services to more than 3 400 banks. The Tink and Serrala partnership will allow businesses to collect invoice/bill payments through open banking rails. Billers today often struggle with separate business processes and flows for the administration of their AR and related payments, often still relying on banks. Bills are also often still collected via traditional direct debits, which comes with limitations. Serrala’s integration of their core AR SaaS software with Tink’s open banking rails will enable billers to administer the automation of their AR and receipt of bill payments through a single integration and benefit from real-time push payments and related value-added services (as illustrated in Figure 2). Consumers could also benefit from added control, making their bill payments directly from their bank accounts through an integrated payment request link. FIGURE 2: Illustration of Serrala-Tink Partnership for Integrated Bill Payments Source: Flagship Advisory Partners research Serrala, who recently announced a strategic investment from Hg, is a pioneer in innovating corporate payments with integrated AR/AP workflows. As we describe in Figure 3, Serrala supports its corporate clients globally including 13 offices in Europe, North America, Middle Easy, and Asia Pacific. FIGURE 3: About Serrala and Services Source: Serrala website, crunchbase, linkedin Hg’s investment in Serrala and parallel partnership with Tink illustrates two prominent themes in market development. One, there is tremendous opportunity for value creation on the forefront of software-integrated payments servicing global multinational corporates. And two, open banking is a catalyst for this trend (particularly in Europe) as open banking enables more robust and technically agile use cases. We anticipate many more investments and partnerships within this part of the market Please do not hesitate to contact Anupam Majumdar Anupam@FlagshipAP.com with comments or questions.

Merchants face ever-expanding complexity for managing payments across geographies, channels, and use cases. Merchants want the ability to quickly adapt their payment infrastructure to embrace growth while delivering robust customer experiences. In parallel, payments technology is shifting into the cloud and opening and embedding into broader API ecosystems. As a result of both merchant demands and modern technical possibilities, a new model of payment services – orchestration, is thriving. As illustrated in Figure 1, payments orchestration introduces a many-to-many technical mindset with a product designed to ease the burden and increase the flexibility for merchants needing broad connectivity, rich data, and transaction flexibility. Within this article, we explore the rise of orchestration and discuss examples of orchestration providers and use cases. FIGURE 1: Payments Orchestration vs. Traditional Siloed Payments Source: Flagship market observations Early Days of E-Commerce and the Emergence of Full-Service PSPs In the early days of e-commerce (2000 - 2010), technical PSPs (or ‘gateways‘) were the prevailing product and operating model for payment enablement. PSPs were generally not the collectors and settlers of funds, but rather technical integrators between merchants and acquirers. This new breed of technical providers thrived in an environment in which traditional acquirers typically lacked a robust e-commerce front-end. In the 2010-2020s, there was a broad shift towards full-stack, collecting PSPs (such as Stripe and Adyen) that could combine technical enablement with acquiring and alternative payments collecting, along with a suite of complementary services (fraud management, multi-currency, etc.). The collecting PSP model rapidly spread and today is the prevailing model for merchant payment services. The rise of collecting PSPs and the sunsetting (to some extent) of pure technical PSPs was driven by a number of forces: One-stop Shop Convenience: Merchants appreciate the simplicity of using a single provider, having one point for technical integration, service, contracting, etc. This now includes enterprise merchants who prefer PSPs that can cover many needs. M&A of PSPs: Merchant acquirers heavily engaged in buying PSPs to enhance gateway capabilities and technical connections. Capabilities Expansion: Technical PSPs recognized the value of expanding across the payment acceptance value chain and grew their product sets to include payments collecting, which offered a more lucrative revenue pool than the technical services (i.e., earning ad-valorem fees versus small fees per API-call). Payment Services Directives: In Europe, PSD opened the market for obtaining payment institution licenses, making licenses readily available with low barriers for entry to hundreds of technical PSPs. Introduction of Payment Facilitation: Visa and Mastercard opened the floodgates to payment facilitation and allowed PSPs to onboard and underwrite sub-merchants on behalf of legacy providers, which further reduced the regulatory barriers to collecting models. The Emergence and Growth of Payments Orchestration The concept of a ‘one-stop shop‘ continues to be a winning concept within merchant payments. However, in practice, the ‘one-stop shop‘ is difficult for multi-national enterprise merchants to obtain. Geographic localization, payment inflows and outflow requirements, systems integration, reconciliation, risk management, compliance, and commerce use cases all introduce complexities that a single PSP struggles to solve. The result for merchants is a complex flywheel of multiple PSPs and value-added service providers that merchants must themselves integrate and manage. We now see the emergence of PSPs (‘Payments Orchestrators‘) that are natively designed to simplify enterprise payments infrastructure by abstracting the complexities of managing many service providers. While still niche relative to the broader merchant payments market, these orchestrators are winning market share in North America and Europe. Figure 2 illustrates examples of payments orchestrators, many of whom are relatively new and small, but some of which are older business that have adapted to serve the demand for orchestration. FIGURE 2: Select Payments Orchestrators Source: Company websites and developer portals, LinkedIn At their core, payments orchestrators enable smart routing which improves transaction success and sales conversion. Merchants are increasingly focused on optimizing conversion and supporting multiple options for processing improves results. Payments orchestrators also make switching volumes and PSPs easier, which enables the ongoing reduction of the costs arising from legacy acquirers / payments collectors. Payments orchestrators also enable transaction abstraction, where transactions are augmented or manipulated to deliver specific use cases. For example, split payments and settlement (single pay-in to multiple sellers), partial payments (one transaction with multiple means of payments, vouchers, etc.), stand-alone authorizations or authentications. Fraud management is also optimized through a similar process by allowing merchants to aggregate multiple providers and data sources into a single decision engine. Multinational merchants, who inevitably use many providers of payments and related services, have a clear need for centralized data. Payments orchestrators also aggregate data across providers and enable easy consumption of this data for various purposes by the merchant (risk decisioning, treasury management, marketplace support, reconciliation, etc.). Payments orchestrators can also help merchants address complex regulatory compliance. For example, PSD2 regulations forced European marketplaces to either become licensed payment institutions or to outsource payment money flows to PSPs. Marketplaces are often multi-geographic, working with many acquirers and collecting PSPs. Payments orchestrators help to streamline the integration of seller (sub-merchant) KYC and management while still supporting many processors into a single point of managed seller payouts. Payments orchestrators help to alleviate PCI compliance by removing sensitive data while greatly enhancing the flexibility the underlying tokens. Many traditional PSPs rely on proprietary tokens which are owned by the PSP, can only be processed by that PSP, and offer restrict the ability for merchants to change their infrastructure while maintaining the tokens. Orchestrators generally provide a much more flexible tokenization service (for example, build on V/MC ‘network ‘ tokens) that allows merchants to use the same token across many processors/collectors. Use of tokenization continues to spread for payments and other forms of data across merchant environments, so flexibility is prized. Figure 4 (below) illustrates the different operating model focal points of traditional acquirers, technical PSPs, collecting PSPs, and payments orchestrators. While the market has moved towards full-service PSPs and more advanced in-house integrations, payments orchestrators have moved in the opposite direction. Orchestrators generally espouse collecting in favor of a dogmatic focus on technical enablement with a core value proposition centered around connectivity (to payments collectors and other), smart routing, transaction abstraction, and data aggregation. Payments Orchestration Use Cases Payments orchestration is most visible today in e-commerce, especially for multi-national merchants in digital verticals, but also relevant and expanding in the POS channel. Figure 3 illustrates how merchants use orchestration to simplify and enrich both e-commerce and POS commerce. As merchants expand their global footprints, the payments orchestration inputs (e.g., payment terminals and e-commerce platforms) and outputs (e.g., local PSPs and acquirers) increase while merchants benefit from having a single integration point. Beyond basic channel and geo enablement, examples of orchestration use cases include: Omni-Channel Merchants: Multinational merchants supporting omni-channel commerce must support many payment methods, form factors, and means of interacting with consumers. Orchestrators help to recognize customers across channels and geos (regardless of the payments provider) and to enable complex transactional use cases such as combining an online booking in one country with a POS check-in in another country. Marketplaces: Multinational marketplaces have some of the most complex set of payments requirements, supporting many buyers, many sellers, many geographies, and many transaction use cases. Orchestrators help marketplaces to support a single infrastructure for managing buyers and sellers across payments providers, for example, enabling a single pay-out infrastructure for all sellers, regardless of the geography, payment method, or payment service provider. SaaS Providers Expanding Into Fintech: Software as a Service (‘SaaS’) providers are increasingly bundling payments to enrich their proposition and to expand their revenue base. Integrating payments across channels and geos presents the same challenges to SaaS providers as to merchants (if not more complex). Orchestrators can help to centralize technical integration into a broad array of payments partners, payment methods, and payments endpoints while also integrating complementary services such as tax-free shopping. Acquirers and Financial Institutions: Traditional acquirers and banks also want to participate within commerce & payment ecosystems. Orchestration can provide them with a simplified means of integrating into a broad set of software and service providers. As we have witnessed with full services PSPs like Stripe and Adyen, a seamless onboarding process and connection point for ISVs / SaaS providers is a winning formula in the payment acceptance market. Payments orchestration could be the next evolution for acquirers and banks (particularly in the U.S.) looking to differentiate legacy gateway solution in favor of cloud-native, API-first technical connections. FIGURE 3: e-Commerce and POS Orchestration Merchant Use Cases (illustrative) Source: Flagship market observations Payments Orchestrators vs. Technical PSPs At a first glance, a payments orchestrator may look a lot like a traditional technical PSP: each has a fundamental purpose of connecting to acquirers and routing transactions; each is a tech-centric organization; and for each, the breadth of connectivity into acquirers and payment methods define the robustness of their service. FIGURE 4: PSP Operating Models Source: Flagship market observations There are, however, a few key differences which set a payments orchestrator apart from a traditional technical PSPs (illustrated in Figure 4): Orchestrators leverage modern tech stacks driven by REST APIs and are developer centric in everything that they do (rich documentation, support, etc.). Orchestrators use fully cloud-based tech stacks, whereas technical PSPs often still rely on traditional on-prem data centers. Orchestrators are built to add, test, update, and maintain connections, and are significantly more agile than others for constant build out of connectivity. Orchestrators effectively deliver unbundled, agnostic services: data, transaction management, etc. can be delivered separately from processing itself whereas technical PSPs tend to offer a more limited, linear set of service options. Orchestrators tend to have a global footprint, whereas technical PSPs are often domestically and regionally oriented. Orchestrators can support hundreds of connections, while PSPs generally reach ‘only’ dozens. In Summary The ability to orchestrate payments and adjacent services across channels, geographies, and use cases via a single technical integration is a powerful value proposition for merchants. Orchestration specialists are rising to meet this demand and are being rewarded with rapid growth. Beyond the orchestration specialists, we expect the future of payments technology and propositions generally to be shaped by orchestration principles, which embrace the realities of complex ecosystems. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com or Rom Mascetti at Rom@FlagshipAP.com with comments or questions.

Even payments and fintech experts often think of the Nordics as a single market with common consumer behavior, business demographics, and culture. While there are similarities, each Nordic market has a distinct payments infrastructure. The bank systems and networks are fragmented, built on domestic rules which make intra-Nordic cross-border transactions cumbersome. Nonetheless, this is set to change under P27. Named after the 27 million inhabitants in the region, P27 is an inter-bank initiative that will introduce a harmonized inter-bank pan-Nordic cross border account-to-account (A2A) payments infrastructure, making payments more efficient and cost effective for consumers and businesses. In this article, we further explore some of the opportunities for innovation on the back of P27, and why P27 illustrates the global potential for modern A2A rails to drive broad-based fintech innovation. With A2A instant payments becoming hygiene factor in Europe (and increasingly globally), the true potential of P27 lies in empowering value-added services that banks and fintechs can offer to end users to enhance value propositions riding the P27 rails. The recently announced merger of MobilePay, Vipps and Pivo further illustrates the potential to drive innovation on real-time-payment rails across borders in the Nordics. We expect this combined mobile scheme to rapidly become the preferred means of payment for P2P, e-commerce, and eventually offline commerce. There are nine interbank ACH clearing houses in the Nordics today, most of which have been operating for decades. P27 aims to replace these legacy clearing platforms with a new infrastructure powered by a modern tech stack, driving real-time, domestic, and cross-border payments in various currencies (see Figure 1). This means consumers and businesses will be able to transact with each other in real time across the region, without having to pay expensive cross border bank fees. FIGURE 1: P27 as One Nordic Clearing Platform Source: Danske Bank, P27, Flagship market observations The P27 initiative envisions the development of a new payments infrastructure in three layers (see Figure 2). Today, the focus is on implementing the core back-bone clearing infrastructure (Layer 1). We observe many fintech opportunities in layer 2 and (particularly) layer 3 services and expect fintechs to drive much of the end-user proposition innovation. FIGURE 2: P27 Layers and Use Case Examples Source: Nordea, P27, Flagship market observations P27 illustrates the global potential for modern and well-structured A2A rails to catalyze fintech innovation. Below we discuss a number of these A2A fintech opportunities, which we also expect to arise in the coming years in the Nordics, as well as other cutting-end A2A markets. 1. Modern A2A infrastructure breaks down barriers to use case innovation P27 is well positioned to build on deficiencies in existing payment use cases that are underserved by Nordic banks. P27 can enable new use cases for both consumers and businesses (see Figure 3) that widen the proposition in payments, but also adjacent categories such as data aggregation, invoicing, lending, and cash management services. Specialized fintechs should be able to ride the core P27 infrastructure to deliver superior end-user propositions. FIGURE 3: A2A Innovation Use Cases Source: Flagship market observations 2. Modern A2A infrastructure allows broader community participation in infrastructure standards and development P27 Layer 2 services will likely encourage fintechs to shape the key enablers and middleware required to power front-end propositions. In Figure 4, we illustrate a few areas where we foresee collaboration opportunities between banks and fintech. For instance, fraud and KYC providers could leverage pan-Nordic data to screen users and leverage enterprise data to make smarter decisions across borders. Providers of sign-up, signing-in and digital signature services would reach a large new audience. FIGURE 4: Potential Fintech Participation (select examples) Source: Flagship market observations 3. Modern A2A infrastructure empowers model payments, including A2A schemes, in e-commerce and POS-commerce Retail payments in the Nordics are still relatively card-centric today. Nordic consumers abandoned cash at POS long-ago and tend to lean on cards for x-border e-commerce. Mobile schemes such as Swish are rapidly gaining share in domestic e-commerce, but encounter limitations for x-border use cases and POS integrations across the region. P27 could strip down remaining barriers to using Nordic mobile schemes across use cases. This will enhance customer payment options, reduce merchant cost of payment acceptance, and reward innovative merchant providers that embrace the new infrastructure potential. 4. India’s UPI illustrates the potential for modern A2A infrastructure to drive broad-based fintech innovation While being quite different from the Nordics in many ways, India’s UPI (Unified Payments Infrastructure) illustrates the potential for open-banking innovation on well-crafted and modern A2A rails. As illustrated in Figure 5, since its introduction five years ago, the UPI rails rapidly displaced cards to become the #1 digital payments rails. Ultimately, the Indian government’s infrastructure vision was key to driving this innovation. FIGURE 5: India – Unified Payments Interface Source: Flagship market observations, NPCI We expect P27 to catapult the Nordics to the forefront of open banking in Europe. Three years after the introduction of PSD2 and open banking, the uptake of A2A payment services through open banking rails remains modest. Part of this slowness is due to the fragmented nature of the open banking technical standards, and lack of a unified infrastructure across countries. P27 has the potential to alter these limitations in the Nordics by powering a more standardized infrastructure. This in turn will spur open-banking value proposition development and ultimately usage. We anticipate P27 to drive the Nordics to the front of open-banking innovation and usage in Europe in the coming years. Please do not hesitate to contact Anupam Majumdar Anupam@FlagshipAP.com or Elisabeth Magnor Elisabeth@FlagshipAP.com with comments or questions.

Neobanks have been highly influential in prodding traditional banks to digitize and improve the customer experience, but many still face a long road towards scale and profitability. The strength of the product catalog is a key growth driver; therefore, we examined the offerings of the top 20 neobanks in Europe and North America as measured by client base and funding. As shown in Figure 1 below, the top 20 neobanks share several characteristics: most are based in the US or UK, and several of the largest did not originate as “pure” neobanks. FIGURE 1: Top 20 Neobanks in Europe and North America by Client Base (in millions) and Total Funding (in $ millions) Note: We define neobanks as fintechs that offer deposit products or quasi-bank accounts. For example, Robinhood, an investment platform, offers a cash management account with a debit card that sweeps deposits to insured banks. Source: Flagship Advisory Partners research compiled from company websites, The Financial Brand, and Crunchbase. The growth in the number of neobanks has been driven by funding availability, the market opportunity to improve upon the customer experience offered by traditional banks, and the advantages of starting fresh with modern architecture, thereby enabling more innovation and faster responsiveness to market and customer needs than traditional banks. Of course, not all neobanks are success stories – many are subscale, and some have failed (e.g., Simple, Azlo, Xinja). Many of these smaller neobanks are challenged to scale due to the inherent difficulties in getting customers to switch primary banks, narrow product ranges, and because many traditional banks have already closed the gap in the digital customer experience. Even the largest neobanks still need greater scale and profitability (e.g., the largest, Revolut, still runs at a loss), and expanding the product catalog is a logical next step. We reviewed the products offered by the top 20 neobanks (Figure 2 below), and found several common themes: Many neobanks still have significant room to expand their suite of lending products; Relatively few offer SME products (surprising given that the customer experience for SMEs at traditional banks is often markedly worse than for consumers); Neobanks’ transactional banking offerings towards consumers tend to offer optically appealing products and features such as round-ups and metal cards; Several have begun to offer direct investments into cryptocurrencies (crypto comprised 15% of Revolut’s 2020 revenue); However, overall offerings of insurance and investments are relatively light compared to traditional banks. FIGURE 2: Product Offering of Top 20 Neobanks in Europe and North America (by number of Neobanks offering the product) Source: Flagship Advisory Partners analysis of company websites. * Cash advance is a small value loan typically structured as an unsecured advance on salary. Given that top neobanks’ product sets are typically weighted towards transactional banking, many will need to continue to push into lending to drive profitability. Focus on SMEs is likely to increase, given the wave of small business digitization driven by COVID-19, general under-penetration in the market, and that the customer experience at traditional banks for SMEs generally remains below that of consumers. Further expansion of fee-generating products delivered by partners, such as insurance and investments, is also a natural next step. To date, many neobanks have followed a logical path to expanding their product catalog: focus on core transactional banking and payments, and then add fee-generating products enabled via partners. While this is a logical launch strategy, it is also arguably not the disruption that the industry feared when neobanks emerged. Rather, it is the tried-and-true universal bank product strategy re-cast for digital delivery. Neobanks’ next steps will likely be towards innovation where it is (arguably) needed most: lending and SMEs. Digital delivery presents a variety of opportunities to increase convenience for consumers via lending products (e.g., umbrella lines of credit, swipe to move your current account transaction to installments, etc.), and for SMEs generally (e.g., easy integration with accounting systems, working capital at the click of a button, digital factoring and receivables financing, etc.). In the meantime, traditional banks, which learned many lessons from neobanks’ approach to digital delivery, should also consider neobanks’ approach to product catalogs. These include being easier to partner and integrate with, a willingness to test “small” products delivered via partners to round out the overall offering, and to increase the appeal of the overall banking relationship via optically appealing add-ons such as metal cards, round-up, carbon offset, and other “soft” benefits. Neobanks remain an influential force in banking. After successfully forcing traditional banks to clean up deficiencies in digital, neobanks’ next steps in product development will be watched closely by their older (but now more digitized) competitors. Please do not hesitate to contact Erik Howell Erik@FlagshipAP.com or Aigerim Assembayeva Aigerim@FlagshipAP.com with comments or questions.

