U.K. consumers initiated nearly 11bn card transactions in 2013, representing over half-a-trillion pounds sterling in spend according to data from the UK Cards Association. In the U.S., consumers initiated 2,600 card transactions per second, out-spending their U.K. counterparts approximately fivefold, writes Joel Leonoff
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Joel Leonoff – CEO of Optimal Payments
The growth of electronic payments and the pace at which they have been chiseling away at consumers’ use of cash differs by region, but one clear driver across all markets is the growth of ecommerce which is expected to reach $1.6trn globally by 2018, according to Forester.
And as electronic payments increasingly become the lubricant of commerce worldwide, it is abundantly clear that the world has woken up to the realm of payments. The attentions of innovators, regulators, global consumers and investors have paved the way for a continuously-evolving sector and an active M&A market.
Payments M&A at a Glance
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By GlobalDataThe payments sector has drawn significant investment attention. Private equity is attracted by steady margins in a consolidating industry, and venture money is fueling literally thousands of payments-related start-ups. These continue to feed the M&A appetites of the more established players who employ strategies seeking enhanced scale, capabilities and market access.
In addition to the recent acquisitions of Meritus Payment Systems and Global Merchant Advisors by Optimal Payments, the last twelve months have been marked by several banner transactions. Paypal scooped-up Braintree for $800 million giving it access to a business almost entirely focused on the payments needs of emerging ecommerce enterprises.
In March of this year, Advent International and Bain Capital, two Boston-based private equity firms who already own WorldPay teamed up with Danish pension fund ATP to acquire Nets for $3.1bn. Also of note is Vantiv’s acquisition of Mercury Payments from Silver Lake Partners for $1.65bn, following on the heels of its 2012 acquisition of Litle & Co. for approximately $360m.
These highlighted transactions are emblematic of recent M&A activity in the space and the trends I expect to see going forward: namely, acquisitions that position buyers to better compete in a card-not-present world, provide the benefit of scale consolidation and, particularly in the case of Optimal Payments’ acquisition, provide market expansion into an attractive geography.
In addition to this M&A activity, payments startups raised $1.2bn in funding across 193 deals last year (source: CB Insights). The funding pace has continued into 2014, hitting a five-year high of committed capital in Q1 2014, according to TechCrunch. For the quarter, 59 startups raised $492m for technologies to support, or supplant, existing payments companies and while only a modest percentage of those businesses will be viable in the long-run, they represent a meaningful source of innovation and talent for the broader payments sector.
1) The lure of the expanding global ecommerce market: According to Forester, ecommerce around the world is expected to reach $1.6trn by 2018, driven by double-digit growth in North America, Europe, Asia Pacific, and Latin America.
Adding to that growth is the emerging mcommerce channel via mobile devices such as smartphones and tablets, which accounted for approximately 20% of card-not-present purchases during the 2013 "Black Friday" weekend according to Business Insider. Gartner forecasts that the worldwide mobile payment market will have over 450m users and a transaction value of more than $721bn in 2017 (5-year CAGRs of 18% and 35%, respectively).
The changing mix from point-of-sale to ecommerce and mcommerce underscores consumer demand for a seamless experience across all retail channels. Innovations in social media and the "cloud" have created an expectation by consumers that one’s digital life is accessible anywhere, driving the demand for omni-channel payment solutions. Whether making a purchase at a brick-and-mortar store or via a mobile device, consumers have come to expect a uniform experience.
M&A Implications: With no end in sight for the growth of online sales, the payment needs of online merchants are steadily increasing and along with it consumer expectations. Look for traditional POS-focused payments companies to make acquisitions to add to existing platforms and offerings, while incumbent gateway providers like Optimal Payments will seek to extend their advantage across the high-growth card-not-present channels.
2) Global economic dynamics: Payments companies are expanding globally by following home-market merchants into new geographies or setting up shop directly to take advantage of attractive growth trends in new markets. Many competitors are drawn to the high-growth opportunities in developing markets such as Asia, Africa and parts of Latin America. And while these regions represent significant opportunities, the growth tends to be fueled by a mix of public and private initiatives, requiring significant local knowledge to navigate.
M&A Implications: In a global economy, there is a pressing need for worldwide coverage to ensure a well-balanced economic portfolio – the ability to dial-up exposure to high-growth markets, insulate from low-growth markets and stay the course in steady markets. As a company builds out its portfolio, I view M&A as a prudent way to fill geographic gaps alongside organic expansion.
3) Regulation: Part in parcel with global dynamics is the worldwide patchwork of regulations impacting the payments sector. The CARD Act and the Durbin Amendment in the U.S. has changed the relative economics of credit and debit cards and helped usher in a renewed focus on prepaid products and merchant-funded rewards. In Europe, the Single Euro Payments Area (SEPA) and the Payment Services Directive promise to blur the payments borders of the EU member countries, allowing well-positioned companies to compete across Europe and potentially making it easier to integrate portfolios across the region.
M&A Implications: Regulation is important from an investment perspective in that it spurs change. And where there is change, there is opportunity for forward thinking, nimble enterprises to compete more effectively. While few regulatory changes ever emerge overnight, M&A provides an expedited way to compete in the new environment.
In the late 1990s and early 2000s, everyone was hoping to be the next "dot-com" phenomenon. Today, payments is the ‘it’ sector creating the buzz. With a tantalizing mix of innovation, landscape-altering regulation and an insatiable consumer appetite for all-things digital feeding the payments frenzy, the next several years should prove to be an interesting period in general and a source of continued M&A activity in particular.
