Investors fuel French processor's mission to help banks compete with disruptors

French marketplace payment processor Lemon Way has raised €25 million from Toscafund Asset Management to help banks compete with the likes of Adyen, Paysafe, and Stripe in the fast-growing marketplace sector.

Marketplaces have complex payment flows and regulatory requirements. Under the EU’s PSD2 regulations, marketplaces aren’t allowed to collect payments themselves from buyers and transmit them to sellers, unless they became licensed payments institutions. However, marketplaces can use banks or payments institutions to provide their users with payments accounts and disburse funds into these accounts.

“Marketplaces have unique requirements from payments providers, since PSD2 brings additional compliance requirements around how to handle funds,” said Zilvinas Bareisis, senior analyst at Celent. “Payment services providers such as Lemon Way, Stripe and Adyen saw an opportunity to provide marketplaces with tailored offerings that help marketplaces avoid becoming licensed institutions themselves.”

A regulated pan-European payments institution, Lemon Way targets B2B and B2C marketplaces, crowdfunding platforms, and e-commerce websites requiring payment processing, payments account management, and KYC/AML services. It supports 1,400 European marketplaces and 200 crowdfunding sites, and has seen its total payments flows rise from €1.9 billion in 2018 to €3 billion this year.
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Lemon Way provides clients with digital accounts, which they give their end users for making and receiving payments, with funds held in escrow bank accounts. These digital accounts are linked to the end user’s payment method such as their credit card or bank account, and have IBANs to facilitate transaction flow reconciliation. To date, Lemon Way has provided 8 million payment accounts to end users.

London-based Toscafund’s investment will be used for product development and to expand Lemon Way’s presence in the U.K., the Netherlands and Germany, according to Damien Guermonprez, Lemon Way’s executive chairman.

“We may also need to obtain a payments license in another region outside Europe,” he said. “Our clients expect us to have a pan-European presence and to also cover Asia and the Americas.”

Lemon Way enables clients to accept multiple payment methods including Visa, MasterCard, SEPA credit transfers and direct debits, PayPal, and online bank account transfer services like Sofort and iDeal.

Last year, Lemon Way received €10 million from two VC funds, Breega Capital and Speedinvest.

"Until fairly recently, the payment solutions market was dominated by an oligopoly of traditional players,” said Ben Marrel, founding partner at Breega. “We’re now witnessing a major shift in the market with the arrival of fintechs using cutting-edge technology to shape the next generation of payment systems. Breega wants to be part of that movement, so we’re investing in an increasing number of payment companies.”

While Breega doesn’t have an official partnering strategy for its portfolio companies, it encourages them, wherever possible, to collaborate, share best practices, and exchange information on issues impacting payments such as regulation, said Marrel.

Toscafund focuses on investing in financial services firms and, along with BBVA, is an investor in U.K. challenger bank Atom Bank.

“We like Lemon Way’s management team and its technology, which has the capability to scale up domestically and across jurisdictions,” said George Koulouris, partner at Toscafund. “We like its specialization in marketplaces and in crowdfunding platforms, which are already a big sector and expected to grow exponentially."

Lemon Way sees itself as a partner to incumbent banks, as it enables them to acquire transactions from marketplaces in competition with non-bank processors. Clients include BNP Paribas, Banco Sabadell, Barclays, and Crédit Mutuel.

“We handle underlying processing for banks,” said Guermonprez. “Our margin on this business is 50%, and we only collect fees on incoming payments and on KYC services — P2P transfers between payments accounts are free.”

Lemon Way is a regulated business, which was important for Toscafund. “It’s able to handle complex payments within a regulated environment,” said Koulouris. “Also, regulated businesses focus on sectors that are lower-risk than areas like cryptocurrencies that aren’t so heavily regulated.”

Lemon Way’s other attraction for Toscafund is its French base.

“France is a large payments market, which is very well developed but still fragmented and underpenetrated in a number of areas,” said Koulouris. “Lemon Way was our first payments-related investment, and we thought its platform was a fantastic starting point to make investments into the payment business.”

Toscafund doesn’t have an ecosystem of related investments, as it doesn’t believe in inter-linking portfolio companies unless there is strategic and financial logic.

“But, for any of our portfolio companies or prospective investments, Lemon Way will be high on the agenda to see if it can provide solutions and partnering,” said Koulouris.

Toscafund gets actively involved with its portfolio companies at the board and operating levels.

“I’ll be on Lemon Way’s board, and we’ll also bring in an operating partner with a number of years of experience in the payment industry,” said Koulouris. “As the market is highly fragmented, Lemon Way has great potential for organic growth and potentially for inorganic growth."

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