As we previously discussed in a three-part series, COVID-19 has impacted the payments and fintech landscape across the board, including M&A activity (as investors continue to love digital payments), sectors (for instance travel and restaurant verticals have suffered, while groceries and online retail have thrived), and has shifted customer preferences towards digital channels and form factors. As many countries approach improving conditions after experiencing second, third, or fourth waves of the pandemic, now is an excellent time to step back, reflect, and update your company’s roadmap. In the prior 2020 version of this article, we advocated a structured roadmap to account for volatility, while in 2021, many of the same principles apply, but we encourage a structured review of your company’s current situation to identify what shifts will “stick” longer term vs. which are short-term impacts that (hopefully) will ease. To aid in this review, below we review keys to success and pitfalls to avoid when creating and executing roadmaps. We then provide some practical examples based on how Flagship Advisory Partners work with our clients to develop winning roadmaps. We have provided these frameworks and examples in a downloadable presentation availa ble here. Keys to Success Good roadmaps are just one component of a broader strategy framework that must also include the voice of your customers, a universally shared strategic vision, and a prioritized backlog. All four of these strategy components should be viewed together, and each should feed into the others. The roadmap itself is the detailed and actionable plan for how to achieve the vision, the backlogs are prioritized to deliver the initiatives in the roadmap, and the entire strategy should be based on customer and stakeholder feedback. Robust roadmaps should include the following components: Current Situation Analysis that answers the question “where are we now?” This should include thorough analysis of both the external market (e.g., customer needs and buying behaviors, segmentation and revenue pools, the competitive landscape, market trends and resulting opportunities) and a company’s internal situation (e.g., customer experience, performance benchmarking, gap analysis, and distribution and cross-sell effectiveness). A Vision that answers the question “where do we want to go?”. This should include clearly and specifically defining (from the company’s perspective) what we are selling, to whom, what needs we are fulfilling, why customers should buy from us, how our product is unique, where and how we will sell our product, how we will keep customers happy, and how we will meet our financial and stakeholder objectives. Prioritized Initiatives that answer the question “what should we do?”. These should include identifying the right universe of opportunities in logical categories (e.g., product, distribution, enablement, M&A), evaluating various execution options, and assessing and then prioritizing the resulting initiatives using criteria such as cost, time, fit, etc. Scoped Initiatives that answer the question “how to we do it?”. For each initiative, this should include clearly defining what to deliver and why (e.g., target clients, value proposition, business case, etc.), how to deliver it (e.g., feature set, development path, etc.), and what resources are needed to deliver. Sequencing and Categorization that answer the question “how do we get there?”. This should define which initiatives are required enablers for others, sequence the initiatives to ensure adequate delivery lead times, and should differentiate between initiatives that deliver the basics vs. those that differentiate and win. A Resource Allocation Check that answers the question “what do we need to deliver?”. This sensibility check can be done by comparing the bottom-up investment budget and human resource allocation to individual initiatives with a top-down view of those initiatives stacked against the overall vision. Regular Updates that answer the question “does it still make sense?”. The roadmap should be a living document that is regularly updated based on feedback, progress on the backlog, KPI performance, market developments, and “what if” scenario planning. Pitfalls to Avoid There are some obvious pitfalls in developing roadmaps: 1) not having one in the first place, 2) not providing adequate resources, and 3) having unrealistic expectations. Beyond the obvious, there are also more subtle pitfalls to be avoided. Not starting with customer needs. The foundational input to all roadmaps should be what customers need, as opposed to what the company wants. These can by hypothesized needs based on innovation rather than the literal results of primary research to avoid the “customers don’t know what they want” trap. Imbalanced focus on technical development. Related to the point above, robust roadmaps should not be led by technical development considerations, but rather on addressing customer needs, which requires a combination of commercial and technical initiatives. On the other end of the spectrum, roadmaps should be specific and detailed enough regarding technical development so that the organization is clear on what, how, and when to deliver. Over- or under-analyzing the current situation. Insightful analysis should be a means to an end, rather than the “analysis paralysis” trap with too little focus on what a company should actually go execute. On the opposite end of the spectrum, under-analyzing by turning the roadmap into a pitch deck supported by a few market examples should also be avoided. Confusing visions with ambitions. Visions should tell a clear and specific story for how a company will create future value. As highlighted in many strategy articles, vague ambitions such as the “we want to be the [digital] market leader in . . .” trope are not strategic visions. Not aligning organizational infrastructure with roadmap delivery. Sound organizational and delivery principles are universal needs that also apply to roadmaps. Weak implementation regarding clarity and transparency around who should deliver what by when, accountability and ownership, regular updates, feedback gathering, agile ways of working, and other delivery principles can throw a good roadmap off track. Practical Examples Below we provide some practical examples of how Flagship develops roadmaps for our clients, in this case using an illustrative PSP. Figure 1 below illustrates that roadmaps are one of four components in a robust strategy, and iteratively link to the vision, backlog, and feedback. As noted above, the vision should clearly define where the company wants to ago, and also how it will create unique value in order to win in the marketplace. The roadmap itself should define in detail how to achieve the vision, and how resources will be allocated. The backlog defines day-to-day prioritization and resource deployment. The entire strategy and execution should be based on customer needs and feedback from other relevant stakeholders (e.g., sales team, etc.). FIGURE 1: Payments Strategy Framework Sources: Flagship Advisory Partners As illustrated in Figure 2, the vision should be based on insightful analysis of the current external and internal situation. At Flagship we tailor this analysis to the situation of our particular client, but typically for the external market we examine customer needs and buying behaviors, market segmentation and revenue pools, the competitive landscape, and trends and opportunities. For an internal analysis we assess the customer experience, benchmark performance, perform gap analyses on products and distribution capabilities, and assess the effectiveness of distribution and cross-sell. Both of these analyses should include examination of structural shifts due to the pandemic, and the trends and opportunities component should include a forward-looking view on how long these changes are likely to continue vs. to what extent they are permanent (e.g., due to channel shifts, behavioral shifts, etc.). These analyses should inform the vision, which typically must answer approximately 10 specific questions to define where and how the company will create unique value to win in the marketplace. As noted above, a good vision should be specific, not vague ambitions. FIGURE 2: Current Situation Analysis and Vision Framework Sources: Flagship Advisory Partners In Figure 3, we see that our hypothetical PSP’s market analysis has identified opportunities to target SMEs with recurring memberships, but lacks some of the product and distribution capabilities to expand out of their domestic market. Therefore our PSP has developed a clear vision for this international and segment expansion, along with a universe of initiatives. After categorizing the initiatives into typical roadmap categories (product, distribution, enablement, M&A), we evaluate each initiative to select the optimal option to implement, and then we prioritize all the initiatives for sequencing in the roadmap. FIGURE 3: Example Analysis, Vision, and Prioritization of Roadmap Initiatives Sources: Flagship Advisory Partners Robust roadmaps should have sufficient detail to enable the organization to clearly execute. In Figure 4 below we illustrate an example framework for scoping each initiative, in this case building a fully online boarding process for our hypothetical PSP’s new merchants. This scoping exercise covers what to delivery and why, how to deliver, and what resources are needed to deliver. FIGURE 4: Example Initiative Scoping Framework (to be used for each major initiative) Sources: Flagship Advisory Partners Once each of the initiatives are scoped, we can create the roadmap itself. Roadmaps can exist in multiple versions, below in Figure 5 we show an example of an executive level roadmap that clearly shows on one page the vision, key initiatives organized by area, which initiatives are prerequisites for others, and which initiatives position our hypothetical PSP to deliver the basics vs. differentiate and win in the marketplace. FIGURE 5: Example Payments Roadmap Sources: Flagship Advisory Partners Since roadmaps are generally constructed bottom-up, we often perform a top-down sense check on resource allocation to ensure that the overall allocation is in line with the vision. In Figure 6 below, we check our hypothetical PSP’s year 1 CapEx budget by illustrating how much of the budget is being invested into each area and in delivering the basics, vs. differentiating and expanding. Since our PSP has product distribution gaps, most of the budget is being invested into differentiating in these areas, which makes sense. FIGURE 6: Example Resources Sense Check (budget allocation mapping) Sources: Flagship Advisory Partners Once the roadmap is finalized and we have performed sense checks, we encourage clients to update the roadmap on a regular basis as illustrated in Figure7 below. Roadmaps are living documents that must react to current realities, so should be updated based on regular feedback that the company receives from customers and other stakeholders, actual progress on the backlog (as perhaps some initiatives are more/less costly and complex than were initially estimated), actual performance vs. KPIs, and how the market is developing. As noted above, it is important to align this type of organizational infrastructure around the delivering the roadmap, and ensuring the ownership of individual initiatives is clearly defined, what success criteria are, that delivery methods are sufficiently agile, etc. Additionally, periodically performing “what if” scenario planning is a useful tool to be ready for future market developments. As we have learned over the past year, the future under the pandemic is difficult to predict, so scenario planning is critical. FIGURE 7: Example Inputs for Periodic Updates to the Roadmap Sources: Flagship Advisory Partners We hope that the above frameworks and examples prove useful as you update your organization’s roadmap to address today’s changing marketplace. Flagship Advisory Partners has significant experience with developing winning strategies and roadmaps for our payments and fintech clients, including: Collaboratively formed board-level strategies to guide group decisioning; Developed actionable (and successful) growth strategies for numerous clients including opportunity identification and prioritization; Collaboratively developed product roadmaps, linking business strategy with technical development and go-to-market execution; and Formed winning positioning strategies based on detailed external and internal evaluations. Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com with comments or questions. DOWNLOAD PPT

Since the introduction of PSD2 and open banking regulations in early 2018, 451 third party providers (TPPs) have procured licenses for payment services (PIS) and account services (AIS). Out of the 451, 422 are currently active. We recently analyzed the landscape of these active TPPs from the EBA register, examining their licensing demographics, the segments served and the underlying business models. We present some of our key findings in this article. As shown in Figure 1, UK continues to be the European open banking powerhouse accounting for c. 40% of all registered TPPs in Europe. UK’s open banking regulations offered TPPs with a standardized account to account (A2A) technical interface which has not surprisingly attracted a larger number of TPPs. In rest of Europe, the PSD2 technical standards and interfaces continue to be fragmented, and banks have been slow to offer the end points to access the A2A infrastructure, broadly explaining why TPPs growth in rest of Europe has lagged the UK. FIGURE 1: Number of TPPs Across Licensed Countries (May 2021) Source: EBA Register More than 90% of the TPPs today have an AIS license, indicating a strong interest in account aggregation services. This emphasis on AIS is evident across top TPP markets such as UK, Sweden and the Netherlands (see Figure 2) which are mature European fintech hotbeds. Fintechs in these markets, such as Klarna, Monner, Trustly and Monthio are enhancing their digital products and services with account aggregation services to drive value for both consumers and businesses. However, in other markets such as Poland, Denmark and France, we see a greater interest in PIS licenses. The prevalence of a higher number of ecommerce PSPs and wide prevalence of A2A payments (e.g. Poland) in these market are contributing factors to explain this trend. FIGURE 2: Break-Up by License in Top 8 Markets (% of registered TPPs) Source: EBA Register, Flagship analysis As we depict in Figure 3, c.85% TPPs serve consumers and businesses (with businesses being the largest sub-segment), the rest being fintechs that serve banks and businesses through infrastructure services. Of the TPPs that serve businesses and consumers, financial planning providers emerge as the largest segment making up c.20% of the TPPs. These fintechs are essentially AIS licensees that serve mainly consumers (and some businesses) by aggregating account data from banks and offer value added services in financial planning, investments, or savings. Online ecommerce PSPs and alternative A2A payments are the next largest segments making up more than 25% of the TPP break-up. Online PSPs view A2A payments as a complementary payment method (next to cards and APMs) that can serve specific verticals (such as recurring, gaming, non-profits, wealth management) better. SME accounting platforms and B2B payment fintechs are also a sizeable segment, contributing to c.20% and value the open banking rails to drive payments and efficiencies in the B2B payables /receivables and expense management processes. Infrastructure providers are generally newer fintechs that offer next-generation bank payment rails to connect businesses to banks and fuel the A2A payment connectivity. We also see a few specialized banking software vendors that have diversified into areas such as digital identity or PSD2 consent management services. FIGURE 3: Split Across Segments & Business Models Served (% of registered TPPs) Source: EBA Register, Flagship analysis across 370+ TPPs serving top 15 European geographies Examining the regulatory licensing segmentation of the TPP business models in Figure 4, we observe a significantly higher adoption of AIS licenses (rather than PIS) among European software/SaaS companies. This illustrates that open banking payment services are still nascent in the European ISVs/SaaS community. PIS licenses hand have largely attracted registered e-money, payments and credit institutions that already play a role in payment services. The primary PIS use cases are allowing consumers to perform an ecommerce checkout with an alternative A2A payment method or funding wallets or e-money through A2A payment rails. We also see emergence of PIS services with select B2B payment use cases, e.g., employee expense payments, payroll, or supplier payables. FIGURE 4: Dominant Regulatory Licenses Observed Across the TPP Business Models Source: EBA Register, Flagship analysis across 370+ TPPs serving top 15 European geographies Three years after the implementation of the regulations, the development of PSD2 and open banking as disruptive forces in the European payments industry is still a developing story. The TPP landscape has many entrants into the PSD2 paradigms, but a slow pace of development and no major disruptions. There is an early emphasis on account aggregation services, less so on payment initiation services. As the saying goes, people tend to overestimate near-term disruption and underestimate the long-term disruption, which seems to be the case for PSD2 to date. We do anticipate acceleration of use cases and scale running through PSD2 licenses and rails in the next couple of years. Please do not hesitate to contact Anupam Majumdar at Anupam@FlagshipAP.com or Joel van Arsdale at Joel@Flagshipap.com, with comments or questions.

Investors love SaaS and integrated payments, as we recently showed here. Marqeta, a next generation issuer processor, went public on June 9 with a market cap at close of $16 billion, 13% above the IPO price. Based on Marqeta’s historical revenue growth rate of cca. 100%, this valuation corresponds to approximately 68x forward twelve months’ gross profits, illustrating that investors’ love of digital payments also extends to the issuing side of the business. Marqeta’s IPO prospectus (available here) provides several insights into the company: Marqeta has achieved truly impressive revenue growth due to its use of modern architecture and APIs to target virtual cards, integrated payments, and other segments not well served by incumbent issuer processors - gross revenue grew by 103% between 2019 and 2020, and y/y quarterly growth has been over 100% for the last three quarters, as shown in Figure 1 below. However, Marqeta’s revenue and growth is highly concentrated in Square, which accounts for 70% of net revenue and volume in 2020, and comprised 80% of growth in 2020 processed volume as shown in Figure 2 below. Marqeta runs at a loss (Figure 4), although bottom line performance is improving as shown in Figures 3 and 4 below. Employee compensation comprises 77% of the expense base, and averages $296,000 per full-time employee, indicating the continued need for scale. Less than 2% of net revenue is from outside the U.S. Unlike traditional issuer processors, about half of Marqeta’s revenue is from interchange sharing, similar to a prepaid card program manager (shown in Figure 5 below). In 2020, Marqeta netted 11bps in interchange revenue plus $0.03 per transaction in processing and other revenue. FIGURE 1: Marqeta Quarterly Revenue Growth ($ mil.; % net revenue growth vs same Quarter prior year) Net Revenue: Total turnover from business activities Cost of Revenue: Share of revenue payable to card schemes, partnered banks and other engaged parties Gross Profit: Profit after deduction of cost of Revenues and before deduction of OPEX Source: Marqeta, Flagship analysis The success of Marqeta and other next-gen processors has driven a renaissance in the formerly staid world of issuing processing (discussed in more detail here). Next-gen processors’ impressive growth has been driven by combining modern architecture and APIs with a focus on fintech segments such as integrated payments, virtual cards, and B2B. Incumbent processors are less well positioned to serve these segments, so the high growth rates achieved by Marqeta and other next-gen processors begs the question of how incumbent processors will compete in these high-growth segments, or whether they will continue to focus on their traditional customer bases (primarily banks). Incumbent processors will also need defensive strategies as next-gen processors begin to target smaller banks and “bolt on” products for larger banks. FIGURE 2: Marqeta Total Processed Volume ($ mil.) Source: Marqeta, Flagship analysis For their part, next-gen processors will need to address how to maintain their growth curves. While the next Square may be out there, the next-gen processor sales strategy leans towards signing many initially small clients in anticipation of a few growing into blockbusters. A logical question for next-gen processors is if and how to attack the traditional bank issuer segment of the market. The downsides of selling processing to banks are well known (banks lack the growth characteristics of fintechs, and banks have idiosyncratic and slow buying processes), but they do bring huge volumes, and many need technology upgrades. At the same time, next-gen processors will also need to broaden their product catalog (Marqeta launched credit cards in February 2021) and add higher margin value-added services (managed services offerings, add-ons such as customer onboarding tools, etc.) to fuel continued revenue and margin growth. North American next-gen processors will also need to address how to expand internationally, particularly into markets such as Europe where the B2B account-to-account (bank transfer) infrastructure is much stronger, and there are different sets of needs (e.g., cross-border payments). FIGURE 3: Net loss as % of Net Revenue FIGURE 4: OPEX as & Net Revenue Source: Marqeta, Flagship analysis While many fintechs choose next-gen processors for their issuing processing needs due to modern architecture and APIs, most traditional banks have steered clear, partially due to most next-gen processors’ limited product set that is primarily focused on debit and prepaid. Banks need new payments revenue sources and the high growth offered by segments like B2B and Buy Now Pay Later, but many will be hesitant to migrate away from existing processing arrangements. Next-gen processors could fill the gap here, by offering (relatively) quick and easy “bolt-on” products to supplement banks’ core cards businesses and processing. Next-gen processors can also appeal to medium and small banks that often have simpler product catalogs and are more receptive to non-traditional offerings. FIGURE 5: Marqeta 2020 P&L Breakdown (as % total processed volume) Click to expand image Source: Marqeta, Flagship analysis FIGURE 6: Marqeta 2020 P&L Breakdown (as per transaction in $) Click to expand image Source: Marqeta, Flagship analysis Marqeta’s valuation illustrates the huge value-creation opportunities in digital payments, and that growth opportunities still abound on the issuing side of the business, albeit in less traditional market segments. These successes have recently driven leading digital acceptance players such as Stripe and Adyen to enter issuing, setting the stage for continued innovation. Please do not hesitate to contact Erik Howell Erik@FlagshipAP.com or Anton Zoldak Anton@FlagshipAP.com with comments or questions.

*This is the third of a three-part series in which we examine the evolution of software-integrated payments and fintech. In this third part, we look at how integrated payments are driving value creation for SaaS public equity investors. Investors love the story of integrated SaaS and fintech. Leading SaaS providers are growing rapidly boosted by the revenue potential of fintech. Leading SaaS providers achieve massive growth, deep penetration of payments, and frequently earn robust revenue take rates (including Shopify’s whopping 2.4%). The success of SaaS Fintech crosses verticals and is rapidly globalizing. We discuss these fundamentals and why investors love the story. SaaS has tremendous tailwinds, boosted by rapid movement of business services into the cloud (which accelerated during the pandemic). SaaS platforms are ideally suited to integrate financial services, although this potential is most meaningful for small businesses. The SaaS Fintech proposition is unlocking a new and highly profitable growth for SaaS platforms, which in turn is fueling investor excitement and equity valuations for SaaS Fintech winners. Revenues arising from fintech (mostly payments) are a major driver of leading SaaS providers’ top-line growth, outpacing total revenue growth. In Figure 1, we compare the 2018-2020 CAGR of payments and fintech to total revenues for select SaaS market leaders. FIGURE 1: Revenue Performance of Select SaaS + Payments Platforms *Revenues from Shopify Merchant Solutions Source: Annual Reports; Flagship Advisory Partners As illustrated in Figure 2, financial services now account for a majority of revenue for Shopify and Bill.com and are an impressive 39% and growing for Intuit (Quickbooks). Xero, another global SME accounting platform is still growing into its finte ch potential, demonstrating tremendous growth (Xero’s fintech revenues grew from 3% to 7% of total revenues from 2018 to 2020). FIGURE 2: Payments & Fintech Revenues as of % of Total Revenues (2018-2020) *Revenues from Shopify Merchant Solutions Source: Annual Reports; Flagship Advisory Partners WIX, a leading e-commerce platform, launched its strategic payment solution WIX Payments in Brazil at the end of 2018, later expanding its payment proposition into the US and Europe. The solution is deployed to 14 countries and is achieving rapid adoption. In its Q4 2020 earnings results, the management declared that c. 80% of new WIX users in geographies where the service is available have opted to include payments as part of their subscription. As shown in Figure 3, revenues generated through WIX Payments already accounted for 5.4% of total revenues in 2020, two years post-launch. FIGURE 3: WIX Payments - Key KPIs (2019-2021E CAGR; 2021 estimated) Source: Annual Reports; Flagship Advisory Partners WIX earned a 1% take rate on gross payment volume in 2020, forecasted to increase to 1.25%-1.30% in 2021. The management stated that the company is on track to exceed its goal of 1.25% to 1.30% take rate in 2021. The value creation of SaaS Fintech is driving tremendous share appreciation for market leaders as shown in Figure 4. FIGURE 4: Share Performance Growth of Individual Equities (indexed of 100; share price growth) Source: Yahoo Finance; Flagship Advisory Partners Note: Bill.com started trading in December 2019 As illustrated in Figure 5, the market valuations of these companies have surged since their IPO date. Early public and private investors have been richly rewarded for betting on the potential of SaaS Fintech. FIGURE 5: Share Price and Enterprise Value Development since IPO *Closing price 28 May 2021 Source: Seeking Alpha; Company News; Flagship Advisory Partners There is a massive value creation potential for SaaS providers who successfully imbed and cross-sell payments and fintech services. A well-crafted SaaS fintech strategy enhances the merchant proposition and expands platform revenue generation (take rates). Public equity investors love this story as much as we do, rewarding SaaS Fintech winners with outsized valuations based on ongoing delivery on the value-creation story. We expect many more SaaS providers to attack this opportunity and for winners to be richly rewarded. Please do not hesitate to contact Joel Van Arsdale Joel@FlagshipAP.com or Charlotte Al Usta Charlotte@FlagshipAP.com, with comments or questions.

