Ep. 94: What Is Changing in Payments M&A? Esme Wilson of Pollen Street Capital Explains Valuations and Investor Priorities

Welcome to The Payments Shed Podcast, the weekly podcast that dives into the big topics, trends and people shaping the worlds of payments, fintech and business leadership, with your two co-hosts, Grant Evans and Justin Hanna.

Host:

Welcome back to The Payments Shed Podcast.

Today I'm joined, as always, by Grant Evans, and we are lucky to be joined by Esme Wilson, VP of Private Equity at Pollen Street Capital.

Esme, thank you for joining us.

Esme Wilson:

Thank you for having me.

Host:

Tell us a little more about yourself and Pollen Street.

Esme Wilson:

We're a mid-market financial services-only investor, so we're a big specialist in the space.

On the private equity side, we've only ever done financial services.

We define that across banking and lending, wealth management, insurance, business services, software and, most importantly, payments, which is where I spend most of my time.

Our payments portfolio includes companies like CashFlows, AutoPay, Ordo, Yoyo and Lumen.

Host:

You've had a front-row seat to the peaks and troughs of the market over the last few years.

Putting a payments lens on that, do you feel payment deal flow is back, or are we just seeing the early signs after a bit of a lull in the market?

Esme Wilson:

It's a good question.

I've been asked this many times over the last couple of years, and I always feel like we're on the cusp of it coming back.

I've felt that every month for the last two years, but we're not really seeing it come back yet.

One of the things is that valuations probably won't return to the levels they were at.

It's still about getting founders comfortable with what the new normal might look like, as well as dealing with a lot of volatility within payments.

We haven't seen deal flow fully come back, although again, we have early signs of recovery.

But I've also said that many times.

Host:

Do you think there's pressure on founders to come back to the table and have these conversations again?

Esme Wilson:

Yes.

If you think about it, the last big fundraising cycle in payments was around four years ago.

That's quite a long time to go without raising external capital.

Naturally, you're seeing a lot of them coming back to the table now.

A lot of them have unfortunately had to trade off growth during that period.

There's always a trade-off between diluting your equity stake and getting the funding to grow.

A lot chose the first option. They sacrificed funding, retained 100% of their company, but weren't able to invest in the same way.

After a couple of years, you do have to come back to the table and speak to investors.

Host:

Do you think pressure also exists for businesses that took partial investment?

You've got investment houses that maybe don't want to go again but have had to because the market slowed down.

Do they put pressure on founders within the ecosystem to make that transaction?

Esme Wilson:

Completely.

Generally speaking, investors will have a five-year horizon. Sometimes it's longer, but it's rarely shorter.

If people invested five years ago, depending on the fund profile, a more mature private equity investor might be looking to make around three times their money.

If you're a VC, you're often looking to make around five times your money.

If you invested five years ago, you're probably now wanting to exit the investment at that return.

Obviously, valuations are lower.

But monetising at least part of it is still better than nothing.

That's definitely putting founders back into the market to get at least some of those returns back.

Host:

You've definitely seen that in sectors where post-COVID promises were made to investors about how the market was going.

COVID happened, and post-COVID there's a whole new world.

As you mentioned, things changed in late 2020.

People now have more confidence to say, "I'll go and borrow some more and give up some equity," or, "I'll back myself to do this on my own."

But without investment, they can't necessarily grow at the scale they could be.

Esme Wilson:

Yes.

One thing we saw post-COVID was a lot of growth and digitalisation.

Another implication is that CACs are really expensive now.

It used to be relatively easy to buy a click-through five years ago. Facebook CACs were pretty low.

Now, with everyone being online and international businesses competing in the same space, it's much more expensive.

What I see is that the better businesses aren't necessarily just the ones that grow faster.

Sales and marketing are so important.

I've worked with payments companies that really don't have a great product, but they've nailed the marketing strategy or invested heavily in it.

Sadly, that's as viable a growth strategy as having the best product on the market.

A great product won't sell itself.

