Dive Brief:

• The fintech industry is set to go through “a wave of consolidation” for the remainder of 2021 and 2022, according to a July 21 report that analyzed fintech deals, including those in the payments industry, between January 2020 and March 31, 2021.The report was published jointly by the research firm S&P Global Market Intelligence, the law firm Shearman & Sterling and British banking company Barclays.

• Despite a global healthcare crisis and economic hurdles in 2020, major acquisitions in the payments industry materialized, like Worldline’s $8.6 billion acquisition of Ingenico, American Express’ acquisition of FinTech lender Kabbage for an undisclosed amount and Intuit’s $7 billion acquisition of Credit Karma. 

• “The payments sector is one of the brightest parts of the larger fintech ecosystem,” Mark Chorazak, a Shearman & Sterling partner in the global Financial Institutions Advisory & Financial Regulatory practice said in an email. “Digital commerce and electronic payments, including digital wallet adoption, are almost certain to have an upward trajectory in the next several years.”

Dive Insight:

The pandemic ushered in an era of mass digital adoption as consumers looked to fight off the chances of contracting the virus. Digital payments volume and “the number of digital accounts increased significantly in 2020 as online commerce represented a larger share of overall commercial activity,” the report said.

This year, Bill.com, an expense management software company, acquired the company now known as DivvyPay Inc. for $2.5 billion while Tyler Technologies Inc. acquired government payments company NIC Inc. for $2.3 billion, the report said.  

Major payments companies like PayPal and Square are adding new features to their offerings "as a growth strategy, breaking away from their traditional role as peer-to-peer or contactless payment providers into broader financial ecosystems,” the report stated.

PayPal launched crypto trending and transferring services along with deferred payments and QR code based payments as a contactless option. The San Jose, California-based based company also launched its hardware point-of-sale iZettle in the U.S. this past month.

As payments and banking get more digital, tech companies might have an edge over incumbent financial institutions that are still using legacy systems, CB Insights Analyst Elif Yayla said in an email last month. 

Financial institutions are taking a mixed approach to digitizing their legacy systems. Some regional banks are looking to buy fintechs while others seek partnerships with younger fintech startups to digitize their products and build fees income. 

Major financial institutions “are approaching payments in numerous ways, from acquisitions of certain payments platforms to partnerships to greater investment in their own payments infrastructure,” Chorazak said.

“The pandemic has demonstrated the importance and unique role of technology in responding effectively to new challenges,” the report cited U.S. Federal Reserve Governor Michelle Bowman as saying. “In the financial sector, I believe we may be seeing a quantum leap in the use of digital deposit, digital payments and online lending.” 

Regulatory scrutiny

As the fintech industry matures, regulators are keeping a close eye on the industry. Regulators will watch “M&A in the FinTech sector, particularly when it involves incumbent players with large market shares and nascent competitors with the ability to innovate and disrupt a market,” the report said.

The U.S. Department of Justice’s antitrust investigation into Visa acquisition of Plaid led to the companies abandoning the merger. 

“The payments and banking industries can expect increased antitrust scrutiny, particularly in light of the Biden Administration’s executive order calling for dozens of interagency actions to scrutinize consolidation activity,” Chorazak said. “Consumer protection issues, including rules governing financial data access rights for consumers of fintechs and banks, will be in focus as well. “

Non-financial firms like Walmart are also looking to penetrate the fintech space and have been active in the payments sector as well. Last month, Walmart announced its partnership with bill payment fintech PayNearMe to enable its customers to pay their bills in cash at its stores starting this August.