Five Trends Shaping Payments M&A
The last 12 months have seen dramatic falls in fintech and payments valuations, but with the payments sector now a core part of the financial services ecosystem, strategic imperatives will continue to drive deals despite macroeconomic headwinds.
We outline five key trends that will shape payments M&A in 2023.
Payments deal valuations have endured a bumpy ride since hitting a peak in 2021.
As inflation, rising interest rates and market uncertainty took a toll on the wider technology and fintech sectors, deal values in the payments space slid by almost 66 percent, according to US consultancy The Strawhecker Group1.
Deal count, however, was only 14 percent off 2021 levels, and although the outlook for 2023 remains challenging, the relative resilience of deal volumes illustrates how the payments sector has matured and become a core part of the financial ecosystem.
Payment transactions deliver significant revenues for banks, fintechs and other players in the space. Apple, for example, is expected to generate $4 billion of revenue from its ApplePay business in 20232, representing around 1 percent of Apple’s overall annual revenues ($394.3 billion in the 2022 financial year3). Global payment provider Elavon, a wholly owned subsidiary of U.S. Bank, meanwhile, processes more than six billion transactions with an aggregate value of close to $450 billion each year4, delivering revenues in excess of half a billion dollars annually5.
The increasing importance of payment services across the globe, combined with the emergence of numerous payments unicorns and decacorns, gives the sector the scale and momentum to support sustained deal flow, despite wider macroeconomic headwinds.
We set out five trends driving payments mergers and acquisitions (M&A):
1. Picks and Shovels: B2B Payments Infrastructure Deals Will Flourish
Consumer-facing payments companies such as Revolut, Square and Stripe may have attracted more attention in recent years, but we expect the backend business-to-business (B2B) payments space to produce the lion’s share of deal flow in the sector in 2023.
There is relentless demand from consumers, retailers and regulators for payment services that are simpler, faster, safer and more reliable. Meeting this demand requires significant investment and rapid development of the back-office infrastructure and technology that is unseen by consumers but a critical component of their day-to-day payments experience.
We have already seen large payments incumbents and fast-growing fintechs turn to M&A to enhance their cybersecurity, integrate additional payments capability (including online checkout and ecommerce) and process payments in and to new jurisdictions.
Nordic payments fintech Lunar, for example, acquired Paylike as part of plans to provide one-step checkout functionality for ecommerce businesses6, while Paysafe’s acquisition of German payments platform Viafintech expanded its capacity to process payments in Europe7.
This “picks and shovels” approach is consistent with our view of the wider fintech market, where fintech infrastructure players have emerged as some of the biggest winners in the fintech and payments gold rush.
2. Remittance and FX Businesses Are Thriving
Remittance and foreign exchange (FX) businesses are thriving. Deal activity is being spurred by strong appetite among these players to grow into new jurisdictions and expand cross-border payments capabilities.
According to World Bank figures, remittances to low- and middle-income countries climbed by 5 percent in 2022, despite global macroeconomic headwinds8, while IMARC Group research forecasts that the foreign exchange market will expand at a compound annual growth rate of 7 percent between 2023 and 20289.
These long-term underlying drivers are encouraging investment and M&A. Neobank decacorn Revolut, for example, acquired Indian money exchange and FX platform Arvog Forex10, and FX group Travelex partnered with digital payment network Ripple to reduce fees and speed up settlement for cross-border payments11. A deep pipeline of similar deals is already building in 2023.
3. Regulation and New Entrants Will Spur BNPL M&A
Buy now, pay later (BNPL) companies—who provide consumers with interest-free credit to spread out goods payments—faced deep valuation corrections in 2022. Swedish BNPL company Klarna, the largest player in Europe, saw its valuation crash by 85 percent when closing an $800 million funding round12, while San Francisco-based BNPL player Affirm has seen its share price shed over 80 percent since hitting a peak in November 202113.
Despite this valuation shock, however, the long-term outlook for BNPL remains broadly positive. The BNPL market expanded from $16 billion in 2021 to $23 billion last year, according to Fortune Business Insights, and is forecast to grow into a $90 billion industry by 202914.
M&A will provide a spur for this growth, as market leaders move to consolidate the market and new entrants, including big tech companies like Apple15 and B2B-focused start-ups such as Mondu, Hokodo and Billie harness M&A to expand market share16.
Regulation of BNPL in the key US, UK and European markets is also on the horizon, providing further strategic momentum for BNPL consolidation as incumbents seek economies of scale to address the cost of regulation.
4. Banks to Divest Merchant-Acquiring Divisions
Over the last few years, many retail banks have actively moved to outsource and monetise their merchant-acquiring operations through M&A and joint venture deals with specialist payments companies.
These merchant-acquiring units were often regarded as unsung cash generators for the banks, but the banks simply couldn’t keep up with the technological innovation required to stay ahead of (or even keep up with) the emergence of new digital payment solutions.
