This partnership announcement is intriguing and as such we’ll take a bit more space than usual to explain our perception of its significance. Mercator also gained additional insight around some deal aspects through post press release discussions with both the AvidXchange CEO, Michael Praeger, as well as Mastercard’s EVP Colleen Taylor. In summary, MasterCard is launching an automated payables solution targeted primarily at small and middle market businesses, which it is calling the Mastercard B2B Hub. The hub will feature existing AvidXchange payables infrastructure and services as the underlying platform delivery partner, while incorporating a fully integrated version of Mastercard’s virtual card system, In-Control. AvidXchange is what we call a mature fintech startup, having been in business now for 15+ years. The company specializes in middle market solutions to automate the cash cycle, with a stated North American client base of 5,500. The announcement also revealed a major concurrent investment funding round of $300 million for AvidXchange, including Mastercard and three other named participants.
“Midmarket and small businesses are growth engines of our economy. The Mastercard B2B Hub is the latest way we are working to meet the broader payment needs of this segment,” said Colleen Taylor, executive vice president of new payments business for Mastercard. “We see this solution as helping organizations maximize every minute and every dollar that they invest in their business. The comprehensive automated payment experience we deliver will help improve supplier relationships and accelerate the conversion of B2B payments from paper checks to electronic payments.”
There are several significant points here. First of all, in a continuing card network trend towards deeper participation in the B2B payables market, MasterCard is actually productizing a payables solution that is not cards-centric, as opposed to expanding card distribution channels through other accounts payable solution providers. This is somewhat different than several recent alliance and partner announcements where competing network virtual card capabilities are being directly integrated with payables companies, but branded as part of the partner solution to gain broader distribution. One may recall that American Express launched a B2B payables solution called PAYVE several years back, but it is not currently marketed under that name and not clear how successful they have been in penetrating the corporate payables space with this approach.
In this particular B2B hub alliance, Mastercard is also taking a minority position in AvidXchange, demonstrating a skin-in-the-game commitment to the enterprise. So the card networks are continuing to find ways of transforming into broader payments offerings, anticipating the rapidly shifting winds and creating flexibility for future moves. Mastercard expects to make the product available to banks (and non-banks) across their network relationships, including some community banks where a need can be filled.
The size and sources of the funding round is also of significance, with an international flavor and well-known investors (Temasek Holdings, Peter Thiel, CDPQ) . To our knowledge $300 million is the largest US fintech funding in 2017. In 2016, the largest was $160 million for a cross border disbursements company called Payoneer. That these funding rounds are investments for B2B solutions is also a trend buster, since a substantial portion of the fintech explosion during the past several years has been primarily directed to consumer-related solutions. Mercator has been predicting that a palpable change in fintech investing would become noticeable in 2017. The funding round seems to recognize the immense B2B opportunity that remains for digitizing processes and improving cash management in the often underserved small and middle markets. The AvidXchange CEO indicated to us that funding would be primarily used for greater business growth, not necessarily infrastructure buildout, which they believe to be robust and scalable as currently designed. Business expansion activities will include direct sales, channel partner support and geographical expansion, starting with broader Canadian presence and pushing into Europe.
The group that AvidXchange assembled for its $300 million round highlights the growing diversity in investment interest for fintech. CDPQ is a long-term institutional investor that manages funds primarily for public and parapublic pension and insurance plans. It is one of North America’s leading institutional fund managers, and this transaction adds to CDPQ’s private equity investments in the financial technology sector. Mastercard is a leader in electronic payments, and this investment will support the partnership with AvidXchange. Temasek is an investment company headquartered in Singapore, whose investment activities are guided by its investment themes and the long-term trends they represent.
So it seems the massive B2B payments space continues to draw new participants in non-traditional roles. Perhaps the inability to penetrate beyond roughly 2% of global share with purely cards rails has something to do with that, but certainly it would seem a wise move forward. Ongoing partnerships and end-to-end simplified procesess across the B2B space is one of the key themes that Mercator indicated would prevail into 2017-2018. The most recent publication dealing with this trend is called Digitizing the Business Cash Cycle: Advancements and Partnerships.
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group
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