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.
Footnotes
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/.
9. https://www.imarcgroup.com/foreign-exchange-market.
13. https://www.marketwatch.com/investing/stock/afrm.
As at 22 Feb 2023.
14. https://www.fortunebusinessinsights.com/buy-now-pay-later-market-106408.
18. https://www.computerweekly.com/news/252524573/Huge-leap-to-contactless-payments-in-past-three-years.
20. https://www.ft.com/content/2db87e56-8a45-4dc2-8f3b-227cf4902ca4.
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