Payments become top attraction for M&A

Pro­cess­ing elec­tron­ic pay­ments used to be seen as the poor rela­tion of finan­cial ser­vices. Bor­ing back-office sys­tems staffed by steady, though dull, peo­ple who lacked the dynamism of start­up buc­ca­neers.

Yet a deal last month, backed by the tur­bo-charged efforts of pri­vate equi­ty, cre­at­ed one of Europe’s largest pay­ments firms. When Italy’s Nexi bought Dan­ish rival Nets for €7.8 bil­lion, it was the lat­est in a rash of pri­vate equi­ty-ini­ti­at­ed deals that has reshaped the once sloth­ful pay­ments pro­cess­ing sec­tor.

Both busi­ness­es in that megadeal start­ed out as part of tra­di­tion­al banks, spun off and led by pri­vate equi­ty firms Advent, Bain Cap­i­tal and Hell­man & Fried­man. Nexi’s acqui­si­tion of Nets fol­lowed hot on the heels of its €15-bil­lion pur­chase of state-owned Ital­ian rival Sia. It now vies with World­line-Ingeni­co for the cov­et­ed title of Europe’s pay­ments, or paytech, cham­pi­on.

Why payments are such a pull

Sim­ply put, pay­ments proces­sors facil­i­tate mer­chants’ abil­i­ty to accept both online and in-store pay­ments while charg­ing a small fee in the form of a sliv­er of the trans­ac­tion price. But giv­en the press­ing need to off­set the high cap­i­tal cost of pay­ments pro­cess­ing tech­nol­o­gy, a rush to scale up has attract­ed the gim­let eyes of pri­vate equi­ty deal­mak­ers.

Accord­ing to data provider Refini­tiv, close to $32 bil­lion in trans­ac­tion val­ue has been sealed this year, com­pared with $8.5 bil­lion in 2019. And that’s despite a 22 per cent fall in con­sumer spend­ing between Jan­u­ary and June this year, cour­tesy of the coro­n­avirus pan­dem­ic, accord­ing to McK­in­sey & Com­pa­ny.

PitchBook’s Q3 2020 Emerg­ing Tech­nol­o­gy Report: Fin­tech cites wide­spread reg­u­la­tions and finan­cial reforms enact­ed since the 2007–8 finan­cial crash, cre­ation of over­sight com­mit­tees, ongo­ing stress test­ing and cap­i­tal require­ments as hav­ing left the finan­cial sys­tem more pre­pared to han­dle the vio­lent eco­nom­ic dis­rup­tion wrought by COVID-19.

This per­spec­tive is bol­stered by Cyrus Pocha, finan­cial ser­vices reg­u­la­to­ry part­ner and co-head at “mag­ic cir­cle” law firm Fresh­fields Bruck­haus Deringer’s Glob­al Fin­tech Group. He says the cur­rent merg­ers and acqui­si­tions (M&A) activ­i­ty in the Euro­pean pay­ments sec­tor can be traced back to the last finan­cial cri­sis when the price of state aid for many uni­ver­sal banks was the com­pul­so­ry sale of their pay­ments capa­bil­i­ties.

What had once been seen as rel­a­tive­ly unin­ter­est­ing finan­cial plumb­ing was pushed into the spot­light. Pocha says: “At the same time, in addi­tion to the growth of online trans­ac­tions, the last decade has seen a grad­ual move away from cash trans­ac­tions towards card and con­tact­less pay­ments and now, increas­ing­ly, dig­i­tal pay­ments using cryp­to assets or anoth­er form of dis­trib­uted-ledger tech­nol­o­gy.”

Payments’ easy-to-scale model highly appealing

So the demand for pay­ment ser­vices is increas­ing and new ways of mak­ing pay­ments has brought oth­er small­er play­ers with high poten­tial growth oppor­tu­ni­ties into the mar­ket.

James Brock­le­bank, man­ag­ing part­ner at buy­out group Advent, points out that pay­ments tru­ly is a scale busi­ness. “The mar­gin­al cost of trans­act­ing a mil­lion extra trans­ac­tions once you have scale is almost zero. So it makes sense for pay­ment providers to get economies of scale,” he says.

“Also, because if you have devel­oped good tech­nol­o­gy and good prod­ucts in one mar­ket, it’s pos­si­ble to use them in oth­er mar­kets and reap the ben­e­fit of the invest­ment across a wider geog­ra­phy.” Pri­vate equi­ty is per­fect­ly able to give these busi­ness­es the focus they need, invest in them and attract top tal­ent.

When Advent and Bain owned World­pay, they spent approx­i­mate­ly $500 mil­lion buy­ing oth­er pay­ments com­pa­nies to cre­ate an enti­ty sub­se­quent­ly list­ed as a FTSE 100 com­pa­ny in Lon­don. That com­pa­ny was then bought by Van­tiv, anoth­er Advent pay­ments com­pa­ny and itself a bank carve-out, sub­se­quent­ly acquired by FIS for almost $35 bil­lion. “So M&A is absolute­ly at the heart of the growth in the major pay­ments play­ers and has been a phe­nom­e­nal­ly suc­cess­ful strat­e­gy,” says Brock­le­bank.

