Technology in the electronic payments space continues to attract intense interest from companies, sponsors and other potential acquirers.
Already in 2019, some significant consolidation plays grabbed the headlines in the first quarter. The robust deal activity in the electronic payments space speaks to a continuing evolution in the relationship between upstart fintechs and traditional financial institutions.
Global investment in fintech broke records in 2018, building on momentum from the previous year. Last year alone, $111.8 billion flowed into the industry on a global scale, and nearly half – $52.5 billion – poured into the U.S., as reported by KPMG’s “2018 Pulse of Fintech” report. A large part of this is due to ongoing expansion in electronic payments, as technology in that niche continues to attract intense interest from companies, sponsors and other potential acquirers.
As in any instance of a market boom, the common query is: Will it last, and if so, for how long? Already in 2019, deal activity and valuations show little sign of abating, with some significant consolidation plays grabbing headlines in the first quarter: $34 billion in the FIS and Worldpay deal and $22 billion in the First Data and Fiserv merger, for starters.
While no one can accurately predict the level of activity for the remainder of the year or beyond, a closer inspection of the drivers of this latest activity provides some indication of the nature of the market environment and its potential to contribute to the momentum for electronic payments players.
Changing Dynamic Between Players
The robust deal activity in the electronic payments space speaks to a continuing evolution in the relationship between upstart fintechs and traditional financial institutions (“FIs”). Long past eyeing each other warily, the two industry segments have achieved a healthy balance between cooperation and competition, or “coopetition.” The agility, innovation and laser focus of fintechs – particularly as their qualities relate to the customer experience – are proving attractive to traditional FIs. In turn, FIs can provide some of the scale, capital, distribution and critical regulatory compliance structure that elude most fintechs in this still-early business stage.
Buy, Partner or Build?
Organizations are constantly seeking to expand the depth and breadth of their offerings by building on their existing capabilities and introducing new and better solutions for customers. One option, of course, is to develop initiatives internally, which can take years. The other option, which strategics are increasingly pursuing, is to buy and integrate.
Small fintech firms are introducing innovative technologies that are ready now. Given the speed at which the market is evolving, strategics are well positioned and well capitalized to acquire such companies and solutions, integrating them into their own product set for deployment in considerably less time than embarking on their own R&D efforts. Private equity firms recognize the opportunity between strategics and fintechs, and those that have proven abilities to collaborate and leverage each other’s capabilities are poised to command strong valuations.
Global Catch-Up
The electronification of payments is inevitable, and the U.S. currently leads the world in the proportion of payments that are fully digitized. While Western Europe may not be far behind, the rest of the globe is lagging.
For electronic payments companies in the fintech sphere, the potential for growth is enormous. As the rest of the world catches up to the U.S. – which itself has significant runway for further electronification of payments, since cash and checks comprise a significant minority of total consumer transactions – this segment of the market should experience strong demand. Cultural and regulatory disparities among markets will be a challenge, but one that strategic partnerships may help overcome.
Customer Experience Is King
Developments in 5G, AI, machine learning and the like are already influencing how we live and impacting how, and how much, information is transmitted. Considering the availability of technologies such as near field payments and digital wallets, electronic payments capabilities are essential and create opportunity for those who can accommodate frictionless transactions. Moreover, as FIs and fintechs look to the future, they see an up-and-coming generation of consumers which will have grown up with screens in their hands and accustomed to 24/7 access and ease of use. No matter how these consumers are interacting with brands on their screens, the expectations will be nothing short of a fantastic user experience: elegant, easy, seamless and device-agnostic.
Expectations are bullish for deal activity for electronic payment and fintech companies in 2019. Secular trends bode well for the space, as more consumers are eschewing cash for electronic payments, and innovation is key to delivering the simple and seamless user experiences demanded on all fronts – consumer and business.
The big players in the industry are financially strong and have ready access to the capital markets, and the amount of sponsor dollars available are a positive sign. Small companies continue to innovate and launch compelling technologies, and integrative software should remain attractive as businesses look to shore up their capabilities. The market appears healthy in the near-term given the anticipated persistence of current drivers, though the economy and global indicators will factor into the future growth trajectory of the fintech industry.
To learn more visit regions.com/securities
