Payments is crowded — but misunderstood.
As investor interest returns to infrastructure, embedded finance, and merchant commerce, we’re seeing a sharp increase in deal flow across ISOs, payfacs, SMB lenders, and acquiring platforms.
Yet many investment committees are still relying on traditional SaaS metrics, or worse, surface-level processor data, to evaluate deals in this space.
In payments, the variables that move enterprise value — and derail transactions — are often hidden in the structure: residuals, attrition, MCC risk, channel control, and platform integration.
Below is what we believe every investor needs to understand before underwriting a transaction, leading a round, or preparing a portfolio company for exit in merchant acquiring or payments infrastructure.
Net residuals remain the single most predictive metric in both M&A and growth capital deals.
Why it matters:
⚠️ Be cautious with residuals that appear flat — many conceal attrition masked by aggressive merchant boarding.
Investors often overlook the composition of sales and distribution — a mistake that directly impacts valuation.
Channel Type
Risk to Value
Comments
W-2 Direct Sales
Low
Controllable, easier integration
ISO/Sub-ISO Networks
Medium
Needs contract review, margin compression risk
Independent Agents
High
Low loyalty, high churn, contract enforcement issues
Global nuance: In non-U.S. markets (e.g. UK, DACH, MENA), channel norms differ — but buyer preferences trend toward integration, control, and post-close leverage regardless of jurisdiction.
Churn in payments is not binary — it’s segmented, and value-relevant.
Key diligence filters:
❗ Most deals overstate LTV because they undercount silent churn — merchants who stop transacting but haven’t technically canceled.
Payment processors and acquirers price merchants based on volume, risk, and vertical exposure — investors should too.
Metric
Implication
Average Ticket Size ↑
Higher interchange spread + chargeback volatility
MCC Code Risk ↑
Greater regulatory + attrition exposure
Industry Mix (e.g., high-risk)
Impacts underwriting, valuation, and buyer appetite
Merchant bases skewed toward MCCs like 5944 (jewelry), 5967 (direct marketing), or 7995 (gambling) often require holdbacks, reserves, or post-close adjustments.
Residual revenue looks attractive — until you realize the contract won't let you touch it.
Red flags to assess pre-LOI:
🛠 We routinely restructure residual ownership, ROFR release, or assignability as pre-conditions to clean sale or financing.
The most common reason deals fall apart in payments? Structuring errors that surface late in diligence.
Key items to validate early:
Structuring risk = valuation discount. Fix it early.
Once capital is in, value isn’t created by ramping headcount. It’s created by:
Capital deployment frameworks should tie directly to merchant LTV, NRR, and OPEX leverage. Anything else is dilution without uplift.
Not all “fintech” tech justifies a valuation premium. In payments, integration and insight matter more than front-end gloss.
Capability
Valuation Impact
Strategic Value
Real-time residual analytics
+0.5–1.0x EBITDA
Improves buyer confidence, lowers risk
API-based underwriting/boarding
+0.5–1.0x
Faster time-to-merchant, lower cost
POS / ISV integrations
+1.0–2.0x
Drives retention, lowers churn, boosts defensibility
Merchant-level credit scoring
Contextual
Monetization + alternate lending origination platform
As you look at buyouts, secondaries, or growth rounds in this market, the best investments won’t come from pitch decks — they’ll come from structural insight:
This is where capital creates real leverage in payments.
If you’re looking at an investment in this space — or want an outside perspective on one you already made — happy to dive in.
Let’s talk.
—
Tom
