By Mike Massaro, CEO Flywire
Over the last year, there has been a huge shift towards consolidation in the payments sector. The titans of MasterCard and Visa have been on the acquisition trail, looking for innovative players that can help fill gaps in their own services. While Visa took Earth port, MasterCard backed-off to swoop a deal with Transfast, a company operating in the same space for the huge sum $274m. March 2019 saw Fidelity Information Services (FIS) acquire World Pay – for a record sum of $32bn – a seismic deal.
But what is behind this recent spate of M&A and is this a good thing for the industry and those it serves?
Out with the old and in with the new
To understand why the giants are making these acquisitions you must first look at fintech companies who have emerged over the last few years. The financial turmoil of 2008 ignited a fintech ‘revolution’ that brought us the likes of Monzo, Starling Bank, and Revolute. The new challenges came-in on a wave of bank inertia, with the added growth of digital services, pushing consumer demand for a more modern way of managing money.
Payment innovation has been a huge part of the fintech revolution of the last decade. New players including Curve, Ripple and Venmo appeared on the market with modern services built on industry-changing technology like real-time payments or blockchain. Ripple provides secure, instant and nearly free global financial transactions of any size with no chargebacks. Curve puts all of a user’s cards in one place to make paying on a chosen method easier and more accessible. Venmo’s P2P service uses real-time payment rails, moving payment volume away from the card infrastructure of previous years.
While technology is giving people the means to disrupt the status quo, changes in regulation are evening the playing field. The Second Payment Services Directive or PSD2 as it is widely known, opened the door on consumer bank data, also bringing with it ‘account-based’ payments. To call it a ‘shift’ would be an understatement. Account-based payments means consumers are now able to choose “pay by bank” as a payment method when dealing with service providers. This totally bypasses the card networks who have ruled the retail payment space in previous years.
At the same time, changes to interchange fees has driven down revenues for card networks and issuers. Over an 18-month period from their introduction, these fees fell by 50% – suspected to dent the credit card issuers alone with a €2bn shaped-hole (PSR, 2017). Further price compression in an ever more commoditised market is simply unsustainable. The payments companies that have become reliant on interchange fees need to look elsewhere to boost their revenue.
Piecing together the puzzle
What does this have to do with consolidation? People still use Visa and MasterCard systems, be it debit or credit cards, but payments is at its core a scale and volume game. The bigger the payments company, the larger its seat at the table – also allowing it to control fluctuation and exchange fees. The shake-up we’ve seen over the last few years has put a target on the scale and volume of payments giants that have been built on years of card-based transactions and a four-party model.
The longstanding titans are fully aware of the threat on the horizon. Knowing new payments services and infrastructure could lure consumers away – and more critically take some of their market share, they have no choice but to compete or buy. The consequences of this has seen players adopt a dual strategy. Firstly, acquire the existing companies from the longstanding card-based world to better their scale, counteracting market price compression. The second part is acquiring the challengers who are front and center in the emerging ecosystems.
What this amounts to is industry giants, threatened by market competition and changes in regulation setting off on the acquisition trail. The big players are trying to fill a puzzle with all the pieces they don’t have – allowing them to compete in a global, data-driven world. They believe bringing each piece together will amount to a ‘utopia’.
Consolidation: Industry in reverse?
Not too long ago, a tiny group of companies controlled the payments market. The fintech sector has shaken this up over the last ten years, PSD2 and an overhaul in interchanges fees has helped to shape a more competitive environment. Law makers have made it a point to promote innovation, create competition and give consumers more choice.
Yet, if the giants continue the acquisition trial, this could result in a step backwards for the industry. Reaching ‘utopia’ – i.e. owning the systems of old and new will mean the decisions taken to remove their grip on the industry will essentially be brushed aside.
At the end of the day, leaving more room in the industry is better for everyone. There is more than enough volume in the payments sector for each player, big and small, to have a seat at the table. But beyond volume, the competition of a modern ecosystem will continue to drive innovation – delivering better services for the consumers that are more affordable and favorable for merchants. Instead of seeking to compete across the industry, giants should be collaborating with the new challengers.
Collaboration is key
So where do we go from here? The word ‘challenger’ may sound as if they are aiming to take a slice of an existing business, but the reality is that challengers and giants both need each other. Payment ‘marriages’ are important, they allow both parties to benefit and reap the rewards. These partnerships help consumers access the latest products they want, and the giants end up doing less of the leg work in innovation. Instead of going after a ‘utopia’, the newer challengers and longstanding giants must work together, building an ecosystem that is in the interest of all parties involved, not just a select few.