(NAS:PSFE) Paysafe: The Payment Powerhouse Capitalizing on iGaming Growth

Thesis

Paysafe (NYS:PSFE) is a global payments provider specializing in high-risk verticals such as iGaming (primarily online casino and sports betting), digital wallets, and alternative payment solutions. The company is positioned to benefit from secular growth in online payments and the rapid expansion of iGaming in the U.S., where legalization continues to unlock new opportunities. Paysafe is successfully transitioning into a cohesive, growth-oriented payments platform after years of fragmented operations borne from its heavy M&A history. With exposure to high-growth markets, a proven regulatory track record, and a focus on operational efficiency, the company is well-positioned for long-term value creation. We see potential for 50% upside from current levels.

[Unless readers are already familiar with the payments space, we recommend first reading the Brief Industry Background in the appendix at the bottom]

Company Background

Paysafe’s origins date back to Optimal Payments (rebranded to Paysafe in 2015), a payments company founded in 1997, initially focusing on digital wallets and online transactions. Over time, Optimal Payments expanded through strategic acquisitions, establishing itself as a key player in high-risk verticals, particularly iGaming and forex trading.

Digital Wallet iGaming Powerhouse

In 2004, when Optimal Payments acquired Neteller, one of the leading digital wallets for online gaming. This positioned Optimal Payments as a critical payment facilitator in regulated online gambling markets. Expanding along this path, in 2015 the company acquired Skrill for $1.2 billion– the dominant digital wallet used in iGaming across Europe. Along the way the company also built its eCash solution through several acquisitions. These solutions enabled the underbanked to access digital commerce without the need of a credit card. With Neteller and Skrill now under the same umbrella, Optimal Payments consolidated two of the largest gaming-focused digital wallets, giving it significant scale and dominance in digital payments.

Payment Processing Foothold & IPO in 2021

Following this expansion, Optimal Payments entered the merchant acquiring business, acquiring Meritus, iPayment, and MCPS, providing a strong foothold in U.S. payment processing. As the company evolved beyond just digital wallets, it rebranded as Paysafe in 2015 to reflect its broader end-to-end payments capabilities. In 2021, Paysafe went public via SPAC. Since then, its stock has declined significantly (~80%) from its IPO price largely due to SPAC-related valuation bubble imploding.

New Management & Organizational Unification

In 2022, Bruce Lowthers (formerly of Fiserv) became CEO and initiated a major leadership overhaul. Before this transition, Paysafe’s business was highly siloed:

• Europe was predominantly wallets.
• The U.S. was focused on merchant acquiring.
• Sales, operations, and support functions were fragmented.

Under Lowthers, Paysafe has focused on unifying its global business, aligning teams across regions, and enhancing cross-selling opportunities between its processing and wallet segments.

Business Segment 1: Merchant Solutions

This is Paysafe’s processing (merchant acquiring) segment. Payment processing operates through two main distribution channels:

1. Direct Merchant Relationships – Where processors onboard merchants directly, often SMBs.
2. Distribution Partners: Independent Sales Organizations (ISOs) & vertical SAAS players (ISVs) – Third-party aggregators that bring multiple merchants onto Paysafe’s processing platform. They handle onboarding and account management.

Paysafe has long relied on distribution partners because the small-business payments market is highly fragmented (millions of merchants/SMBs in U.S.), making scaling direct merchant acquisition challenging. With around 600 ISOs, Paysafe has built a strong support infrastructure, offering:

• Portfolio & residual management tools.
• Data transparency & analytics for ISOs.
• A focus on specialized verticals (e.g., veterinary services, beauty, wellness, and gaming).

Gross margins for Paysafe’s processing segment have historically been ~50%, with a major portion of COGS tied to ISO commission payments. Take rates for Merchant solutions is 75bps, NRR is 103%.