Regulation has improved the landscape

In par­al­lel, adds Fresh­fields Bruck­haus Deringer’s Pocha, the reg­u­la­to­ry envi­ron­ment in which pay­ments firms oper­ate in the Euro­pean Union has also improved. The first har­monised EU rules were intro­duced with the pay­ments ser­vices direc­tive (PSD) in Decem­ber 2009 and updat­ed by PSD2 which was gen­er­al­ly imple­ment­ed by mem­ber states in 2018.

These reg­u­la­to­ry changes pro­vid­ed pure pay­ment ser­vices firms with a Euro­pean pass­port, sim­i­lar to those enjoyed by banks, while impos­ing a lighter reg­u­la­to­ry bur­den, among oth­er things, in rela­tion to cap­i­tal. Over­all, this meant that as the pay­ments space became more inter­est­ing to sophis­ti­cat­ed pri­vate equi­ty, it was also becom­ing more acces­si­ble.

Tra­di­tion­al banks typ­i­cal­ly owned pay­ment providers in the past, such as Roy­al Bank of Scot­land-run World­pay, Nets led by 186 Nordic banks, Nexi by the Ital­ian Popo­lare banks and Con­car­dis by Ger­man region­al banks. These are not best own­ers of pay­ments com­pa­nies, accord­ing to Brock­le­bank, as it’s not their core busi­ness, which is lend­ing and deposits.

“So they strug­gle to invest enough in them, attract the right tal­ent, use M&A to acquire scale and capa­bil­i­ties, or give them the inde­pen­dence they need to be nim­ble oper­a­tors in a rapid­ly evolv­ing mar­ket­place,” he says.

The perks of an international market

Giv­en its his­to­ry as a piece of mar­ket infra­struc­ture run by banks or con­sor­tia of banks, the pay­ments mar­ket has tra­di­tion­al­ly been char­ac­terised by strong region­al or nation­al play­ers, says Pocha. “It there­fore made sense to seek to grow the cus­tomer base through M&A in dif­fer­ent EU mem­ber states and regions,” he says. “This also played to the pri­vate equi­ty industry’s strengths: investors were per­fect­ly placed to imple­ment such cross-bor­der ‘buy and build’ strate­gies.”

Cou­pled with the fact that pri­vate equi­ty lives with the imper­a­tive of hav­ing to send its cap­i­tal out to work, and many of the active funds were raised pri­or to the pan­dem­ic, this has meant it has been able to con­tin­ue pur­su­ing its M&A strate­gies at a time when oth­er poten­tial trade acquir­ers are paus­ing for breath or find­ing it hard­er to com­pete on price.

Addi­tion­al­ly, the pan­dem­ic has impact­ed the pay­ments M&A land­scape by illus­trat­ing the dan­ger of being too niche, as in the exam­ple of pay­ments firms which relied heav­i­ly on ser­vic­ing the trav­el indus­try and were dis­pro­por­tion­ate­ly neg­a­tive­ly impact­ed.

Sur­pris­ing­ly, pen­e­tra­tion of dig­i­tal pay­ments remains rel­a­tive­ly low in Ger­many, the pow­er­house of Europe’s econ­o­my. Ger­mans have tra­di­tion­al­ly not been com­fort­able with high lev­els of bor­row­ing and instead pre­ferred local deb­it schemes and cash. As a result, the pen­e­tra­tion of cards, typ­i­cal­ly a pre­cur­sor to dig­i­tal pay­ments, has lagged behind the rest of Europe.

Finding the right players for investment

Where com­pe­ti­tion is most evi­dent is around the edges, says Brock­le­bank. For exam­ple, niche ecom­merce offer­ings from nim­ble fin­tech play­ers. “But even those strug­gle to get trac­tion with big, glob­al mer­chants who need blue-chip, resilient, scaled solu­tions,” he says. “These nim­ble fin­tech play­ers are more of a threat in the small and medi­um-sized enter­prise (SME) cus­tomer base.”

One such nim­ble fin­tech play­er is Lon­don-based pay­ments proces­sor Safenet­pay, which ser­vices the UK and, immi­nent­ly, Euro­pean and Asian SME sec­tor with inno­v­a­tive pay­ments and busi­ness cur­rent account solu­tions.

Co-founder and chief exec­u­tive San­jar Mavlyanov says, although advances by pri­vate equi­ty groups may be flat­ter­ing, Safenet­pay is not recep­tive to such over­tures. “We pride our­selves on being inde­pen­dent and hav­ing a tight­ly knit glob­al team that can act fast to meet and exceed clients’ ever-evolv­ing pay­ments needs,” he says.

So despite the evi­dent surge in takeover activ­i­ty in pay­ments pro­cess­ing, there are still min­nows will­ing to take their chances in fin­tech seas awash with hun­gry preda­tors.