You need to invest in selling it, and that's expensive.

Host:

We've seen that over the last few years.

Big dinosaur providers buy really snazzy start-ups or scale-ups, and two years later the product gets sunset.

They're saying, "What happened? We bought this business for £60 million."

Then suddenly the product isn't what they thought it was or they can't integrate it into the platforms they expected.

From a valuation perspective, how are things behaving now?

Esme Wilson:

It's difficult to know what the new normal is.

Payments is different from more mature industries.

Take insurance, for example. Some incumbents have been trading for 30 years.

With payments, even dominant players like Adyen haven't been trading for that long.

You can't really take a through-the-cycle view.

We had very elevated trading in 2021 and 2022.

Now we're seeing some normalisation and a slight dip.

One of the difficult things about payments is that every subsector trades quite differently.

A pure-play merchant acquirer might trade at, for example, around six times GP. An issuer processor can be similar.

If you look at issuer processors, the only listed comparable is Marqeta, which trades at around four times GP.

But that has a very nuanced effect from its contract with Square.

That contract is around 80% of revenue but only 20% of EBITDA, so it has a mathematical impact on the valuation.

Again, that's the only listed issuer processor.

When you think about valuing companies, you have to look more at private transaction comparables and potentially on a sum-of-the-parts basis.

That's difficult because there hasn't been a full suite of transactions in the last couple of years.

Private market transactions tend to trade higher.

I also think stock markets really undervalue volatility.

Payments will always be volatile, even around a stable long-term increase.

That's quite a nuance of the payments sector compared with other sectors.

You might have some volume minimums, but you don't necessarily have long-term fixed contracts.

Private or public markets will never fully get comfortable with the true value unless they accept the volatility and take a longer-term view.

That's quite difficult for retail investors.

Host:

I think that's why payments companies are looking to buy SaaS companies that have more fixed contracts as part of their portfolio.

We've been through this huge period of what Money20/20 has called the great bundling and unbundling of payments.

We went through a bundling process with lots of mergers, and the market feeling now is that some unbundling is starting to happen.

That presents opportunities for businesses like Pollen Street.

What types of payment businesses get your attention as we go into that cycle, and which ones are being left behind?

Esme Wilson:

On the unbundling, it's not just specific to payments.

When sectors are new and experience a lot of growth, investors want to put everything together to get multiple arbitrage.

You buy companies at, say, 10 times EBITDA, but the platform might trade at 15 times, so there's an incentive to put everything together.

On the payments side, that happened with a lot of players.

For example, acquirers bought issuers because people said there were synergies.

But they're completely different sides of the card schemes.

There aren't necessarily any real synergies there.

Most acquirers have since divested the issuing businesses.

Either side of the stack, there's really no cost synergy.

One serves the merchant, one serves the cardholder.

The merchant and cardholder don't interact apart from at the point of sale.

Having them together often doesn't make much sense.

I think that was probably avoidable and could have been foreseen before putting them together.

But markets get overheated, people get excited and they want to put everything together in a land-grab way.

Host:

There's a reason banks sold their acquiring arms years ago.

Esme Wilson:

Yes.

Host:

Then suddenly you've got banks trying to buy acquirers again or acquirers becoming banks.

You've got legacy banks getting interested again.

You just wait for someone like Adyen to become more bank-like, and suddenly they're offering much more to merchants.

Esme Wilson:

With acquiring, from my experience, it's a homogeneous product.

When you go to the ground and speak to merchants, the margins are slim.

Price is often the main selling point the merchant is focused on.

It's a huge scale game.

There's a cost-of-living crisis. People aren't spending as much.

If merchants can shave anything off the margin, that's their priority when they're choosing.

They might pay a little more for loyalty features or something similar, but merchants don't always want to pay a premium for an all-singing, all-dancing offering because people are very cost-conscious.

There are different segments, obviously.

Stripe is relatively expensive within the market, but it doesn't necessarily have mass-market appeal.

If you go to a corner shop, they might not choose Stripe.

