Global payments industry: Frantic M&A activity not slowing down

Couverture médiatique juin 2019

*disponible en anglais seulement

This article was originally published by The Lawyer’s Daily, part of LexisNexis Canada Inc.

A payments industry that was stagnant and stale for decades has recently entered a transformational and disruptive period of innovation, with seemingly boundless growth ahead.

Payments players have engaged in record-setting levels of global mergers and acquisitions (M&A) activity over the course of the past few years, but 2019 is poised to be yet another banner year for deal-making in the payments space. Rather than showing signs of plateau, this crescendo is set to continue beyond the immediate future.

The frenetic pace of M&A activity in the payments space recently has grown out of a confluence of factors. Private equity firms have entered the fray, accounting for many acquisitions of payments companies in recent times, in particular by making significant investments in fintech companies, which are often: valued at attractive multiples; generally asset-light; and able to generate significant free cash flow.

For example, global private equity firm Advent International has entered into over 30 payment company acquisitions in recent years. Also, consumer behaviour, attitudes and expectations have shifted, transforming the way they pay for products. Payments providers are pivoting in order to meet those demands and relying on M&A to do so. Technological capabilities, too, are improving at seemingly warp speed. Payments players have been capturing market share through inorganic growth by snapping up agile, innovative technology companies, thereby broadening their suite of offerings.

Global payments deal-making is likely to further accelerate due to a combination of the following:

  • Growth. Some estimates peg current global payments revenues in excess of $2 trillion per year, and increasing. The overall number of payments transactions is also increasing rapidly. A burgeoning market will continue to lead acquirers to circle, with a view of monetizing those growth opportunities;
  • Untapped markets. Realizing value in emerging markets, where the number of digital payment users is growing, will lead payments players to pursue M&A opportunities in developing economies. Where there is room for e-commerce and digital payments penetration, wider adoption is sure to follow;
  • Synergistic opportunities. Cost-cutting, cross-selling opportunities, gains in pricing power and better operating margins await global payments companies that snap up market share through business combinations;
  • Continuous innovation. While smaller, more nimble and agile companies innovate and pioneer new technologies, large payments players may ultimately need to resort to growth by acquisition to keep up with customer demands for enhanced technological capabilities, expanded range of services and a broad suite of product offerings; and
  • Battling fraud. One method of combating sophisticated fraud may be through acquiring specialized cybersecurity companies.

Scale and consolidation

The payments industry can largely be organized into two categories:

  1. Front-end customer-facing products; and
  2. Back-end infrastructure that is facilitative of payments transactions.

While payments M&A activity is likely to accelerate, the nature of deals may change. At this juncture, it appears as though the market is entering a consolidation phase where large-scale payments players are turning their attention away from smaller-market technology and software companies and eyeing up one another as targets.

In order to own the digital commerce payments track from start to finish, with end-to-end capability that spans the entire value chain and provides true full-service capability, large-scale payments players may resort to consolidating or vertical integration. Preliminary signs in 2019 are already demonstrative of this trend. For example, the purchase of Worldpay by Fidelity National Information Services Inc. (FIS) in March, for US$43 billion inclusive of debt, is the biggest ever transaction in the payments industry, by deal value.

Payments sector M&A activity engages numerous key areas for advisers and M&A lawyers, including:

  • Regulatory frameworks, compliance and oversight. New technologies are evolving constantly. Such shifting capabilities, in many cases, require appropriate levels of transparency and oversight to ensure compliance with applicable laws. Cybersecurity and anti-money laundering concerns are two sensitive areas that payments players should take into account in the context of M&A transactions.
  • Data protection, ownership and security. Global initiatives including open banking such as PSD2 and GDPR may be engaged by payments sector M&A activity. Issues relating to ownership, sharing and security of data are particularly relevant and should form the basis of governance models and decision making as it relates to pre-transaction and post-transaction planning.
  • Cross-border considerations. Funds flow and e-commerce matters often involve currency traversing international borders. A complex web of payments has fuelled the need for cross-border advice. Cross-border and cross-currency payments will require particular foresight and consideration.

Growth in the payments sector has repeatedly smashed estimates. Attendant M&A activity, in Canada and globally, is likely to flourish in pursuit of such growth. The movement away from cash by consumers and toward the electronification of payments, is gathering steam. Continued consolidation and healthy M&A activity is likely to naturally follow.