Consolidation in Payments and the Future of Fintech

Marquee name acquisitions in the payments space may signal an era of turbulence, as incumbents and challengers consolidate to gain wider market share.

The payments industry has seen an uptick in consolidation over the past several years, and especially within the last few months. The ability to boost pricing power is seen as the main impetus behind this consolidation, enabling the indomitable unions to increase market share, improve technology and cut costs.

As ecommerce and electronic payments continue grow, payments companies have seen an increase in demand. The fintech and payments startup scene is rich with companies that continue to disrupt the scene and add value through innovative technology. Some startups look to quicken the pace of digital transformation in payments as a standalone offering, while others aim to augment established companies with creative solutions and applications.

Trend Towards Consolidation

The payments world has seen a sweeping trend of mergers, acquisitions, and consolidation over the past several months. In January, Fiserv and First Data Corporation announced a merger agreement where Fiserv acquired First Data, bringing together two huge fintech companies into one massive, leading payments and fintech provider.

More recently, Fidelity National Information Services (FIS) announced its intent to buy Worldpay in a record-breaking payments acquisition totaling $34 billion in stock. This union sees a processing leader in the payments space join with a bank-office, credit-card processing and bank ATM service provider to create a “high-growth e-commerce” powerhouse.

It’s not an unforeseen trend; Capgemini pointed toward this likelihood in its Top Ten Trends in Payments 2018 report. With technology as the primary driver of payments evolution, and with new entrants disrupting the space consistently, incumbents face the challenge of retaining existing customers despite cumbersome and slow legacy systems. As the open banking tide continues to rise, the level of competition will cause additional pressures as margins decrease. This presents the perfect storm—and opportunity—for consolidation.

Implications for Payments Technology

In looking at the Fiserv and First Data Corporation merger, the union appears to be very complementary. Together, this mega-fintech can offer leading technology capabilities that enable a range of payments offerings, spanning from account processing and digital banking solutions to card issuer processing and network services, integrated payments, and point-of-sale (POS) solutions. What’s more, the company boasts comprehensive distribution channels and the deep expertise in payments partnerships that run the gamut: FIs, processors, billers, and software developers.

This aggregation of services can improve the movement of money and data. First Data excels on the merchant acquiring side as well as with global issuing services. Fiserv has led the market in technology solutions for financial services players, including banks, credit unions, securities processing organizations, and more.

Payments players that offer enhanced digital capabilities will be the main targets of acquisition as larger incumbents face mounting pressure to scale, drive down costs, and take a bigger slice of the digital payments pie. Payments processing will continue on the path to commoditization, making those vendors apt to expand and improve offerings through value-added services. These conditions are ripe for consolidation to occur.

The catalyst behind many acquisitions is the need for access to emerging technology, fresh talent, and access to existing customer bases. That said, the objective has also been to optimize existing resources and minimize costs.

This consolidation will also be beneficial to end consumers, who are already enjoying more innovative payment options that are faster, more secure, and seamless. We especially see this as PSD2 takes hold, opening up the banking ecosystem to a more diverse set of players equipped to enhance the customer experience to a great degree. The future of the industry is centered around a customer-centric payments experience.

The Future of the Fintech Ecosystem

The role of intermediaries in traditional payment processing continues to diminish. Fintechs—with the help of industry pushes toward open banking and increased security—are stepping in and delivering on niche solutions for different parts of the payments value chain. Where consolidation is concerned, these fintechs have an opportunity to collaborate with incumbents by broadening the range of customer offerings and helping those incumbents remain relevant as the value chain evolves.

Third party providers (TPPs) will continue to benefit banks and incumbent financial services providers, though it will be a mutually beneficial relationship. These symbiotic relationships will enable TPPs to access large customer bases while providing them with faster, more frictionless interfaces. With retail ecommerce sales on pace to surpass $735 billion in 2023, supported by digital payments, this trend will likely continue as more entrants to the space drive up competition. This, in turn, will force consolidation of payments entities who will be looking to capitalize on economies of scale.

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