As a result, many banks have carved out their merchant-acquiring units as separate businesses and in many cases entered into long-term partnership agreements with specialist payment service companies, such as Worldline, Nexi and Euronet, who are better placed to deliver the right point-of-sale solutions to merchants and consumers.
These carve-outs have created significant value for the banks through full or partial sales, in tandem with long-term partnering agreements which can generate significant fees and commissions for the banks.
While many deals have already completed, including Wordline’s acquisitions of the merchant-acquiring units of Banco Desio and Eurobank17, we expect to see an ongoing wave of activity in this space.
5. Cash Is Still King in Some Communities
Even though close to 90 percent of all face-to-face payments in developed countries like the UK are now made using contactless debit cards18, cash remains an important component of consumer behaviour, especially for lower-income communities who have limited access to banking products and use physical cash to manage spending and avoid incurring debt on cards. Bank of England research shows that in the UK, one in five people still consider cash as their preferred means of payment, while the value of banknotes in circulation is at near-historic highs19.
Regulators across Europe, meanwhile, are mandating that banks maintain cash provision services to protect financial inclusion and customer choice. In the UK, for example, the Financial Services and Markets Bill passing through Parliament will mandate that cash access be protected, even as many banks close branches to cut costs20.
As a result of these consumer and regulatory drivers, and despite the increasing popularity of digital payments, the cash-handling and automated teller machine (ATM) market is still providing a steady flow of unique deal opportunities.
Banks looking to reduce the costs associated with cash handling and ATM maintenance (in the UK it costs around £5 billion a year to transport cash, fill up ATMs and providing cash to shops) are responding by divesting cash-handling functions to specialist ATM networks and security companies.
In 2022, US-based group Brink’s acquired NoteMachine, an operator of 9,000 ATMs in the UK, in a $179 million deal21. The transaction followed Brink’s purchase of G4S’s cash-handling services business in 202022 and expanded the Brink’s ATM portfolio to 130,000 machines.
Consolidation of the ATM and cash-handling market is set to carry on apace as traditional security companies continue their evolution from analogue cash-handling providers into cash-as-a-service players.
1 https://www.paymentsdive.com/news/payments-deals-merger-acquisition-may-climb-this-year-2022-2023/639616/. See par 2.
2 https://biz.crast.net/apple-pay-later-whats-the-game-plan-for-monetization/. See par 2.
3 https://www.apple.com/uk/newsroom/2022/10/apple-reports-fourth-quarter-results/.
4 https://www.elavon.co.uk/company/about-us.html#cookieAccept.
5 https://www.zippia.com/elavon-careers-22294/revenue/.
6 https://www.lunar.app/en/personal/blog/corporate-news/lunar-acquires-paylike.
7 https://igamingbusiness.com/strategy/ma/paysafe-to-acquire-viafintech-as-ma-streak-continues/.
8 https://www.worldbank.org/en/news/press-release/2022/11/30/remittances-grow-5-percent-2022#:~:text=Growth%20in%20remittance%20flows%20is,%24100%20billion%20in%20yearly%20remittances.
9 https://www.imarcgroup.com/foreign-exchange-market.
10 https://www.revolut.com/en-US/news/revolut_acquires_indian_forex_business_as_it_advances_multi_million_dollar_india_expansion_plan/.
11 https://cointelegraph.com/news/ripple-partners-with-travelex-to-launch-enterprise-crypto-payment-service-in-brazil.
12 https://www.reuters.com/business/finance/klarnas-valuation-slumps-67-bln-with-800-mln-raise-2022-07-11/.
13 https://www.marketwatch.com/investing/stock/afrm. As at 22 Feb 2023.
14 https://www.fortunebusinessinsights.com/buy-now-pay-later-market-106408.
15 https://www.forbes.com/sites/ronshevlin/2022/06/28/how-apple-will-boost-the-apple-card-with-buy-now-pay-later/?sh=3777443b19c4.
16 https://www.cnbc.com/2022/06/28/forget-klarna-investors-bet-new-startups-will-in-buy-now-pay-later.html.
17 https://www.fintechfutures.com/2022/11/worldline-to-buy-banco-desios-merchant-acquiring-activities-for-e100m/.
18 https://www.computerweekly.com/news/252524573/Huge-leap-to-contactless-payments-in-past-three-years.
19 https://www.bankofengland.co.uk/quarterly-bulletin/2022/2022-q3/knocked-down-during-lockdown-the-return-of-cash.
20 https://www.ft.com/content/2db87e56-8a45-4dc2-8f3b-227cf4902ca4.
21 https://www.marketscreener.com/quote/stock/THE-BRINK-S-COMPANY-14179/news/Brink-s-Acquires-NoteMachine-for-Approximately-179-Million-to-Accelerate-ATM-Managed-Services-Strat-41918370/
22 https://www.globenewswire.com/news-release/2020/02/26/1991163/0/en/Brink-s-to-Acquire-Majority-of-G4S-Cash-Operations-for-860-Million.html
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