M&A Sweeps Through Global Payments Industry

A broad set of related trends is fueling the increased M&A activity, include continuing growth in e-commerce and a global shift from cash to electronic payments. Those trends are affecting both established players and newer financial-technology (fintech) firms, and making payments companies attractive acquisition targets.² At the same time, global payments companies are also making acquisitions, aimed at building broader e-commerce product suites and increasing their geographic reach. Among the potential benefits for businesses: more-comprehensive omni-channel and e-commerce payment solutions, and new options for cross-border payments.

Global Payments Continue to Rise

Worldwide, the estimated number of electronic transactions increased nearly 11 percent to more than 522 billion in 2017, according to the World Payments Report 2017.³ While healthy growth in e-commerce was a contributing factor, so was the shift from cash to electronic payments in brick-and-mortar stores. This shift is attributed in part to the broader adoption of card payments in emerging economies, as well as the spread of newer technologies such as mobile and contactless payments.⁴

Global growth in so-called “cashless payments” is likely to continue, experts say. By 2020, emerging economies are expected to grow at three times the rate of mature economies, with the adoption of digital payments helping to propel Asian economies to an annual growth rate of nearly 31 percent, according to the World Payments Report. But some experts say there is also room for growth in mature economies such as Germany and Italy, where the penetration of electronic payments is still relatively low.⁵

This global payments growth is one factor that has made payments companies, especially those specializing in the fastest-growing sectors such as mobile payments, attractive acquisition targets. The global payments industry is also highly profitable, systematically outperforming other financial services sectors; revenue has been growing at 7 percent and profit at 30 percent annually in recent years, according to a McKinsey & Company report.⁶ Furthermore, payment companies’ high cash flow and relatively asset-light businesses have made them attractive to private equity groups, which have been particularly active buying units that were previously owned by banks, according to the Financial Times.⁷

At the same time, the industry has seen consolidation among existing payments processors, which are seeking economies of scale through global expansion, according to the McKinsey report.⁸ There have been several major cross-border M&A deals among payment processors in the last year. Some experts expect that consolidation to continue, driven by trends such as the growth of cross-border payments and global e-commerce.^9,10

Deals to Build Omni-channel Global Payment Providers

Payment providers are also using acquisitions to build omni-channel global payment capabilities, increasing their ability to support businesses that sell both online and in stores. Two recent transactions involved companies whose products let small businesses use smartphones and tablets as point-of-sale devices. In one deal, a large U.S. fintech online payments firm acquired a European provider of mobile point-of-sale technology, thus increasing its international presence as well as gaining the ability to support brick-and-mortar purchases.¹¹ In the other deal, a leading U.S. supplier of mobile point-of-sale technology acquired a firm offering website development tools, with the aim of creating a cohesive solution for entrepreneurs looking to build online and offline businesses.¹²

‘Serial M&A’ for Broader E-commerce Suites

Some fintechs are undergoing what McKinsey described as “serial M&A” to build broader solutions for SMEs and other customers. One large company’s acquisitions included a leading peer-to-peer mobile payments company, a merchant payment processing firm, an international money-transfer company, a company providing AI-driven personalized marketing, and a financial-services firm specializing in small-business lending.^13,14

Established Financial Firms Dive In

Established financial institutions and global payment providers have also targeted smaller payments providers and other fintechs as they seek to expand and upgrade their services, and in some cases also to increase their international presence.¹⁵ One major French payment technology firm acquired a New Zealand-based payment service provider, thus continuing its expansion into the Asia-Pacific region, and it also purchased a technology provider that enables SMEs to accept online payments.¹⁶

Open Banking May Drive More Payments M&A

Experts say that “open banking” regulations designed to open financial-services markets to more competition may also catalyze further acquisitions in the global payments industry.^17,18 Among them are the EU Payment Services Directive 2 (PSD2), which requires banks to open up consumer account data (with the account owner’s consent) to third-party providers of payment-processing and information services. Other countries, including the U.K., are also implementing open banking initiatives.