Business Segment 2: Digital Wallet Segment

Paysafe’s Digital Wallets segment, led by Skrill and Neteller, processes the overwhelming majority of the company’s wallet transaction volume, primarily facilitating iGaming payments across Europe. These wallets are widely used for online sports betting, casino deposits, and high-risk transactions, offering players a secure and fast way to move funds. Beyond gaming, Paysafe’s eCash solutions (Paysafecard, viafintech, SafetyPay) cater to underbanked consumers, enabling cash-based digital transactions across retail, entertainment, and financial services. While processing volume is smaller than traditional card acquiring, take rates are significantly higher, making wallets one of Paysafe’s most profitable business segments.

Processing makes up most of Paysafe’s transaction volume, but wallets generate significantly higher take rates, making them a more profitable segment despite their smaller share of TPV (Total Payment Volume). The charts below clarify the breakdown in by each segment (*starting 2022 Paysafe lumped in their highly profitable but low volume ecash business into digital wallets.)

Competitive Advantages

Industry-Leading Risk & Compliance Infrastructure

Unlike mainstream processors like Stripe or Adyen, which serve broad e-commerce markets, Paysafe thrives in specialized, high-risk niches. Merchants often use generalist processors for standard payment acceptance, but turn to processors like Paysafe when they need expertise in complex, regulated industries.

Paysafe’s long-standing reputation in iGaming and other compliance-heavy markets, and alternative payment methods makes it a go-to provider for merchants that require specialized payment solutions. This gives it an edge in:

• Underwriting merchants in high risk verticals
• Navigating licensing & regulatory approvals across jurisdictions.
• Managing fraud, AML (Anti-Money Laundering), and KYC compliance at scale.
• Partnering with banks & regulators in regions where many competitors struggle to gain approval.

Digital Wallets as a Key Differentiator

Paysafe’s digital wallet segment (Skrill & Neteller) provides a significant strategic advantage over standard payment processors. Unlike most processors, Paysafe owns a highly adopted gaming-focused wallet, which can benefit merchants when it comes to customer acquisition.

Global Reach & Deep Banking Relationships

Paysafe operates in nearly every major payments market, with:

• Regulatory approvals across multiple jurisdictions (critical for iGaming expansion).
• Integration with nearly every payment provider worldwide.
• Banking relationships in nearly every key region, allowing for efficient cross-border transactions.

This global infrastructure makes Paysafe an ideal partner for multinational gaming operators and merchants that require international payment capabilities.

Opportunities

Expanding Direct Sales: Higher-Margin Growth

Paysafe has historically relied heavily on distribution partners, but direct merchant relationships generate ~3-4x higher margins. Paysafe remains under-indexed in this area—creating an opportunity for margin expansion. To capitalize on this, Paysafe has significantly expanded its direct salesforce, hiring several hundred account managers and sales personnel.

Cross-Selling Opportunities from a Unified Business Model

Historically, Paysafe’s business was highly siloed, with different teams managing processing and digital wallets independently. As a result, less than 1% of Paysafe’s enterprise client base used more than one product—wallet users didn’t use Paysafe’s processing, and processing clients didn’t use wallets.

Following the company’s organizational unification under CEO Bruce Lowthers, Paysafe has made significant progress in cross-selling its payment solutions. In recent quarters, 19% of new client relationships have been successfully cross-sold into multiple Paysafe products.

Gaming & iGaming Expansion Driving Payment Volumes

The U.S. iGaming market is still in its early stages of growth, with states gradually legalizing online sports betting and casino gaming. While gaming-related processing currently accounts for less than 10% of Paysafe’s total processing volume, the U.S. online gambling market is projected to double by 2029, fueled by increasing legalization (as states seek additional revenue) and technological advancements like in-game betting. Even in legalized states, consumer adoption will take years to ramp up as markets mature. 25 states have legalized some form of online gambling in the past five years, bringing the total to 30.

E-commerce Growth & Secular Payment Trends

Beyond iGaming, secular e-commerce growth remains a long-term tailwind for Paysafe. Online payments continue to grow in volume, frequency, and complexity, driven by increased global money supply, cross-border digital commerce needs (even small businesses can call themselves multinationals), and expansion of alternative payment methods.