They want something clean that accepts payments and doesn't cost too much.

People aren't always willing to pay a premium for more.

Putting everything together had its issues.

Host:

I think some of those providers challenged the status quo by taking the payments product to another level.

People did start paying.

I'm not saying the corner shop, because that's a good example where price matters.

But there were certainly brands.

Even with the iZettles of the world, hospitality hadn't seen better systems that helped staff, tipping, stock and inventory.

We went through a journey where bars and restaurants had raced to the bottom on pricing.

Suddenly, they were willing to pay 1.5% for a Square or SumUp device because it gave them more technology.

We had to go through that pain period where a lot of new providers turned up at the same time in the SMB environment, then Stripe did the same in e-commerce.

It took established players a long time to catch up.

We're at an interesting point now where that catch-up has happened to a large degree, and the fight for the customer has never been more prevalent.

I want to move onto the way founders look at the market and decide whether to grow, fundraise or sell.

How do you think they actually make that decision?

What are the tipping points?

Esme Wilson:

It's not clear-cut.

It's not simply, "If you're X percent revenue and X percent growth, you should fundraise."

There are a lot of softer aspects.

Some of it is cultural.

When you're fundraising, it's about whether you're comfortable owning a smaller piece of a larger pie.

You might have the view that a rising tide lifts all boats and you're happy to take a smaller stake.

Some people have that inherent view.

Others want to own 100% and are happy if the company is smaller as a result.

There's no right answer.

There is some maths behind it.

For example, if £1 million of funding is spent on marketing and your CAC is €50, you can calculate how many customers that might buy you and the resulting revenue and profitability growth.

If that growth offsets, for example, a 5% reduction in your ownership at the given valuation, that's one way you might think about it.

Obviously, it's not that simple in practice.

What I find when speaking to founders is that they get to a stage where they simply can't spend what they want to, mainly on marketing.

A lot of people get the technology and product right.

The business plan in the first few years is structured to fund enough to get the platform ready.

Once that's done, people often find they don't have as much money for marketing as they thought, and marketing is more expensive.

Part of that is rising CACs.

That's normally when people bring investors in.

They'll say, "This is the growth. We need £5 million."

In a lot of the budgets I see, 60% to 80% might go into marketing.

Sometimes another portion will be about getting a new licence.

If they don't have a UK licence, they'll get one.

If they already have a UK licence, they might be trying to get a European one.

Host:

Those are the guys we can help with their marketing.

Esme Wilson:

I'll send them the budget.

Host:

We'll figure it out.

You're dealing with conflicted founders who can't always decide which way to go.

That must be challenging in your own sales cycle because you're also selling yourselves as the investor for them to go with.

Esme Wilson:

There are definitely different perspectives.

There's negative sentiment towards investors in general.

But at the end of the day, I do well if the company does well.

Our incentives are very aligned.

A lot of my work metrics are aligned to the company doing well.

There is a misconception that we're trying to screw founders over.

That isn't the case for us.

I won't speak for every investor because some strategies may operate differently.

But often we genuinely want to help.

We don't do well if the company doesn't do well.

Host:

Are we seeing more creative deals to bridge valuation gaps for founders?

Esme Wilson:

Yes, 100%.

2025 was really the year of the liquidation preference.

As I said, investors might want to make three times their money.

A liquidation preference can guarantee that you make three times your money regardless of the ownership stake.

I could buy 10% of a company and invest £10 million.

If I have a three-times liquidation preference, I get £30 million back even if the company sells for £30 million.

Host:

Is that similar to the BrewDog thing that's just happened?

Esme Wilson:

That's slightly different because that's more about investors not being paid back at all.

But yes, earlier investors are affected too.

The worst affected can often be founders.

There can be an information disadvantage on the founder side because investors have large legal teams.

If you're a founder who is a payments expert and you've built a company, you don't necessarily have all the reference points.

You haven't seen every deal structure ever.

Deals are what we do.

