Intensifying M&A in the Payments World

In its efforts to keep pace with the value creation needed to meet rising customer expectations, the payments industry is facing more disruptions than ever before. As new business models pose competitive threats, it becomes imperative for every player in this ecosystem to plan for transformation in order to survive and retain their positions in the payments value chain. Powered by the digital revolution enabling a plethora of cashless payment methods, large fintechs and technology giants are moving in to grab a piece of the payments pie.

A wave of consolidation in the form of mergers and acquisitions, many of which are cross-border, is creating large payments players with huge market caps. Significant megadeals in recent times are Fiserv’s $22 billion deal to buy First Data in January 2019, Fidelity National Information Services’ whopping $35 billion acquisition of Worldpay in March 2019, and the $21.5 billion TSYS-Global Payments merger in September 2019.

Global networks Visa and Mastercard have been equally busy. In its largest acquisition ever, Mastercard has recently agreed to purchase a billing and instant payments platform owned by Denmark’s Nets for $3.19 billion. Prior to this, Visa had bought U.K.-based Earthport, a cross-border payments provider, for a reported $257 million. The strategy behind both these deals is to move beyond cards to enable a global banked population to send and receive money through fast and secure account-to-account payments.

Other than building scale and entering new geographies, the key drivers behind this frenetic M&A activity have been (a) the acquiring of new technology to create differentiated products that monetize data, and (b) competing with fintech start-ups that focus on customer and merchant expectations.

Bearing the brunt of this changing milieu are the Banks, most of which are lagging behind with legacy infrastructure and outdated batch processes. To cut costs in the wake of digitization of banking services, RBS, Barclays, HSBC, Lloyds, and others have together shut down two-thirds of UK’s bank branches over the last thirty years, losing some of their business in less populated areas to post offices. According to a September 2019 Aite Group report, “Payments Transformation Race: Criteria for Success” that has surveyed 22 top banks around the world, the primary driver of digital transformation is real-time or instant payments with speed being a vital goal of any transformation effort. As the focus shifts to data-driven, value-added services, banks that are not taking the transformation exercise seriously stand to lose customers and endure falling transaction volumes and declining profitability.

Although a fourth of the top-tier banks are seeking vendor partners to help them on their transformation journeys, many are choosing the M&A way. In June 2019, leading U.S. banks BB&T and SunTrust announced a $66 billion merger to create Truist Financial Corp, the sixth-largest bank in the U.S. that will invest in acquiring talent to drive innovation. According to S&P Global Market Intelligence, as of end-August, 176 U.S. bank deals worth $45.25 billion had been announced, compared to 186 deals valued at $23.77 billion over the same period in 2018. Back in India, the Govt. has recently announced mergers of 10 public sector banks into 4 larger, stronger entities that can support the country’s planned $5 trillion growth by 2024.

Regulations such as PSD2 in Europe that have ushered in a new era of APIs and Open Banking could also increase the likelihood of M&As. PSD2 requires FIs to give third parties access to their customers’ personal data (with customer consent) to enable them to create differentiated offerings such as a consolidated portfolio across various banks in a single screen. A new breed of fintech players is thus likely to join the payments bandwagon to provide these services and help FIs comply with these regulations.

Analysts around the world are forecasting continuing global M&A activity in the financial sector, as more and more entities realize the need to consolidate and reinvent to stay current in a rapidly evolving payments space.

Referred sources for this article:
Aite Group report, “Payments Transformation Race: Criteria for Success”, September 2019

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