Dive Brief:

• Of the 20 largest fintech deals worldwide since the beginning of 2020, eight have involved a payments industry player, either as buyer or target, according to an S & P Global Market Intelligence report issued this week. Those big transactions add up to about $23.4 billion in payments deal-making for the past nearly 18 months but there was also a bevy of smaller payments deals.
• The payments acquisitions included the $8.52 billion combination of the two major French payments companies Worldline and Ingenico Group early last year; Plano, Texas-based government contractor Tyler Technologies’s $2.33 billion acquisition of payments software and services company NIC this year; Social Finance’s $1.2 billion purchase of Galileo Financial Technologies last year; and Italian payment behemoth Nexi’s purchase of rival SIA in a $5.34 billion transaction last year.
• The research organization predicts there is more merger and acquisition activity on the way as financial institutions “prepare themselves for a world in which a greater share of major transactions could shift to digital," S & P Global's principal analyst on payments, Jordan McKee, said in the report.

Dive Insight:

The deal-making frenzy in the payments arena comes as venture capitalists are pouring money into young companies seeking to disintermediate the traditional banking and payments systems. That's fueling innovation and competition in the industry.

It was happening even before the outbreak of the COVID-19 pandemic last year, but the lockdown restrictions that followed the deadly virus outbreak led to a rise in online shopping and e-commerce that accelerated digital payments trends.

"My hunch is that the M and A activity is going to continue at an elevated pace fo the foreseeable future," McKee said in an interview with PaymentsDive. That will be driven by younger companies that can't go public giving their investors an exit through a sale instead, he said. It's also likely to result from annual e-commerce growth of about 20% and secular payment trends shifting from cash to cards and digital payments, he said.

Consolidation revved up “with a flurry of sizable deals” between March and June, according to the S & P Global Market Intelligence report published Monday. They included Shoreview, Minnesota paper check company Deluxe paying $960 million for global payment tech firm First American Payment Systems; Global Payments acquiring real estate payments specialist Zego for $925 million, and Greek bank Piraeus Financial Holdings selling its merchant acquirer business to payments company Leawood, Kansas-based Euronet Worldwide Inc. for $358 million. 

The Deluxe deal is emblematic of the change happening with an old line issuer of paper checks snapped up by a company that offers mobile, online and in-store payment processing services. Check-writing in the U.S. may still be popular, accounting for about a quarter of the value of payments passed, but it is on the decline, with that percent having been cut in about half over the past decade, the S&P Global report noted.

“There are signs elsewhere of other financial institutions strategically buying up payments companies to prepare themselves for a world in which a greater share of major transactions could shift to digital,” McKee said in the report.

The trend isn’t confined to the financial services sector. It’s also reaching into other industries, including healthcare and real estate, that understand the shifting landscape that is arriving with the digitization of payments. Bank of America’s April acquisition of healthcare payment technology company Axia Technologies and Global Payments absorbing Zego’s online rent payment system underscore the trend’s tentacles reaching into a spectrum of industries.

“Real estate and healthcare are two areas where check payments have traditionally dominated, but it looks as though Bank of America and Global Payments are positioning themselves for a potential shift to digital in these particular verticals,” McKee said in the report. 

Merger and acquisition research firm Preqin has also documented the trend. There were fewer than 40 deals in the sector from 2010 through 2015, and then the count climbed fairly steadily to a decade high of 64 in 2019 before leaping to 107 deals last year, according to annual data from Preqin. The value of the sector’s deals peaked in 2019 at a record $25.9 billion thanks to three mega deals, including the FIS-Worldpay, Fiserv-First-Data and Global Payments-Total System Services mergers, but remained high last year at $18 billion, the second-highest annual value.

The surge in consolidation is likely to continue because payments companies especially benefit from scale, according to London financial services regulatory lawyer Cyrus Pocha, who was cited in the S&P Global report. 

"Their core revenue comes from taking a very small fee for each transaction they process and once you have your technology and infrastructure in place there is very little additional cost to the business in processing more transactions,” said Pocha, who is co-head of the law firm Freshfields Bruckhaus Deringer’s global fintech group. “Scaling up still makes a lot of sense and M&A has been shown to be and, in my view, remains the best way of achieving this.”

Big tech firms are particularly eager to expand in the payments sector to capitalize on their big customer counts and to generate new data streams, he said. Specialist firms could be particularly attractive as targets, he added.

Consolidation could take the form of payment service providers combining to bulk up either geographically or in certain sectors, or it could also result from acquirers seeking to add certain services related to specialties, such as buy-now-pay-later or know-your-customer capabilities, said Radboud Vlaar, a managing partner at venture capital firm Finch Capital who was also cited in the S&P report.

Despite the consolidation, the payments industry remains inherently fragmented, McKee said. A slew of new payment fintechs have arrived on the scene in recent years and the space is intensely competitive, he noted. "There are many new entrants that are looking to stake claim to many areas in the payments industry," he said in the interview.

Some of those newer players, fueled by venture capital, are starting to make acquisitions a part of their game plans, McKee said. For instance, Stripe purchased card authentification company Bouncer and tax software tools company TaxJar in recent months while Checkout.com bought the Estonian software developer Icefire this month, he noted.

"As more venture capital flows to fintech companies, part of their strategy will be M & A, as they look to expand their position in the market,” McKee said in the interview.

In addition to the new arrivals, there are local nuances to the payments market that will perpetuate its fragmentation as some local players are likely to continue to hold their own in separate regional markets, McKee said in the interview.