What I saw especially last year was that people wanted a valuation uplift from 2021.

The way they bridged that was investors saying, "We can give you that valuation, but we need a liquidation preference."

If you have a strong liquidation preference as an investor, the headline valuation becomes less important.

I can invest at a £2 billion valuation and, if the company sells for £2 billion, still get three times my money depending on the terms.

Host:

That's had a huge impact.

I've gone through this personally.

You join a business and you're promised shares.

Then suddenly everyone at the top and the new investors have been promised certain returns.

The employees getting their payout are right at the bottom, if they're lucky.

Esme Wilson:

Completely.

I also think some founders haven't necessarily understood the repercussions.

You can really only do that once.

It works for this cycle over the next five years.

As an investor, I would never invest in a company that already had a massive liquidation preference over it.

Those investors obviously get paid their money first, and many of them write into the structure that nobody else can come in above them.

People were taking this capital when they weren't actually that desperate, and I don't think they fully understood that it could make raising again very difficult.

I wouldn't say never, because that's too dogmatic, but it becomes much harder.

Host:

Someone once said the best people to invest in are the people who don't need the money.

Esme Wilson:

Yes.

Host:

I liked that because they can be creative and know they're going to do something useful with it.

Esme Wilson:

Exactly.

You can negotiate a lot better when you're not desperate.

You can say no to more structures.

If you've got a funding gap, it's harder to reject being squeezed.

Host:

What are the biggest mistakes founders still make when they come to market?

Esme Wilson:

One thing I've seen is going out with too high a valuation.

We see a tonne of deals and need to know where to spend time.

If a founder comes out running a process and the company is realistically worth £500 million, but they go out saying it's worth £1 billion, there's no way my investment committee will approve that.

It's a bit of a turn-off, for lack of a better phrase.

You'll never get there.

I'm not going to spend time diligencing the company when I already know there's a major issue.

A lot of founders did that to see where the market would go.

The issue with overshooting the valuation is that when the valuation comes down during a process, it's not a good sign.

It can look like weakness or a process falling apart.

When it comes down, it can come down very quickly.

Host:

Some people believe their own hype, don't they?

Esme Wilson:

Exactly.

Being realistic about the ask is important.

I've seen people go out at maybe twice the valuation they'll ever get, then never raise.

They don't necessarily come back and raise at the lower valuation either.

Host:

That's a good segue into the elephant in the room: 2021 and 2022, when there were some crazy valuations.

What did the market learn from that period in terms of investment into payments companies?

Esme Wilson:

I don't know if the market learned anything.

Host:

The next question was going to be whether the lessons stuck, so probably not.

Esme Wilson:

Exactly.

What happened was that people got the timing very wrong.

People were at home, people were using the internet and digitalisation happened very quickly.

The ultimate level of digitalisation didn't necessarily change. We just reached that level faster.

In terms of increasing GDP, the revenue benefits were more limited.

People extrapolated the growth in digital adoption as though it would continue forever.

But there's a cap.

If I spend £5 a month on a subscription that helps me sort my finances, that doesn't become £10 next year simply because digitalisation exists.

People have fixed amounts they're willing to pay.

When company valuations outstrip what people are actually paying for products, you get a mismatch.

People simply didn't want to miss out on payments.

The valuations we were seeing were crazy.

Host:

Some people knew though, didn't they?

A lot of founders managed to cash out at the right time.

Esme Wilson:

For sure.

I also think it's a bit of a curse to raise at a valuation that high because it puts people off later.

When you go back into the market, you may have to take a haircut.

People who don't understand the space then think the company is doing badly.

You might have raised at £20 billion five years ago and now be worth £4 billion.

But you can have very good companies raising at much lower levels.

Rapyd is a good example.

They were valued at around $9.6 billion in 2022.

The last raise was around $3 billion.

The growth they've experienced in that period is monumental. They're doing fantastically.

For me, that's actually quite a good valuation.

Yes, it's much lower.

If you don't understand the market, you'd say, "That company isn't doing as well because it's taken such a haircut."

