How is consolidation transforming the payments industry?
- Tech advancements and e-commerce growth are transforming the payments industry
- There have been significant M&A deals in this area in recent years
- We expect this trend will continue and create exciting opportunities on the public market in the near term
What long-term trend are we observing?
The payments sector has experienced a significant amount of consolidation in recent years, with pure payment firms such as WorldPay and Visa establishing themselves as larger players in the industry through mergers and acquisitions (M&A).
In 2018, total investments through private equity, venture capital and M&As rose considerably, largely driven by deals in the payments sector. In Europe, H1 2018 saw a notable transactions by US credit card processing firm Vantiv’s $10.4 billion merger with UK-based WorldPay1, which was finalised in January 2018.2 PayPal completed its $2.2 billion acquisition of Swedish digital payments firm iZettle in September 20183, while 2019 has so far seen the merger between Nets and Concardis4 for a reported $6 billion.5
Meanwhile, the announcement of three mega-deals in 2019 is anticipated to catapult aggregate fintech deals in the US to new heights. The US payments deal bonanza in 2019 was kick-started by fintech provider Fiserv, which agreed to acquire payment processor First Data for $22 billion in January.6 In March, Fidelity National Information Services agreed to buy WorldPay for $35 billion, marking the biggest payments deal to date.7 The third mega-merger came from Global Payments, whose deal with Total System Services in May has been valued at $21.5 billion.8
What does this mean for investors?
The global payments industry is set to reach $3 trillion in revenue by 2023 as a result of rapid consolidation9, as more firms look to increasingly invest in technology in order to keep pace with the transition towards digitalisation.
Source: Global payments 2018: A dynamic industry continues to break ground, McKinsey & Company, October 2018
This figure is expected to accelerate, driven largely by ongoing market innovation to support key trends around e-commerce growth and increasing omni-channel and cross-border activity. The shift away from cash is likely to serve as the biggest driver of the global electronification of payments: in the UK, contactless transactions rose by almost a third in 2018 to £69 billion.10 Within Asia, the share of digital payments in China rose from 4% in 2012 to 34% in 201711, illustrating the huge potential for market penetration. Despite its preference for cash, Japan has seen a high adoption for prepaid card solutions like SUICA.
Private equity houses and pure play payments firms have led M&A activity in the payments sector. Examples include Advent International and Bain Company, with both participating in the Nets/Concardis merger12, and Nordic Capital, which acquired Swedish online banking payments provider Trustly.13 Payments firms look to sustain their upward growth trajectory by increasing the volume of transactions through cross-border coverage and, in time, lowering the overall cost of maintaining their platforms, to become complete service providers.
The US has seen increased interest in business-to-business deals, including Mastercard’s acquisition of Transfast14 and JPMorgan’s acquisition of medical payments tech firm InstaMed.15 Meanwhile, Latin America is home to a new fintech unicorn, Prisma Medios de Pago, which achieved its status following the buyout of a 51% stake in the firm by Advent International.16 Moreover, in October 2018, Visa invested in Brazil-based Conductor to develop solutions for tokenising payments through mobile wallets.17
The rapid rise in contactless adoption worldwide has taken the payments services sector to new heights, complementing a range of industries from retail to insurance. The shifting digital landscape has meant that it is necessary that such companies continue to substantially invest in technology in order to remain relevant and retain their market share. Mega-deals are starting to put some banks under pressure, with strategic moves such as distribution partnerships needed for them to reach their target markets.
We expect a sustained level of payments consolidation, which will undoubtedly see a divergence between the winners and losers in catering to consumers in today’s digital age. The three mega-deals in the US illustrate the fast pace of digital disruption and further strengthen the industry’s value proposition.
1 Arjun Kharpal, ‘Vantiv seals $10.4 billion merger with Worldpay’, CNBC, 9 August 2017
2 ‘Vantiv and Worldpay complete combination to form Worldpay, Inc.’, PR Newswire, Worldpay, 16 January 2018
3 ‘PayPal completes acquisition of iZettle’, Business Wire, 20 September 2018
4 ‘Nets A/S and Concardis Payment Group complete merger’, Nets A/S, 7 January 2019
5 Arno Schuetze, ‘Scandinavian payments group Nets to merge with German peer Concardis’, 4 June 2018, Reuters
6 Siddharth Cavale, David French, ‘Fiserv to buy First Data for $22 billion to boost payments business’, Reuters, 16 January 2019
7 Justin George Varghese, Rachel Armstrong, Pamela Barbaglia, ‘U.S. firm FIS buys Worldpay for $35 billion in payments deal bonanza’, Reuters, 18 March 2019
8 Jennifer Surane, Nabila Ahmed, ‘Global Payments agrees to buy Total System Services’, Bloomberg, 28 May 2019
9 ‘Global payments 2018: A dynamic industry continues to break new ground’, McKinsey & Company, page 3, October 2018
10 ‘UK embraces contactless payments’, Finextra, 15 March 2019
11 ‘Global payments 2018: A dynamic industry continues to break ground’, McKinsey & Company, page 5, October 2018
12 ‘Nets and Concardis Payment Group form leading European payments player’, Advent International, 4 June 2018
13 ‘Nordic Capital buys Swedish online banking payments firm Trustly’, Reuters, 14 March 2018
14 ‘Mastercard further extends payment network with acquisition of Transfast’, Mastercard, 9 July 2019
15 Hugh Son, ‘JP Morgan buys health-care payments firm InstaMed in the bank’s biggest acquisition since the financial crisis’, CNBC, 17 May 2019
16 ‘Advent International to acquire 51% of Prisma Medios de Pago, Argentina’s leading payments company’, PR Newswire, Advent International, 22 January 2019
17 ‘Visa makes strategic investment in Conductor to accelerate adoption of digital payments in Brazil’, Business Wire, Visa, 23 October 2018
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