The most lucrative, fastest growing merchant payments companies are not acquirers. Payment facilitators such as Stripe, PayPal, Sumup, d-local, Ebanx, Mercado Pago, PagSeguro, Stone, Shopify, Intuit, Mollie, and others reinvented the market, extracting huge profits by leveraging digital technology to address the long-tail of small merchant payments. Acquirers largely missed the boat and have often relegated themselves to basis point scraps of acquiring for these high growth payfacs. Payment facilitation began with PayPal years ago. PayPal now works with many millions of merchants around the world. Stripe also supports more than 1 million merchants globally as does Sumup. Most of these merchants are considered unprofitable by acquirers. (Psst, hey acquirers, Stripe made $1.6 billion of net revenue with a net take rate of 53 bps in 2020). Payment facilitators now have a market cap that exceeds that of all acquirers globally (including Stripe’s c. $100B valuation and PayPal’s c. $300B valuation). FIGURE 1: Estimated Stripe Processed Volume and Market Capitalization Source: Financial Times, Forbes, press releases While many of these payfacs focus on small merchants, there are also payfacs thriving with larger merchants with a focus on the longtail of geographic markets. d-local, who recently filed for IPO, is reinventing the market for payment services in far-flung developing markets, making it easy for merchants to achieve local payment advantages without having to incur the pain of legally localizing. In exchange for this valuable payment facilitation service, d-local earns a juicy 2.9% net and 5.0% gross take rate (see Figure 2). Visa and MasterCard are certainly happy to have relaxed their rules and opened the world to payment facilitators, who now account for much (if not most) of the growth in global merchant acceptance, particularly in developing markets. FIGURE 2: d-local Financial Highlights Source: d-local annual report 2020 Acquirers largely failed to innovate and adapt to the promise offered by mobile and cloud technologies, and to pursue the high-growth revenue pools of the longtail of merchants and countries. Payfacs thrive with digital marketing, easy sign-up, real-time responses, and fully digital servicing environments. Payfacs also rapidly globalize with products and tech stacks designed to connect into new acquirers and to support new languages, currencies, and payments methods. Acquirers, on the other hand, tend to be stuck in their domestic markets while continuously working to modernize their technology and customer experience. M&A has driven much of the growth of the world’s largest acquirers, but this M&A comes at the price of having to execute on challenging, post-merger integration work. Payfacs tend to focus on organic development and maintaining clean, agile tech stacks. Acquirers also failed to embrace SaaS platforms and developers, the distribution secret to the success of many payment facilitators. A developer/platform-first approach allows payfacs to deeply integrate into commerce bundles and to achieve highly scalable and profitable customer acquisition models. Acquirers must continue to strive for reinvention, following the lead set by payment facilitators. The massive, longtail of small merchants can be highly profitable with the right digital operating and distribution models. Please do not hesitate to contact Joel Van Arsdale Joel@FlagshipAP.com, with comments or questions.

Flagship recently supported the development of The Paypers' Who's Who in Payments report for 2021, and would encourage everyone to download the report for great market and participant insights. [From The Paypers] The Who’s Who in Payments Report 2021 reveals the payments industry's high-rising trends, M&A activity and investments, startups to watch, along with detailed accounts of all the relevant capabilities and distinguishing portfolios of players activating in the B2B and B2C ecommerce space The second edition of the report drills down into topics that are pivotal for merchants, payments professionals, and beyond – such as the rise of mobile ecommerce payments, to Buy Now Pay Later as a disruptive force and the rise of SaaS platforms – and offers the most updated data on important mergers, acquisitions, and investments in the ecommerce payments space. Moreover, the report contains an extensive analysis of the startups making a mark on the industry that redefines the concept of a startup in itself, along with key strategic insights on how companies can position themselves on the market to encourage growth and upkeep customer loyalty and engagement for their merchant clients. Download the report to gain insights into the following key points: What you need to be in the know An insightful article on 2021’s changing payments landscape (Flagship Advisory Partners) A cohesive retrospective of all the notable mergers and acquisitions in the sector redacted by The Paypers, complemented by a detailed infographic on the strategic and financial buys in the payments industry 2020-2021 2020 Key Investments Overview in payments and fintech (CleverAdvice) followed by an infographic revealing the strategic investments that shaped the industry in the past year Startups to watch Challenges and opportunities in defining the ‘startup’ of 2021 (Rally Cap) The Paypers roundup of relevant startups that made a mark in the industry over the past year Interview with Ryan Gwee, Founder, Chairman and Group CEO of Aleta Planet Choosing the Right Payments Partner - Key steps to define a payment strategy in 2021 (Allyiz) Who’s Who in Payments 2021 | Infographic of featured solution providers and company profiles Extensive infographic of startups and incumbents in the B2B and B2C commerce payments

Issuer card processing and financial institution account to account processing have evolved dramatically in the past ten years. What used to be an (arguably) commoditized landscape of providers with a clear delineation between card issuing and account to account payments has undergone significant shifts in technology, business models, and new entrants. Below we examine the overall landscape as it stands in 2021, and in subsequent articles, we will examine issuer card processing and account to account (bank payments) processing separately. Shifts in supply and demand have shaped the landscape as of 2021. On the supply-side: Traditional incumbents consolidating via M&A Next-gen processors achieving rapid growth and high valuations (e.g., Marqeta’s $10 billion IPO) from what used to be viewed as “niche” segments such as prepaid and B2B Initial steps towards convergence as traditional incumbents focus more on non-banks, and next-gen processors start to focus on banks On the demand side, buyers are seeking: Easy and robust integrations Fewer silos (especially cards) Speed to market Turnkey business models Digital VAS (onboarding, risk, fraud, etc.) Back-off automation tools Bundled pricing, including coverage of future regulatory requirements As illustrated in Figure 1 below, these shifts have created a landscape of providers that give buyers significantly more options than 5-10 years ago. What used to be 2-3 provider options per category, often with geographic limitations, has expanded to multiple providers with expanded geographic coverage, support for a range of operating models, and (to varying degrees) support for both card issuing and account to account processing. FIGURE 1: Card Issuing & Account to Account Bank Payments Processing Landscape Source: Flagship Advisory Partners As shown in Figure 2 below, the provider landscape is broadly categorized into “Traditional” and “Next-Gen” providers. Traditional providers primarily target financial institutions, while Next-Gen providers have achieved high growth and valuations by focusing on previously underserved categories such as prepaid cards, virtual cards, B2B payments, and open banking. Next-Gen providers target fintech and corporate customers, often using “as a Service” operating models, but are likely to target financial institutions as they seek scale. FIGURE 2: Traditional vs. Next-Gen Providers Source: Flagship Advisory Partners Customer needs and buying behaviors, as illustrated in Figure 3 below, vary widely by segment. While banks often seek well-established brands and have long and idiosyncratic buyer behaviors, fintechs and corporates place high value on speed and ease of integration. As many financial institutions digitize and seek to reduce technical and business silos while increasing agility, traditional providers have adapted, and Next-Gen providers see entry opportunities. To date, these “worlds” have remained largely separate, but we expect further crossover over time. This convergence will require both traditional and next-gen providers to adjust their go-to-market approaches, as targeting a bank migration a far different sales and delivery process than a fintech implementation, and vice versa. FIGURE 3: Customer Key Needs and Buying Behaviors Source: Flagship Advisory Partners As shown in Figure 4 below, successful providers will navigate the changing processing landscape using classic B2B vendor tactics: clear positioning, clearly defined and string products, a focused go-to-market approach, and strong operational execution while avoiding pitfalls such as lack of focus, poorly defined value propositions, and misaligned resourcing. FIGURE 4: Keys to Success and Pitfalls to Avoid Source: Flagship Advisory Partners Please do not hesitate to contact Erik Howell Erik@FlagshipAP.com, Anupam Majumdar Anupam@FlagshipAP.com, or Zuzana Krulišová Zuzana@FlagshipAP.com with questions.

We recently analyzed the contrast between B2B payments in the U.S. and Europe, focusing on the integration of financial services with accounting/ERP, accounts receivable (A/R), and accounts payable (A/P) management software. The results are a stark contrast between the market fundamentals in these two geographies, due to the differences in the bank-to-bank payments infrastructure, penetration of integrated software payments, and monetization models for B2B payments. B2B payments in the U.S. are typified by the ongoing of prevalence of paper checks and invoices as well as a legacy ACH system which has not yet been fully replaced/updated for real-time, rich-data payments. US businesses still issue and accept massive volumes of checks, making various forms of check digitization and processing a critical service within the domain of B2B payments. Additionally, the legacy ACH rails are often not a reliable B2B payments network without additional value-added services. ACH+ (with enriched data and early payment rebates) is a common product model to fill gaps in standard ACH payments. Instant payments via RTP (The Clearing House Real Time Payments) and OCT (Original Credit Transaction) are growing rapidly in the U.S., but not yet at true scale. The upside to network infrastructure inefficiencies in the U.S. is a significantly larger revenue pool, given the premium value created by check digitization, virtual cards, and ACH+. In contrast, Europe bank payments infrastructure is often real time, rich-data capable, and low cost. Virtually all European B2B payments flow through these bank payment rails, with low usage of alternative payment networks or value-added services. We contrast these differences in payment mix in Figure 1 below. FIGURE 1: B2B Payments Mix, U.S. vs. Europe (2019 estimate) Source: Goldman Sachs, ECB, Flagship Advisory Partners estimates B2B ISV-Payments in the Enterprise Segment While legacy U.S. B2B payment rails remain creaky and widely used, we observe significantly more maturity in the software enablement of A/R and A/P workflow automation, including deep integration of payments. Software first companies such as Tipalti and Coupa have embedded automated payouts into their core software services and support payouts through multiple payment methods: ACH+, digital checks, virtual cards, international wires as well as supply chain financing solutions. Broad acceptance of payment methods and work-flow automation are key value-adds given the prevalence of use cases in the U.S. The U.S. market also saw an emergence of payments-first A/P and A/R fintechs such as PayCertify, FastPay, MineralTree that are thriving by providing a cloud-based, one-stop shop for invoice-to-cash and procure-to-pay services in addition to processing card payments. Business SaaS platforms with integrated payments offer tremendous value creation potential by eliminating paper and manual processes, by accelerating cashflow and capture of payment term discounts, by reducing payment risk, and by enhancing the customer and supplier experience and satisfaction levels. This value-creation allows for payment service providers to earn premium payments take-rates (1-2%). These value-added payments are significantly more penetrated in the U.S. (c. 10%) relative to Europe (c. 3%) making the U.S. revenue pool for B2B payments roughly six times larger than Europe (as shown in Figure 2). FIGURE 2: B2B Payouts Spend and B2B Payments Revenue Pool Note: revenue pools include only bank transaction fees, excluding all other bank fees Source: Flagship Advisory Partners estimates, ECB, Goldman Sachs In Europe, bank payment rails are modern, but the development of software integrated payments is less mature than in the U.S. Europe’s addressable revenue pool is significantly lower compared to the US (see Figure 2) mainly because most of the B2B spend today is served by general-purpose bank transfers which cost only a few cents. Banks, not fintechs or ISVs market integrated payments, and are therefore still the dominant payment services providers for A/P (payouts) and A/R (payment acceptance) today in Europe (see Figure 3). Enterprises typically maintain direct connectivity to banks through file-based host-to-host channels and generally view payments as a separate process, disconnected from their A/P and A/R management. We believe the potential for end-to-end automation of A/R and A/P software and payments initiation and reconciliation is tremendous. We are seeing more software companies addressing this need, for example procurement / ERP companies integrating virtual cards for payouts (e.g. Basware, Jaggaer). Because card acceptance is still limited in European B2B commerce however, this revenue pool is still limited (though we expect strong growth). FIGURE 3: European Payouts and Payment Collections Landscape Source: Flagship Advisory Partners analysis While Europe lacks the scaled monetization of virtual cards as seen in the U.S., we do see ongoing integration of bank payments and e-invoicing and A/R management software from both SaaS providers and fintechs. For example, Payer, a Swedish fintech offers an integrated invoice-as-a-service allowing businesses to issue an e-invoice and collect receivables through direct integrated payments as well as supply chain financing. Another example is Unifiedpost, a Belgian A/R SaaS company that offers a cloud-based platform for e-invoicing, procurement, digital identity, payouts (bank and cards), pay-ins and working capital financing, all in a one-stop integrated model. B2B SaaS-Payments in the SME Segment For SMEs, accounting software is well positioned to serve as a ‘one stop shop’ for integrated financial services. In the US, companies such as Intuit are already mature with the integration of accounting and various forms of pay-ins and payouts. Intuit Quickbooks, the U.S. market leader for small business accounting, generates close to 40% of its net revenue through payment services with a 20%+ growth in payment revenues over the last 3 years (as shown in Figure 4). Intuit has been successful in driving these upsides through a wide network of fintech partners that help to power payments acceptance, payouts (digital checks, ACH, cards), payroll and working capital financing. Intuit also used selective M&A to build its fintech business. FIGURE 4: Performance of Select US B2B SaaS-payments Platforms Source: Flagship Advisory Partners analysis, annual reports from intuit, Bill.com A/R and A/P software companies in the U.S. are thriving by evolving into fintechs. Bill.com, a U.S. SME market leader, started as a SaaS online bill payments platform and grew into an integrated A/P and A/R payments fintech, integrating e-invoicing, pay-ins and pay-outs through ACH, credit/virtual cards and international wires. As shown in Figure 4, more than half of Bill.com’s net revenue today comes from payment services (transaction fees and interest float income). Much of the success of Bill.com comes from its distribution focus – including many partnerships across the A/P and A/R ecosystem (Bill.com has partnerships with 80% of the top US 100 accounting firms). The maturity of integrated accounting and payments in the SME segment in Europe is again, less mature than in the U.S. Leading European accounting platforms are still filling in their potential to offer and monetize end-to-end automation and financial services (as shown in Figure 5). While we see players such as Visma and Exact taking the right steps in integrated payments, payment services contribute only a small portion (<10%) of net revenue FIGURE 5: Integrated Payments Coverage of EU Accounting Platforms Source: Flagship Advisory Partners analysis Although we only see the tip of the iceberg today in Europe, we have high expectations for growth as accounting/ERP platforms move aggressively into the fintech opportunity around the world. Sage, for example, has rapidly expanded its network of fintech partners in Europe (e.g. ModulR for bank-to-bank payouts). A strong B2B SaaS-fintech operating model will generally involve multiple partners because there are multiple, different fintech opportunities associated with this play as described in Figure 6. FIGURE 6: Integrated Payments Opportunities for SaaS Based Accounting / ERPs Source: Flagship Advisory Partners analysis In Summary The state of B2B integrated payments in the U.S. and Europe are quite different. In the U.S., the payment rails are old and imperfect, but software providers generally offer end-to-end automation plus payments to fill the native gaps in payment rails and automate a broad set of use cases. In Europe, B2B payment rails are modern, but business often lack end-to-end integration between business software and payments. U.S. market structure results in a massive, high-growth revenue pool with many unicorns and happy investors (though ongoing growth from displacement of legacy is still tremendous). European market structure results in a smaller revenue pool, although similar growth potential as SaaS providers and fintechs increasingly address the opportunity for end-to-end process automation via integrated payments. Please do not hesitate to contact Anupam Majumdar Anupam@FlagshipAP.com or Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.

*This is the second in a three-part series in which we examine the evolution of software-integrated payments and fintech. In this second part, we analyze the best practices of SaaS platforms and ISVs offering integrated payments across verticals. ISVs and SaaS platforms continue to grow into their potential within payments, which is only the beginning of the broader expansion into fintech. While certain software verticals are ahead of others, we observe the same raw potential, and many of the same best practices across sectors. Virtually all ISVs/SaaS platforms should be strategically focused on fintech expansion. Imbedded, strategic payments services improve the merchant proposition and vastly expand the revenue potential of the platform. Shopify is the bellwether for SaaS potential in payments. In its earnings release in February 2021, Shopify announced 86% YOY growth in revenues to $ 2.9 bil, led by Merchant Solutions (where payments are the majority). Shopify Payments volume grew at a CAGR of 75% between 2017 and 2020 to $ 54 bil. in 2020 (45% of all Shopify GMV). Primarily due to its success in payments, Shopify earns a 1.69% merchant solutions take rate on GMV. Shopify Payments now operates in 17 countries. FIGURE 1: Massive Potential – The Scaling of Shopify Payments Source: Annual Reports Shopify Inc.; Flagship Advisory Partners The revenue generation potential of payments is to fall in love with, but strategic payments also vastly improve the customer proposition and experience. Traditional approaches to payments involve many partners (or plugins) and a poorly integrated customer experience: multiple portals to access data, transaction and payment data are in different locations, multiple logins and point of servicing, multiple contracts, etc. With a well-built strategic payments proposition, a merchant has only one point of service and one dashboard and control panel to manage the business. While Shopify is clearly a best practice among e-Commerce platforms, there are countless SaaS platforms that are thriving in payments globally, across verticals. As noted in Figure 2 and illustrated in Figure 3, we observe integrated payments success stories across many software verticals (noting that this figure is far from comprehensive in listing the many global success stories). FIGURE 2: Best in Class ISV/SaaS-Payments Platforms Sources: Flagship Advisory Partners In restaurants, U.S. payments companies such as Shift4 and Heartland established the potential for integrated SaaS + payments years ago, and we now see cloud-based SaaS providers such as TouchBistro, Toast, and Lightspeed growing rapidly with integrated payments. In hotel property management SaaS, Mews has established a robust suite of payment services in support of the unique needs of small hotels. In health, wellness, and fitness, companies such as MindBody, TSG, and ABC have powerfully imbedded and lucrative payments offerings. In accounting, Intuit has long been a champion providing a broad range of omni-channel payment services for the SME segment with unique integration into the QuickBooks accounting software. In travel each of Airbnb, Booking, and Amadeus continue to expand their payments offerings (authorization pay-in, pay-out, fraud management, etc.) as an extension of their core booking and property management services. Zuora has built a market-leading bundle of subscription management and payments. And finally, a variety of other SaaS providers such as Blackbaud continue to expand their uniquely crafted SaaS + payments offerings in government, education, and fundraising verticals. FIGURE 3: Selected Examples of ISVs/SaaS + Payments Propositions Source: Mews, Shopify & Lightspeed websites Across these various software verticals, we observe a somewhat common set of best practices for developing, marketing, and monetizing a winning payments proposition. We outline these best practices in Figure 4 below. FIGURE 4: Best Practices for Growing SaaS-based Payments Source: Flagship Advisory Partners COVID taught us that it is also critical that SaaS platforms cater to a wide variety of omni-channel payments use cases (as listed below). One-click (stored credentials) checkout – tokenized payment credentials allow for streamlined checkout for a registered user In-app – checkout and payments optimized for the mobile phone including fraud detection, authentication, and payment methods Robotics / chat – payments embedded into digital customer servicing environments Subscription/recurring – recurring payments, optimized for the unique needs of ongoing subscription continuity e-invoice / text / email + pay-by-link – invoicing or various forms of request-to-pay including imbedded pay-by-link POS – physical transacting via a payment device, or soon, via PIN-on-glass (aka SoftPOS) SaaS-Payments potential applies equally across SaaS verticals and transacting use cases. SaaS + Payments enhance the overall utility of the SaaS package while also greatly reducing the cost to acquire and to serve a payments services customer. Even small payments merchants can cost $400+ to acquire. With strong marketing, SaaS-Payments customer acquisition cost is near zero. Similarly, a well-built SaaS proposition can also greatly reduce the cost to serve payments given that merchants naturally gravitate towards digital self-servicing. A global proposition requires significant ongoing development; each country presents its own requirements for success. Many countries have preferred local payment methods beyond cards which must be supported (e.g., iDeal in the Netherlands). Each country tends to have its own address, name, and KYC conventions, and many have their own language and currency. Some, such as Brazil, have complex tax requirements. And a few have onerous requirements for maintaining data in country (e.g., Russia, Turkey, and India). When expanding SaaS-Payments globally, platforms must adapt the product internally and potentially by expanding their partner network. Payments is clearly the lead financial service, but there is ample room to grow from there. Shopify Payments also allows its merchants to access other financial services such as Shopify Capital (live in the US, UK, and Canada) and card issuing (soon). Best practices clearly indicate strong merchant demand and profitability potential for working capital loans and platforms are in an ideal position to market loans given their insight into merchant cashflows. The potential for further expansion into core banking, card issuing, and treasury services also looks promising given the expanding technical possibilities of global virtual banking. SaaS platforms that optimize proposition design and marketing and expand across countries tend to be richly rewarded. Small ISVs with simple referral partners tend to earn only about 30% of the net revenue of payments, while scaled players can earn 75% or more. Platforms with strategic payments also benefit from stickier customers and the potential for ongoing expansion into financial services. We observe many software providers across verticals, channels, and transaction use cases leveraging best practices to achieve success in payments and it is clear in 2021, that all SaaS businesses should be strategically focused on maximizing their potential in fintech. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com or Charlotte Al Usta Charlotte@FlagshipAP.com with comments or questions.