But it can still be a good valuation.

The previous one was simply inappropriate.

Host:

They were silly numbers.

People expected businesses to have more customers and every customer to be paying a lot more.

Esme Wilson:

Yes.

Rather than having more customers paying a little more.

Host:

It was equivalent to the dot-com boom in so many ways.

I've certainly got a few war wounds from investments I made during that 12-month period.

The hype in that 12 to 18 months was only really matched by the original dot-com boom, which had its own boom-and-bust period.

Esme Wilson:

Humans have a tendency to behave like this.

Think about waves of technological innovation going right back to the steam engine, the internet and machinery.

All of those changed global GDP dramatically.

If public markets had existed in exactly the same way at those points, they probably would have gone crazy too.

Maybe that would have been more justified.

But even the Dutch tulip crisis shows that humans have a tendency to reinforce each other's behaviour and fear missing out.

These feedback loops are part of irrational human behaviour.

It happens all the time.

When a new technology arrives, you can't conceive of the next wave of technology.

When the internet arrived, you couldn't conceive of AI.

You think, "This is it. This is the final cycle. We're going to have flying cars."

In practice, not that much necessarily changes as quickly as people expect.

With AI, if we're talking about the benefit to GDP, increasing GDP requires more output because you need people paying for more things.

Most of the AI savings right now are on the cost side.

There's a huge valuation gap, but I think we're quite a long way from AI materially adding to the GDP of an economy.

Host:

Are we going to see déjà vu with AI then?

Esme Wilson:

For sure.

If the sum of company valuations across the market is increasing massively, people ultimately need to spend more in the economy to generate the revenue supporting those valuations.

What's interesting is that if AI cuts jobs, there's less money for people to spend.

Host:

It's making businesses richer but potentially individuals poorer.

Esme Wilson:

Exactly.

Then who is ultimately paying the businesses?

Host:

Saving costs but not delivering revenue.

That's really interesting for a business like Pollen Street Capital because you can almost see what's going to happen.

But you also have to take some risk.

You need to be seen investing in the space because that's where everyone is putting their money.

If you just watch from the sidelines, you miss opportunities.

AI is doing a lot of good, but the valuations can be crazy.

That must be difficult to navigate.

Esme Wilson:

I always get asked, "Are you investing in AI?"

It's important to understand that AI isn't a sector.

If you think about sectors, you've got consumer goods, industrials, infrastructure, financial services.

AI isn't a sector.

It's not creating independent value.

Host:

You're not buying AI itself.

Esme Wilson:

Exactly.

I don't wake up in the morning and think, "I need AI. I'm going to pay £10 a day to get some AI."

It only exists in relation to other sectors.

Within financial services, all of our companies are implementing AI to different degrees.

Some have developed things in-house. Some use third parties.

So yes, we're invested in AI because all the companies are using AI.

It's a huge topic of conversation.

But investing in standalone AI doesn't necessarily make sense to us in that way.

It's obviously unavoidable.

SaaS multiples were the previous version of this.

When you have a new wave of innovation, especially with machine learning, waves of innovation may become more frequent even if we can't conceive of what the next one is yet.

Host:

I think we're only scratching the surface in payments.

It's a very innovative industry, but there's also an innate fraud risk with AI.

We're still trying to work out where that goes over the next few years, particularly with agentic commerce.

Esme Wilson:

People ask whether I'm scared about AI, but there are so many use cases.

If I can reduce fraud and chargebacks at my companies using AI, happy days.

There are so many use cases within existing companies that make life easier for the customer and the business.

They're just scratching the surface of what they can implement.

AI companies and existing payments companies can work really well together.

You don't need to be an AI company to do well.

What's different with AI is how quickly adoption has happened.

It's at everyone's fingertips.

Any company can use AI.

It's not that expensive to get a subscription to Claude or similar tools at a basic level.

The proliferation of third parties will become very common and very price competitive.

Everyone can use AI.

