Join or die. That appears to be the motto of the payments services industry, which is integrating vertically, horizontally, geographically — and quickly. The latest merger came last week, when Worldline agreed to buy Ingenico for $7.8bn, forming the largest European payments company in a sector dominated by US-based giants.
Like previous tie-ups, this one joined companies with strengths in different parts of the payments value-chain. Worldline is strongest in payments software for merchants, while Ingenico — long mooted as a takeover target — specialises in merchant hardware and online transactions.
The tie-up follows a blizzard of payments mergers in just the past few years, including FIS’s $43bn acquisition of Worldpay; Fiserv’s $39bn purchase of First Data; Global Payments’ $21.5bn deal for TSYS; and a series of smaller transactions. All of these companies help merchants accept in-store or online payments and route them though credit card networks or allow banks to accept payments from those networks — or, after consolidation, both.
“Imitation is the sincerest form of flattery,” said Jeff Sloan, Global Payments chief executive, in an interview. He said that the Worldline deal “validates our strategy” of seeking greater scale to enable more investment in technology.
A number of factors make the logic of consolidation compelling in the payments industry, once a sleepy backwater of finance that has emerged in the past few years as one of its most exciting sources of growth. Like many finance businesses, fixed costs — namely the required technology investments — are high, while the marginal costs of processing more transactions are negligible. Companies processing lots of payments therefore enjoy higher margins, and can reinvest the profits in better technology to extend their advantage over smaller rivals.
“You need to do [deals] because the amount of investment needed to keep up is going to make you unprofitable otherwise,” said an investment banker who has worked on several European payments deals. “If you don’t invest you’ll be out of the market very soon.”
Darrin Peller, payments analyst at Wolfe Research, said companies have also come under pressure to better reach smaller merchants in different industries and markets, as providing services to the largest retailers has become increasingly commoditised.
“Value-add services and software matter for small business,” he said. “These mergers enable companies that had one offering to offer three or four to a small business, and small businesses pay more per transaction.”
The greatest driving factor in a wave of transactions that has driven three consecutive years of record dealmaking in the sector may be the sheer amount of money at stake. Companies that establish oligopolistic positions at the heart of payments networks are nearly impossible to dislodge. They benefit from a global trend of consumers moving away from cash to electronic payments, driven by the ubiquity of smartphones and the rise of online shopping.
The Visa/Mastercard card network duopoly is the ultimate example of this. Both companies have grown their revenues at double-digit annual rates over the past decade and their shares, some of the hottest on Wall Street, enjoy very high valuations. Both networks’ shares trade at price/earnings ratios over 30, three times the rating of JPMorgan, the best-performing bank.
FIS, Fiserv and Worldpay have price/earnings ratios in the 20s, but aim higher. Mr Sloan said when his company bought TSYS that the deal made it “a kind of mini-Visa or Mastercard.”
All of this means that there are undoubtedly more deals to come, particularly in Europe, where the industry remains fragmented.
Italy’s Nexi, which was originally set up by a consortium of Italian banks before being sold to private equity groups Advent and Bain, listed its shares last year and has already purchased another payments business from Intesa Sanpaolo. It has been linked with Italian peer Sia, and also shares its major investors with Nets, which is active across the Nordic region and Germany.
Other European groups, including Adyen, the Dutch newcomer, could also have a role to play in consolidation, according to industry insiders.
Nor is US consolidation finished. Mr Sloan of Global Payments said that “now the integration [of TSYS] is in good shape, we have a full pipeline of deals we’re looking at — as we approach the spring and summer I’d expect to see more activity.”
It is hard to see what will stop the industry from consolidating into a small group of powerful players. A widespread economic downturn would hit the pace of growth, but executives are confident that processing volumes would continue to rise thanks to the structural shift away from cash payments.
Specialists are also facing renewed competition from banks — which used to dominate the sector — with lenders such as Royal Bank of Scotland, Santander and Bank of America all investing in the space.
Mr Sloan said banks could benefit “in certain markets” that complement their existing corporate banking services, but said competing with international specialists such as Global Payments was “a much higher bar”.
A bigger fear, familiar across other parts of the financial sector, would be encroachment by major tech platforms. Tencent, Ant Financial and Alibaba have already transformed payments in China, while US groups like Google and Amazon have been increasingly moving into financial services.
So far the Chinese groups’ initiatives in Europe and the US have been limited to providing services for Chinese tourists. Meanwhile executives have hoped that western tech giants will be put off by the heavy regulation that comes with running payments networks.
Nonetheless, some believe that the real threat for these companies is the likes of Amazon, Google and Apple.
“Payments companies just intermediate between Visa and Mastercard — who own the systems — and the final consumer,” said the European investment banker. “If tomorrow morning Apple decides to say, ‘I don’t have to go through these payment companies any more’, this is what would really hurt these guys.”
Additional reporting by Leila Abboud in Paris