Wednesday , February 20, 2019

M&A in Payments: Good or Bad?

The current wave of buying and selling is the right prescription at the right time for a business that badly needed shaking up, says O.B. Rawls.

For decades, the payments industry was pretty stagnant, but over the past decade, and even more so recently, that has changed drastically. Now part of the fintech (financial technology) “revolution,” payments is one of its hottest markets. As a result, we’re witnessing more investment than ever before, new entries flooding the space, and a significant increase in mergers and acquisitions.

According to a 2016 report from Boston Consulting Group, funding has skyrocketed over the past 11 years, growing from just $5.5 billion to more than $78.6 billion in the U.S. alone. Fintech startups are on a similar trajectory, growing from just 1,000 a year in 2005 to over 8,000 in 2016. And to put this all into scale, FT Partners, an investment-banking firm focused exclusively on the financial-technology marketplace, reported that in August, financing volume (investments) reached $1.9 billion over 122 transactions and M&A volume eclipsed $8.5 billion over 87 transactions. That’s just one month!

While all of that activity isn’t focused on legacy payments, it’s been very interesting to watch, especially as consolidation via both mergers and acquisitions continues, and among some very large firms. In the past two years alone, some of the biggest players in the space have made significant moves: Vantiv and Worldpay, Heartland and Global, First Data and CardConnect, and TSYS and TransFirst.

Happier Shareholders

As the “bigs” get bigger, the first question I ask myself is why. Why are Vantiv and Worldpay merging? Global expansion. Why did First Data buy CardConnect? Established integrated channel and partners. It’s the age-old saying, “build or buy.” Do I build scale over time, or buy it and have it immediately?

Granted, buying isn’t always the answer, and it’s not always feasible, but because of the investments in and around this space and the sense that growth must be faster, it’s something we’re seeing more and more of. I don’t expect that trend to change any time soon.

It’s not just the traditional players that are buying and merging. In August, we saw PayPal respond to Square’s success with Square Capital by buying Swift Financial. That’s just one acquisition out of eight PayPal has made in the past four years. We expect more, and they could be big. In late September, some analysts were speculating that PayPal could be looking at another big powerhouse like Square, Stripe, or Adyen. Wouldn’t that be interesting?

New entries, along with new technologies, are also challenging the distribution process. Merchants are more informed than ever, and, as Square taught us, merchants have figured out how to “self-select” payment processing and other value-based services, like cash advances. This tells me that the distribution methods employed today are time-tested and true. They are also expensive and sometimes less-than-reliable in terms of disclosure of cost and functionality.

Why do I mention distribution? Because it’s a rather large cost center. If we find the right methodology for merchants to self-select their processor, we will have a more educated and more satisfied merchant. Less distribution expense, improved overall efficiency, and reduced attrition yield scale and higher revenues, which drive better valuations and make for much happier shareholders.

The New Normal

Companies of any size would be remiss if they weren’t eyeing their own acquisition or merger targets. I think you have to if you want to remain competitive and scale your business at or ahead of the pace of the competition. The market is just that hot right now. But it’s hard because you don’t want to buy or merge as a knee-jerk reaction to someone else’s M&A.

When we evaluate a potential M&A candidate or opportunity, we remain very pragmatic throughout the entire due-diligence process. It’s interesting, I think, that everyone jumps right to the economics, which are naturally key. But we’ve learned that the economics are not the only consideration. We look at the dollars and sense, not just the dollars and cents.

We ask ourselves why we would partner with or acquire the company. Does it have something we need and want? Is its solution or offering bench-tested? How will this business decision benefit us in terms of accelerating growth? What is the cultural alliance between the two companies? What would a post-M&A organization look like? These are just a few of the considerations, as this is a long and tedious process that must be executed flawlessly to keep from making a wrong decision.

I won’t deny that I find this activity very exciting. I’m not sure I’d say we’re in a “grow-or-go” space right now, but we’re darn close. Even for organizations not active in M&A, this is an exciting positive in the payments space. It draws more attention to the industry, which opens more doors and unlocks new opportunities.

While this activity is definitely amping up the competition among both legacy firms and new entries, it’s also driving those with the desire to grow to accelerate those efforts and think bigger than we ever have. Phones are ringing, new strategies are being developed, more conversations are being had. I view that as the new normal in the space.

I’ve always felt that disruption and change present opportunity. In an industry that hasn’t had much of that in its history, what is happening now is major, and it’s needed.

O.B. Rawls IV is chief executive and president of iPayment Inc., Westlake Village, Calif.

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