I don't think it will necessarily displace the incumbents.

Incumbents can pay to use AI to improve their processes.

In terms of entering the market and taking over, I don't think the winner of payments will be an AI company.

I think it'll be one of the existing companies that implements AI the best.

Host:

Or the incumbents will just start buying them.

That's a good founder opportunity.

Go and create specific tools or products that payments companies need.

We're seeing AI companies claiming to be payments experts.

That asks questions of the payment companies: "We don't have this. Maybe they are the experts."

One of the ways you find out is by investing in or acquiring them.

I see people building businesses on tools like Lovable and suddenly they're at £3 million ARR after being live for hardly any time.

You think, "How are they doing this?"

But we only hear the good-news stories.

We probably won't hear the bad-news stories until someone buys one and discovers it doesn't do what they thought it did.

Esme Wilson:

Completely.

Six months ago, you might have thought OpenAI was the clear winner.

For me, I'm seeing Claude taking over in some areas.

Host:

I'm a fan.

Esme Wilson:

I'm a big fan too.

It's interesting because, since I started my career as an investor, there was always a question about whether machine learning would get rid of bankers' jobs.

I remember being nervous about that 10 years ago.

I haven't actually seen many of my processes improve until the last six months, when I've found Claude quite helpful for things like PowerPoint.

Even then, in my actual day-to-day, it might save 10 or 15 minutes.

If it eventually saves an hour, that would be ideal, but there's still a long way to go.

Because nobody knows who's going to win and innovation is moving so quickly, it makes sense not to own one solution.

You can lease the technology.

There's no need to find one AI company and buy it.

Use a couple.

We try different ones all the time.

You can turn them off and on.

Subscription models allow you to do that.

I would recommend not committing to one because nobody knows who's going to win.

Host:

Looking at investments in payments companies, and the fact that some investors were burned during the period we discussed, has that changed what investors are looking for today?

Esme Wilson:

I think everyone who's invested in payments in the last five to 10 years has been burned at some point.

I don't know anyone who hasn't.

When valuations are that high, it's unavoidable.

When you get burned, you're more cautious.

Investment committees are more cautious.

You get more questions.

"How can you prove there won't be a downturn?"

Previously the discussion was more, "Can you prove the growth justifies the multiple?"

You might say, "I want to pay 20 times because it's growing 100%."

Now, you might invest at 10 times, but you have to prove revenues won't decrease.

There's a more cautionary framing around how we think about investments.

We're not necessarily going after the highest-growth businesses.

We're probably more willing to accept a lower return.

Part of that is related to the maturity of the industry.

At the beginning, lots of companies were growing 100% year-on-year.

You're just not seeing that as much now.

Host:

Does that influence the leadership teams you look at?

If you have a stable payments company and you've seen the mistakes of others, you're looking for long-term predictable revenue.

How involved are you in selecting the C-suite or board and in the day-to-day of a payments company in your portfolio?

Esme Wilson:

It's really important to have balanced leaders.

You want people who know what they're doing and don't need constant help, but who will also listen.

Part of what investors bring to the table is that we've worked across a lot of companies.

We don't have the same depth as the people working inside each business.

But at any one time we might be working across five payments companies.

That means we've seen more instances where something happened and either went well or badly.

You can complement the management team's knowledge with that experience.

We like to think of ourselves as a sounding board to management.

They have their ideas and we challenge them.

You want someone who can synthesise a room of different opinions and work out the right answer rather than going ahead with blinkers on.

Especially in payments, a lot of companies that have failed recently have had regulatory issues.

You need a pragmatic approach.

You don't necessarily need the sexiest business model ever, but you need to keep tabs on everything.

Governance is very important.

You need oversight rather than simply charging ahead in the market without considering the broader risks.

Host:

Some payment companies are becoming very focused on one or two sectors, such as education or government.

Are those becoming more attractive to investment companies?

Esme Wilson:

Definitely.

I'm spending quite a lot of time in this space personally.

