Consolidation in the payments market - Which PSPs will come out on top?

John Meehan is a founding member of Arma Partners. He has seven years of experience working in the investment banking divisions of Goldman Sachs, Lehman Brothers and BZW in London, New York and Paris with a particular focus on the technology sector. With Arma John focuses in particular on the Financial Technology sector and heads the firm’s activities in this area.

We invited John to a discussion about the current surge in M&A deals in the payments industry. We also looked at which payment companies will come out on top during this consolidation phase and how to leverage M&As for a better strategic position. 

What has been driving the surge of M&A deals in the payments space during the last few years?

We see five key trends that have been driving a lot of the recent consolidation in the market.

The first one would be geographic expansion, and it includes companies that are looking to establish a global presence and move out of their domestic market. Good examples in this sense would be Vantiv’s acquisition of WorldPay, Fintrax Group’s acquisition of Planet Payment, or Ant Financial’s proposed acquisition of MoneyGram – the latter of which ultimately didn’t happen. 

The second key trend - which is linked to the first - would be scale. In terms of volumes being processed, scale is critical to success. The ability of PSPs to leverage their fixed-cost platforms and increase volumes is particularly important for the acquiring segment of the payments market, where we see a very high level of pressure being put on pricing. The commoditisation of the acquiring market is therefore driving deal activity. 

Diversification is another important driver, as some PSPs are looking to move into adjacent areas or markets.  Ingenico, for example, has pursued this strategy aggressively, as it moved from being a hardware POS terminal provider to being more of a comprehensive payments provider. Ingenico achieved this through various acquisitions, which helped it to diversify its services. 

Innovation also leads to consolidation, as large payments companies around the market have not been able to innovate fast enough to keep up with market dynamics. As a solution, they use M&A as a means to gain access to new technology and new platforms. For example, payments are becoming an increasingly part of the merchant business strategy as consumers demand a seamless multi-channel purchasing experience. The acquisition of iZettle by PayPal is an example of a provider looking to offer a complete omni-channel experience to customers.

The last key driver that we’ve identified is verticalisation, in the sense that payment providers move towards more vertical solutions (such as education, healthcare, online marketplaces) and some are making acquisitions to gain expertise in specific segments.  

What types of PSPs do you see prospering and what types you see falling behind?

Certain parts of the market are starting to mature, and this is particularly true if you look at the payments gateway sector, which a few years ago was very buoyant. Now, this same sector has become, to a certain extent, a mature market - mainly because many companies already have a payment gateway and differentiating yourself from this point of view is very difficult. 

Thus, many players are looking for other value-added services, an area that we expect to prosper significantly, particularly when it comes to areas like data, analytics, and fraud solutions. 

Another sector with excellent growth potential is omnichannel offerings. Today, consumers look for a very similar experience, regardless of the type of environment where the transaction takes place (be it online, offline, card present, card not present etc). This means that payments service providers must have an omnichannel strategy in place, and that they must be able to accept all different forms of payments. And, seeing how the number of payment methods is increasing, there is a lot of opportunity in this area. 

As mentioned, payment processors are seeing increasing pricing pressure and are responding to this by acquiring increased scale and value-added services. 

What is your take on PSD2? Will it make room for other parties to challenge the role of incumbent PSPs?

We believe PSD2 is a significant development in the market and demonstrates that Europe is at the forefront of some of the changes that are happening in the payments market. We also feel that other geographies, particularly North America, are looking at PSD2 and will try to come up with something similar in the future. 

We also think of PSD2 as one of the main factors shaping the change in the landscape, particularly when it comes to banking and payments. Under PSD2, banks risk becoming just the plumbing, while other parties such as the internet giants or nimble start-ups provide the front-end. 

A good example of what could happen is the dynamics in the telecoms world a few years ago, when similar changes occurred – telcos have been commoditised, becoming the underlying plumbing infrastructure, a change which mostly benefited the internet giants. 

Due to PSD2, we could expect history to repeat itself on the banking and payments side, as new companies emerge to be the consumer-facing front-end and just link to the banks and payments providers at the back-end. This is why you see banks struggling to keep pace, making a number of investments in this area and trying to be as innovative as they can be through partnerships and internal developments. 

Do you expect to see PSPs expand into consumer markets (e.g. by offering wallets/credit options)?

That potentially could happen. We may also see these payments providers/banks look to cut out the card schemes (e.g. VISA, Mastercard) and have that direct relationship with the consumer, but in order to do that you must have significant scale and your brand has to be very trusted. 

It seems like the GAFA (Google Apple Facebook and Amazon) are also eyeing the payment market. Are these big tech companies posing a threat to PSPs?

I think everybody is looking at these companies at the moment, trying to figure out to what extent they want to advance into the payment market, particularly as Ant Financial and Tencent have been at the forefront of payments in Asia. Google has made some steps in this direction with Google Wallet, which is mostly focused on epayments. However, traction outside of North America has been low. 

The same thing can also be said about Apple Pay, which – although it has enjoyed some adoption – has not had as much success as expected.  

When it comes to GAFA, the one concern people have is around data: how these companies collect it and what they do with it. If we were having this same discussion a year ago, we would have expected to see the big tech companies at the forefront of payments. However, due to recent events, now they will be a little more cautious. If you move into payments you move into a highly regulated environment, which is probably something that they do not want at the moment. 

I can see them being present on the consumer front, and I can see how they can benefit from PSD2, but I don’t think that they would like to risk getting into the back-end of payments, where PSPs are very dominant today. 

So far, it seems like most of the battles have been fought over markets in Europe and US. What are the next markets in which we will see a similar consolidation of the payments landscape?

I think Asia is a big talking point at the moment, particularly as you’ve seen the rapid emergence of Alipay and WeChat Pay, which have transformed the payments markets in Asia/China in a short time-frame. These companies pursue both M&A and investments in order to grow their product capabilities and geographic reach, particularly in the emerging markets but also in Europe. 

India is also a very interesting market. I think it is still quite unsophisticated and it is still dominated by cash, but as we see that movement from cash to digital and cards, we anticipate that it will create real opportunities for companies and will ultimately result in consolidation. 

About Arma Partners:

We work with a wide range of clients including young, cutting-edge start-ups, established market leaders, Venture Capital and Private Equity houses and large global publicly-listed corporate and government entities. We advise our clients on public and private mergers, acquisitions, divestments and recapitalisations. Our pan-European team is based in London and Munich and our North American team is located in Palo Alto and New York.