The month of July is usually associated with the beginning of the slow news (or "silly") season, when little of importance happens, and the news media occupies itself (and readers) with frivolous stories. Not so this July, which has seen a steady stream of large M&A announcements in the payments space, alongside a great deal of rumor and industry speculation about a number of other players across Europe.
The largest deal was the announced acquisition of Worldpay by Vantiv for £9.1bn (around $10bn), which brings together one of the largest merchant acquirers in the US with the biggest in Europe. The attraction for Vantiv is multifold; in addition to Worldpay's scale, very complementary customer base, and geographic footprint, it has successfully built on its original foundations as the former merchant acquiring arm of the RBS Group to have a strong omnichannel offering. In addition, it has recently invested heavily in its acquiring platform and transaction data insight offering for merchants.
Ingenico has also been on the acquisition trail, buying Bambora from its private equity owners for €1.5bn ($1.75bn). At the time of the acquisition, Sweden-based Bambora had 110,000 merchant relationships, many of which are small to medium-sized enterprises. Key for Ingenico will be the capabilities in delivering effective e-commerce checkout and payment gateway solutions to this customer segment that Bambora brings.
Worldline, too, has been busy and announced an agreement to acquire Digital River World Payments (DRWP), a subsidiary of the Digital River company. Also headquartered in Sweden, DRWP offers a payment gateway, full-service acquiring, and remittance services. Terms were not disclosed, but DRWP generated €37m ($43m) of revenue in 2016.
This flurry of activity looks set to be the beginning of a period of consolidation on the acquiring and payment gateway side of the market, something that is driven by a number of short- and long-term factors. In the short-term side of the ledger, too many large acquirers and processors are comparatively weak when it comes to providing more stripped-down gateway and commerce services to small and midsize merchants. As digital commerce expands across all sectors, and price competition for tier 1–3 merchants has become fierce, the SME segment is now too large not to have a strong capability to serve it. Buying firms with these capabilities is a tried-and-trusted method of course, and it's notable that this is a feature of each of the major acquisitions announced this month.
In Europe, the impact of PSD2 will undoubtedly lead to the decline in importance of payment card transactions, as they are (over time) substituted for those running across immediate payment rails. While the precise revenue implications are not yet clear, top-line revenues for acquirers will fall, which will increase the need to operate at scale. Indeed, while payments have always been a volume game, the pressure on small and midsize acquirers and processors will ratchet upwards.
Looking long-term, it is clear that digital transactions will continue to grow at a pace. Despite the rapid increase in penetration of payment cards in particular over the past 15 years, there remains a huge amount of cash and other paper forms to squeeze out of the system. At the same time, as commerce becomes ever more digital, it is clear that digital payments as an industry will continue to enjoy strong growth for many years yet.
Perhaps the biggest change though, and the factor driving the current push for consolidation, is the need to differentiate. As payment acceptance services become commoditized, providers must expand their ability to provide added-value services around the payment in order to remain relevant (and operate at a reasonable margin). Expanding across more areas of the transaction value chain, and particularly through the use of analytics around transaction data to drive higher customer engagement, conversions, and operational benefits, is already an important competitive battleground.
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