Exceeding $700 Million, Payments Investment in 2012 Could Be Most Seen Since 2001

Venture-capital and private-equity investors are on pace to meet or exceed the $753 million they infused into the payments industry in 2011, the most since the $1.4 billion they invested in payments in 2001. Through the first three quarters of 2012, venture-capital and private-equity investors pumped $711 million into startup and adolescent payments companies, according to The MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association and based on data from Thomson Reuters.

Companies most frequently catching investors’ attention are those developing mobile-payments, loyalty, identity-verification, and gift card solutions. San Francisco-based Square Inc., a developer of mobile payments for micro-merchants and small businesses and payment processor for Seattle-based Starbucks Coffee Co., is by far the top investment opportunity in payments, receiving $200 million so far this year, according to The MoneyTree Report.

Others atop the leader board in the race for payments venture capital include San Francisco-based companies Stripe Inc., an online payments platform provider ($38 million), and Boku Inc., a mobile payments provider ($35 million), Mountain View, Calif.-based Jumio Inc., a provider of Webcam and mobile-payment solutions ($28.9 million), and Boston-based game developer SCVNGR ($21.25 million), which owns mobile-payment service provider LevelUp.

“There are many compelling solutions in the digital economy that have the potential to change consumer behavior in a monumental way,” Tom Blaisdell, a general partner for DCM, a Menlo Park, Calif.-based early-stage venture-capital firm and former Intuit Inc. executive tells Digital Transactions magazine in its upcoming December cover story about where payments investors are placing their bets. “This is the most innovation I’ve seen around payments in a long time.”

One area payments investors are steering away from is digital wallets based on near-field communication (NFC), a technology that can marry payments and marketing data in potentially powerful new ways. The stumbling block with NFC-based wallets, according to investors, is lack of adoption so far by merchants and consumers, despite the extensive hype around the technology as the next big breakthrough in payments.

Compounding the problem is that only about 5% of all smart phones in the United States are fitted with an NFC chip, and future market-share gains for NFC-enabled phones are expected to come at a snail’s pace. Venture-capital and private-equity executives project it will take at least five years for NFC-enabled phones to gain the market share necessary for merchants and consumers to fully embrace the technology. Until then, the timeline to achieve a desired return on investment (ROI) is too far out for most investors. Venture-capital and private-equity investors look for an ROI at a targeted level in three to six years, on average.

“The risk with investing in NFC wallets is that it is a product being built for which there is no market right now,” says Matthew Witheiler, principal for Boston-based Flybridge Capital Partners, tells Digital Transactions. “I am very skeptical of investing in that space.”

On the other hand, loyalty applications, in which companies look to monetize consumer behavior for merchants by increasing consumer spending and purchase frequency, is attracting investors. “The opportunity to tie data around a financial transaction to marketing initiatives that increase consumer spending is generating quite a bit of interest in loyalty,” says Witheiler.