How M&A is driving consolidation in the fragmented payments industry?


  1. The rise of digital along with the latest technologies like Cloud/ Machine learning and demands from end customers is fueling M&A activity across industries where incumbents are looking to acquire growth and at the same time, protect its existing market share.
  2. Payments industry has long been a commoditized business with investments in payments infrastructure to process transactions involving banks, merchants and end customers.With the rise of digital, the existing business model of payments industry is disrupted by the entry of new technology players like PayPal, Stripe and Square.This has triggered the M&A activity giving rise to consolidation in existing fragmented industry.
  3. Let us look at how the existing business model in Payments was disrupted by Digital followed by M&A activity in the sector.

Disruption in Business model

  1. The business model of the payments ecosystem includes a front end segment that has the merchant acquirers at one end and back end, which involves the communication of interchange networks with the issuing banks along with final settlements between the issuing and acquiring bank.
  2. A payment transaction ideally involves a customer swiping his card either online or through a terminal at POS.The terminal processes the card transactions and connects to the interchange platform like Visa or Mastercard.The interchange platform then shares this data with the issuing bank which checks the funds balance in the accounts along with the checking the user identity and then ccompares the pin information entered by the customers against its database to either accept or reject the transaction.
  3. In the above transaction, the backend part of it which essentially is the communication between interchange networks like Visa/ Mastercard with issuing bank is least disrupted.This revenue model is profitable as interchange networks like Mastercard charge a nominal interchange fee from banks, merchants and customers for every transaction. This business is dominated by few key players and does not have any competition giving rise to a moat business.
  4. The front end part of the business which is primarily the merchant acquirer part of it has become highly commoditized. The incumbent businesses drove margins through high volume of transactions been processed through its payments infrastructure.This scale model of driving more transactions through a fixed base lowers the cost per transaction.The incumbent business was able to drive good margins from this business model.Processors like First Data and Worldpay were market leaders in this business.
  5. With introduction of digital, customers started looking for omnichannel experience where payments can be done through multiple channels and not restricted by card transactions through POS terminals.This demand from customers forced merchants to accept other channels of payments like mobile payments and wallets in order to acquire customers.The new age fintechs like square saw an huge opportunity for growth in this market and built service offerings, solely focusing on merchants.They came up with innovative open source software API that can allow merchants to accept other forms of payments.This API after accepting the payment from customers, then links this data to processors.Hence the new age fintechs created a business model that focused on creating a platform focusing on merchant needs and integrated that with existing payments ecosystem.
  6. Firms like PayPal and Square offered platforms that were more customer friendly to merchants and users by focusing on high customer experience.The legacy players anticipated this threat from new age fintechs but were slow to respond.The fintech players targeted niche business like small businesses and provided services in micro payments.The legacy players did not focus on these services as these were low margins.The legacy players continued to focus on banks, FI and retail players.
  7. The legacy players were more sales driven where as fintechs are more service driven.The legacy players provided innovative offerings only when their customers demanded where as the fintechs anticipated the unmet customer needs and came up with targeted customer solutions.Over a period of time, fintech started to capture more rrevenues from merchants with their service offerings. As fintechs were focusing on merchants, they also started selling value added service like providing analytics reporting and in some cases loans to merchants.The legacy players on other end were pushed to lower end of the value chain with commoditized service offerings.
  8. Fintech ability to sell additional offerings to merchants increased potential of their revenue growth where as incumbent players were seeing the decline in revenues due to the lack of differentiated offerings.

M&A landscape in Payments

  1. Above disruption in business model gave rise to M&A activity in the payments industry.The deal rationale for the M&A activity extended from scale deals to scope deals to access to new customers and markets.
  2. Fintech industry were targeting startups that focused on using technologies like Machine Learning and AI to improve customer experiences by offerings personalised offerings.These deals came at a premium with high valuation multiples.
  3. The incumbent players on the other end needed to come out of the commoditized service offerings and move up the value chain.Hence they acquired niche fintechs to enter into value added service offerings provided by Fintech.These acquisitions did not increase their market share and continued to lose revenues to fintechs.In future, one of the legacy players can look to acquire Square or Stripe but these acquisitions would come at extremely high valuation multiples.It is highly unlikely that the boards of the incumbent companies would approve of such transactions.
  4. Hence the legacy companies only alternative was to look at consolidatations and drive scale to protect their existing market share and margins.By consolidating, there will be more cost savings through costs synergies by elimination costs in duplicate functions. In addition, there could be a component of revenue synergies by cross selling new services as well as access to new markets and additional customers.Acquisitions like FIS of Worldpay and Fiserv of First Data are such instances.Any cost savings through cost synergies can be used for either acquiring Fintechs or doing additional investments in partnerships with new age fintech startups.


  1. Rise of Digital has disrupted the existing business model in Payments industry.This has given rise to M&A activity driving consolidation in a fragmented industry.
  2. New age fintechs are continuing to acquire startups with capabilities focused on Machine Learning/AI to improve customer experience.
  3. Legacy companies are driving scale deals through consolidations to reduce costs savings, protect their market share and gain access to new markets and customers.
  4. As Fintech companies are focusing on more value added service offerings as against the commoditized service offerings provided by incumbents, the legacy companies would continue to lose revenue share to Fintechs in longer term.

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