Thursday , March 28, 2024

E-Commerce And a Thirst for Data Are Driving Big Payments Mergers, An Analyst Argues

The payments industry’s relatively rapid move into digital transactions and broader business software is doing much to fuel the consolidation of big payments providers, according to an analysis posted Friday.

Just since January, the industry has witnessed deals that will see Fiserv Inc. acquire industry giant First Data Corp. in a $22 billion transaction and Fidelity National Information Services Inc. swallow Worldpay Inc. in a deal putatively valued at nearly double the price tag on First Data. More such mergers are expected.

Transactions of this size have left veteran observers, who are accustomed to viewing payments processing as a staid, low-margin business, scratching their heads. But processing has steadily moved into digital channels, particularly e-commerce, and that’s transforming payments from an afterthought in the back office into a strategic concern, according to Ian McDonald, a research analyst at Janus Henderson Investors, a London-based firm with offices also in North and South America and in Asia.

McDonald: “The data generated by payments represents a potential treasure trove of business intelligence.”

“The retail space is rapidly digitizing, with e-commerce taking an ever larger slice of the consumer wallet,” McDonald says in an analysis posted on Seeking Alpha. What that means, he adds, is that the business can now generate far more data that can be mined for insights into consumer behavior. This information is also increasingly valuable in fighting fraud, he adds. “The data generated by payments represents a potential treasure trove of business intelligence,” he writes.

Against this backdrop, firms are sorting themselves into two broad groups, McDonald says. The first group is made up of processing entities seeking to gain economies of scale and improve data analytics. The second group, which includes companies like PayPal Holdings Inc. and Square Inc., are looking to add software capabilities businesses can use to improve front- and back-office efficiencies.

Some older firms like Global Payments Inc., which has in recent years expanded heavily into recruiting and acquiring independent software vendors, also fall into this second camp, according to McDonald.

The key factor for both groups is the rise of digital processing and the increasing trove of data this processing can generate. “The tailwinds provided by a rising share of digital and e-commerce transactions as a portion of overall consumer spending is magnified by the data generated by payments becoming a potential revenue source rather than a necessary expense.” McDonald says.

The global importance of digital payments markets, including mobile commerce as well as e-commerce, was underscored this week by a report from Citigroup Inc. According to the report, the banking firm’s index of readiness for electronic payments in 84 countries has risen 5.5% over the past five years.

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