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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.

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.

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.

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.

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

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.

*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.

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.

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 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.

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