Payment Issuers: The Next Wave of FinTech Consolidation
We are seeing an increase in not only the volume of M&A activity but the average values of transactions, across the entire payments spectrum on a global basis.
Over the past decade, the Financial Technology (FinTech) business model has shifted as traditional financial institutions were disrupted in the aftermath of the 2008 global financial crisis (GFC). As digitally native providers were introduced and the FinTech industry matured into phase 2.0, financial institutions utilized mergers and acquisitions (M&A) to adopt new FinTech markets, products, and regulatory expertise. The FinTech industry has now entered a new, accelerated phase of consolidation known as phase 3.0, evidenced by record levels of M&A in Q1 2021. Pent up demand from delayed deal activity in 2020 in combination with the adoption of digitally-based finance channels led to 232 transactions in Q1 2021, a 71% increase quarter-over-quarter. Additionally, Q1 M&A activity outpaced pre-COVID levels, positioning 2021 to be a record-setting transaction year.
M&A activity in the Payments segment rose in conjunction with the broader FinTech industry, with an increase of 67% quarter-over-quarter in Q1 2021 (95 deals). Transaction volume has climbed steadily in the segment since 2018, driven by increased cross-border commerce, the digital economy, and merchants upgrading point-of-sale (POS) technology. As payment providers also reach maturity, mergers with special purpose acquisition companies (SPACS) have been utilized to efficiently gain capital through the public markets. Of note, cross-border payment platform Payoneer merged with FTAC Olympus Acquisition Corp. (Nasdaq: FTOCU) in February for a post transaction enterprise value of $3.3 billion, equivalent to 7.6x revenue. The capital gained will enable Payoneer to expand its addressable market and bring its suite of payment and merchant services globally.
Shifting Payments Ecosystem
The emergence of digital payment technology transformed payment processing, enabling business owners to manage transactions through gateway software platforms while issuers and acquirers provide the back-end infrastructure. Issuers are financial institutions that represent the purchaser by assuming the risk of a cashless transaction and issue payment on their behalf. Acquirers allow merchants to accept payment from the issuing bank or institution within a credit card network or payment issuing platform. A payment gateway is a software platform utilized by merchants to securely accept digital payments. Gateways such as PayPal, Inc. (Nasdaq:PYPL) operate online with accounts for consumers and merchants, while others such as Square, Inc. (NYSE:SQ) connect proprietary software with POS hardware for brick-and-mortar clients. Independent payment processing companies, such as Fiserv, Inc. (Nasdaq:FISV), FIS (NYSE:FIS) and Global Payments (Nasdaq:GPN) can act as acquiring institutions by accepting digital payments, among many other services including anti-fraud and compliance functions. Additionally, Fiserv provides cross-border payment gateway enablement to provide merchants with full-service offerings at competitive transaction fees. Fiserv recently expanded its Merchant Acceptance segment in Q1 2021, with the completed acquisition of Ondot Systems, Inc. in January for an enterprise value of $270 million, contributing to this segment’s 8% adjusted revenue growth quarter-over-quarter, according to Fiserv’s Q1 2021 earnings presentation.1
Top Players: Payments Segment
Acquirers Focus on New Business Lines
Acquiring banks and traditional institutions with merchant acquiring services have consolidated over the past three years, enabling acquirers to scale across markets and enhance capabilities in competition with digital merchant service providers including Adyen (ENXTAM:ADYEN) and Stripe. Notably, Adyen specializes in online and in-app merchant services, catering to applications with embedded gateways such as Uber and Spotify. Adyen also provides issuing services in the form of physical and virtual bank cards, further competing with traditional banks. As a result, acquirers have actively diversified service offerings to preserve and expand market share, evidenced by select players establishing real estate and Insurance payments platforms.
Bank of America (NYSE:BAC) recently expanded into health insurance payments through its acquisition of Axia Technologies LLC for an undisclosed sum in April. Axia develops payments technology for transactional management services in health insurance. Axia’s Payment Fusion, along with their full suite of merchant services, bolsters Bank of America’s payment offerings to health insurance clients and accelerates its ability to serve the vertical.
Global Payments, Inc. (NYSE:GPN), a leading FinTech merchant processor, announced its acquisition of PayLease, LLC in May for an enterprise value of $925 million. PayLease offers financial software to property managers, owners, developers, and homeowner associations to accept payments from occupants or members digitally. The acquisition extends Global Payments’ leadership in payments software into the real estate vertical, which they estimate to be a $6.5 billion target addressable market, according to the press release.2
The digital transformation to automate the internal processes whether it be invoices, cross border remittances, supply chain finance, or offering bank or insurance customers a better way to engage digitally and seamlessly has been accelerated by the pandemic but is here to stay.
Issuers Expand Through PaaS
Issuing banks and institutions have capitalized on the emergence of Payments-as-a-Service (PaaS) providers utilizing partnerships and M&A to efficiently modernize payment portfolios without incurring the overhead costs of developing proprietary software. PaaS companies operate cloud-based platforms offering specialized services in cross-border payment processing, payments clearing, and virtual card issuing. The programs are interoperable with existing platforms, enabling banks to expedite product launches to a three-month timeline rather than the standard two years, according to McKinsey’s 2020 Global Payments report.3
JPMorgan Chase & Co. (NYSE:JPM) exemplified this approach through its partnership with Oakland, California-based Marqeta, Inc., a PaaS card issuer, to expand its suite of commercial credit cards. While virtual wallets are typically enabled by traditional credit card networks, Marqeta allows for the instant issuance of virtual cards into mobile wallets including Apple Pay and Samsung Pay. “Marqeta’s push to wallet functionality will add a new dimension to virtual card payments. With Marqeta, our virtual cards can be expanded to new use cases like facilitating payments to disaster relief volunteers or for recruitment spend where interview candidates can be issued a card into their mobile wallets for travel expenses,” commented JPMorgan’s Head of Commercial Card John Skinner in a press release.4
Capstone expects issuers to actively pursue targets in the Payments segment throughout 2021, as banks and institutions look to bolster technology stacks through acquisitions to maximize business, consumer accessibility, and payment volume.
Fiserv, “Q1 2021 earnings presentation,” https://investors.fiserv.com/static-files/74158b9c-b61a-4db1-92c9-51f0af9daa82, accessed May 7, 2021.
Businesswire, “Global Payments to Acquire Zego,” https://www.businesswire.com/news/home/20210504005216/en/Global-Payments-to-Acquire-Zego-a-Leading-Provider-of-Real-Estate-Software-and-Payments-Solutions, accessed May 7, 2021.
McKinsey & Company, “The 2020 McKinsey Global Payments Report,” https://www.mckinsey.com/~/media/mckinsey/industries/financial%20services/our%20insights/accelerating%20 winds%20of%20change%20in%20global%20payments/2020-mckinsey-global-payments-report-vf.pdf, accessed May 6, 2021.
PYMNTS, “JP Morgan Teams with Marqeta on Virtual Cards for Commercial Clients,” https://www.pymnts.com/news/payment-methods/2020/j-p-morgan-teams-with-marqeta-on-virtual-cards-for-commercial-clients/, accessed May 6, 2021.
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