*This is the first in a three-part series in which we examine the evolution of software-integrated payments and fintech. In this first part, we explore the evolutionary journey for software providers and the globalization of the SaaS-payments business model. SaaS (Software as a Service) platforms and ISVs (Independent Software Vendors) continue to grow into their strategic potential in payments, which is only the beginning of a broader expansion into fintech. Integrated fintech, starting with payments, is unlocking new propositions and revenues for software providers. SaaS-fintech services are easier to use and distribute and increase the overall utility of the SaaS package. We expect best-in-class software providers to drive a significant portion of their ongoing revenue growth from payments and fintech as this business model wins market share globally. Software providers do not leap directly to sophistication and scale. As illustrated in Figure 1 below, SaaS/ISVs tend to follow a common evolutionary journey. FIGURE 1: SaaS-payments Business Model Evolution Sources: Flagship Advisory Partners At the outset of this journey into payments, software providers are generally focused on basic utility, ensuring that software customers have access to payment services via plugins or similar passively supported offerings. As the strategy develops, the product and go-to-market strategies evolve, for example, owning the brand and customer interfaces. The more deeply that payments are imbedded into the software, the higher the value creation for customers. A well-integrated software platform becomes a one-stop-shop for merchants, with one single point of service, data, settlement, billing, and business insights. SaaS-payments providers demonstrate low customer acquisition costs and low costs to serve which allows for significant monetization expansion with scale. Smaller ISVs generally earn less than 30% of payments gross margin while large-scale software platforms can earn more than 80% of the payments take rate. As SaaS-payments franchises grow, the operating model for payments can also evolve. As shown in Figure 2 below, software providers have a range of operating model alternatives, each with corresponding advantages and disadvantages. FIGURE 2: Payments Operating Models, Pros and Cons Sources: Flagship Advisory Partners Establishing a simple referral relationship with a PSP is the easiest operating model; this is where ISVs generally begin. More sophisticated models such as registered ISO or payment facilitator, allow the software provider to assume greater control of the customer, though these models also increase risk, fixed costs, and operating burdens. The payfac model is not the right model for all ISVs and expanded ownership of the product does not necessitate being a payfac. Payfacs generally white-label the services of a preferred strategic payment partner and more deeply integrate this partner to control and customize the customer onboarding, pricing and contracting, payment checkout, customer servicing, and settlement. Shopify and Airbnb, respectively, operate as a payment facilitator and a licensed e-money institution; models that allow them to control all the customer facing aspects of their integrated payments offering. Also given their global footprint, these payments franchises require dozens of people for technical development, product management, risk management, and payment operations. Geographic expansion becomes the growth priority for software providers that have an established payments strategy and operating model in their home market. Many of the largest SaaS-payments franchises emanate from North America and are now expanding globally. Global markets have ample white space to expand integrated payments. As shown in Figure 3, software integrated payments represent 40% or less of payments volumes in regions like LATAM, CEE, and MEA, compared to 85% of volume in North America. FIGURE 3: Maturity of Integrated Payments Globally* Sources: Flagship Advisory Partners Globalization presents many challenges such as the need to support local, alternative payment methods as well as adaptations to various aspects of operations (languages, currencies, risk, compliance, etc.). Physical POS payment services are particularly challenging to expand globally. Globalization often requires an expanded network of payment partners, although market-leading payments partners are increasingly global (as well as increasingly omni-channel). SaaS-payments is not a one-size-fits-all operating model and we observe a broad community of potential payments partners with differing geographic and capability strengths, as shown in Figure 4 (note that this figure is not comprehensive as there are countless payments providers supporting ISVs globally). FIGURE 4: Leading Payment Partners Enabling SaaS-payments Sources: Flagship Advisory Partners Stripe is a leading payments partner to SaaS platforms (with a concentration in e/m-commerce) and these platforms are helping to fuel Stripe’s meteoric growth. Stripe Connect provides unique ease-of-use with a robust feature-set and technical support that is specifically designed for platforms. PayPal also supports many leading global SaaS providers with its one-of-a-kind global footprint and massively scaled customer base (with the iZettle acquisition boosting omni-channel capabilities). Adyen is more recently focused on the SaaS segment, where they bring a powerful global footprint and omni-channel capability set. For POS-centric SaaS platforms, Square has a strong position in the U.S. as does PaymentSense in the U.K. and Tyro in Australia. The potential for ongoing value creation for ISVs and SaaS platforms in fintech is massive. Most of the software providers that we support and observe are still in the early stages of evolving and scaling their strategic payments propositions. Furthermore, payments are only the first of many potential integrated fintech products. Leading SaaS platforms are now adding an array of financial services such as lending, card issuing, bank accounts, payroll, and cash management services (examples of such products are shown in Figure 5 below). FIGURE 5: Selected Examples of Expansion Initiatives Beyond Payments Sources: Flagship Advisory Partners; Company Websites Fintech is a massive opportunity for software providers, and we expect financial services to be a primary growth driver in the SaaS market for years to come. Beyond the vast incremental revenue pool, integrated financial services also improve the feature set and user experience in the core software product. Optimizing the fintech opportunity is an evolutionary journey for software providers. Finding the right operating model, selecting the best-suited partner(s), enriching the integrated feature set and customer experience, and then globalizing the franchise are key milestones along this journey. Please do not hesitate to contact Charlotte Al Usta Charlotte@FlagshipAP.com or Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.

Lost in the escalating hype and company valuations of fintechs is the changing role of banks in merchant payments. Historically, the market for merchant payments in North America and Europe was owned by banks, but now, banks own less than half of merchant acquiring market share in North America and Europe. Over the last two decades, banks have typically been sellers of merchant assets. Today, we still see some banks which are sellers, but we also see many leading bank franchises either re-entering merchant payments organically or doubling down via expansionary M&A. FIGURE 1: European (including UK) Merchant Acquiring Market Shares by Type (% of card turnover) Sources: Flagship Advisory Partners Much of the reduction in bank market shares in merchant acquiring (as shown in Figure 1) was driven by M&A: banks divesting ownership stakes in merchant payments assets, often via the formation of merchant acquiring alliances with processors. This trend started in the United States in the 1990’s and continued into the 2000’s. In Europe, this same trend started a bit later before accelerating in the 2000’s. In Figure 2, we highlight the timeline for select bank acquiring alliance formations and dissolutions in North America and Europe. Bank market share reductions in Europe were also driven by divestment of interbank processors/acquirers, an operating model which eroded over time as banks pursued their own strategies and were attracted by highly accretive exit multiples. FIGURE 2: Select Bank Alliance Formations in North America and Europe and Divestments of Interbank Processors Sources: Flagship Advisory Partners Bank acquiring alliances have generally served their purpose in helping to create value for the respective stakeholders. Banks benefit from enhanced scale economies and capex avoidance while the acquiring specialists benefit from expanded scale and enhanced go-to-market channels. Digital commerce introduced certain pressures on the bank-alliance operating model, however. Digital commerce is more cross-border centric, whereas these bank alliances are often bound by domestic borders. Bank distribution is also somewhat less relevant in a digital world in which payments are integrated and distributed via SaaS (software as a service) providers. Digital forces of disruption, which create both opportunities and threats for banks, are motivating some banks to pursue merchant payments with renewed vigor. Banks have good reason to be threatened by fintechs such as Square, PayPal, and Stripe, which are increasingly offering a broader array of financial services (working capital, cash services, virtual banking, etc.). Banks also have good reason to be excited about the potential to leverage their banking relationships and assets to compete in merchant solutions. Banks have for too-long under-delivered on the potential to integrate payments, cash management, and banking in a truly-valued-added way (fueled by rich data services). In North America and Europe, we see a handful of banks which are effectively ‘doubling down’ on merchant payments by investing in significant acquisitions. Each of these five banks (JPM, ING, Santander, BofA, and US Bancorp), along with their key acquisitions, are described in Figure 3 below. We also observe several notable banking franchises (RBS, Deutsche Bank, and Citibank) that organically re-entered merchant payments with the help of operating partners. FIGURE 3: Banks Investing and Exiting Merchant Payments Sources: Flagship Advisory Partners Banks with a leading brands and market positions should be focused on maximizing value creation from merchant payments. But there are also many pitfalls (described in Figure 4) for banks to avoid, particularly when M&A is involved. FIGURE 4: Pitfalls for Banks in Merchant Payments Sources: Flagship Advisory Partners To operate successfully in merchant payments, banks must leverage strategic operating partners. Few banks have the wherewithal to compete with global specialists on their own. Choosing the right partners in the right areas of operations is critical. To sustain growth, banks must also maintain ongoing investment into product technology and distribution. Global competitors such as Adyen and Stripe never slow down, never stop investing into product technology and expanded distribution. Banks too often execute a major investment, only to later back-off from either product technology development or distribution spend. Growth requires a merchant services franchise to continually invest in product technology and sales & marketing (i.e., >25% of net revenue). Additionally, banks must learn to be easy to work with, with both customers and partners. Merchant payments are increasingly part of a broader SaaS ecosystem and inability to work within an ecosystem of partners will cripple long-term growth. Lastly, banks must develop and maintain a degree of specialization in merchant payments, ensuring that delivery on key success factors are not lost in the organization and go-to-market approach. Recently, many leading global banking franchises are bucking the long-term trend of divestment and market share pullback by investing to grow in merchant payments. It will be interesting to see if these banks find and sustain success. Banks have many assets (particularly brand and potential for rich data services) which can help to drive success in merchant payments. Unfortunately, banks also have many pitfalls to avoid and too often we see these pitfalls hinder banks’ ability to drive sustained growth in merchant payments. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.

We recently analyzed and compared the composition of the MasterCard payment facilitator lists in North America and Europe1. The lists are similar in size, with 244 payfacs in North America and 232 in Europe2. However, the composition of the two payfac lists is quite different and we believe that this difference tells an interesting story about the development of these two payments marketplaces. For each payfac on the Mastercard payment facilitator list we identified two key characteristics: 1) is the company an ISV (independent software vendor) where software is the primary business and payments are secondary, and 2) in what business category or vertical is the payfac focused. 1 European economic area countries only, excluding Russia, Turkey, and other non-EEA countries 2 Payfac counts exclude unidentifiable or defunct companies North America is a Mature ISV Market, Europe is Not The first key difference between North America and Europe is the penetration of ISVs. In North America, 41% of all payfacs are ISVs, whereas in Europe, only 8% of payfacs are ISVs. The North American market for integrated payments is vastly more mature than in Europe. North American software firms commonly integrate and monetize payments, with registration as a payfac a key step along this strategic journey. In Europe, few software vendors have a strategic focus on payments to the point of moving into superior operating models such as becoming a payfac. Figure 1: Penetration of ISVs Among Payfacs Source: Mastercard payment facilitator lists, Flagship analysis North America is More Vertically Specialized and Diversified The second key difference between the North American and European market for payfacs is that most North American payfacs are vertically specialized, whereas in Europe, relatively few payfacs are vertically specialized. In North America, 68% of payfacs are vertically specialized, while 32% we categorized into three non-specialized categories: 1) C2B payment acceptance generalists such as ISOs providing multi-channel and multi-vertical payment services, or 2) general e-commerce payment service providers, or 3) financial service providers beyond just payments. In Europe, only 17% of payfacs are vertically specialized beyond these more general categories (C2B general, e-comm, or financial services). Figure 2: Vertical Specialization of Payfacs *Payfacs are considered not vertically specialized if they are C2B payment generalists, e-comm generalists, or financial services providers (beyond just payments). North American payment facilitators are generally vertically specialized, leading to a population which is broadly diversified across many verticals as shown in Figure 3 below. The leading vertical specializations for payfacs in North America are government/ education, fundraising/faith, healthcare, property management, and membership services. In Europe, there is no specialized vertical which comprises more than 3% of the payfac list. Rather, half of European payfacs focus on general e-commerce and 17% are financial services providers beyond just payments (which typically means a focus on FX services or virtual banking). Figure 3: Vertical Categorization of All Payfacs North America EU and UK Source: Mastercard payment facilitator lists, Flagship analysis The presence of vertical specialization among payfacs in North America goes hand-in-hand with the penetration of ISVs, who tend to be vertically specialized. As shown in Figure 4, the vertical categorization of ISV payfacs in North America shows a similar profile as the general payfac list with categories such as govt/education, fundraising/faith, membership/subscription, and property management being the most sizable vertical categories. Figure 4: Vertical Categorization of North American ISV Payfacs Source: Mastercard payment facilitator lists, Flagship analysis Implications for Market Development The contrast between the North American and European payfac marketplaces is driven by market structure and relative stage of development. Europe is geographically diverse, and smaller geos do not support vertical specialization, thus most EU paypacs are generalists. The U.S., conversely, is a single, large, and homogenous market where verticals are independently scale-relevant and where competitive pressures force payment facilitators to become vertically specialized. North American verticalization is also boosted by greater acceptance of cards across verticals (as payfac registration is, by definition, card driven). For example, in the U.S., it is common to pay for government charges, membership fees, or even rent with a card. In Europe, bank transfers are more prevalent, and cards are not always accepted in verticals such as government/education, membership, and property management. As European markets for both payment services and software consolidate across countries, we do expect greater payfac vertical specialization. There is tremendous upside for European ISVs to become payfacs and for acquirers to supply this development. To share your views or discuss those above, please contact Joel Van Arsdale at Joel@FlagshipAP.com .

(Part 3* – Channel and Form Factor Impacts) *This is the third in a series of blogposts, in which we compare our original hypotheses related to COVID-19’s impact on the payments marketplace at the onset of the pandemic versus the reality of today. In this part III, we examine the impact of COVID-19 on retail spending channels and consumer choices on means of payment. Our Outlook from April 2020 on COVID-19’s Expected Sales Channel Impact Back in April, we expected a significant shift towards digital commerce channels and away from physical shops given the direct impacts of a lockdown as well as perceived safety advantages of distance commerce. Even with traditional POS categories such as groceries, we anticipated spend to shift online. We also expected some consumers to shift away from cash in favor of safer contactless means of payment. Realities of Today – Consumers Prefer Digital Commerce and Contactless Payment Form Our expectations from April 2020 played out as expected: the pandemic shifted retail spending online and dramatically increased the use of contactless means of payment (even beyond our high expectations). COVID-19 accelerated the multi-decade shift in retail spending from point-of-sale (POS) to e/m-commerce. Online retailers as well as their payment service providers clearly benefited from this shift. In parallel, there was a significant shift away from cash and towards contactless means of payment at point-of-sale. There is also a more subtle ongoing shift from credit cards to debit cards. We further detail these behavioral changes in the observations that follow. Retail Spend: POS to Online Shift As anticipated, COVID-19 lockdowns drove retail spend online. This was particularly pronounced in April and May when lockdowns were most severe. We also now expect similar impacts now given the expanding lockdown. As discussed in Part II of the COVID Impact, sector impacts varied widely. Within retail, electronics and spend at supermarkets were most impacted by the shift from POS to e/m-commerce channels (as shown in figure 1). Luxury, on the other hand, declined both offline and online, although some of this is attributable to the luxury industry’s lagging position in enabling e/m-commerce. FIGURE 1: COVID Impact on Online Retail (YOY Change as of July 5, 2020) Sources: Contentsquare Many e-commerce PSPs, those overweight retail and underweight travel, have seen a significant boost in growth since the pandemic. We expect a number of these PSPs to use the accelerated growth momentum as a catalyst for a capital event. TCV’s investment in Mollie appears to be one such example given the tremendous valuation multiple relative to 2019 performance. Note that the point-of-sale is far from dead. In fact, POS card spend generally rebounded well in Europe during the summer as prevention measures were relaxed and consumers happily returned to cafes and retail shops. As shown in Figure 2, POS card spend in Ireland returned to pre-COVID levels during the summer (noting that card POS spend was boosted by a shift away from cash as we discuss next). FIGURE 2: Ireland: Y0Y Card Turnover Growth (monthly vs. pre-Covid) Sources: Bank of Ireland Card Spend at POS: Cash to Cards Shift Cash has been shifting to cards for many years and is a major catalyst for the ongoing growth of the payments industry. This shift has generally been driven by generational preferences as well as the impact of mobile technologies and digital commerce. COVID-19 accelerated the shift from cash to cards by incrementally influencing cash-payers to use cards instead of cash, which is perceived as unclean. According to an article in the Washington Post1, 2017 study of $1 bills in New York City discovered that the bills were rampant with bacteria and viruses from humans and animals and that small bills change hands more than 600 times in their lifetime. As shown in figure 2, consumer usage of cash dropped dramatically from mid-March and this change in behavior seems to be persisting and unlikely to ever revert. Cash usage in Ireland during the summer was down 40% from the prior year. According to Hubert O’Donoghue, GM of AIB Merchant Services, card payments went from half of payments turnover to 70% due to COVID-19. “The shift from cash to cards in Ireland has been pretty marked. Prior to COVID-19, payment mix was 51% cash and 49% cards. Post COVID, the mix changed in favor of cards to 30% cash and 70% cards” --- Hubert O'Donoghue, General Manager at AIB Merchant Services (Visa podcast 9 July 2020) As shown in figure 3, the pace of cash-to-cards shift in Switzerland accelerated 3x during the pandemic. In Spain, the cash to card shift increased 3.5x in 2Q 2020. FIGURE 3: Cash Withdrawals vs. Card Payments as a Percentage of Total Card Turnover in Spain and Switzerland Sources: Swiss National Bank Sources: Banco de España The pandemic has also accelerated consumers’ preference towards contactless payments. As with paper cash, card pin pads are touched hundreds and even thousands of times per year, often without proper cleaning. COVID-19 heightened consumer awareness of the hygiene advantages of transacting in a contactless manner (as shown in Figure 4). 1Washington Post, ‘Will the pandemic finally kill cash’,10 August 2020 FIGURE 4: Most Important Consumer Criteria When Shopping In-Store (% respondents; June 2020; select European markets) Sources: McKinsey & Company, COVID 19 Consumer Pulse surveys, conducted June 15-21, 2020 Contactless payments were already growing rapidly prior to COVID-19, but the pandemic has clearly accelerated this growth. As shown in Figure 5, monthly year-over-year growth in contactless payments in Switzerland was 60% during the six months leading up pandemic, but this growth accelerated to 100% this past summer. According to Visa Europe, 80% of all Visa card transactions at point-of-sale in Europe are now contactless. “Consumers are increasingly demonstrating a clear preference for touch-free payments, with 80% of face-to-face Visa payments in Europe now being touch-free” --- Antony Cahill, Managing Director of the European Region at Visa Inc. (18 Nov 2020) FIGURE 5: YOY Growth in Local Card Turnover in Switzerland Sources: Swiss National Bank Contactless payments benefited from increases in maximum contactless transaction limits early in the pandemic. By April, Visa and Mastercard had doubled contactless limits across many global markets. In Spain, contactless limits increased from €20 to €50, in Switzerland from SFr. 40 to SFr. 80, in Australia from AU$100 to AU$200, and in Canada from CA$100 to CA$250. We see global markets increasingly following the examples set in Australia and Canada (that introduced high limits) with the objective to eventually enable contactless for the vast majority of transactions. Card Spend: Debit Card to Credit Card Shift COVID-19 also appears to be steering consumers towards debit cards and away from credit cards. Some of this shift is a by-product of the massive downturn in travel. But even considering only domestic spend, there is still a notable shift from credit cards to debit cards. As shown in figure 6, credit card spend in Ireland and in the U.K. declined significantly while debit card spend returned to its pre-Covid growth levels. We attribute some of this trend to the substitution of debit cards for cash. It is also possible that this debit-to-credit shift is driven by other categorical spending impacts (e.g. more groceries and less restaurant spend). FIGURE 6: YOY Growth in Credit and Debit Cards in Ireland and the U.K. Source: Central Bank of Ireland Source: UK Finance In revolving credit card markets such as the U.K., we also see expanding conservatism on supply and usage of credit as issuers and consumers shift their mindset towards a potentially prolonged macro-economic contraction (see figure 7). FIGURE 7: YOY Growth in Credit Card Outstanding Balances in the U.K. Sources: UK Finance COVID-19 Impact on Cash and POS Spend: Outlook So long as lockdowns continue, POS retail spend will shift online. We expect POS spending to mostly, but not entirely, return when COVID-19 is under control, given that some of the behavioral shift towards e/m-commerce is likely to persist. Fortunately, the shift from cash to cards will help to offset the decline in overall POS spend for providers of POS payment acceptance services. Consumers’ love for contactless payments accelerated and will remain, where we expect other global markets to follow Europe’s lead towards 80%+ contactless penetration. Please do not hesitate to contact Yuriy Kostenko at Yuriy@FlagshipAP.com or Joel Van Arsdale Joel@FlagshipAP.com should you have any comments or questions.

Worldline recently completed its merger with Ingenico. In parallel, Nexi and Nets have agreed in principle to merge. These two events culminate a decade of consolidation in the European retail payments market. These two groups (assuming completion of the Nexi/Nets merger) become clear market leaders for diversified processing and pan-European merchant services (noting that e-commerce has a broader group of market leaders). On subsequent pages, we compare each group side-by-side via a series of figures: · Figures 1 & 2: compare the M&A development timeline for each group · Figure 3 & 4: compare the European geographic footprints for each group, focusing on their core businesses of merchant services and issuer services (processing) · Figure 5: compares the product & service portfolio (focusing on issuing and merchant services) of each group · Figure 6: compares the revenue scale and growth for each group While each of the Worldline and Nexi groups now have significant work to do integrating their various businesses, we still see further M&A in the future, for example in France, Spain, Portugal or Central and Eastern Europe. It also feels inevitable that each group will either target or be targeted by North American multinational payments groups in the coming years. FIGURE 1: NEXI + SIA + NETS M&A Timeline Sources: Company press releases and 3rd-party articles FIGURE 2: Worldline + SIX + Ingenico M&A Timeline Sources: Company press releases and 3rd-party articles Figure 3: Merchant Services Geographic Footprint in Europe Sources: Company websites, Flagship observations FIGURE 4: Issuer Services Geographic Footprint in Europe Sources: Company websites, Flagship observations FIGURE 5: Product Portfolios at Worldline Group and Nexi Group Sources: Company websites FIGURE 6: Worldline Group and Nexi Group Revenue Development A: Actual; *Note that revenues for SIX Payment Services are included only as 1 Dec 2018, thus the 13% growth rate is not a true organic growth rate. Revenues are net of interchange including estimated Ingenico’s interchange fees for 2015-2017 Sources: Company data A: Actual; PF: Pro-Forma PF incl. a.o. Concardis, Mercury Processing, Ratepay, Paypro, Poplapay, PeP *Revenues net of interchange Sources: Company data, Investor Presentation Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com or Yuriy Kostenko Yuriy@FlagshipAP.com should you have any comments or questions.

