Bolting on Technology While Chasing Scale

An Analysis of M&A Trends in the Payments Ecosystem

The global payments industry has seen a blockbuster 2017 with transaction volumes up 174% through the third quarter. While large deals drive most of the headlines and transaction volume, the number of deals have remained relatively flat over the last ten years.

This analysis seeks to understand which segments of the payments ecosystem are driving M&A activity, how it has evolved over time, and the strategic rationale for both public and private deals.  To do this, we broadened the SNL industry classification to include bank owned merchant acquirers, emerging payments technology, and software solutions providers. This tripled the number of companies active in the payments ecosystem. We then filtered the M&A transactions announced and closed from 2008 through Q3 2017 down to the 643 payment-related transactions.

To understand the strategic rationale driving M&A activity, we have broken down the industry into the following segments:

• Merchant Acquirer
• Payments Technology
• Banking Technology
• Bank Owned
• Card Network

Deal count and Volume

The payments industry has seen very consistent M&A transaction activity over the past ten years with increases in volume that are in line with the SNL U.S. Fin Tech Payments Index. Merchant acquirers provide a sizable portion of 2017 volume with payments technology companies seeing the highest volume it has seen to date after a slow 2016.

However, deal volume does not tell the full story.  Almost half of the deals in our analysis do not have their transaction value available, and about 80% of deals are under $100 million or do not have transaction values available. We will look to examine the transactions in detail for the most active segments (Merchant Acquirers and Payments Technology).

Merchant Acquirers

Merchant acquirers have been the most active by volume driven by the consolidation of 6 of the top 20 companies. Vantiv acquiring Worldpay, Global Payments acquiring Heartland, and TSYS acquiring TransFirst are some of the significant consolidation transactions. The significant volume increase in 2017 is due to three transactions. Two of them being consolidation with Vantiv acquiring Worldpay and First Data acquiring CardConnect. The other major transaction was Global Payments acquiring Active Network, an integrated payments strategy.

Deal count and Volume

Strategic Themes

Consolidation, integrated payments and eCommerce are the top acquisition themes among Merchant Acquirers, driving 97% of overall transaction volume. On average, consolidation-related deals are about twice the size of integrated payments and triple the size of ecommerce deals.

Integrated payments and eCommerce deals play a larger role in deal counts, and these deals often involve acquihires and new products aimed at customer acquisition and margin growth among existing customers. Integrated payments provide merchant acquirers with a sticky solution that offers 50% lower controllable attrition rates, according to digitaltransactions.net. eCommerce is a high growth area in payments and consensus predictions are for double digit growth until 2020 and most likely beyond.

Payments Technology

This sector has seen an increase in both deal counts and volume and is the only sector in our analysis where deal counts have been trending upward. Payments technology also contains the highest number of deals under $100 million. There is significant fragmentation in the sector and deal counts and volume should continue their upward trend as key players continue to defragment the ecosystem in eCommerce, integrated payments, and other technologies. Deal counts and deal volume follow a similar trend in payments technology.

Deal count and Volume

Strategic Themes

Consolidation by acquiring gateways and merging with other eCommerce providers is the largest theme in payments technology, but it is not the bulk of activity as observed in merchant acquiring. Companies in payments technology are looking at vertical integration to provide more services to merchants and consumers. Companies like PayPal and Square are providing services in merchant and consumer lending and this year Square applied for a bank charter.

Other Segments

The bank owned sector has shown decreasing activity in the past ten years compared to other sectors in the payments industry and have limited their acquisitions to smaller book or merchant buys as well as investments in consumer finance and mobile banking technology

The banking technology sector has seen a slowdown in deal count as its consolidation trend continues. Notable transactions have been Finastra Holdings acquiring DH corporation, Mercury UK Holdco. acquiring Setefi S.p.A and Intesa Sanpaolo Card D.O.O, and Finastra by way of DH Corporation acquiring Fundtech Limited.

The card networks comprise less than 5% of overall M&A activity in the industry. Notable deals in the sector include Mastercard acquiring VocaLink Holdings Limited, Mastercard acquiring Applied Predictive Technologies Incorporated, and Visa acquiring CyberSource Corporation.

2017 and Beyond

2017 could be a sign of things to come with even more consolidation in the payments space.  The economics of the industry will force further consolidation in fragmented geographies like Northern Europe, and companies will continue the trend of buying products or technologies that allow for customer acquisition or ancillary revenue to fight off the trend of price compression. As the year reaches its conclusion CDG will provide an update with year-end information and further insight into each of the segments of the payments industry.  For more information on the payments and fintech industry follow us on LinkedIn.