Consolidation is driving M&A momentum, and it’s time for banks to pick a strategy – expand or sell?
This article originally appeared in our #payments newsletter - volume 23 (pdf).
Once the domain of banks with only fragmented competition, the payments acceptance market is fast becoming a global market dominated by a few big players. Consolidation is driving a growing momentum in M&A, with more than 70 M&A transactions recorded in 2018. These deals are just the beginning of what we see as three major waves of consolidation in this space.
Banks are under pressure to sell assets
Providing solutions for merchants to accept cashless transactions in-store and online has traditionally been the business of banks. It allows them to solidify customer relationships, generate additional revenue and access transactional data. But the rapid transformation of the payments industry is putting banks under pressure. Many are selling their payment acceptance arms in a series of consolidations that are proceeding through three waves:
- Wave one: National assets are sold
- Wave two: Regional assets are consolidated
- Wave three: Transcontinental M&A establishes global payment acceptance leaders
Wave one: Disposal of national assets
The starting point of consolidation is marked by the sale of national assets focused on domestic business. Sellers are often banks that played a role in the original establishment of the traditional service providers for the acceptance of card payments in brick-and-mortar retail.
These sales are motivated by banks determining that payment acceptance is not a core part of their business. With a subsequent unwillingness to invest in and expand this element of the business, it makes sense to exit the market at a time when successful providers are increasingly characterized by their ability to continually innovate, operational excellence and economies of scale. Buyers attracted to these assets are usually international payment service providers or financial investors looking for expansion opportunities and suitable platform companies for subsequent consolidation.
In Germany, wave one is well advanced. Previously, Savings Banks, Cooperative Banks, Deutsche Bank, Commerzbank and HypoVereinsbank all had their own payment acceptance assets; now, only Savings Banks (Payone) and Cooperative Banks (VR Payment, former CardProcess) still own service providers.
Notable asset sales include:
- Concardis: Sold by the German banking industry to financial investors Advent and Bain in 2017.
- EasyCash: Sold by Deutsche Bank in 2002 and now in the hands of Ingenico.
As well as banking service providers, other major German players have been sold to international investors:
- TeleCash: Acquired by First Data from the US in 2003.
- InterCard: Taken over by terminal manufacturer Verifone in 2015.
Elsewhere in Europe, consolidation progress differs. In the UK, Ireland and Scandinavia, the first wave is well advanced. In contrast, the French and the Spanish markets are fragmented and the acceptance business is largely still in the hands of banks.
We expect that we’ll soon see the first wave of consolidation completed in Germany and begin to accelerate in other European countries, particularly those larger markets with high levels of fragmentation, such as Spain, France and Italy. National assets without sufficient scale will come under increasing pressure as the second and third wave of consolidation in Europe moves forward. Large European players are on the hunt for further consolidation opportunities.
Wave two: Regional consolidation
In the second wave of consolidation, buyers seek additional assets in adjacent regions to combine them with companies acquired in the first wave. Their objective is to create national or regional market leaders who can gain competitive advantage by leveraging synergies and exploiting economies of scale.
This wave of consolidation began in Europe a few years ago and has gained strong momentum in recent months, with certain companies consolidating to lead the market. In January 2019, Nets owners, Hellmann and Friedmann and Advent, and Bain, owners of German Concardis, completed the merger of their assets. Meanwhile, Worldline has been pushing for a consolidation of markets in Belgium and the Netherlands and, in a big move forward, purchased Swiss market leader SIX Payment Services in 2018.
The merger of BS Payone and Ingenico Payment Services (formerly EasyCash) created Payone, the leading provider in the DACH (Germany, Austria and Switzerland) region, in January 2019. In Italy, consolidation is also progressing — financial investors Advent, Bain and Clessidra have joined forces to buy five Italian acceptance assets and are now preparing an IPO of the combined Nexi.
Looking forward, regional consolidation activity is likely to continue gaining momentum with less than 10 players set to dominate the European market. Regional consolidation in the DACH region is expected to be largely completed in the next 12-18 months.
Wave three: Transcontinental M&A
The third wave of consolidation is global. Regional leaders created in wave two are now moving to take over similarly-sized competitors across the world. Buyers aim to achieve international scale to further increase competitiveness, achieve sustainable profitability and meet investors' growth expectations.
This global consolidation process has already begun in the e-commerce segment. One example is the acquisition of British market leader Worldpay by the American merchant acquirer Vantiv for the equivalent of US$9.9b. Announced in July 2017, and due to be completed in mid-2018, this acquisition will result in Worldpay becoming the world’s largest merchant acquirer. Recently, FIS — a global provider of financial services technology — announced the acquisition of Worldpay complementing FIS’ offering with payment acceptance services (at an enterprise value of US$43b). In January 2019, Fiserv, another global provider of financial services technology, had already entered the payment acceptance business with the acquisition of First Data for an equity value of US$22b. The latter two transactions reflect a global consolidation from a broader financial technology perspective beyond the payment acceptance space.
We’re yet to see further major global transactions as wave two of consolidation still offers lots of opportunities for consolidation on individual continents. While wave three consolidation in the e-commerce could increase in the short-term, the wave is expected to pick up speed in the in-store business in the mid-term.
Expand or sell? Time for banks to pick a future strategy
Waves of consolidation are rapidly reshaping the payment acceptance segment — creating a global market dominated by just a few suppliers.
These developments highlight the increasing importance of banks to consider their own payment acceptance strategy. While the trend toward international consolidation is growing, in our experience, only a few large banks can successfully complete this kind of expansion due to the high investment requirements and specific know-how. Most other banks should consider two strategic options for their payment acceptance business:
- Expand existing assets, achieving necessary scale through partnerships with other banks, service providers or financial investors.
- Sell existing assets, instead pursuing distribution partnerships with leading payment service providers.
The strategy chosen will depend on the individual circumstances and goals of each bank. However, what’s important is that banks move now to consider the future of their payment acceptance offering — neglecting this part of the business at such a critical time will see banks miss out on additional revenue potential and risk losing customers to competitors with an integrated service offering.