May 30th 2018
20 of the biggest deals in the payments industry over the past 20 years
We investigate the biggest mergers and acquisitions of the last 20 years and answer some key questions about consolidation – and what it could mean for merchants.
The recent announcement that iZettle is being purchased by alternative payment giant PayPal is the latest in a long line of consolidations in the payments industry. In this article, we identify 20 key examples of consolidation you might have missed, assess whether all this churn is healthy for the industry, and explore what it all means for the merchant community.
What’s the biggest example of consolidation in recent years?
In June 2016, Visa Inc. completed the acquisition of Visa Europe for €18 billion. The Visa Europe takeover was particularly noteworthy because of its sale price of €18 billion. This represented a premium of around 70 times Visa Europe’s annual profit, which is far in excess of a typical valuation for a company. This has left many in the merchant community worried that Visa Europe will adopt a U.S.-style charging structure, and indeed since the takeover, European merchants have been informed of multiple scheme fee increases, many of which have been substantial.
Why is consolidation so attractive?
There are large profit margins due to high barriers to entry and high costs of change in the payments industry. This means that competition is naturally limited. Regulation is simply not strong enough to limit high profitability in most jurisdictions. Visa and Mastercard regularly report profit margins in excess of 50% year-on-year, acquirers report margins in excess of 30%, whereas on average, merchants report around 5% profit margins.
Is consolidation bad for innovation?
This isn’t a simple question. Horizontal integration – one company absorbing a direct competitor – leads to fewer suppliers in the market, fewer suppliers mean less competition, and this in turn typically leads to higher pricing and less choice for merchants. However, while this is true in most circumstances, this isn’t exclusively the case, and some mergers and acquisitions can even be good news for merchants. Often consolidation is between large global companies that acquire smaller, local companies in order to expand their international presence which can be beneficial for merchants seeking a multinational payments solution. Another important example is Apple Pay – an innovation technology that many were hopeful could really shake up the payments industry and provide a payment alternative to Visa and Mastercard. Unfortunately, Apple Pay aligned itself with the card schemes, and what looked like it could have been an innovative payment option, has not come to fruition. Market innovation is key, and start-ups should be competing with the biggest players, not being consumed by them.
Why are there so many joint ventures?
As you can see from the table above, there have been a number of joint ventures within the acquiring industry over the past two decades, many involving First Data. These joint ventures generally exist because of a fundamental, mutual benefit – the bank can provide the merchant relationship and the processor can provide the technology/scale. This is technically beneficial for all parties, as it should reduce underlying costs and, therefore, lead to lower pricing.
So consolidation isn’t necessarily a bad thing for merchants?
Consolidation can be good when there are synergies/efficiencies that can be transferred to the end user in the form of lower pricing. The announcement of a merger between Worldpay and Vantiv was an industry example of horizontal integration, a merger between companies offering the same or similar products and services in the same industry. These card giants are both big players in the industry (Worldpay is a key player in the UK while Vantiv holds a large share of the card acquiring market in the U.S.) but this merger is not seen as anti-competitive as they operate primarily in very different geographies. The deal was publicised as a way for both organisations (who now operate under the Worldpay name) to generate synergies by amalgamating their knowledge and products, offering a better service to their international client base.
Will there be further consolidation?
There is still a long way to go considering the amount of fragmentation in many markets. For example, the PSP market may have five clear global leaders – Ingenico, Adyen, Worldpay, CyberSource and Data Cash – but their combined market share is still relatively low. Meanwhile, domestic acquiring markets across Europe are still dominated by local players, many of whom are still issuer-owned. In many cases we have seen these local acquirers protected by scheme tiers, and selective fees such as “market development funds”.
Competition is vital in an industry that tends towards natural monopolies. Mergers and acquisitions can provide synergies and efficiencies that are mutually beneficial, but industry changes like these can often mean uncertainty for all players in the supply chain – and merchants should remain aware of these changes and what they mean for their relationships with suppliers.
Merchants need to carefully assess all consolidations within the payments market on a case-by-case basis. It is too simplistic to simply label all acquisitions and mergers as bad news for merchants. There are too many complex factors to consider, and as discussed throughout this article, these consolidations can often be beneficial for merchants who are proactive in seeking the opportunities they can provide.
CMSPI believes that competition authorities need to look closely at all deals to assess whether there is a reduction of competition – directly or indirectly – and keep in mind the impact on the merchant community.