Lost in the e-commerce hype of COVID-19 is the ongoing evolution of the physical point-of-sale (POS) towards next-generation product and service models. Mobile technologies and digital service models have reinvented POS solutions as affordable and easy to use (a major leap from legacy ePOS solutions which are expensive and challenging to deploy or adapt/integrate). We expect the shift towards Next-gen POS to accelerate on the backend of the pandemic when we expect a wave of physical business start-ups, making the present the right time for service providers or investors to position themselves for this wave of growth. FIGURE 1: POS Product Convergence Source: Flagship market observations What is Next-gen POS and Why is it So Powerful? There is a broad range of next-generation POS proposition models, and a variety of names that get attached to them (as illustrated in Figure 1). At the low end of the market, mPOS and even pure app-based solutions (‘SoftPOS’) allow any smart phone or tablet to function as a POS device. Small businesses that need dedicated payments hardware now also have access to Android-based payment terminals (‘SmartPOS’), which are enabled for payment acceptance as well as running a range of core commerce software (e.g., a taxi running Uber on an android mini terminal like the PAX A77). Merchants that need superior business management software and often multiple devices are now well served by powerful software as a service (‘SaaS’) kits that include core business software with integrated payments (we refer to these SaaS kits as ‘Next-gen POS’ throughout the remainder of this article). Larger merchants still generally use more customized and componentized solutions delivered by value-added resellers (VARs) and integrators (also supported by mobile technologies). FIGURE 2: Merchant POS Segmentation1 Source: Flagship Advisory Partners Tier 3 & 4 merchants with 1-20 POS are the sweet spot for Next-gen POS. These merchants want and need business software with integrated payment services, but they do not want to pay for customized solutions. On the low-end of this segment (1 POS), software needs are quite basic. As merchants migrate towards multiple POS or multiple shop locations, the software and hardware need to become more complex. These merchants require vertical-specific software to connect their devices and locations, and to deliver on specific commerce use cases such as table management and online ordering and bookings. Next-gen POS solutions are built on common mobile technologies, often using Apple iPads as the core platform. iPads have proven to be strong and resilient devices able to withstand sustained usage, particularly when coupled with supporting hardware such as stands and cases. Mobile platforms are also developer friendly environments where integration to other apps or hardware, including payments, is significantly easier than within traditional, proprietary or Windows environments. The use of standard mobile technology also greatly reduces the cost of Next-gen POS solutions. Traditional ePOS often carries price points of c. USD 5,000 plus monthly costs, while Next-gen POS can be procured for only USD 40-100 / month (with options to purchase hardware outright). Next-gen POS can be deployed without physical set-up, greatly reducing the costs for customer acquisition and enablement. Whereas traditional ePOS solution developers rely on VARs to distribute and deploy and service their solutions, Next-gen POS providers are focused on digital and multi-channel marketing supported with remote sales and servicing departments. Who is Best Positioned to Win the Next-gen POS Market? There are two distinct groups of companies addressing the Next-gen POS market: 1) providers with payments DNA and 2) providers with software DNA. The payments-DNA group of suppliers is led by Square and Clover (a Fiserv company). The software-DNA group of suppliers is more fragmented and characterized by high-growth SaaS companies such as Shopify and Lightspeed. In the U.S. market, the payments-DNA suppliers have already achieved impressive scale (c.>500,000 POS each, excluding mPOS). Within the software-DNA group, most providers have fewer than 50,000 POS enabled in the market, although the pre-COVID growth rates for these providers was impressive. Figure 3: Supplier Landscape for Next-gen POS Note: Logo size indicative of POS scale Source: Flagship market observations We do not view Next-gen POS as a ‘winner takes all’ marketplace; we expect many winners in the market. However, there are clear scale advantages (success is based on cost-to-acquire and cost-to-serve efficiencies) and we do expect winners to achieve meaningful scale in the relative near-term. Both payments-DNA providers and software-DNA providers have achieved meaningful scale in the U.S. market. Europe is somewhat less developed, with no Next-gen POS supplier enabling more than 25,000 POS as of today. Software-DNA and payments-DNA providers position with different advantages in the market. Software-DNA providers have more advanced software, which is generally tailored for specific segments. These software-DNA providers also tend to be better at integrating adjacent software services such as loyalty, accounting, or HR services. Software-DNA providers position best with merchants operating multiple points of sale, where more advanced, sector-specific software is required. Payments-DNA providers are better at serving smaller, single location merchants who have basic software needs. These providers are highly effective at monetizing smaller merchants and driving distribution scale with a range of POS and payments solutions (mPOS, portable payment terminals, tablet solutions, full POS stations). While market leading payments-DNA providers are driving more than one million POS, many of these POS are limited to payment acceptance usage and not the full SaaS usage. Use of the more robust Next-gen POS solutions such as Square Register or Clover Station (including printers, cash drawers, and more sophisticated software) are scaling rapidly which is helping these payments-DNA providers to move up market into the multi-POS segment. Growth Potential In the U.S., Next-gen POS are highly visible with established scale, but also great ongoing growth potential (software-DNA provider Touchbistro reported a near 100% topline growth in 2019). In Europe, Next-gen POS has low penetration today (c.20%), relative to the potential. COVID-19 is clearly challenging growth in the POS SME segment generally, with low start-up rates and high expected failure rates. However, COVID-19 is also causing merchants to be more focused on omni-channel readiness where Next-gen POS solutions have significant advantages over legacy ePOS. On the backside of the pandemic, we expect a wave of business start-ups, which will drive much of the demand for Next-gen POS. New-to-business merchants are overwhelmingly selecting Next-gen POS rather than traditional ePOS (we estimate 75%) while switching rates for established businesses are much lower given the pain that accompanies a migration of core business software (c.10% annual switching rates). FIGURE 4: Next-gen POS Growth Potential Source: Flagship estimates and expectations Keys to Success Next-gen POS winners will have to be patient to wait out the near-term impacts of COVID for the wave of demand that will accompany the backend of the pandemic. Beyond this macro-economic and capital patience, we see the following keys to success for winning in the Next-gen POS marketplace: 1. Upselling / cross-selling a small number of highly adjacent SaaS and financial services: Providers such as Shopify and Square enable extensive marketplaces with hundreds of apps. However, Next-gen POS success is not defined by the number of apps in the marketplace as small merchants only use a few applications. Best in class next-gen POS suppliers will be those that are highly effective at marketing and monetizing a select handful of adjacent services such as accounting, loyalty, billing, or working capital loans. 2. Digital, multi-channel marketing: Next-gen POS is a great product because it is far more affordable than legacy ePOS solutions. However, this affordability brings lower customer lifetime values to providers, and business models which are sensitive to cost-to-acquire and cost-to-serve. Winning in Next-gen-POS requires multi-channel marketing feeding remote sales closure. The economics of Next-gen POS generally do not support the legacy VAR distribution models. Worth noting is that traditional payments distribution channels such as banks have also been challenged to adapt to selling SaaS solutions such as Next-gen POS. 3. Remote servicing: cost-to-serve must be highly efficient to drive profitability in Next-gen POS. Market leaders have established servicing models which are highly digital, supporting by inside servicing teams (not VARs). 4. Vertical specialization: winners will be vertically focused, meaning that both software and distribution is tailored to specific sectors such as quick-service food, fine dining, beauty and wellness, etc. Next-gen POS solutions are redefining the POS market while creating a new class of highly valued SaaS providers and accelerating value-creation for a small number of payments providers who have scaled their position in business SaaS. While COVID-19 has introduced near-term growth challenges in point -of-sale, we expect a massive wave of growth for next-gen POS when the market emerges from the pandemic. To share your views or discuss those above, please contact Joel van Arsdale at Joel@FlagshipAP.com.

B2B payments, long the bastion of commercial banks, remains fertile ground for fintech innovation and market penetration. While the pace of innovation and consolidation in B2C payments has been brisk, large cross-sections of B2B payments remains relatively traditional and undisrupted. B2B payments have lagged in digital innovation due to: 1. Slow lead times for changing procure-to-pay and order-to-cash processes. 2. Fewer imperatives to optimize the customer buying experiences (as compared to B2C payments). 3. Stubbornly resilient paper-based payment instruments. Infrastructure improvements (e.g., real-time payments) and enabling technologies (e.g. open banking) have created a perfect nexus for an acceleration of innovation in B2B payments. As discussed throughout this article, we expect a wave of fintech growth and shareholder value-creation as new products and business models attack traditional transaction banking and decoupled B2B workflows. Trillions in Untapped Opportunity Global annual B2B commercial consumption spend in 2019 was $150 trillion. As of today, only c. 5% of this $150 trillion total market is addressed by fintechs. The remaining $140+ trillion remains unaddressed by fintech, running over legacy domestic and cross-border banking rails. Fintechs will increasingly address this $140T of global spend exploiting new technologies to enable faster and richer integrated payment flows. FIGURE 1: Global B2B Consumption Spend ($Trillions; est.2019) Total commercial B2B consumption is c. $150T Source: PYMNTS, Citibank, Juniper Research, PR Newswire, Visa, Flagship estimates Maturing B2B Segments There is wide variability in the relative maturity of different B2B payment services segments (as shown in Figure 2). There are segments of B2B payments which are well addressed by specialists/fintechs. For example, travel and entertainment business credit cards and central billing are well-penetrated (though far from saturated). Similarly, business fuel spend is relatively well addressed by fleet cards. And lastly, employee benefits in some countries and contexts, such as meal vouchers, are well-addressed by specialists such as Edenred and UpDejeuner. Note that these segments are far from reaching the end of their innovation and growth cycles, but there is clearly maturity as defined by the global scale achieved by category leaders. Each of these segments of spend illustrates the value-creation potential that specialized providers of payment services can introduce to the marketplace. FIGURE 2: Maturity in B2B Payments Segments Source: Flagship Advisory Partners Proven but Accelerating B2B Segments As shown in Figure 2, there is a second category of B2B payments segments where the value-creation storyline is clearly proven, but where today’s scale is a fraction of the global market potential and there promises years of ongoing rapid growth. We consider cross-border B2B payments and cross-border payout services to fall into this category as well as Procure-to-pay automation. The vast majority of cross-border B2B payments still flow through traditional correspondent banking, typified by high costs, often slow speeds, and lack of traceability. Fintechs such as Banking Circle and Currencycloud are attacking correspondent banking with new, rapid virtual global payment and account networks. Other fintechs such as TransferMate are focused on developing and distributing end-user propositions for cross-border payment users (in particular innovating the technical toolkit and integration with B2B software platforms). In parallel, fintechs are also addressing the unique needs of the rapidly growing (17.5%*) gig economy (i.e., distributed workforces). The gig economy cannot be well served by traditional banking networks that underserve cross-border needs, particularly for small businesses. Fintechs such as Payoneer and Transpay have introduced a range of easy-to-use and fast propositions for global payments, exploiting new technologies such as virtual cards and Visa/MasterCard original credit transaction (OCT) technologies. Lastly, fintechs have served as a proven ground for automating workflows in the procure to pay processes, addressing inefficiencies in these processes, which tend to be manually intensive. Fintechs such as Tradeshift and Basware offer possibilities to automate the entire procure-to-pay processes by digitizing the interfaces across procurement, ERP, invoicing and reconciliation systems. * 17.5% annual growth as estimated by MasterCard: https://newsroom.mastercard.com/wp-content/uploads/2019/05/Gig-Economy-White-Paper-May-2019.pdf] Less Proven B2B Opportunities with Massive Growth Potential There is then a category of opportunities which we consider to be relatively unexploited and where we see great opportunity for fintechs to thrive in B2B payments by exploiting the expanding array of technologies well-suited to address B2B needs. Open banking is one innovation enabling access to real-time bank payment networks via APIs (which then in turn allows for expanded integrated software functionality). Fintechs and banks alike are now positioning to innovate beyond the basic API plumbing to enable new value-added services through this plumbing. Visa and Mastercard are also a driving force for innovation with each introducing a range of innovations which can be levered to address the B2B market. Software providers and fintechs are also increasingly integrating the traditionally fragmented end-to-end workflows of B2B commerce with real-time payments and banking services. Finally, marketplaces are increasingly common in B2B commerce and marketplaces necessitate innovation so that buyers and sellers can easily enter the marketplace and transact in real-time on a trusted basis. Each of these innovations are enhancing the opportunities available to fintechs focused on B2B payments. Emerging Opportunity #1: Payments Integration in B2B Procure-to-Pay and Order-to-Cash Lifecycles Figure 3: ‘Procure to Pay’ and ‘Order to Cash’ Workflows Often Exist in Silos, We Expect Fintechs to Automate These Workflows Sources: Flagship Advisory Partners. In mid-sized and large businesses, accounts payable and accounts receivables continue to be separate processes, often managed by separate departments. In addition, the fragmented landscape of IT systems responsible for A/R and A/P functions (ERP, CRM, billing, payouts, reconciliation) makes the end-to-end supply chain complicated and inefficient. Large businesses often spend millions of dollars filling the gaps and manually managing exceptions arising from this far-too-siloed ecosystem. The ongoing preference of paper-based instruments (especially in the US, APAC) further compounds the efficiencies and needs for manual processes and expenses. Fintechs will play an increasing role in automating end-to-end supply chains, breaking traditional siloes between the order-to-cash and procure-to-pay processes, and delivering integrated payment services which are automated and intelligent. This innovation is already visible with fintechs such as VersaPay, MineralTree, and AvidXchange serving businesses with automated payout solutions integrated into ERP systems. Fintechs are also increasingly integrating payments with accounts receivable systems to drive automated reconciliation (which remains a sharp pain point for most businesses). Given that many mid/large businesses tend to be multi-banked, fintechs are also now offering services to integrate incoming and outgoing payments data across service providers and countries. For example, Cobase, a fintech investment of ING group, offers businesses with a multi-banking portal and a single integration point for all banking accounts and cash balances. Worldpay acquired fintech provider Payzein, provides a solution which consolidates acquiring data across providers in order to streamline reconciliation. Emerging Opportunity #2: Innovation via Open Banking FIGURE 4: Open API driven Business 2 Bank payment flows likely to disrupt traditional Business 2 Bank flows Source: Flagship Advisory Partners. Traditional banking is limited by poor integration technologies. Thus, even in cases where various workflows software components are integrated, there is often a reliance on bespoke file-transfers based payment execution. Banks today also do not generally offer a robust set of value-added tools to manage payment exceptions and reconciliation mismatches. Thus, even if the payment transactions can be processed at low cost, the systemic efficiencies around failures and exceptions still leaves lots of opportunity for value creation. Open banking enabled by modern API technology will enable fintechs to address these unmet needs. Software and workflow service providers will increasingly partner with fintechs to access real-time, value-added payment services (such as invoice issuance, fraud prevention, online notifications, chasing late payments, automated reconciliations, payee confirmations). New commercial models will arise to reward these innovations beyond the basic cents per transaction of traditional bank payments. Open banking fintechs such as Tink or token.io offer businesses banking gateway services allowing access to hundreds or even thousands of banking via a single API. We also see emergence of fintechs offering integrated end-user open banking services such as Nuapay and Modulr, offering businesses with integrated accounts and payments with benefits of automatic payment alerts, automatic reconciliations and real time visibility. Emerging Opportunity # 3: The Rise of B2B e-commerce Marketplaces FIGURE 5: Vertical B2B Marketplace Source: Hokodo, Applico B2B commerce is increasingly driven by marketplaces, which can greatly simplify the typically complex B2B supply chains. In fact, many expect B2B marketplaces to exceed the scale of B2C marketplaces in the relatively near term. These B2B marketplaces are often vertically focused, for example specializing in machinery, agrifood, commodities, transport & logistics, retail, and chemicals. Marketplaces have complex requirements for payments as there are many sellers and pay-in needs as well as many buyers and pay-out needs. B2C marketplace PSPs such as MangoPay or Lemonway (along with Stripe and Adyen) are increasingly expanding their focus to B2B marketplaces. So too we see new fintechs entering the market or adapting existing services to serve the needs of B2B marketplace payments. For example, Enterpay offers automated credit management and invoice payment services to B2B marketplaces. Nanopay, another fintech, offers cash and liquidity management functionality (allowing companies to more intelligently move and monitor liquidity) alongside its B2B payment services. Beyond the many requirements of a B2C marketplace (complex underwriting, compliance, and hierarchies, varying legal/commercial models, x-border facilitation, etc.), B2B marketplace PSPs often fill requirements specific to B2B commerce. For example, supporting payment terms and need for credit/float, complex regulatory reporting, and multi-stage procurement flows. Other important tactics for authorizations and digitalization include optimizing settings for contactless transactions via PIN-request limits and chip counter resets, checking that fraud monitoring systems are not producing an undue amount of declines, and reviewing mobile and digital banking self-service functionality to allow customers to quickly and easily change daily limits, turn cards on/off, etc. Emerging Opportunity #4: Visa and MasterCard Technologies Stimulate B2B Disruption FIGURE 6: V/MC B2B Product Launches, Investments & Partnerships Source: Visa and Mastercard Visa and MasterCard recognized the massive potential of B2B payments many years ago, though penetration of the B2B market was relatively slow (particularly outside of the U.S.) until recent years. Today, Visa and MasterCard have a powerful toolkit for enabling B2B payments innovation headlined by virtual card, OCT (Visa Direct and MasterCard Send), and specialized bank-to-bank payment networks leveraging blockchain technology. Used in combination, these new tools allow businesses to both better control and to instantly pay their suppliers in real-time. Travel specialists such as WEX have for years leveraged the power of virtual cards for both managing travel spend and facilitating payouts to distributed travel providers. Payout specialists such as Payoneer are increasingly leveraging V/MC networks to support their GIG economy payout services, where OCT technology is particularly powerful. B2B payments fintechs such as Boost Payment Solutions are increasingly enabling virtual card issuance (for buyers) and acceptance (for supplier) as well as converting card payments to bank payments as needed to facilitate B2B network transactions. Finally, next generation, cloud-based card processors are also benefitting from V/MC innovations and even the direct investments of Visa and MasterCard themselves. For example, Mastercard recently invested in next-gen processor Marqeta and Visa invested in Global Processing Services (GPS). An expanding array of technology innovations such as open banking, B2B marketplaces, workflow automations, software integrations, and V/MC virtual accounts and real-time push payments are enhancing the ability for fintechs to enter and thrive in addressing the unique payment needs in the massively scaled B2B payments market. As the last decade was the age of fintech in B2C payments, so too we see the next decade as the age of fintech in B2B payments. To share your views or discuss those above, please contact Anupam Majumdar at Anupam@FlagshipAP.com or Joel van Arsdale at Joel@FlagshipAP.com.

