Changing Global Payments Landscape – A View On M&A/Investments

Payments continues to be the one of the most important and fastest growing areas of financial services worldwide. Industry reports indicate, Global Payments Revenue is set to grow at a CAGR of 6% by 2026 and set to generate an additional 0.9 Trillion $ in Payments revenue as emerging markets continue to grow and cashless transactions become more widespread. In parallel, shrinking margins are accelerating focus by participants to reduce costs & deliver new revenue generating services including tap adjacencies and penetrate underserved markets.

What are the Key Challenges for Incumbents?

• Rising Customer expectations due to disruptive services from fintechs delivered at low cost and sophisticated value adds offering an enhanced user experience
• Inability to capitalize new technology benefits owing to less agile and legacy payments infrastructure
• Increasing compliance and regulatory mandates driving up costs of change and maintenance

What are the key catalysts supporting Incumbents?

• Emerging technologies such as IOT, AI / ML, distributed ledger enabling deliver innovative use cases
• Initiatives like PSD2, Open banking. fostering collaboration between banks and 3rd party provider’s Alternative payment infrastructures setting new standards for payments

In this article we will follow major investments, regulatory movements & initiatives by participants to understand growth patterns

America / Canada
In US and Canada, several existing payment service providers are rapidly consolidating capabilities to address new market segments / adjacencies

• First Data / Blue Pay ($760M): To augment the digital capabilities for payment processing of merchants & Suppliers
• Chase / WePay ($350M): In the area of online payment gateways and payment solutions
• Jack Henry / Ensenta ($100 million): innovative enterprise-wide SaaS solutions for mobile and online deposits and payments
• TD Bank acquisition of startup Layer 6 for 100 million to enhance AI based platform for prediction and personalization
• Paypal – izettle acquisition enabling Paypal penetrate in-store payments
• VISA and FICO rewriting playbooks by developing newer underwriting strategies to capture the unbanked population & deliver creative products

Regulations in the US will continue to be interesting to watch, with the possibility of a Fintech specific national banking charter & developments around Consumer Financial Bureau data sharing regulations. The Instant payment launch by platforms such as The Clearing House set to gain critical mass by 2020 & upcoming Fedwire Instant payments, is fast pressurizing treasury departments to enhance service offerings for corporates capitalizing on the speed & enriched data of Instant payments. An area to look out for will be the subsequent modernization of enterprise payments architecture through payment hubs as banks gear up for modernizing the overall corporate payment experience. In Canada, apart from increasing focus on Faster payments, the Central Government is actively pursuing cyber security enhancements for banks

Europe
Apart from PSD2 driving major transformation in the region, several developments by late stage fintechs and pilots by incumbents in new technologies demonstrate interesting patterns

• Transferwise ($280 million) / Monzo raised funding to $94 million, to improve products and customer base Organizations like Germany based N26 are looking at US expansions
• Incumbents are challenging the challenger bank space as demonstrated by the Clydesdale bank $1.6 billion offer for Virgin Money
• Likely acquisition of SIX services by Wordline
• Exploration of Blockchain for new segments like small business by Deutsche Bank, UniCredit, KBC, Rabobank, Societe General

Faster payment infrastructure such as Instant SEPA is gaining focus and aiming to reach critical mass by 2020. An additional interesting area to watch is planning by European Commission to bring virtual currency exchange platform under the scope of 4th AML Directive for users who trade in virtual currencies will drive more consolidation

Asia
Asian markets too are witnessing major consolidation and adopting disruption quickly in the areas of financial inclusion, digital cash & open payment infrastructure like the deals such as

• QUO CARD/ T-Gaia Corporation ($199 million) for Provides issuing, maintenance, encoding and sale of prepaid cards in Japan to grow the digital economy in Japan
• Tech Mahindra/ Comviva Technologies ($51.3 million) Offers products to banked and unbanked consumers to save, borrow, transfer and spend money using their mobile
• In India, following Demonetization, subsequent focus in digital payments and implementation of GST has seen increased focus. Major investments have been drawn by POS providers – $41 million Series D raise by POS platform provider Mswipe Technologies, and a $30 million Series D raise by online banking marketplace BankBazaar.
• Incumbents are forming interesting pacts such as Banks investing in ad-marketplaces to expand reach to customers and consortiums to address the demands of SMB platforms as driven by CBA, Microsoft and KPMG.
• In Singapore – The country continued to showcase its value as an Asia-based fintech hub, particularly in areas like blockchain, AI, and machine learning.
• Financial inclusion is fast emerging as a critical priority, with the desire to make micropayments and remittances more accessible and cost effective for individuals working in the country who remit payments to family elsewhere in the region

Across the region, in recent quarters, a number of the leading Fintech regulators, including the Monetary authority of Singapore, the Hong Kong Monetary Authority and the Australian Securities and Investment Commission (ASIC), have taken a mentorship role with respect to working with less mature countries in the region to develop, regulate, and support fintech. In Australia, post the launch of new payments platform, the Australian government is pushing banks to onboard the Open API initiatives.

In conclusion, changing patterns indicate 5 new charters of growth

• Core Modernization driven by Platform Consolidation / Open API for improved service offerings through exceptional user experience
• Increasing Strategies targeted at underserved segments / adjacencies for e.g. Alternative scoring, micro payments, Prepaid
• AI / ML for Modernization in Security, Regulatory and Compliance Offerings Efficiencies in X border payments
• B2B Fintech with specific focus on Instant payment driven value added services for Corporates & SMB service offerings.

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