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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