European bank management boards typically view credit cards as a cash cow business with good returns on equity but challenging to invest in growth. Recent trends largely reinforce this skeptical view: Stagnant or declining receivables; impacts from Covid-19 (e.g., tightened underwriting, regulated payment holidays); decreasing transactional revenues (e.g., interchange caps, FX margin competition); and increasing regulatory burden (e.g., PSD2) driving ever-increasing operating burdens. This negative view of credit cards in Europe is misplaced. Credit cards, like many aspects of banking, have challenges, but the potential for growth and differentiation is good. Quantitatively, penetration of unsecured short-term credit in most European countries is still relatively low. Qualitatively, the underlying concept of a flexible credit facility accessible as a means of payment is a strong value proposition that meets a variety of consumer needs. Admittedly, success in revolving credit cards requires adaptation and investment beyond what most EU banks do today. FIGURE 1: Household Debt vs. Income Source: OECD. 1 Annual household income is defined as total income less employers’ social insurance contributions, employees’ social insurance contributions, taxes on income and regular taxes on wealth. 2 Short-term debt is defined as debt that has maturity of one year or less. Maturity can be defined either on an original or remaining basis. 3 Long-term debt has an original maturity normally of more than one year, except that, to accommodate variations in practice between countries, long-term may be defined to require an original maturity in excess of two years. Source: OECD. Despite economic uncertainty due to the pandemic, now is a good time for European bank credit card issuers to optimize their businesses and then lay out a clear plan to grow when conditions are right. Most European banks are likely to keep their credit card businesses in cash cow mode, therefore those banks that optimize now will be well-positioned to win market share and achieve profitable growth in the future. The potential for growth and high returns in European credit cards is illustrated by specialized lenders such as NewDay and Advanzia, who have found significant success via focus, targeting underserved niches (store cards, co-brands, near-prime), and investing to build strong competencies in distribution, risk management, and CRM. FIGURE 2: Example Specialized Credit Card Lender 2019 Pre-Tax Return on Receivables and Growth in Risk-Adjusted Revenues Sources: Company reports. Fintechs are often considered to be potential disruptors in the unsecured credit space due to their ability to innovate, strong user experience, modern tech stack, and ability to leverage data. The success of credit-oriented fintechs like Klarna supports this view, and certainly banks need to ensure that their unsecured credit businesses are not eroded in the same manner as their basic banking businesses have been. However, credit is not an easy win for most fintechs: they have significant capital disadvantages vs. banks, much smaller operating scale, and lack the ability to integrate credit into a broader proposition and cross-sell it via multiple channels. Many neobanks still do not offer unsecured credit, and the bankruptcy of Kreditech/Monedo is a red flag for over-emphasizing innovation in underwriting. At Flagship, we believe that European banks can grow shareholder value in credit card issuing via a two-phased approach: optimizing the existing business now, and then re-positioning the business via innovation to grow when market conditions are more favorable. The first optimization phase uses a “toolkit” of tactics that we detail below and requires a moderate amount of investment. The second growth phase, which requires more significant investment, will be detailed in a subsequent article. FIGURE 3: Bank Credit Card Issuer Vision for Growth Sources: Flagship Advisory Partners. The optimization toolkit is designed to enable an issuer to improve their business using tools available today, and then prioritize based on their individual needs (an example of how to do so is described here). We have categorized the catalog of tactics into four areas: product, marketing, distribution, and operational efficiency. FIGURE 4: Credit Card Issuer Optimization Toolkit Source: Flagship Advisory Partners. Toolkit: Product Enabling digital commerce is a critical prerequisite for future growth due to the continuing shift from physical channels to digital and omni-channel and the huge increase in e-commerce sales as a result of Covid-19 (as illustrated in the figure below) have made digital enablement even more urgent. FIGURE 5: EU Sales vs. Same Month of Prior Year Source: Eurostat. Beyond the basics such as enabling Apple Pay and Google Pay, issuers should carefully review their plans for implementing Strong Customer Authentication (likely via 3D Secure 2.1) to create a better user experience. The digital experience for using cards online has suffered in recent years compared to other forms of payment (e.g., PayPal) as the security measures for cards grew more cumbersome and issuers have been generally unwilling to invest to innovate and improve the user experience. While some components of authentication are mandated via PSD2, there are often ways to introduce a smoother interface (e.g., biometric authentication in mobile banking instead of separate apps and additional passwords) and to optimize fraud controls. European issuers often have relatively blunt rules-based authorization strategies that err on the side of hard declines, and therefore could take a page from U.S. issuer playbooks, and approve transactions but request cardholders to confirm the validity after the fact (via e-mail or push notifications) coupled with customer-friendly chargeback procedures. Other important tactics for authorizations and digitalization include optimizing settings for contactless transactions via PIN-request limits and chip counter resets, checking that fraud monitoring systems are not producing an undue amount of declines, and reviewing mobile and digital banking self-service functionality to allow customers to quickly and easily change daily limits, turn cards on/off, etc. Tailoring products to segments is an opportunity for most issuers, although this of course needs to be balanced with not having an overly large product catalog. SME cards are under-penetrated at most issuers, and while attractive unregulated interchange rates present an easy business case for SME cards, the underlying customer needs (credit and expense management tools) make a strong case for an attractive SME card proposition. Other typical segments include sharpening the cross-sell pitch and process to new mortgage customers, clients without overdraft, and affluent clients (although the business case of the latter is becoming challenging as FX revenues decrease). Strategic pricing that emphasizes long-term value rather than cash-cowing is critical to growth. While it is often tempting for issuers to maintain existing (often high) prices, future profitability often requires sacrificing some short-term price points to defend against attrition and make the overall proposition more attractive. Example tactics can include removing monthly/annual and ATM withdrawal fees to create a “no reason not to take it” proposition, and lowering FX mark-ups (either as a defensive move or as part of an acquisition key selling point). Revenue declines from these tactics can be offset by removing the grace periods on revolver-oriented cards (boosting interest revenue while simplifying the product pitch to customers that are confused by grace periods), reducing or eliminating rewards programs and other spend incentives that cannot be justified quantitatively by either a clear lift in profitability, or decreases in attrition or increases in acquisitions (the latter two measured on the basis of bank-wide profitability), and cross-selling value-added services. Customer bases and market conditions can vary widely across Europe, so continuous A/B testing of price points and tactics can ensure that propositions optimally balance attractiveness to customers to support long-term growth with near-term profitability objectives. Toolkit: Acquisitions Setting the right marketing mix is important under normal conditions, and the pandemic has made optimizing multi-channel marketing (supplementing branches with digital channels, call center, and outbound marketing) even more important. Building digital channels via strong customer onboarding journeys is necessary to position the business for future growth and to supplement branch production in current pandemic conditions. If fully digital onboarding has not been built yet, creating the solution design (e.g., mapping out technical solutions and processes) is a necessary first step, and refreshing web pages can typically be done quickly and easily (e.g., does the web page clearly communicate two to three key selling points for the product and create a call to action?). Optimizing branch acquisitions can be done via “tried and true” tactics such as setting sales targets for bankers supported by an incentive system, checking that sales collateral is clear and compelling, running periodic sales contests/campaigns, regularly refreshing sales training, and providing strong sales scripts. Testing bundling credit cards into current account packages (e.g., free credit card and/or overdraft facility with current account) can also boost acquisitions. Distribution via third parties is increasingly important, as credit markets mature and become more digitally oriented, aggregators and other digital third parties are large (if not the largest) channel for new acquisitions (e.g., as in the UK). Actively managing and optimizing these partner distribution channels is increasingly important, and is likely to become even more so as payments and credit become more integrated into other services. In less mature credit markets, traditional brokers still play a large role, and they can also be effective distributors (albeit often via bundling credit cards with mortgages and other lending products). Many of the branch tactics noted above can be used here as well, but incentive levels and effective bundling with other lending products play a larger role. Toolkit: Lifecycle Most European banks under-market to existing credit card customers. Banks (logically) will typically allocate existing customer marketing budgets to either general relationship building (e.g., mobile app feature education) or to products with or high-volume/certain return products (mortgages, installment loans, investment funds). Credit cards often receive little marketing support, therefore, issuers must focus on building the case for relatively small investments to find and optimize the most valuable campaign types and channels, and making the case based on ROI. Seasonal campaigns are a basic starting point. Well-timed 0% interest for [x] months offers (e.g., before back to school or before Christmas) can generate profitable lift in acquisitions and balances. Capturing travel spend profitably via broad campaigns can be done but is trickier (even pre-Covid) and usually requires more testing. Tried and true lifecycle management tactics including early months on books (EMOB) campaigns to activate new cardholders, periodic balance building campaigns (promotional interest rates, etc.), and credit line increase programs (CLIP) provide many options for well-targeted and profitable campaigns. Lifetime value calculations at the product or segment level, and ideally at the individual account level, provide a strong quantitative base for targeting all types of campaigns. Performing this analysis can help remove unprofitable “spend and get” campaigns, unprofitable retention offers, and generally re-orienting focus and investment away from unprofitable customers (often transactors) to more profitable customers (often revolvers). Trigger-based campaigns can be highly profitable and can be done on a simplified basis even without a real-time campaign management software. Successful tactics typically include acquisition or top-up offers to current account customers that are overdrawn, acquisition offers to debit card customers who were declined due to insufficient current account balances, acquisition offers to debit card customers with e-commerce or foreign transactions, conversion offers to consumer card users with SME characteristics, and promotional balance offers to revolvers who are paying down their balances. Contact policy limitations are a common barrier, but lifetime value associated with the above tactics is often enough to justify at least rudimentary testing. Toolkit: Operational Efficiency While the tactics described above are focused on revenue growth, optimizing profitability requires that issuers continually drive operational efficiency. Business cycles tend to lead to an emphasis on either revenue growth or efficiency, as organizations naturally focus limited resources on a few initiatives. Ideally, issuers can form a culture of constant efficiency improvements even when they are in revenue growth mode. Implementing a culture of continual operational efficiency improvements can be challenging as operational delivery often falls under the responsibility of different groups/departments within bank credit card issuers. These diverse responsibilities often create complexity that is ripe for cost and efficiency savings. Tactics here can include funnel checks for branch onboarding, digital onboarding, and risk/underwriting approvals to identify steps in the onboarding process with high drop-off rates, risk reviews to ensure that the risk appetite is commensurate with returns, and process efficiency checks to perform high-level activity-based costing and to remove manual processes from back office functions, and to utilize modern tools for disputes and settlement/reconciliation. Optimizing processing system settings can yield profitability improvements by ensuring that foreign currency conversion rates and multi-currency settlement processes are optimized, and optimizing authorization decline rates by channel, product, and customer type can provide an improved customer experience (and incremental volumes). Checking stand-in processing settings from time to time is also useful to ensure that the business and customers are protected if online authorizations are down. Vendor cost health checks can lower costs when done with a partnership mindset (please see additional discussion here). In addition to re-negotiating vendor rates given the changed situation due to Covid-19, tactics here can include performing 80/20 analysis of scheme and processor invoices to investigate and potentially eliminate high cost or unclear line items, eliminating reports and data files from card schemes and processors that are no longer needed, and tracking vendor contract expiration dates and running tender processes well in advance. Balance sheet optimization, such as closing dormant accounts or reducing dormant credit lines to reduce line exposure, or optimizing product settings and customer terms and conditions to reduce Risk Weighted Asset allocations for credit cards, can also produce significant cost savings in the form of reduced equity allocations. The Path Forward Like all financial services, unsecured credit products and distribution are clearly becoming more digital, and banks must increasingly compete with challengers such as fintechs. The toolkit provided above gives issuers a set of actionable initiatives that can be executed now to improve the performance of the business, but positioning for increased market share and significant growth when market conditions stabilize requires further innovation. While this path forward via innovation is not without challenges, the underlying opportunities in the market are significant, and most European banks continue to under-invest in and under-market credit cards relative to their potential. We will present our vision for innovation-led in a subsequent article. To share your views or discuss those above, please contact Erik Howell at Erik@FlagshipAP.com.

The race to scale in European Payments leapt forward yesterday with the news of Nexi’s acquisition of SIA and rumors of a sale of Nets, for which Nexi is also a rumored potential buyer. These announcements follow a pattern of furious consolidation in the last 5-7 years in a race to achieve preeminent scale in the European market for payments processing and merchant services. FIGURE 1: NEXI Market Cap and Financial Profile Source: S&P Capital IQ Nexi is a tremendous success story, evolving from a traditional interbank utility to become a modern and vast fintech champion in Italy. The acquisition of SIA would solidify Nexi’s market leadership position and infrastructure in Italy as well as fueling an international expansion ambition supported by SIA’s strong position in pan-European instant payments. SIA is a leading technical processor for payments in Italy a well as the technical backbone for EBA Clearing and much of the pan-European instant payments clearing (described further in Figure 2 below). FIGURE 2: SIA Company Overview Sources: company website, press releases, and annual reports, EBA Clearing, ECB Nets is a desirable target with a unique footprint across Northern Europe. Nets also underwent significant expansion and modernization efforts during its recent years of private ownership and is well-built for sustained EBITDA growth via expanding scale efficiencies. There is clear rationale for payments consolidators to focus on Nets as an acquisition candidate given its unique Nordic / DACH (Germanic) / Baltic / Polish footprint. FIGURE 3: Nets Select Performance Metrics Sources: company annual reports and 3rd-party press The fit between Nexi and Nets is undeniable, given somewhat similar interbank backgrounds, development curves, and the companies’ highly complementary European footprints (as well as some common shareholders). There is also clear acquisition rationale for the global, U.S. multi-national processors (Global Payments, Fiserv, FIS) to target both Nets and Nexi who are each a desirable target for scaling a European market position. Below, we profile the impressive expansionary paths of Nexi and Nets. FIGURE 4: Nexi and Nets Key Acquisitions (since 2010) With the likely acquisition of Nets to playout in the coming weeks or months, the European market for processing has morphed from being largely domestic (15 years ago) to a highly consolidated European marketplace led by Worldline, Fiserv, Global Payments and Nexi (presuming that one of these companies also acquires Nets). Shareholders should continue to benefit from ongoing operating model efficiencies, where robotics and other technologies offer great potential. The most attractive revenue growth engine for these groups remains the merchant services franchises, where consolidation and scale efficiencies are a key theme, but so too there is a growth and innovation imperative to compete with the likes of Adyen and Stripe who are gaining market share rapidly in Europe. To share your views or discuss those above, please contact Joel Van Arsdale at Joel@FlagshipAP.com.

The convergence between financial services and business services (delivered as Software as a Service) is accelerating, creating tremendous shareholder value along the way. Fintechs such as Square or PayPal are increasingly expanding their portfolio of both business and financial services. Meanwhile, SaaS providers such as Shopify and Lightspeed are rapidly expanding into payments with the potential to expand from there into other financial services. These market leaders are already achieving great success via convergence, but today, we see only the tip of the iceberg for value creation potential. Under the surface lies the enormous potential of commerce data intelligence, where commerce and payments data could drive new, Google-esque business models. FIGURE 1: Convergence Landscape * For hardware, core capability = unique design and sourcing of the manufactured product (not an off-the shelf HW) ^These capabilities vary widely across channels and may be visible online, but not in POS and vice versa Source: Company websites, Flagship Advisory assessment Shareholders clearly love this story (as they should). Convergence has the potential to create tremendous value for customers and their providers. At the core of this convergence lies tremendous technology and business model innovation. These SaaS-centric market leaders have completely reinvented traditional product and services using modern technology (cloud, mobile, digital experience, etc.) as well as reinventing distribution and customer servicing models (no more face-to-face sales and “please call back during business hours” servicing.) FIGURE 2: Notable SaaS & Fintech Share Performance (Share price indexed from base period, Mar-17, to 4 Sept 2020) Source: Yahoo Finance SaaS and Fintech convergence leaders are rapidly expanding their portfolio of business and financial services as well as their geographic footprint, although their individual expansion strategies are a somewhat varied mix of organic and inorganic expansion. Square has largely focused on organic services expansion (although both M&A and partnerships to obtain capabilities have been enablers) and has been somewhat slower to scale outside of its core North America market. Shopify is accelerating its global expansion organically, although it has engaged in a series of generally small, capability-focused acquisitions. PayPal is already highly global and in recent years has focused on large-scale capability acquisitions. Lightspeed is generally using M&A to drive both geographic and sector expansion. Figures 3 and 4 summarize the expansion paths of Square and Shopify respectively alongside their revenue scaling. FIGURE 3: Square Development Timeline Source: Square website, LinkedIn, Crunchbase FIGURE 4: Shopify Development Timeline Source: Shopify website, LinkedIn, Crunchbase Within this increasingly bundled and technology driven intersection of business software and services and financial services, do banks and traditional merchant payments companies have a chance to compete? In short, yes, but it will require significant effort and well-crafted investments and partnerships. SaaS providers challenge traditional business models of merchant payment companies, who now must adapt. As an example, Fiserv, a traditional payments company, appears to be succeeding with its convergence platform Clover. The Clover product continues to expand its breadth of services, vertical specialization, and global footprint. Highly visible in the market for some years in North America, we are now also seeing the product within shops in Europe (Fiserv, then First Data, reported that Clover surpassed the 1 million units milestone in 2018). Smaller merchant payments companies will struggle to achieve the massive and patient investment poured into Clover, but there is a growing array of partners who can help to enable SaaS packages. FIGURE 5: Notable Fintech Investments of BBVA and ING Source: company websites, Crunchbase Banks are most challenged to innovate given the natural capital profile and pre-existing innovation/reinvention challenges arising from digitization. However, there are glimpses of potential for leading bank franchises to market SaaS services. Commonwealth Bank achieved some early success with Albert and Credit Agricole has an interesting suite of commerce services (ePOS, web shop, etc.), although it is not clear if these expansions can be considered a resounding success at this point. Banks have the advantage of trusted brands and massive stores of data to leverage for SaaS services; but banks have not yet positioned significantly for the convergence between fintech and SaaS. Banks (such as BBVA and ING) remain primarily focused on fintech investments as a defensive measure against threats on their core banking business. The great convergence of SaaS and fintech, fueled by technology and business model innovation, is reshaping the marketplace for business and financial services. This trend will clearly continue given the vast potential for ongoing service and geographic expansion. Traditional providers of busines and financial services have an imperative to adapt in the face of more innovative competition. Finally, we expect data-driven services to emerge from convergence, with vast value-creation potential in the coming years. To share your views or discuss those above, please contact Joel Van Arsdale at Joel@FlagshipAP.com.

Ant Group, the parent company of Chinese digital payments and fintech giant Alipay, recently filed an IPO prospectus which demonstrates the value-creation potential of fintech: for shareholders, consumers, and partners. Ant’s 674-page prospectus makes for fascinating reading, and strikingly illustrates three key takeaways: Ant Group is a payments and fintech behemoth with massive scale and breadth of revenue; Ant has successfully expanded Alipay from a payment method into a financial services supermarket, and is now expanding into what it terms “daily life services”; and, Ant’s development and business model is the result of unique circumstances, which while not be replicable in the North America and European markets given their respective state of maturity, still offers valuable lessons for fintech leaders in developing markets. Scale and Breadth Ant Group and its Alipay payment method are uniquely huge, with 711 million average users, $17 trillion in annual payments volume, $300 billion in consumer and SME credit balances, and $600 billion in investment assets under management. In terms of market shares in China, this represents 47% of the population, 55% of digital payments, 10% of consumer and SME credit balances, and 2% of personal investable assets, respectively. FIGURE 1: Ant Group Revenue Growth and Mix (RMB trillions) Source: Ant Group draft Application Proof file at Hong Kong Exchanges and Clearing, https://www1.hkexnews.hk/app/sehk/2020/102484/documents/sehk20082500535.pdf Services Expansion Ant Group has grown revenue and profitability with a 30%+ CAGR between 2017 and 2019, driven heavily by its successful expansion into distributing credit, investments and insurance. In 2019, these other non-payments expansions comprised 57% of gross revenues. Credit, where Ant acts as a distributor, score provider, and servicer for others lending (98% of lending is off balance sheet), has been the primary growth driver beyond payments. In the six months ending June 2020, gross credit revenue surpassed gross payments revenue. Payments is still very lucrative however, with net revenue equivalent to 4.7% of volume during 2019. Ant, via the Alipay platform, is now expanding beyond financial services and into “daily life services”, which include over 1,000 mobility and local services and over 2 million “mini apps” within the main Alipay app. During the past 12 months, these services were utilized by an impressive 60% of Ant’s total users. Alibaba remains important to Ant’s payments business (and overall ecosystem) contributing RMB 9.2 trillion in payments revenue to Ant in 2019, or 18% of total gross payments revenue (diluted by the significantly lower gross margins on payments volume of 0.60%). Ant investors will be comforted to know that most contracts with Alibaba are 50-year contracts with a subsequent 50-year auto renewal. FIGURE 2: Ant Group Key Metrics Source: Ant Group draft Application Proof file at Hong Kong Exchanges and Clearing,https://www1.hkexnews.hk/app/sehk/2020/102484/documents/sehk20082500535.pdf Key Lessons Ant Group’s trajectory is the result of highly unique scale, which is not replicable outside of China, but the diversity of revenue bodes well for fintechs in other growth markets. Alipay clearly demonstrates the potential of multi-service platform emanating from payments. We caution the applicability of this lesson to North America and Europe, however, where consumer behaviors are not consistent with Alipay’s “one app to rule them all” approach. Still, there are important lessons that fintech providers globally can draw from Ant’s success. Partnerships are core to fintech: Ant emphasizes that its business model is to partner with banks and other financial services providers and generate revenues from distribution to its user base, rather than compete head-on as the owner of the underlying product. The future of payments is integrated services: As illustrated by Ant’s revenue expansion and ecosystem approach, integrating payments into other services (and vice versa) is a powerful generator of usage and revenues (including B2C and B2B integrated services). This trend is playing out globally in integrated payments and business services as we describe in a recent article [click here for article], though integrated consumer use cases generally lag Ant’s success. Transactional credit is a large revenue opportunity: Alipay demonstrates the potential of providing easy-to-use, digitally delivered credit to finance purchases (which is a market still growing into its potential in most global markets). Many fintechs have focused on the opportunity, most notably Klarna, but traditional providers of unsecured credit must innovate in order to compete with fintechs in this segment of the market.New Paragraph To share your views or discuss those above, please contact Erik Howell at Erik@FlagshipAP.com.