One of the issues with payments is volatility and the lack of guaranteed payment volumes.

It's a nuance of the sector that's slightly counterintuitive because payments underpin every other sector, but you don't necessarily have contractual guarantees.

There can be volume minimums, but as an investor you want predictable cash flows that are relatively stable.

One way payments can achieve that is by having really high-quality, blue-chip counterparties.

For example, national governments.

If you're doing payments for those organisations, you might operate on a five-year contract.

That de-risks the volatility of daily transaction flows.

That's another way investors are looking at it.

We're happy to do lower-risk plays.

They aren't necessarily the highest-growth sectors.

Host:

Margins can be very fine there though.

You've got things like the Crown Commercial Framework for government organisations.

That may historically have made some sectors less attractive to payments providers.

You might get the volume, but the volume can be at such a tiny margin.

It's like supermarkets.

Historically, you might process hundreds of millions or billions because you've got Tesco or another huge merchant, but the revenue generated can be relatively small.

We've signed deals in our careers where you sign £1 billion of turnover that's worth only a few hundred thousand pounds.

Then another sector might do £100 million in volume but be worth twice as much because the rate margin is much higher.

Esme Wilson:

In practice, I see both sides.

If you've got a tender framework and the margin is guaranteed, government customers can be less susceptible to price.

Somebody can't simply come in and say, "I'll offer you 10 basis points lower," because it may not be worth going through another tender.

If the solution does the job, it's within budget and they like it, there's less incentive to find another one.

When you're selling to commercial merchants or businesses, they're always trying to improve the bottom line and looking for cheaper alternatives.

That's one difference.

In education, there are some emerging players, particularly in schools and things like paying for children's meals or services.

Margins can actually be relatively high because the pre-existing software was often very poor.

There's an opportunity to come in with a better product.

You can also layer on value-added services such as management information systems.

Host:

That's really interesting because some platforms are now at huge scale and have embedded payments.

I work in the embedded payments ecosystem, and we have large platforms that have become payment facilitators.

Do you start turning your attention away from investing in a traditional acquirer or PSP and look at a technology business where payments are now one of the biggest earners within the stack?

There might even be a route for them to become a fully licensed payments company because the volumes are at that level.

Is that an interesting part of the market for you?

Esme Wilson:

Yes.

A lot of this is around SaaS, especially vertical SaaS.

The businesses that have done it well start with the SaaS product.

Mews is one of my favourite companies.

I think it's great.

Host:

We had Mews on recently.

Esme Wilson:

Really?

Host:

Yes, coming out soon. You can listen.

Esme Wilson:

Great company.

I've always wanted to invest. It's very competitive.

They started with hotel or accommodation property-management software on the SaaS side.

Once you're in there, it's relatively easy to add payments.

For Mews, I believe around 50% of revenues are now from payments.

That's a way you can differentiate yourself.

If you're just a payments company and want to sell into a hotel, you have to offer a very slim margin or give them another strong reason to change.

If you go in through SaaS and say, "We've got a system that improves your operation..."

Host:

Payments become a by-product.

Esme Wilson:

Exactly.

People want one system.

You've made their lives easier.

You've shown them what you have to offer.

You can handle room management and booking.

People like the system, so why not use it for payments as well?

Payments become relatively commoditised.

If you've got the SaaS product that got you into the account in the first place, it's easier to add payments.

When we look at vertical software companies, some businesses without payments are still part of our payments thesis because one of the first opportunities may be adding payments in-house.

Host:

Do you look at hardware as well?

E-commerce is always the easy, quick-to-market one.

But when you break down the numbers, a huge amount of global transaction volume is still happening at the point of sale in a hardware environment.

Esme Wilson:

I went off hardware between around 2022 and 2024, and I think that was wrong.

I'm actually very pro-hardware at the moment.

Going back to the corner-shop example, that's what you're selling to the merchant.

The merchant doesn't necessarily care deeply about the transaction infrastructure.

Luckily, we're in an era where a tonne of payment companies can accept transactions.