Risks

Paysafe is highly leveraged and would be vulnerable in a recession

Paysafe is highly leveraged at 4.7x adj EBITDA. A global economic slowdown or recession would impact Paysafe’s transaction volumes, particularly in gaming, travel, and other discretionary spending categories. Their high leverage level is a vulnerability and is why we have sized it as a smaller Core Position despite the significant upside potential.

Mitigating Factor: Paying down debt is stated as the highest ranking priority for Paysafe’s capital allocation policy. Management is targeting a 3.5x leverage ratio by ’26. We look for opportunities to add to our position as management continues to execute and brings down leverage.

Regulatory Risk

Regulatory compliance is a core competency for Paysafe, but the increasing complexity of global financial regulations remains a risk. iGaming, crypto, and cross-border payments are heavily scrutinized, and new compliance requirements could:

• Slow down merchant onboarding & expansion efforts.
• Increase compliance costs, squeezing margins.
• Introduce legal uncertainties in key markets.

Mitigating Factor: Paysafe has been navigating complex regulatory environments for decades, giving it a strong track record of compliance. Its longstanding banking and regulatory relationships reduce the likelihood of business disruptions due to regulatory changes.

Competition

Paysafe and Nuvei are similarly sized competitors in high-risk payment markets, particularly in iGaming and alternative payments. So far, they have coexisted without significant disruption, and take rates have remained stable. Paysafe leverages its wallet solutions (Skrill, Neteller) and reputational strength, while Nuvei focuses on merchant-facing cashier services. As both companies expand, competition remains something to monitor. (Nuvei was taken private in November 2024).

Valuation

Paysafe presents a compelling investment opportunity with 50%+ upside from current levels, driven by sustainable mid-to-high single-digit (MSD-HSD) revenue growth, expanding profitability, and a dominant position in high-risk verticals like iGaming.

At its core, Paysafe is a growth stock with a strengthening competitive position. The company has spent the last several years integrating its previously siloed business units, and under new leadership, it is now building connective tissue between its core offerings—processing & wallets. Its leadership in iGaming, improving direct sales strategy, and successful business unification under new management provide strong fundamental support for blended MSD-HSD secular growth and margin expansion. (We expect its digital wallet segment to grow LSD along side broader European gaming market trends and processing to grow HSD-LDD). Given growth and margin expectations, Paysafe’s enterprise value is trading at 5.5x estimated 2028 EBITDA and presents a compelling entry point.

APPENDIX

Brief Industry Background: Understanding Payments

Payment processing began with the invention of credit cards in the 1950s. Simply put, it refers to the steps a processor (aka acquirer) takes to ensure that a credit card payment results in a debit from the customer’s account and a corresponding deposit into the merchant’s account. Originally paper-based, the process remains essential as long as customers use cards for payments.

Modern card processing involves underwriting the merchant, setting up a merchant account, providing a payment gateway that encrypts card data, and transmitting transactions through the underlying digital infrastructure that integrates into banking and card networks to ensure settlement. In essence, everything that happens behind the scenes when a customer swipes their card and sees an “Approved” message is orchestrated by payment processors.

At its core, payments involve merchant acquiring and payment processing. For the purposes of this research, we use payment processing and merchant acquiring synonymously. While these terms originally had distinct meanings, the industry has evolved significantly, and the lines between them have blurred. Below, we provide additional context:

Payment Processing vs Merchant Acquiring

Merchant Acquiring (Front-End)

• Directly interacts with businesses (aka merchants) – The acquirer onboards businesses, sets up merchant accounts, and provides card acceptance solutions.
• Handles merchant underwriting & risk – Determines whether a merchant is eligible to accept card payments and manages fraud & chargebacks.
• Facilitates merchant funding – Ensures funds from customer transactions flow into the merchant’s bank account.

Payment Processing (Back-End)

• Routes transactions between parties – Payment processors handle the technical side of moving funds between the merchant, banks, and card networks.
• Authorization & settlement – Processes real-time approvals, encrypts data, and ensures funds flow through payment infrastructure.

Where They Overlap

• Many companies (e.g., Adyen, Fiserv, Stripe) handle roles in both camps acquirer and a processor.
• Fintech Acquirers/Processors often work with third-party processors to handle transactions (e.g., Chase Paymentech as an acquirer using First Data/Fiserv as a processor).
• Some payment processors (like Paysafe) also act as merchant acquirers, giving them more control over the entire payment flow.

