M&A frenzy grips European payments

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cross Europe, payments players are seizing the opportunity of the rapid transition to digital transactions and new markets to consolidate their positions and gain market share.

The ongoing consolidation of the payments sector began as early as 2000, with some smaller activities among bank-independent payments specialists.

In particular, the withdrawal of banks from the payments business and the trend towards digital payments contributed to this development.

The billions of euros’ worth of payments industry M&A deals recorded at the beginning of this year marked a continuation of the series of acquisitions that was already apparent last year.

The analysis that follows is from the research by global consultancy Ernst & Young.

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.

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 bricks-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 characterised 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 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 will 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.

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, owner 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.

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 US merchant acquirer Vantiv for the equivalent of $9.9bn.

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’s offering with payment acceptance services (at an enterprise value of $43bn).

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 $22bn.

The latter two transactions reflect a global consolidation from a broader financial technology perspective beyond the payment acceptance space.

We are 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.