In B2B, Embedded Payments Make For Attractive Acquisitions

In the build versus buy debate, particularly within B2B and payments modernization, for at least some companies, the decision rests squarely on the side of “buy.”

To that end, earlier this week, private-equity firm Lightyear Capital said it established ProfitSolv to acquire integrated solutions for billing, payments and software services.

Founded in 2000, Lightyear is a financial services-focused private-equity firm based in New York, which focuses on middle-market companies in North America associated with financial services.

The news came against a backdrop where other announcements and activities have illuminated the attractiveness of B2B FinTech as an investment space.

As reported earlier in this space, dealmaking to date in 2020 has included eCommerce-as-a-Service firm Mirakl securing a $300 million investment, and payments firm Zoop securing a $10.85 million round, among others.

In discussing the formation of ProfitSolv, Michal Petrzela, managing director at Lightyear Capital, told PYMNTS that Lightyear’s affiliated investment funds are currently focused on investing in payments companies that “embed payments with vertical-specific software solutions.”

The software market is a fragmented one, he said. Petrzela contended that this fragmentation provides business end users with options, and increases awareness of digital offerings and solutions.

Thus far, Lightyear said in its announcement, ProfitSolv has acquired three solutions: Rocket Matter, which works in cloud-based legal billing, practice management and payment processing; TimeSolv, which provides cloud-based software for legal billing and timekeeping; and ImagineTime, a practice management and payments company working with accounting firms and other such companies.

The recent work-from-home environment further proved the importance of having integrated, cloud-based billing, invoicing and electronic payment acceptance – especially as remote transactions have become daily necessities.

Deeper software integration is important because, explained Petrzela, “it can significantly streamline workflows and turn what can be manual, labor-intensive process into a fully automated, electronic process, from calculating a bill and issuing an invoice all the way to receipt of payment.”

The benefits of automating this process include reduced overhead, a streamlined payment reconciliation process and a shortened payment cycle for the payee.

Petrzela said that Lightyear’s own studies have shown that embedded payments are projected to grow by $16 billion to reach as much as $140 billion in revenue over the next five years, a CAGR of over 54 percent.

Drilling down a bit, he said there is a particular opportunity in legal and professional services, where the market is worth $1.4 billion and growing, due to shifts to the cloud and away from paper and manual processes. There is also growing demand for better accounts receivable (AR) management, he added.

“Based on our research, over 70 percent of small to medium-sized law firms’ revenue is still collected through paper checks,” said Petrzela, noting that there are “significant opportunities in embedding electronic payments with a cloud-based billing and invoicing software” in order to accelerate the shift away from paper checks.

Integrating payments with vertical-specific billing and invoicing software can drive stickier customer relationships, improved workflows and a more seamless experience for end users, said Petrzela.

“We believe electronic payments that are embedded into vertical-industry software will grow significantly faster than traditional providers of electronic payments,” he told PYMNTS. “Embedding payments and providing bill-to-cash solutions creates an important stickiness and positions ProfitSolv platform companies as a choice solution for industry professionals.”