If readers still find this confusing, it’s because the industry has significant terminology inertia—terms that made sense 75 years ago continue to be used even though their descriptive value has eroded. The most intuitive explanation is that large payment providers most investors are familiar with (Stripe, Adyen, Paysafe, PayPal’s Braintree) are involved in both processing and acquiring but often still partner with traditional legacy players that have deep and complex integrations with banking systems and card networks (e.g., Fiserv, JPMorgan, TSYS).

To add to the complexity, this is a U.S.-centric explanation and does not necessarily apply in other regions. Payment infrastructure, key players, and regulatory frameworks vary significantly by country.

The API Revolution and Commoditization of Payments

The rise of API-driven payments has been the single biggest disruptor in the online payments industry. Stripe changed the game by making it possible for merchants—both small and large—to accept online payments with just a few lines of code. Before Stripe, businesses had to navigate cumbersome approval processes with banks, often requiring extensive paperwork and direct integrations into banking infrastructure. Many small businesses simply resorted to PayPal, which redirected customers outside their website, stripping them of a branded checkout experience.

Stripe’s innovation ushered in a new era where payments became frictionless, setting a new standard that forced every major processor to adopt API-first solutions. Today, payment processing is increasingly seen as an “internet utility”—something that just works rather than a differentiator. This has led to the commoditization of traditional card-based payment processing, pushing processors to find new ways to add value beyond transaction facilitation.

The Rise of Integrated Payments and Vertical SaaS

As payments became commoditized, much of the value shifted up the chain to Integrated Software Vendors (ISVs) and Vertical SaaS providers. Instead of just processing transactions, these companies embed payments directly into industry-specific software, creating all-in-one business solutions.
Companies like Toast (restaurants), Mindbody (fitness), and Lightspeed (retail) combine inventory management, payroll, CRM, and payments into a single platform, making payments just another feature of their broader ecosystem. By integrating payments into mission-critical software, these companies capture more economic value than standalone processors, forcing traditional payment companies to rethink their business models.

This shift has also led legacy payment acquirers to backward-integrate, acquiring merchant-facing technology to stay relevant. For example, Fiserv acquired Clover in 2019, a POS and business management suite, to deepen its merchant relationships and offer value-added services beyond payments.

Alternative Payment Methods (APMs) and the Future of Payments

While processing was once a term used strictly used for Cards it is now expanding to serve alternative payment methods. While credit and debit cards still dominate in most developed economies, the rise of alternative payment methods (APMs) is reshaping the industry. The global payments landscape is shifting toward faster, more secure, and more diverse payment options, including:

• Peer-to-Peer (P2P) & Real-Time Payments – Zelle, Venmo, and RTP (Real-Time Payments) networks allow instant bank-to-bank transfers that bypass card networks.
• Buy Now, Pay Later (BNPL) – Klarna, Affirm, and Afterpay let customers pay in installments, reducing reliance on credit cards.
• Global APMs – Cross-border commerce demands support for regional payment giants like Alipay (China), UPI (India), and PIX (Brazil)—each of which operates outside card networks.
• Crypto – While crypto payments are not widely used today, processors are exploring ways to integrate them into existing payment systems.

This shift presents both risks and opportunities for traditional processors. On one hand, reliance on card networks may decline as more payments move to direct bank transfers, digital wallets, and real-time payments. On the other hand, processors that successfully integrate APMs and position themselves as multi-rail facilitators—allowing merchants to accept any payment type—can better secure long-term relevance.

INVESTMENT DISCLAIMERS & INVESTMENT RISKS
Past performance is not necessarily indicative of future results. All investments carry significant risk, and it’s important to note that we are not in the business of providing investment advice. All investment decisions of an individual remain the specific responsibility of that individual. There is no guarantee that our research, analysis, and forward-looking price targets will result in profits or that they will not result in a full loss or losses. All investors are advised to fully understand all risks associated with any kind of investing they choose to do.