(Part 2* – Dramatic Sectorial Impacts) *This is the second in a series of blogposts in which we compare our original, bearish hypotheses related to COVID-19’s impact on the payments marketplace back in April versus the reality of where we are today. In this second part, we examine the impact of the pandemic on sectorial spending patterns. Our Bearish Outlook from April on COVID-19’s Expected Sector Impacts In April, we expected that dramatic changes in spending behavior arising from social distancing would ripple through marketplace sectors idiosyncratically. The travel and entertainment sectors would be most negatively impacted, with little hope of a broad-based return to historically high 2019 spend levels for years to come. We expected demand for both international leisure travel and business travel to be devasted. Airlines, cruise lines, and hotels would come under financial pressure and would need government support. We also expected that restaurants would try to adapt to delivery and take-out, but many would struggle to survive if the pandemic dragged on through the summer. However, we did expect demand for restaurants, cafes, and certain types of local travel to rebound in parallel with market opening. Digital entertainment would benefit so long as consumers continued to isolate. If the pandemic continued through the summer, fall, and winter of 2020, we expected high levels of business failure within the restaurant and entertainment sectors. We expected that impacts on the retail sector would vary dramatically based on channel and product type. Grocery merchants would thrive as people would be forced to displace eating-out with eating-in. Online merchants would generally benefit from a dramatic channel shift as buying would shift almost entirely online for a time (with some lasting effect). As a result of GDP contraction and these expected changes in consumption behavior, we forecast that suppliers of payment services would experience corresponding impacts. Those providers that are over-indexed on travel and entertainment (e.g., Amex) would be harmed, while those most favorably impacted by channel and sector shift (e.g., PayPal) would thrive relative to the broader market. Reality of Today – Dramatic and Unfortunate Impacts on Many Sectors Sadly, our bearish predictions from April have proven largely true; travel, entertainment, and restaurant merchants have been dramatically impacted as have their respective payments providers. Figure 1, based on card spend in Ireland, illustrates the dramatic sectorial spending impacts inflicted by COVID-19. Government assistance is helping to buffer the financial impacts of spending shortfalls across these sectors, but business failure rates are likely to accelerate in 2H 2020 if these trends continue. FIGURE 1: YoY % Card Turnover Changes in Selected Sectors (Ireland Example, from January to June 2020) Source: Central Bank of Ireland COVID-19 Impact on Travel No industry has been more negatively impacted than travel and tourism, which accounts for 10% of global GDP and employment. As of today, there remains little room for optimism and the industry is retrenching, hoping for an eventual vaccine or other measures to control the transmission of COVID-19. As shown in Figure 2, Adyen, a leading provider of payment services in the Travel sector, illustrates the massive and ongoing impact of the pandemic on travel spending. FIGURE 2: Adyen Weekly Processed Volumes, Total vs. Travel Source: Adyen H1 2020 Shareholder letter AIR TRAVEL Air travel was down 90% during the height of infections and has today, only partially recovered in most global markets (as shown in Figure 3). IATA forecasts a global reduction in air travel of $84 billion in 2020 (a reduction of 55% from 2019). Air Travel in the U.S. in June and July remained down 70% relative to 2019[1]. Positively, domestic air travel in China, where infection rates are low, travel frequency has approached 2019 levels in recent months. FIGURE 3: YoY Change of Weekly Flight Frequency of Global Airlines (January 6- August 10, 2020, globally) Source: Statista https://www.statista.com/statistics/1104036/novel-coronavirus-weekly-flights-change-airlines-region/ CRUISE TRAVEL The cruise industry was an unfortunate poster child for COVID impacts and vulnerabilities. As of June, according to the Financial Times, all of the industry’s 338 cruise ships were docked[2]. Some cruises, for example in the Mediterranean, have now returned but the industry outlook remains gloomy, given what could be permanent damage to the perception of safety in the industry. LOCAL TRAVEL Local travel spending provides a glimmer of optimism. People are escaping their homes, but they are now generally doing so via local travel, within driving distance, and with a focus on outdoor activities. According to Airbnb CEO Brian Chesky, “Tourism as we knew it is over … the model we knew has died and will not return. We are going to get in our cars, drive a few kilometers to a small community and stay in a house.”[3] Consumers looking to buy boats or other recreational vehicles in July were out of luck with inventories dry. BUSINESS TRAVEL Business travel, which dropped to near zero in April and May, remains limited as employers are cautious not to put employees at risk. Experts forecast a 50-75% return of business travel spend, but not until 2022[4] and with some lasting effects. Businesses have realized that remote working can be effective, and the cost savings of remote work help to offset the lost value of face-to-face interaction. Several of our clients have told us that their reduction in business travel expense as a major upside to offsetting the EBITDA impact of lower payments volumes and revenue, and we expect this pressure on travel expense to continue. ACCOMMODATION According to Booking Holdings, accommodation bookings declined 91% in Q2 and the company is planning a 25% workforce reduction[5]. There are some signs of hope (i.e., local travelers), but also concerns about lasting impacts. Here in Amsterdam, local merchants describe a more limited population of tourists from mostly neighboring countries (i.e., German) returning in July and August. Payments providers over-indexed on travel are seeing significantly negative impacts on business performance. American Express revenues declined 29% in Q2 with a corresponding 29% decline in the share price since its high in February[6] (see Figure 4). FIGURE 4: Share Price Development of American Express Stock (17 January -17 August 2020, in USD) Source: Yahoo Finance COVID-19 Impact on Entertainment and Restaurants As with tourism, the impact of COVID on the entertainment and restaurant and pub industry has been devastating. There are now terrible expectations for significant business failure across these sectors. ENTERTAINMENT In-person entertainment including concerts, movie theatres, and other events has been ravaged by the pandemic. The movie theatre industry is expected to be permanently damaged with large numbers of theatre closings. AMC, the largest movie theatre chain in the U.S., has cautioned investors that it may not survive the pandemic[7]. Digital entertainment, however, has clearly benefited from the pandemic. Netflix subscriptions doubled during the initial months of the pandemic and its share price has increased nearly 50% this year[8]. Disney is on the downside of in-person entertainment (earnings down 90% in 2020 YTD), but its Disney+ unit had already generated 54 million paying subscribers by the end of May[9]. Merchants providing conference, wedding, and similar event services have seen revenues plummet to zero in countries in which infections and associated lockdowns persist. Many of these merchants will go out of business, creating significant potential risk exposure for acquirers. Video gaming has thrived during the pandemic. U.S. video gaming revenue was up more than 50% in May compared to 2019 (LATimes). RESTAURANTS Restaurants were overwhelmed by the pandemic and the market expects significant business attrition by year-end, although there are signs of hope in June and July turnover in countries less impacted by the virus (i.e., in parts of Europe). In a desperate bid for survival, many restaurants pivoted to online ordering and delivery and take-out services during the lock-down. According to McKinsey and City Pantry, U.K. food delivery order volume increased 40% during the lockdown[10] and 20% of U.K. restaurants started offering take-out for the first time. The market expects permanent or long-term impacts on a restaurant marketplace which is emerging from many years of steady growth. According to Bloomberg, one-third of restaurants in the U.S. (231,000 from a total of 660,000) will shut down in 2020[11]. And according to Yelp, 55% of the businesses listed on their service which have closed since 1 March will never re-open. FIGURE 5: Number of Permanent and Temporary U.S. Business Closures Since March 1, 2020 Note: Among US businesses that were open on March 1. Closures updated through July 10.Sources: MarketWatch, Yelp https://www.marketwatch.com/story/41-of-businesses-listed-on-yelp-have-closed-for-good-during-the-pandemic-2020-06-25 COVID-19 Impact on Retail The pandemic has driven consumers online at the expense of in-store retail. IN-STORE RETAIL In-Store retail has been significantly damaged by the pandemic as social distancing was a unique one-time shock to in-store retail buying behavior. Sectors such as apparel, which tend to rely more on in-store buying, have been most impacted by consumer reluctance to return to stores (as shown in Figure 6, European apparel sales dropped 22.4% from February to June). FIGURE 6: Retail Trade Volume Growth Rates by Product Type, EU (June 2020 compared with February 2020) Sources: Eurostat https://ec.europa.eu/eurostat/statistics-explained/index.php?title=File:Retail_trade_June_2020.jpg ONLINE RETAIL The pandemic has accelerated the ongoing shift from offline to online retail. Online retailers have generally thrived during the pandemic. According to Adobe, online sales increased between 49-78% a month in April through July relative to 2019 (peaking with 78% YOY growth in May)[12]. Figure 7 (Adyen retail sector weekly volumes) illustrates the dichotomy of pandemic impacts on online vs. in-store retail spending. FIGURE 7: Adyen Weekly Processed Retail Volumes by Channel Sources: Source: Adyen H1 2020 Shareholder letter Payments providers with a healthy exposure to online retail and digital have benefited. PayPal added more than 20 million active users in Q2, helping to drive transaction value growth of 30% (the highest growth since PayPal’s separation from ebay) and PayPal’s share price has increased 130% from its low in March[13]. Outlook GDP growth for most of the world declined dramatically in Q2 (-9.5% in the U.S. [14] and -12.1% in the Euro area[15].As we unfortunately expected in April, this GDP contraction along with significant changes in buying behaviors rippled across the economy, inflicting brutal impacts on numerous sectors including travel, entertainment, restaurants, and in-store retail. We expect some of these behavior changes to affect lasting impacts. We remain hopeful that improvements in controlling COVID-19 will help many of these sectors to rebound. In the meantime, providers of payment services will suffer along with their customers, and we remain concerned about the impact of business failures on payments providers with credit exposure in these heavily impacted sectors. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions. [1] https://www.cnbc.com/2020/07/06/air-travel-jumps-july-4-weekend-but-still-down-sharply-from-2019-amid-covid-19pandemic.html [2] https://www.ft.com/content/d8ff5129-6817-4a19-af02-1316f8defe52 [3] https://www.entrepreneur.com/article/352419 [4] https://www.bbc.com/worklife/article/20200731-how-coronavirus-will-change-business-travel [5] https://www.phocuswire.com/booking-holdings-q2-2020 [6] https://www.investors.com/news/american-express-earnings-q2-2020-american-express-stock/ [7] https://www.cbsnews.com/news/amc-movie-theater-chain-survive-coronavirus-pandemic/ [8] https://www.marketwatch.com/story/netflix-in-the-age-of-covid-19-streaming-pioneer-may-have-new-edge-on-competition-2020-04-07 [9] https://www.marketwatch.com/story/disney-in-the-age-of-covid-19-for-now-disney-may-be-the-only-plus-2020-04-07 [10] https://www.mckinsey.com/industries/retail/our-insights/reimagining-european-restaurants-for-the-next-normal# [11] https://www.bloomberg.com/news/articles/2020-07-31/one-third-of-u-s-restaurants-face-permanent-closure-this-year [12] https://www.digitalcommerce360.com/article/coronavirus-impact-online-retail/ [13] https://www.fool.com/earnings/call-transcripts/2020/07/30/paypal-holdings-pypl-q2-2020-earnings-call-transcr.aspx [14] https://www.statista.com/chart/18095/quarterly-gdp-growth-predicted-growth-selected-industrialized-nations-oecd/ [15] https://ec.europa.eu/eurostat/documents/2995521/11156775/2-31072020-BP-EN.pdf/cbe7522c-ebfa-ef08-be60-b1c9d1bd385b

(Part 1* – Impact on M&A) *This is the first in a series of blogposts in which we compare our original, bearish hypotheses related to COVID-19’s impact on the payments marketplace back in April versus the reality of where we are today. In this first part, we examine the impact of the pandemic on payments M&A and funding activity (with a focus on Europe and North America). Our Original, Bearish Outlook from April on COVID-19’s Impact on Payments M&A Activity In April, we expected the pandemic to drive a significant decline in deal activity in Q2 and Q3 2020 as buyers, sellers, and investors would need time to assess the new normal. We expected that some fortunate prospective sellers (those benefited by sectoral and channel shifts) would accelerate potential exit timing based on one-time boosts in business growth, but that many sellers (those negatively impacted by sectoral and channel shifts) would retreat and reevaluate the best timing for a monetization event. We expected that private equity buyers could see the greatest slow-down, as leveraged debt markets (which where historically favorable in 2019) became more dovish. We expected that venture and growth equity investors would continue to be opportunistic, but also far more discerning in where they placed capital. Finally, we expected institutional investors to hold fast in payments stocks through a likely downturn in equity values given the long-term safe-haven status of the sector. Reality of Today - Payments M&A and Funding Activity Payments M&A Deals Q2 2020 Review M&A activity was healthy in Q2 2020 despite the pandemic, down slightly from Q2 2019. According to FT Partners (Q2 2020 Quarterly Fintech Insights), there were 409 fintech M&A deals globally announced in 1H 2020 compared to 479 M&A announced deals in 1H 2019 with the vast majority of these acquisitions made by strategic buyers. Notable recently announced payments M&A deals include: Source: Crunchbase, Finextra, Barrons, Bloomberg Based on our own work, activity levels continue to be brisk among prospective buyers and sellers. On the buy-side, we continue to see aggressive strategic buyers as well as many billions of dollars in sponsor capital in search of quality investments globally. In fact, among both strategic and private equity investors, we perceive as much eagerness as ever to do deals. There has been some rationalization of perceived asset quality; for example, we observe less appetite for payments companies which are over-indexed in travel or in POS payments. On the sell-side, we see sellers (often smaller companies) increasingly considering opportunistic 2020 monetization events, motivated by founders looking for greater wealth stability or from shareholders capitalizing on beneficial impacts from the pandemic (i.e., retail e-commerce PSPs who are often benefiting significantly from changes in customer buying behaviors). Payments Funding Deals Q2 Review Funding activity in payments also remained healthy in recent months despite the pandemic with only a modest downturn in activity in Q2 2020 relative to Q2 2019. According to FT Partners (Q2 2020 Quarterly Fintech Insights), there was $9.3 billion of fintech funding activity globally in Q2 2020 (479 funding deals in total, c. 20% being payments related), just slightly down from $11.3 in Q2 2019 (437 total financing deals). Notable recent payments company funding rounds include: Source: Crunchbase IPOs and Public Equity Markets Q2 2020 Review There was only one payments IPO which we noted in Q2 2020 – Shift4’s highly successful IPO on 4 June. The IPO price of $23 immediately rose to $33 and now trades at $38. As noted in our prior article Payment Stocks Perform Well During Pandemic, institutional investors continue to love payments, even more so during the pandemic. Each of these publicly listed payments companies recently reached all-time highs during: *Shopify can increasingly be characterized as a payments company Source: Barrons, Yahoo Finance In conclusion, our bearish views in April fortunately proved to be overly pessimistic as M&A and investment activity within the payments industry continued to be brisk during Q2 and into July. Our outlook is now bullish for this healthy activity to continue, even as the roller coaster ride of COVID-19 and its economic impacts continue throughout 2020. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.

The SME business segment has traditionally been profit-challenged for large commercial banks. Many fintechs love the segment however, due to general under-penetration and opportunities to differentiate with digital products and quick and easy user experiences. Despite the pandemic, fintechs continue to pile into the SME segment as illustrated by recent introductions of business banking services from Starling and Monzo. Both new entrants and incumbents will need to adjust their strategies for SME banking during the pandemic and we expect less emphasis on lending (or at least lending not temporarily supported by national guarantee/employment schemes) and more emphasis on transaction banking services. As of today (see Figure 1 below), most fintechs with SME banking propositions offer a rather basic bundle (e.g. a current account product with associated cards and spending analytics/controls), whereas a few fintech banks like Starling use marketplaces to broaden their SME offering. Few fintechs focus on SME verticals (Penta being an exception) and virtually no fintech enables a robust, cross-border banking and FX proposition. FIGURE 1: European Fintechs With SME Banking Propositions (selected examples) Sources: Flagship market observations Since there is still significant opportunity in the SME banking space in Europe, below we describe several keys to success based on our experience. First, meet basic digital hygiene standards, including quick and easy fully online boarding, robust self-servicing via digital channels, and the ability to speak to a live customer service agent when needed. More advanced digital features are of course certainly welcome, but SMEs tend to be more conservative than the general population (the freelancer sub-segment being a notable exception). Second, the product construct needs to be sufficiently compelling and do more than one thing. This includes: Being optically price competitive (in many markets, free, although “competitive” does not have to mean “lowest price”); Offer one-stop shopping within the traditional banking sphere, such as deposit accounts bundled with payments, cards, payment acceptance, FX, and ideally a line of credit in a simple, easy to buy package; and, Ideally, provide a non-monetary reason to switch providers, such as strong integration with key software, useful features (invoicing, receipt and expense collection, tax management), perks (discounts, access, premium look and feel), etc. Third, the service should be tailored to SME needs (primarily, making their lives simpler). This includes integrating well with accounting and other software, and handling somewhat more complex needs than consumer products such as multiple user accounts (e.g., second signatory, accountant, etc.), FX transactions, bulk payment orders, etc. Fourth, while the current credit environment is deteriorating, SMEs ultimately need a path to credit. The concept of a small starter line of credit or credit card is a traditional approach, but in today’s market digital factoring is a strong alternative (as the risk is reduced because the credit risk is on the B2B buyers of the SME’s products/services, and those buyers are often better established). A key arrow in traditional banks’ quivers is that they are well positioned to monitor and provide SME credit, while fintechs who remain transaction banking-only risk eventual loss of SME customers to credit institutions as their customers mature (or worse, never attracting these customers the first place). Finally, and probably more controversially, to serve a broader definition of the SME segment the offer should ideally be as omnichannel as possible (meaning, not just in-app). While pure digital has proven traction in the consumer segment, many small business owners want to know that a person can help them, oftentimes in person. While branches have the disadvantage of cost overhead, they are still effective tools for retention and cross-sell in the SME segment. Payments specialists have proven that the SME segment can be lucrative with the right focus and execution. We see similar opportunities for fintech banks that can effectively deliver full-service SME banking services adhering to these (above) keys to success. Specifically, the following three opportunities jump out as strategies for fintechs to penetrate the SME banking opportunity. Opportunity #1: Segment (and Even Sub-segment) Focus Multi-national SMEs are particularly underserved as SME banking tends to be highly domestic in its design, marketing, and compliance. Speaking from personal experience, it can be challenging for a small multi-national business such as Flagship to obtain the right footprint of banking services. The pandemic is likely to drive new start-ups that are more digital/remote work-oriented and more multi-national, as individuals made redundant (or sensing market opportunities) collaborate across borders. Players that can provide onboarding for multi-national ownership structures, strong FX and multi-currency capabilities, and integration with international software packages (e.g., Xero, etc.) will have an advantage as the segment is highly underserved. Opportunity #2: Credit Innovation As a result of the pandemic, SME revenues have plummeted during the past few months (see Figure 2), leading to increased liquidity needs. National governments have responded with various approaches to support SMEs, but when these programs end, lenders will naturally pull back due to increased credit risk. In such a difficult credit environment, offering SMEs a path to credit will therefore be an even stronger and more differentiating proposition than under normal conditions. Digital factoring and fuel cards are examples of existing products that provide access to credit, but due to their more focused nature reduce overall exposure. However, there are also other significant opportunities for new credit product innovation in the SME credit space, such as defining a specific path to credit (e.g., credit line granted and grows based on pre-defined transaction banking behavior). Technical capabilities such as leveraging data science and increased access to account information driven by PSD2 APIs can also be used to differentiate on underwriting capabilities. FIGURE 2: SME Revenue Change Resulting From the Pandemic (UK; % of respondents; n=600) Q1: How did your company’s revenue change in the last year (before COVID 19)? Q2: How has COVID-19 impacted your company’s revenues?Source: McKinsey UK Small and Medium-Size Enterprise Survey (May 2020) Opportunity #3: Integrated Software and SaaS Services As we describe in a separate article here, integration of payment services into the broader universe of software and SaaS services is a major defining trend in European payments. The same can be said for all fintech services. SMEs like simple, bunded products. Given this behavior, over time, fintech services will increasingly be bundled into broader business SaaS packages (e.g., a restaurant package). This means that SME banking providers must strive to integrate and work with software vendors, but also to construct their own relevant bundles or application value-adds. For example, ensuring that the bank account is integrated into relevant SME accounting software, commerce front-end software (i.e., web shops, POS) property management software, payroll software, and various other software domains. This integrated approach also provides SME banking providers with significant opportunities to drive new revenue streams via value-added services. The SME space is evolving rapidly, so to share your views or discuss those above, please contact Erik Howell at Erik@FlagshipAP.com.

(Adapted from original publication in The Paypers) In the last decade, the number of fintech startups exploded around the world. Europe, fueled by its market opening regulations, experienced meteoric growth in the number of licensed payment institutions (‘PIs’) and e-money institutions. We expect the brutal market conditions of 2020 to drive a Darwinian shakeout among this community as revenue expectations disappoint and growth capital tightens. Flagship Advisory Partners recently examined the entire population of registered PIs and e-money institutions in the UK, which is one of Europe’s largest and friendliest market for fintech startups. We segmented and categorized the nearly 3,700 companies and within this article we analyze areas of the market where we expect the greatest shakeout. FIGURE 1: Status Distribution of Listed U.K. Payment and e-Money Institutions (% of total registrations) Sources: UK Financial Conduct Authority As of April 2020, there were 2,901 listed Payment Institutions in the UK, 67% of which were no longer authorized to provide the services permitted under the PI license. This already suggests relatively high rates of failure given that the Payment Institution license only became available in 2009 (noting that PSD2 required all UK PIs to re-register to be considered authorized). Among the 964 PIs that are still authorized, 551 are classified as ‘Small Payments Institutions’ by the UK Financial Conduct Authority (FCA) (small defined as less than EUR 3 million of monthly payments volume). Given that Small PIs are effectively micro-businesses, we did not conduct further analysis on this population, though we fully expect a high rate of extinction in this population. According to a survey conducted by Innovate Finance (as quoted in Finextra on 2 July), 70% of smaller UK fintechs have a cash runway of six months or less and most of these are rapidly trying to adapt in order to survive including 11% who already have plans to cease operations (link). There were also 766 listed e-money institutions in the UK, 20% of which were no longer authorized. 53% of these registered institutions are certified as Electronic Money Services Directive (EMD) Agents, which are not themselves licensed as e-money institutions. We excluded these EMD Agents and the 3% of e-money institutions that are designated as ‘small’ from our further analysis. As of April, there were 413 ‘Authorized Payment Institutions’ and 181 ‘Authorized e-money Institutions’. Flagship examined and categorized each of these 594 UK authorized payment and e-money institutions. This distribution by business type is shown in Figure 2 and Figure 3 below. FIGURE 2: UK Payments & e-Money Institutions by Business Type (total no of registrations, 594 in total*) * Excluding institutions no longer authorized and excluding “small” institutions Source: UK Financial Conduct Authority FIGURE 3: UK Payments & e-Money Institutions by Fragmentation & Shakeout Potential (bubble size = no of registrations) Source: UK Financial Conduct Authority, Flagship Advisory Partners analysis Money Remittance, FX, and x-border Payments Population fragmentation (282 institutions) Shakeout potential Almost half of the 594 authorized payment and e-money institutions focus on money remittance, cross-border payments, and foreign exchange services. Most of these providers are exceptionally small, often with less than EUR 1 million of revenue. The barriers to entry into these business segments are low, while gross margins are high, which has created a large population. We expect significant pressure on these small businesses in 2020 due to less cash usage and high rates of unemployment in the services sector, among others, which will drive a wave of exits. Traditional providers in this segment have already largely consolidated, including the recently proposed acquisition of MoneyGram by Western Union. Meanwhile, a small number of fintechs have achieved real scale and a path to meaningful profitability (eg TransferWise and WorldRemit). Finally, global digital payments champions are increasingly attacking this market (eg, Alipay’s acquisition of WorldFirst and PayPal’s acquisition of Xoom). Merchant Payment Services Population fragmentation (91 institutions) Shakeout potential Among the 694 U.K. authorized payment and e-money institutions, there are 91 merchant service providers including e-commerce PSPs, acquirers, bank transfer providers, and other merchant providers (collectively referred to herein as “PSPs”). The PSP marketplace is increasingly mature, with increasing competitive separation of the global providers (e.g., Adyen, Worldpay, Stripe) from the smaller, domestic PSPs. Smaller PSPs now often struggle to grow revenue or to invest sufficiently into distribution or technology renewal and innovation. This market, considered highly attractive for investors, has seen significant M&A-driven consolidation in the last ten years. While we expect this M&A wave to continue, we also expect an escalating failure rate among PSPs who are too small to be attractive acquisition candidates. Neo & Virtual Banking, Open-Banking APIs, and Banking Aggregators Population fragmentation (81 institutions) Shakeout potential There are 81 licensed institutions that focus on digital, virtual, and Open Banking, and the provision of technology and services underpinning these banking services. Most of these institutions are young and lack meaningful revenue scale; almost none are profitable. While there are good reasons to believe in the long-term value-creation potential of open/virtual banking, we do not expect Open Banking to drive a competitive revolution in which many startups succeed. Rather, we expect a small group of service and platform providers (such as U.K.’s token.io) to capture scaling momentum and move beyond basic open banking API access services to more lucrative value-added services such as authentication an verification services. For the neobanks serving consumers and small business directly, 2020 will surely be challenging as we are still waiting on that elusive data monetization revenue model and SME startups and customer bank switching will diminish. While clearly some consumer-facing fintech’s such as Revolute have achieved lasting scaling momentum, many of the fintech’s in this segment will never reach profitability and will fail as the supply of venture and growth capital tightens. The insolvency of Wirecard will also have an immediate and potentially deadly impact as some neobanks see their card programs fail (as many are issued by a now frozen Wirecard). Companies such as the U.K.’s Revolut that thrive in this segment will have proven revenue models and a sharp focus on specifically underserved customer segments. Card Issuing and Consumer Finance Population fragmentation (44 institutions) Shakeout potential High in credit and travel, lower elsewhere There are 44 UK authorized institutions that focus on card issuing or consumer finance. Clearly, the business of unsecured consumer lending is facing a reckoning in 2020 as unemployment reaches near historic highs. As with the economic crisis in 2008, this crisis will surely lead to more exits, with the smallest and newest being particularly vulnerable as their balance sheet comes under pressure. Many of these card issuers, however, focus on card products other than credit cards, including prepaid, fleet cards, commercial (charge) cards, and gift cards. These other classes of card issuers will face less macro-economic pressure, although those issuers specifically focused on travel will come under pressure as will those who are not digitally advanced (plastic to mobile accelerating rapidly). Wallets and Payment Schemes Population fragmentation (26 institutions) Shakeout potential High in credit and travel, lower elsewhere This group (26 institutions in total) contains both huge, lasting global companies such as Visa and Google, as well as start-ups. We see no threat to the well-established global companies who are generally winners in digital commerce and will sustain (or even thrive) through the challenges of 2020. For the start-ups, however, we do expect a shakeout as they will generally fail to establish revenue traction in an increasingly crowded market (e.g., big tech such as Google and Facebook, commerce apps such as Uber, ongoing expansion of PayPal and Visa/MasterCard, etc.). Successful challengers in this space will need large-scale distribution partners, which will be challenging for many of these early-stage wallets. A lack of revenue combined with scarcity of ongoing venture funding will doom some in this group to failure. Software (“ISVs”), Commerce Platforms, and Business Services Population fragmentation (26 institutions) Shakeout potential Low for established, high for early-stage There are 26 licensed payment and e-money institutions whose core focus is not payments or financial services, but rather software and business services (e.g., accounting/ERP software, payroll services, cash management, digital commerce platforms, etc.). These providers are increasingly expanding into payments as a revenue source and as a value-added service for their B2B customers. This trend will continue and even accelerate, regardless of the external market pressures of 2020. There is tremendous value to be created by better integrating payments and financial services into all facets of business management and technology. B2B customers also benefit tremendously from receiving more integrated software and services which combine business and payments/financial services use cases. There are thousands of companies in this group that are expanding into payments as a revenue source, but chose not to obtain their own payments licenses but instead partner with licensed providers. Note that we cover this topic in greater detail in this article Payment Facilitation: The Key Theme for the Next Decade of European Payments. The ambition of the original Payment Services Directive to open access to payments marketplaces has been achieved, resulting in thousands of institutions becoming licensed over the last decade. We expect a Darwinian shakeout among this population due to the challenging macro-economic circumstances of 2020. Many of the smaller providers competing in highly fragmented markets such as FX and money remittance will be forced to exit as revenues fail to materialize and funding becomes more challenging to obtain. For winners, 2020 could provide an opportunity to opportunistically acquire smaller assets and to further distance themselves from lagging competitors. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.

