At a Glance
- Market volatility and rising interest rates hurt the buy side, and declining valuations meant that companies that didn’t need to sell simply avoided the market.
- Bold companies in the payments sector will pursue capabilities to integrate into offerings and extend propositions via scale deals and cross-border grabs.
- Banks are well positioned to become acquirers in the payments sector, and they have a head start in defining this rapidly evolving industry.
This article is part of Bain's 2023 M&A Report.
The distinct M&A slowdown in the payments sector after record deal value and volumes in 2021 masks an important reality: This is a dynamic industry that likely won’t maintain its rapid evolution without M&A.
Dealmaking took a pause in mid-2022 for all the same reasons that it stalled in so many other industries. Market volatility and rising interest rates hurt the buy side while declining valuations on the sell side kept quality assets from coming to market. The big area of growth that we extensively reported on last year—that is, the boom in deals to fuel the “buy now, pay later” sector—all but dried up in 2022, but for different reasons. Headwinds in the form of rising credit losses, greater competition, and increased regulatory scrutiny made both buyers and sellers nervous. It’s a fragmented end of the business that is still growing fast and will require consolidation. But with falling valuations, again, companies that don’t have to sell are avoiding coming to market.
Instead, the bulk of dealmaking is shifting to four other areas where the biggest opportunities are emerging for companies willing to make the bold moves that help them shape an industry.
Scale deals to consolidate
Despite the small number of scale deals made in 2022, consolidation across the payments ecosystem was a major contributor to deal value. Consolidation deals are showing up in all varieties. Although it was dwarfed by Square’s (now named Block) $29 billion purchase of Afterpay in 2021, the biggest deal of 2022, Global Payments’ $4 billion takeover of EVO Payments, was a global consolidation—albeit with the added benefits of acquiring new business-to-business (B2B) capabilities and eliminating their US overlap. Worldline’s acquisition of Axepta Italy and Nexi’s joint venture with Alpha Bank in Greece represented regional consolidation. There was local consolidation, too—think of DNA Payments’ purchase of Card Cutters in the UK. We expect to see all flavors of consolidation continue, particularly in the (relatively) commoditized merchant acquiring sector in which large incumbents need to drive down unit costs to compete with faster-growing challengers.
Consolidation deals are showing up in all varieties.
As the consolidation race heats up, winners are fast emerging—and focusing on their core business. For example, in Europe the two emerging powerhouses are Worldline and Nexi, with Worldline shedding its legacy physical terminals business to focus on e-commerce.
Cross-border capabilities grab
The cross-border payments sector continues to see many capability-focused deals. The increasing requirement to provide a standard set of global corridors and pay-in/pay-out rails (including local automated clearinghouse connections and wallets, for example) has been the impetus behind a number of recent deals, including Fleetcor’s acquisition of Global Reach Group, iBanFirst’s purchase of Cornhill, and Ebury’s decision to buy Bexs (Brazil). While some of these deals also provide an opportunity to scale up, the capabilities are the real prize for now.
It’s not just the cross-border specialists that are capturing multinational alternative payment methods (i.e., noncard payment capabilities); we are also seeing a continuation of the 2021 trend in which multinational gateways and B2B providers expand their global coverage to include an ever-increasing range of local payment methods. In 2022, that quest for expansion led to deals such as PayRetailers’ purchase of Paygol and Pago Digital, Revolut’s acquisition of Arvog Forex, and the Banking Circle-SEPAexpress deal.
It’s not just cross-border specialists capturing multinational alternative payment methods.
Buying payments capabilities to integrate into software offerings
The US independent software vendor (ISV) market has led the way in integrating payments with wider software solutions highly focused on specific industries. It’s a trend that is gradually expanding to other regions—Europe, and particularly the UK, are at last showing signs of going in a similar direction—opening up opportunities for M&A. This will take several forms. For example, ISVs will acquire payments capabilities—that’s what happened when Access PaySuite bought Pay360. Also, incumbent payments companies will buy software capabilities, as FIS/Worldpay did when it acquired Payrix, with its capabilities for embedding payments into software-as-a-service (SaaS)–based platforms. And finally, challengers will look to provide payment services to ISVs. That was the approach taken when Payroc bought Worldnet.
Acquiring capabilities to extend SaaS propositions
Banks continue to eye opportunities to provide banking-as-a-service (BaaS) propositions for third parties, including payments services. As they do, the market for service providers that support these banks remains robust. And the service providers are looking to broaden their offerings. That was what Ximedes did when it bought Ginger. It gained payments-as-a-service capabilities to offer to banks for a broader BaaS proposition.
Banks are positioned well to become acquirers in the payments sector, and they have a head start in defining this rapidly evolving industry. Their situation has changed substantially since last year. Yes, they will need to wrestle with more credit losses, but their balance sheets are generally healthy and rising interest rates mean that the liabilities side of their balance sheets is now generating income. Furthermore, last year’s trend toward stock deals is less evident, so banks looking to buy their way into interesting payments markets are now much more well positioned.
There is also less competition from private equity for deals as the cycle turns and multiple expansion becomes more difficult to achieve. This offers opportunities for banks and other buyers to acquire (for either scale or scope reasons) at relatively attractive rates, but we also expect to see fewer quality assets coming to market as sellers bide their time. If not forced to sell, many will simply wait it out.
This raises unique challenges for potential acquirers in the payments sector in 2023. For the capability hungry, acquiring high-quality assets will require bold approaches to companies that are not necessarily looking to sell—and striking a fine balance on offers that get them to the table without overpaying. Also critical is a disciplined approach to due diligence, ensuring that the asset quality really is what they say it is (with a willingness to walk away if the signs are negative).
For the consolidators, there is a window of opportunity to absorb competitors at less stratospheric prices, particularly those that are unwilling or unable to invest to maintain their competitiveness. This may unlock new opportunities to carve out banks' underinvested merchant acquiring businesses, for example.
For potential sellers, the key will be getting to maturity and profitability (or at least on a clear path to profitability) as fast as possible. The environment has much less tolerance for cash-burning models.