M&A Trends Relating To Consolidation in Merchant Payments

The merchant payments industry has been undergoing significant consolidation in recent years through mergers and acquisitions (M&A). There are several M&A trends driving this consolidation which we will discuss in this article

M&A trends

First, the rise of fintech companies and innovation in payments has introduced new competitors to established players. Established payment networks and processors are acquiring leading fintech and startups to gain access to new technologies, innovative products, and talent. For example, Visa’s acquisition of Plaid and PayPal’s acquisition of Happy Returns aimed to boost their capabilities in open banking and digital payments.

Second, the growth of e-commerce and mobile payments is creating opportunities for scale. As more merchants move online and consumers shift to mobile wallets and buy-now-pay-later options, companies that can aggregate more merchants and payment formats at a lower cost are poised for success. Mergers that combine complementary client bases, processing platforms, and alternative payment methods stand to benefit.

Third, regulatory changes like the Durbin Amendment have placed cost pressures on payment companies. By reducing costs through consolidation and avoiding duplicate infrastructure, payment companies can maintain profit margins in an increasingly tight regulatory environment. Major mergers of equals, like the proposed FIS-Worldpay combination, aim to generate substantial cost savings through integration.

While consolidation brings both benefits and risks, it is clear that the payments landscape will continue to evolve rapidly through M&A. The combinations of today could shape the dominant players of tomorrow, influencing how payments work for both merchants and consumers worldwide. By monitoring consolidation trends, payment companies can make strategic decisions about their own growth path in this dynamic industry.

Influence of fintech innovation

The rise of fintech companies and new innovations in payment technology has introduced disruptive competitors to established payment networks and processors. These incumbents are actively acquiring promising fintech startups and innovative payment companies to gain access to cutting-edge technologies, innovative product capabilities, and talent.

For example, Visa’s acquisition of Plaid aimed to strengthen its position in open banking and API connectivity. By purchasing Plaid’s financial data aggregation and transaction tracking tools, Visa gained key capabilities to enhance its developer platforms and better compete with fintech challengers. Similarly, PayPal’s acquisition of Happy Returns was designed to boost its in-store mobile payments offerings and rivalry with tech giants expanding into financial services.

While the integration of fintech acquisitions brings benefits such as faster innovation, entry into new market segments, and improved user experiences, it also introduces risks. Valuing fintech startups often means high purchase prices and potentially overpaying for unproven concepts. There is also a possibility of losing key talent or facing struggles to align different company cultures and strategies. If not managed carefully, fintech M&A could divert resources from core business priorities or lead to failures in execution.

Payment networks and processors must pursue fintech partnerships and buyouts judiciously to achieve the upside potential of new ideas, design thinking, and on-demand engineering talent without stumbling into the downside perils of sovereign fintech entities. With the fintech revolution accelerating changes in the payments space, M&A will likely remain an important tool for incumbent players looking to sustain their competitive advantage. But selection and integration should be guided by a disciplined, balanced approach. By doing so, payments companies can successfully ride the fintech wave rather than be overwhelmed by it.

Growth of e-commerce and mobile payments enabling scale

The growth of e-commerce transactions, mobile payments, and alternative payment methods is creating substantial opportunities for scale in the merchant payments industry. As more merchants move their business online, consumers shift to mobile wallets, and payment options proliferate, companies that can aggregate more merchants, process more payments, and offer a wider range of methods at a lower cost structure will gain a significant competitive advantage.

Mergers and acquisitions that combine complementary merchant bases, adjacent processing platforms, and alternative payment formats stand to benefit greatly from scale incentives. For example, a large payment processor acquiring a leading mobile payments startup could rapidly expand its presence in fast-growing digital payments at a lower customer acquisition cost. A merchant acquirer purchasing an e-commerce payment gateway would gain immediate access to that segment without having to build organizational and technical capabilities from scratch. By bringing together companies with under-leveraged assets and reaching into different parts of the payments ecosystem, payment companies can fuel scalable growth and improved profit margins at market-leading levels.

Of course, there are also risks to pursuing scale through M&A. Diversification into new business areas could distract management or strain limited resources. Complex mergers may prove difficult to integrate, resulting in cost overruns, loss of focus, and organizational chaos rather than synergies. Large, diversified companies often struggle with agility, creativity, and business model adaptation – very relevant concerns for an innovative industry like payments. There is no guarantee that simply combining entities will actually generate sustainable scale advantages or competitive differentiation.