Assuming the transaction goes through, when you sell to a merchant, they interact with the terminal.

That's what you're selling them.

Host:

That's the product.

Esme Wilson:

Exactly.

That's what the merchant makes a decision around.

Obviously, cost is part of it.

But the terminal is how you get to the customer.

They have a terminal they like.

Host:

I think hardware has been overlooked.

Esme Wilson:

Completely.

A lot of hardware is acquirer-agnostic anyway, so it doesn't necessarily matter who's doing the acquiring underneath.

Hardware is definitely underinvested in.

I'm looking at it again now.

I think the e-commerce-to-offline penetration is probably fairly stable at this point.

In terms of the propensity to buy things in person compared with online, I don't think customer behaviour will materially evolve in one direction forever.

We have everything at our fingertips, but we'll still buy things in person.

We saw a big decline in physical retail, especially post-COVID, particularly clothing shops.

But some are coming back because people want to see things and try them on.

More digitalisation is not always better.

People assumed 100% digitalisation was where we were heading.

But at the end of the day, you don't want AI to walk your dog.

Host:

It's about improving the customer-facing experience.

Esme Wilson:

Exactly.

There are things we enjoy doing in person.

We enjoy leaving the house.

It's not a straight line towards everything becoming digital.

I think we'll see maturity a lot faster.

Host:

Potentially a generational thing as well.

Esme Wilson:

Yes.

Host:

We have a final segment at the end of the show called the Shelf of Shame.

We ask every guest to nominate something from the wonderful world of business, payments or fintech that they'd banish forever.

What are you bringing to the shelf today?

Esme Wilson:

There are so many.

But I think I'll choose real-time payments.

I see it in every payments deck.

Everything is "real-time payments".

What's interesting is that when people say something is real-time, it's often still settled over non-real-time rails.

Ultimately, they're taking the risk themselves.

As an investor, I don't necessarily want the business doing that.

I'd rather you settle in a day at zero risk than fund it upfront and take the risk.

Even in extreme examples using stablecoins to settle instantly, for transactions to actually happen there is a physical ledger somewhere.

Currency conversions still have to be updated somewhere for the transaction to happen.

Most payments, from my perspective, are already pretty near instantaneous.

The average settlement time might be a couple of hours.

The difference between an hour or two and a second isn't always as material as people make it sound.

Host:

Is it the way people market real-time payments that bothers you?

Esme Wilson:

Yes.

Host:

They're making it sound like it's going to completely change people's lives when it can sometimes just be a nice-to-have.

Esme Wilson:

Exactly.

What is the actual benefit of getting a payment five seconds earlier in the mass market?

I don't think it's as huge as people make it sound.

Host:

I think the bigger issue is same-day and weekend settlement.

For a weekend trading business, that's more frustrating than whether something happens in one second.

They're saying, "I'm giving you my goods on Saturday. Give me my money on Saturday."

That's often a scheme issue.

The scheme isn't settling the acquirer, so the acquirer doesn't settle the customer.

Some acquirers have piloted earlier settlement, but as you said, they're effectively taking the risk.

They're pre-funding.

They're saying, "That's a low-risk retail transaction. We're pretty confident the money is turning up on Monday, so we'll settle you early."

But they need the cash available to do that.

Esme Wilson:

Exactly.

Same-day and next-day settlement are really important.

Again, it's often a scheme issue.

When people say, "We do real-time payments," but they're still using traditional routes and schemes, sometimes they're simply bearing the risk.

That's a completely different product.

Just don't market it as better technology if that's not what's actually happening.

Host:

We'll have to unpick that one further with some of the account-to-account companies.

Esme Wilson:

Open banking is fair.

They get to say it.

Host:

Esme, thank you so much for joining us today.

Where can people find out more about you and Pollen Street?

Esme Wilson:

On the Pollen Street website, and I'm always posting on LinkedIn as well.

Host:

Perfect.

Thank you so much for joining us today.

Esme Wilson:

Thank you for having me.