There were simply too many intermediaries considering the transition to digital. That’s one logical take on the consolidation that’s reshaping the payments industry. But as payments and financial technology providers bulk up to offer a one-stop shop for end-to-end services, market share will increasingly be defended by having the best available product as scale will be a more level playing field.
The profound shake-up in the payments industry has been years in the making. The sector’s becoming increasingly crowded with start-up payment and FinTech companies and now, in quick succession, some long-standing leaders are being consolidated. In the first half of 2019 alone, the three largest acquisitions in industry history have been announced, likely removing the customary boundaries of serving either the merchant, bank, or consumer.
|18-Mar-19||Fidelity National Information Services (FIS)||Worldpay||$36,257|
|28-May-19||Global Payments||Total System Services (TSYS)||$22,144|
|Source: S&P Global, PwC.||$ in millions|
When considering the total deal value across the aggregate financial services industry in the first half of 2019, 60% has gone to payment companies.
For starters, the combinations seen in Figure 1 are likely to result in massive distribution reach, largely due to ties to bank distribution channels. Secondly, the collective impact essentially marks the end of the independent payment processor, which acts as a gateway to the payment networks in addition to providing payment authorization, settlement, and other services. The resulting three companies will be the top independent processors by essentially capturing a “super majority” of volume and transactions among themselves and inhibiting other independent processors’ efforts to achieve the necessary scale to effectively compete on price and capability.
Payment processing has become commoditized and that has pressured fees and margins, making it even more critical to increase processing volume. The extent of the recent consolidation, however, will effectively neutralize the scale advantage and create a need to compete on other variables. As each combination also forms a two-sided network—with reach from the merchant to the card issuer—the race is now on to develop new services that span this end-to-end reach.
The payments sector has become much more about the technology than distribution as many basic roles have been subsumed into the activity itself. Whether ordering a meal, hailing a ride, or shopping via e-commerce, each has been reduced as close to a one-click activity as possible—with the payment function often invisible. In fact, many consumers are moving beyond the notion that payments are a one-directional money flow to a merchant. Instead of a card-based payment or the concept of payment acceptance, consumers simply care about money movement regardless of whether it is to an individual, merchant, or for bill pay.
The question for banks, most of which outsource their payment operations, is whether the change in how consumers move money will elevate payments from a basic operational transaction to a differentiating capability that can influence customer acquisition and retainment.
Today, “digital” is redefining the primary banking relationship. Rather than a checking account, the sum of all interactions—card use, branch visits, digital exchanges—dictate how banks look to acquire customers and grow deposits. Seamless money movement capabilities and personalized rewards are another arrow in the quiver that banks can leverage to shape customer engagement. A customer ordering lunch from the same restaurant several times a week, for instance, might value a free lunch over the goal of collecting reward points over several months or years.
The point is that as the form factor for payments moves away from cards, the ability to simplify the process between point of sale and the funding source (e.g., DDA account) is an opportunity to improve how banks understand customer interaction for the purpose of improving engagement. Much of the current payment infrastructure is too fragmented to have complete visibility in order to act.
Large banks may want to consider incorporating payments operations in-house or reassessing non-bank payment providers. As payments becomes more about the technology and end-to-end visibility, greater synergies may exist when combining overall payment and overall core bank infrastructure. On the flip side, the many medium and smaller-size banks that outsource core banking technology may see greater synergies from the recent acquisition combinations. But this may come with the risk that costs increase due to a smaller competitive field and the bundling of additional services occurs.
As for the payments ecosystem, the consolidation of the independent processing market arguably strengthens the case for the viability of additional closed loop networks. Two of the combined entities in Figure 1 have payment networks (Fiserv with Accel and now STAR; FIS with NYCE). The combined market share that each network will now represent might make a more appealing option to circumvent incumbent market leading payment rails with the added benefit of on-network processing and transaction routing. This could result in margin expansion for the payment companies while reducing acceptance and processing costs for others.
Payment providers and non-bank companies (e.g., Adyen, PayPal, Square) will be emboldened to develop additional services to what they already offer merchants and consumers. This is arguably the strength of many newer generation payment companies due to their modern technology infrastructure and mix of developer talent. If payment processing is truly commoditized and payment networks are in fact seeing true competition, differentiation will occur at the application layer with the development of new services.
It’s too early to assess the impact of the consolidation on the broader industry. Still, some directional trends have been validated. First, as payment activities shift further away from cards to DDA-based payments and other payment forms, there is a need for issuing banks and payment companies to participate in more payment flows. Second, as payments are more about the technology than distribution, a global reach will become increasingly important.
Financial Services Leader, PwC US
Financial Services Advisory Digital Leader, PwC US