THE COWEN INSIGHT
Our proprietary survey of 100+ merchants in more non-discretionary categories (grocery, retail & pharmacy) reveals that COVID-19 has accelerated the digitization of payments. This opens a $19 billion revenue opportunity. Merchants are looking to invest more in proprietary digital solutions vs. third-party. We expect expanded digital payment offerings such as wallets, both online and in-store. We also see potential software M&A opportunities for payment processors.
Digitization of Payments Has Accelerated and Is Durable
Cowen’s FinTech, Retail and Restaurant research teams surveyed 105 merchants with annual sales in excess of $200 million across the grocery, pharmacy and restaurant verticals. These are verticals that traditionally over-index to cash sales. The goal was to discern the impact COVID-19 is having on digitization efforts.
It is no surprise that digital sales accelerated in 2020. The trend poised to continue long term (39% of respondents noted an increase y/y). 77% of respondents led by the grocery/pharmacy verticals actually expect eCommerce as a percentage of total revenue to increase further in 2021 despite the difficult comparable to 2020. We believe this highlights the durability of the shift toward digital payments even as the world beings to “normalize.” This also suggests the pace of digitization has likely been pulled forward.
We estimate the total addressable market (TAM) of these specific verticals exceeds $2 trillion. Cash still accounts for ~40-50% of sales on average as compared to ~12% for US personal consumption expenditures (PCE) overall (16% including checks). We estimate cash conversion to electronic payments represents an incremental revenue opportunity across the payments landscape (~$19 billion).
First-Party Payments Solutions Represent Fertile M&A For Acquirers
We expect the wave of consolidation across the payment processing and point of sale (POS) segments to continue. Increasingly, we see payment processors pursuing scaled software platform acquisitions. This is due to the success of fully owned integrated payments solutions (software + payments), not to mention the higher valuations afforded to them.
The restaurant vertical, historically representing ~10% or more of acquiring revenue for most processors. Restaurants could represent attractive, albeit expensive, M&A opportunities with respect to software. Specifically, we think first-party restaurant ordering platforms would fit well within processors’ legacy acquiring solutions. They preserve a merchant’s brand and are generally more cost effective relative to third-party delivery platforms.
Respondents Indicated a Clear Preference for Proprietary Payments Solutions
Roughly 78% of restaurant respondents in our survey (80% across all verticals) indicated they plan to increase investment across proprietary solutions – a clear preference over third-party platforms. We believe this type of M&A would present the processors the opportunity to offer more bundled solutions (ordering + legacy acquiring and processing). It also opens additional cross-sell and lead generation opportunities and diversification to higher multiple SaaS-based revenue streams.
We note that integrated POS providers (albeit generally servicing restaurants far smaller than our surveyed group) have had great success monetizing internally developed online ordering solutions.
Moving Beyond Credit & Debit Cards
Even in more non-discretionary spend categories, the need to expand beyond traditional electronic payment methods, namely credit and debit cards, is clear. Nearly 90% of respondents indicated they plan to increase the number of digital payment solutions in their offerings online/in-app. Nearly 90% also indicate the same for in-store solutions.
Not surprisingly, digital wallets leaders continue to be the most prevalent in terms of current acceptance. The results dovetail with our findings from our consumer-based contactless payments survey. This survey indicated that 70% of respondents expect to use more digital payment offerings post COVID-19.
That said, merchants are clearly open to additional offerings and even buy now pay later (BNPL) solutions. The latter solutions are surprising to us given the non-discretionary nature of the grocery/pharmacy segment and to a lesser extent the restaurant vertical.
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