Regulatory and cost pressures fueling major mergers

Regulatory changes and cost pressures are significantly impacting the merchant payments industry, driving substantial consolidation through mergers and acquisitions. Rules such as the Durbin Amendment have compressed profit margins by lowering interchange fees, a key revenue source for payment networks and processors. At the same time, demands for enhanced fraud protection, data security, compliance, and reporting capabilities continue to boost expenses.

To counterbalance financial headwinds and ensure prosperity, major payment companies are pursuing enormous mergers and acquisitions that can generate hundreds of millions in cost savings each year through integration and the elimination of duplicate functions or infrastructure. For example, the proposed FIS-Worldpay combination would combine two of the largest payment technology, services, and software providers globally, resulting in estimated annual synergies of $700 million. Examples among issuing processors, merchant acquirers, and card networks are also prevalent.

Regulatory/cost-motivated mergers, often referred to as “mergers of equals,” hold significant promise but also meaningful risks. On the promise front, companies can realize significant benefits including:

•Reduced real estate footprints, office space, and rental costs through consolidation of locations and headquarters.

•Lower headcounts by eliminating duplicate positions, especially in administrative and management ranks.

•Consolidated technology platforms, reducing costs of maintenance, upgrades, interfaces, and total infrastructure spend.

•Greater negotiating power with vendors, suppliers, landlords, and service providers.

•Improved utilization of assets like data centers, software licenses, and computing equipment.

However, risks and difficulties abound, including complicated integrations that delay benefits, management power struggles, cultural clashes hampering collaboration, reinvestment needs that limit realizable cost savings, concerns over decreased competition, and job losses that strain employer-employee relationships.

Balancing benefits and risks of consolidation

While consolidation continues gaining pace in the merchant payments industry through M&A, decision-makers must balance the potential benefits of deals against the meaningful risks. Scale, cost efficiency, access to innovation, and competitive advantage are among the meaningful benefits of consolidation, but so too are integration challenges, loss of focus, reduced competition, and attacks on culture.

Any proposed merger or acquisition promises synergies and progress but must be rigorously evaluated based on facts, not hopes, to determine if actual benefits warrant the costs and complexities that would result. It is easy to overestimate synergies, overlook risks, and underappreciate downsides when opportunities seem most compelling. But real-world outcomes often prove far more difficult than projections.

Payments companies must ask hard questions, including:

•What specifically are the projected synergies and cost savings, and what assumptions underlie them? Vague notions of “efficiencies” do not have an opportunity to make.

•Which costs, jobs, or initiatives would be impacted, and how? The numbers behind benefit projections must align with realistic assessments of what can be reduced or eliminated.

•How will culture, leadership and key talent be impacted or retained post-merger? Integration is challenging even when cultures and management styles closely align, and payments organizations often develop very strong, distinct cultures.

•What is the likelihood of successfully integrating within planned timelines and budgets? Technology changes, process reengineering, and organization restructuring take far more time, cost, and effort than proposed timelines suggest in most transactions.

•How might the increased scale and scope impact the combined company’s agility and responsiveness to market changes or customer needs? Greater size often means slower adaptability, even if greater resources are present.

•What are the competitive implications, and how will the combined company differentiate while keeping its most vital assets? Consolidation cannot simply replicate scale without a strategy.

•What exit or transition strategies exist if the merger ultimately proves flawed or misguided? A good deal is useless if integration cannot be achieved, yet unwinding a merger is far more complex and costly than negotiating or terminating an acquisition or partnership.

Conclusion

In summary, consolidation is drastically transforming the merchant payments industry through mergers and acquisitions. Trends including the rise of fintech innovation, growth of e-commerce and mobile payments, regulatory changes, and cost pressures are fueling sizable combinations of payment networks, processors, technology providers, merchant acquiring banks, and alternative payment companies.

While these trends bring opportunity, they also carry substantial complexity and risk. Integration challenges, loss of key talent, cultural clashes, cost overruns, market power concerns, and misallocation of management focus pose real dangers of distraction, excess, and reduced competitiveness. For payments companies, benefits of scale, efficiency, and strategic advantage must be rigorously weighed against these meaningful harms before any deal is pursued or completed.