The marketplace for European payments has gone through a series of evolutionary waves, beginning in the 1990’s when the markets were domestic and owned by banks. The 2000’s was defined by the move to a single European payments market and a massive wave of M&A and consolidation. The 2010’s saw a boom in fintech, enabled by PSD market opening as well as the rise of cloud and mobile technologies. Today, there are c. 300 suppliers of merchant payment services in Europe and roughly 1,000 companies actively distributing merchant payments. The next decade will see an explosion of merchant payment services distributors as software and B2B service companies integrate and commercialize payments. By the end of this decade, payments will be completely interwoven into the software as a service (SaaS) landscape, and the winning payment services suppliers will be those who best address payment facilitators such as SaaS providers and marketplaces. FIGURE 1: The Evolution of Merchant Payment Services Distribution in Europe Source: Flagship Advisory Partners Payment facilitation and payment facilitators come in many forms. Taken literally, Visa and MasterCard define payment facilitators as third-party agents who can sign a merchant acceptance agreement on behalf of their sponsoring acquirers and receive settlement of proceeds on behalf of their sub-merchant clients. Taken more broadly, payment facilitators are essentially any non-licensed party that enables and distributes payments. This could include independent sales agents, marketplaces, booking engines, commerce platforms, and software providers (increasingly defined by SaaS cloud-based product and business models). Marketplaces and SaaS providers, most notably, are increasingly driving the growth in merchant payments. SaaS providers cover a broad range of software and services, including web shop software, ECR/POS software, accounting software, property management software, restaurant management software, travel booking software, and many others. Integrating payments deeply into these software environments creates tangible benefits for end-users as payments are easier to enable, simpler to understand, and more automated (reducing the time to service and reconcile transactions.) Integrated payments are also a great way for SaaS providers to make money, as SaaS customers are less price sensitive and highly likely to accept a service package that includes payments (resulting in low acquisition costs). FIGURE 2: SaaS Payment Facilitator Examples Source: company websites, Flagship Advisory Partners Prognosticating this decade in European merchant payments as the era of payment facilitation is not exactly a leap of faith as the same trend already played out in North America throughout much of the last decade. We simply see the same trend now accelerating and impacting the European market. As in North America, tremendous value will be created by those that embrace payment facilitation. FIGURE 3: North American Payment Facilitation Winners (PSPs & SaaS) Source: Flagship Advisory Partners Marketplaces and other forms of aggregators are also a key segment for growth in merchant payments. In Europe, online marketplace turnover growth is now almost 2x non-marketplace growth (merchant-owned websites) and more than half of SME merchants trade online via marketplaces. Marketplaces also come in various forms and across sectors, such as retail/apparel, travel, digital media, gaming, and charity (among others). Marketplaces require unique and rich capabilities from their merchant payment service providers (PSPs) given the complexity of supporting hundreds or thousands of sub-merchants for pay-ins and payouts (for example, fully automated onboarding, servicing, and compliance). Supporting marketplaces also often requires PSPs to offer a variety of legal and commercial models based on their marketplace clients’ sales model, technology infrastructure, and payments licensing. FIGURE 4: Marketplace and Aggregator Payment Facilitator Examples Source: Flagship Advisory Partners There are relatively few PSPs who can fully and capably support merchants and partners in the SaaS and marketplace segments. Stripe, who is using both SaaS partners and marketplace merchants to drive its rapid growth in Europe, is clearly the bellwether for competitors to follow. European PSPs looking to outgrow the market must find ways to compete versus Stripe. Stripe’s success in the SaaS channel is driven by its rich integrated payments capabilities including robust technical integration toolkits, friendly and automated sign-up and servicing, and meaningful revenue share back to its SaaS partners. Stripe’s success with marketplaces is driven by its commercial and legal flexibility and also by its highly automated sign-up, compliance screening, and servicing platform capable of onboarding thousands of sub-merchants in a day. As the M&A market for PSPs diminishes due to consolidation, smart payments investors will also increasingly look to SaaS companies as a channel for value creation in payments. Shopify typifies the potential for revenue generation in payments; the company made $936 million in merchant services revenue (mostly payments) in 2019, an increase of 54% from 2018. Similarly, Lightspeed (POS and e-comm SaaS provider) reported that in its most recent quarter more than 60% of new customers purchased Lightspeed Payments (formally launched only in 2019) in conjunction with their purchase of the core underlying commerce software. The value creation potential for payment services integrated with business software is enormous and still relatively untapped on a global basis across a broad range of software verticals. We believe that the single most important theme for merchant payments in Europe will be the integration of payments into other SaaS services and facilitation (distribution) of payments via these SaaS providers. In parallel, we also see marketplaces acting as a form of payment facilitator increasingly outgrowing the broader e-commerce market. Suppliers of payment services in Europe must adapt to win in the SaaS and marketplace segments in order to outperform in the coming decade. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions.

Image credits: Adyen Institutional investors love payments stocks and have driven share prices and valuation levels to record highs despite the pandemic and macro-economic uncertainty. This love affair with payment stocks began (more or less) in 2017 and accelerated in 2018 and 2019, during which time our sample of U.S. payment stocks (1) outperformed with 70% growth in value compared to 21% for the S&P 500 (2). The onset of COVID-19 as a global pandemic in March was an immediate shock to global equity markets. Payments stocks were not immune to this shock, as our US payments sample decreased 18% in value between 31 December 2019 and 31 March 2020, compared to a 20% decrease of the S&P 500 during the same period. Following the initial shock, payments stocks quickly returned to favor, however. From 1 April through 22 June of this year, our U.S. payments sample grew 26.5% compared to 20.5% for the S&P 500. FIGURE 1: Performance and Valuation of US Payments Stocks vs. S&P 500 Note: Share performance indexed to 1 Jan 2018, P/E ratios based on trailing 12 months earnings Sources: ycharts, WSJ Institutional investors are fueling the incredible performance of payment stocks as 86% of our U.S. payments cohort is owned by institutions vs. 66% for FAANG stocks *. These institutional investors love payment stocks due to their resilience (generally not subject to large cyclical swings), cash-flow generation, and growth (fueled by globalization and displacement of cash). In addition to strong share price performance, institutional investors continue to bet on strong growth as valuation multiples continue to rise. As of 22 June, our U.S. payments sample had a forward P/E ratio of 43*, well exceeding the forward P/E for the S&P 500 of 25*. Performance of European payments stocks have been similarly robust, excluding Wirecard. Each of the payment stocks in our small EU sample (3) are up at least 63% since the earlier of inception or 1 Jan 2018 (Worldline up 63%, Nexi 77%, and Adyen 205%)*. FIGURE 2: Performance and Valuation of Select Payments Stocks (US and EU) Note: Each indexed to 1 Jan 2018; Forward PE ratio as of 22 Jun 2020 Sources: ycharts, Yahoo Finance While most payment stocks have strong fundamentals, even during a pandemic, there is significant variation in performance and valuation levels within our public equity sample. American Express, due to its exposure to both travel and credit risk, has trailed S&P 500 performance and is flat relative to 1 Jan 2018. QIWI is also flat relative to 1 Jan 2018 while EVO is generally in line with S&P 500 performance (given its focus on small businesses and greater concentration at the POS). Each of the remaining 15 stocks in our US and EU samples have outperformed the S&P 500. Valuation multiples range broadly within the sample based primarily on growth. Adyen and Square, which are each achieving topline (gross profit) growth of more than 40% trade at exceptional valuation multiples (Adyen has a forward P/E of 145 and Square 217)*. Larger incumbents achieve organic growth closer to 10% which drives valuation multiples generally in line with the S&P 500. We will not prognosticate the potential for continued growth and valuation escalation within publicly listed payment equities, but we do expect sector fundamentals to remain generally sound and for institutional investors to continue to focus on the sector for long-term investing. Given this demand and full valuation from institutional investors, we also expect continued IPO activity in the coming years. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions. Notes: * all analysis to the present based on 22 June 2020 (1) Our U.S. payment stock index includes the following U.S. listed companies: Visa, MasterCard, PayPal, FIS, American Express, Fiserv, Global Payments, Square, Fleetcor, WEX, EVO, and QIWI. (2) S&P 500 share price performance as tracked by the SPY ETF (3) Eurozone equities in our sample include Adyen, Worldline, and Nexi

There are a fortunate subset of companies who have benefitted from the COVID-19 pandemic, those overweight in digital-commerce and underweight in travel. Most companies are struggling with the P&L impacts of the downturn however, and are looking for evasive actions to drive revenue expansion and cost reduction. Many have already taken initial steps to address immediate cost reduction opportunities (e.g., staff reductions), and we recommend that everyone make the effort now to update your payments strategy roadmaps as discussed here. A logical next step in responding to the today’s challenges is to negotiate vendor cost reductions while also addressing any operational deficiencies that became apparent during the crisis and preparing for new realities such as increased market volatility and remote work. Before renegotiating lower vendor costs, we suggest first assessing how future-proofed your overall payments vendor network is, and then renegotiating with individual vendors based on that forward-looking vendor strategy. Performing this future-proofing assessment can be done by reviewing five key areas. Keys to Success Good roadmaps are just one component of a broader strategy framework that must also include the voice of your customers, a universally shared strategic vision, and a prioritized backlog. All four of these strategy components should be viewed together, and each should feed into the others. The roadmap itself is the detailed and actionable plan for how to achieve the vision, the backlogs are prioritized to deliver the initiatives in the roadmap, and the entire strategy should be based on customer and stakeholder feedback. Robust roadmaps should include the following components: Structure to assess whether the organization is outsourcing the right activities. This should include examining whether currently outsourced/insourced functions still fit with the organization’s strategic vision and new market reality, which outsourced/insourced functions have fulfilled their business case and expectations, whether there better alternative models going forward, and whether key capabilities are needed that are not being developed internally but also have not been purchased. Selection to assess whether the organization is outsourcing to the right vendors. This includes examining whether current vendors are still leaders in their field (in terms of product, servicing, technology, etc.), if those vendors are ready for the future (e.g., do they have a clear vision and strong roadmaps?), and whether the current vendors delivered and provided the right support during the crisis. Management to assess whether the organization’s current processes to manage vendors are ready for the new market reality. This may include examining whether management, monitoring, and day-to-day cooperation with vendors is ready for remote work, pandemic-level operational disruptions, and other aspects of the post-COVID operational reality. Additionally, we suggest examining whether there are sufficient risk mitigants and contingencies in place for vendor failures or delays, sub-contractor and geographic risk, and any other operational difficulties observed during the crisis. Contracts to assess whether vendor costs and terms are optimized based on the new reality. Certainly cost reductions should be sought, but targets for cost reductions should be based on whether absolute vendor cost levels are still in line with revenues, and whether those costs are structured to mitigate the impacts of future volume and revenue volatility. Vendor contractual terms should also address market volatility and any operational difficulties experienced to date during the pandemic. Future needs to assess if the organization’s overall vendor strategy is positioned to effectively adapt and win in the future. This examination should include whether the organization has the structural and contractual flexibility needed to change insourcing/outsourcing strategy and add/remove individual vendors as needs arise. Additionally, the assessment should examine whether the organizational infrastructure for vendors is sufficiently future-oriented, such as linking vendor strategy to the organization’s overall roadmap, monitoring vendor roadmaps, and planning for volatility and contingencies, among others. FIGURE 1: Payments Vendor Network Future-Proofing Framework Sources: Flagship Advisory Partners Once the vendor strategy has been assessed, it is time to hunt for cost reductions and future-proofing enhancements. To achieve optimal results, we suggest first assessing each vendor individually to identify specific objectives and tactics for renegotiation. This assessment can take a similar form to the overall future-proofing assessment described above (illustrated in Figure 2 below). Costs: Are costs efficient relative to market? Are you benefiting from your own scale? Does the vendor also have “skin in the game” or is the customer bearing all the downside risk from volatility? Terms: Are force majeure terms clear enough for pandemics and other national emergencies, and do SLAs need to be modified to better address the realities of situations like COVID-19? Support: Did the vendor demonstrate that they will do what it takes to deliver during the pandemic, and should governance and ways of working be updated for remote work, short-term disruptions, etc.? Future-proofing: Is the vendor’s product roadmap sufficiently innovative, and is the vendor ready to support the organization’s overall roadmap? Risks: Can the organization quickly transition the service if the vendor experiences operational failures or delays, and where are the vendor’s weak links (e.g., subcontractors, services provided from other countries, etc.)? Based on the above assessment, objectives for the renegotiation with each vendor can be set, and renegotiation tactics defined. Objectives typically take the form of “asks” and can include items such as: Price reductions and/or more sharing of volume risk; More flexible tiering structure to account for market-level volatility; Revised contract terms based on learnings from COVID (e.g., force majeure, SLAs, governance, etc.); More robust business continuity scenario planning, updated governance and cooperation structure, more oversight over sub-contractors and fulfillment locations, etc.; and/or, Support for specific roadmap initiatives. Keep in mind that good vendor relationships are long-term partnerships, therefore give and take will be necessary. Determining what “gives” to offer in exchange for the “asks” can be challenging, so we suggest starting with non-monetary gives and then moving to commercial items as necessary. Example “gives” can include items such as: A positive reference and PR support (e.g., offer to be a public case study, etc.); More flexibility around vendor non-monetary pain points (e.g., SLAs, etc.); Extended term; Extend scope and/or purchase add-on services; and/or, Revised commercial model (e.g., share volatility risk, upside sharing, fixed fee but with lower volume-based tiers, etc.). FIGURE 2: Individual Payments Vendor Assessment and Renegotiation Tactics Sources: Flagship Advisory Partners While renegotiating with vendors, we recommend maintaining this partnership mindset. Good vendors will recognize that the market has fundamentally changed and will show a willingness to support their clients. But vendors also need to address their own revenue shortfalls. Mutually addressing the needs of both parties will result in the best long-term outcome. Flagship Advisory Partners provides payments and fintech clients with a range of vendor and partnership support, including vendor selection, strategic partnership formation, negotiation support, and cost and contract optimization. Our unique experience includes advising market leading brands on the formation of partnerships to optimize returns on payments, and supporting numerous financial institutions and merchant services providers on processor selections, negotiations, and contract and cost optimizations. To learn more about how we can help, please contact Erik@FlagshipAP.com . If you are a payment accepting merchant interested to improve your vendor network and capability set, we recommend reviewing our approach to optimizing payment acceptance here. DOWNLOAD SAMPLE

Payments are an increasingly strategic function within merchants of all varieties (retail, travel, digital, etc.). Payments are a key enabler of digital commerce and a mission-critical point of customer interaction and loyalty. Far too often; however, we come across merchants with otherwise large and thriving businesses that lack a strategy to guide payments development and performance improvement. This article highlights some of the best practices for developing a winning payment acceptance strategy. The starting point for any good strategy is a thorough understanding of the current situation. This includes a sound understanding of external market influences as well an internal diagnostic of approach and performance. When conducting a payments acceptance diagnostic, we generally cover each of the areas of shown in Figure 1 including: market trends and influences, payment methods, infrastructure, customer experience, fraud and conversion, peer best practices, and a thorough assessment of the vendors and costs. FIGURE 1: Components of a Payment Acceptance Merchant Diagnostic Source: Flagship Advisory Partners The diagnostic will identify opportunities for improvement in the form of enhanced customer experience (including payment methods), improved conversion/fraud balance, vendor cost reductions, capability gaps, and opportunities to streamline infrastructure. It is critical that this diagnostic not just consider costs and vendors, as much of the improvement opportunity may arise from a merchant’s own decisions related to the checkout experience, fraud tolerance, and internal infrastructure. Once opportunities are identified, we recommend sizing each opportunity and then assessing ability to execute, which will allow for the prioritization of these opportunities as near-term or longer-term. We illustrate (in a simplistic manner) this approach in Figure 2 below. FIGURE 2: Prioritizing Improvement Opportunities *This example is merely a high-level illustration. Actual deliverables are detailed and robust. Source: Flagship Advisory Partners The prioritization of opportunities flows directly into the formation of a strategic vision for payments. A good strategic vision is a clear and simple set of objectives defining where your organization wants to go and how it will get there. It is important that the vision be shared across an organization as payments is virtually never an autonomous function. Some of our clients manage payments within the CFO office while others within the CTO/CIO office (though the CMO or CPO offices are critical stakeholders for delivering a unified and robust customer experience). With a clear strategic vision in hand, we then typically define a small number of pillars which drive the execution of the strategy, for example: payment cost reduction, vendor rationalization, infrastructure optimization, payment future-proofing, and new market enablement. These illustrative pillars are not suited for all merchants as the pillars should reflect that merchant’s own priorities. For example, some of our clients are hyper-focused on checkout conversion/approval rate and fraud outcomes while others prioritize geographic expansion above all else. As shown in Figure 3, under each pillar there should be a clear set of initiatives which define the roadmap for driving the strategy. Within Figure 3, we illustrate a simplified framework for vendor rationalization. The frameworks used to define the strategic initiatives can vary, so long as the objectives and actions to be taken are clear. FIGURE 3: Strategic Pillars and Vendor Rationalization Illustration Note that this example is merely a high-level illustration. Actual deliverables are detailed and robust. Source: Flagship Advisory Partners Once the initiatives under each strategic vision are clear, we recommend then elaborating on the roadmap with specific responsibilities, timelines, and resourcing budgets. Figure 4 illustrates such elaboration (though again, in a simplistic manner). The final outputs must be a clear plan of action across the organization, considering critical dependencies and resourcing requirements. Such a plan aligns and motivates the organization. FIGURE 4: Strategic Pillars and Initiatives Illustration *Note that this example is merely a high-level illustration. Actual deliverables are detailed and robust. Source: Flagship Advisory Partners As a final step in the strategy development process, we recommend producing a summary roadmap which highlights each of the key initiatives to drive the company’s payments strategy (an illustrative example is shown in Figure 5 below). Oftentimes we advocate fitting such a summary onto a single page so that it can be easily understood and communicated. A CEO/CTO/CFO should understand and be able to articulate this vision within the company as well as externally to partners and other stakeholders. FIGURE 5: Summary Roadmap Illustration Note that this example is merely a high-level illustration. Actual deliverables are detailed and robust. Source: Flagship Advisory Partners As payments become more strategic for merchants, so too must your payments strategy develop and grow. We recommend a thorough process which looks both internally and externally, considers the entire spectrum of payments value creation levers (cost, sales conversion, etc.), and defines a clear vision and actionable plan to drive improvements. Please do not hesitate to contact Joel Van Arsdale at Joel@FlagshipAP.com with comments or questions. DOWNLOAD SAMPLE