Partnerships / Acquisitions

Why The Pandemic Is A ‘Black Swan’ That Will Spur Payments M&A

The mergers and acquisitions, the deal-making, the funding and IPOs among payments players may be just getting started.

In an interview with Karen Webster, Jim McCarthy, president at i2c, said that a great digital shift will spur tie-ups of all sorts — from partnerships to outright buyouts — as incumbents seek to move quickly to modernize their tech stacks.

 

The conversation was the first in a multi-part series on the “race” that is bringing stakeholders in the payments processing, credit and financial services verticals together through a continuing spate of mergers, acquisitions and partnerships.

Despite — or perhaps because of — the pandemic, a number of strategic and financial deals are taking shape. Scan recent headlines and you’ll see that Equifax bought Ansonia Credit Data; Corsair Capital bought B2B payments solution provider MSTS, and OnDeck was bought out. Western Union has been public about its desire for acquisitions.

Special purpose acquisition companies (SPACs) have been all the rage, too. For example, over the summer, integrated payments and eCommerce technology provider Paya merged with  FinTech Acquisition Corp. to go public.

The underlying theme, of course, is the realization that consumers increasingly want more control over (digital) payments (today, done in a more touchless manner) and have ever-higher and rising expectations, according to McCarthy. And companies must deliver — or risk being rendered obsolete.

We are now entering an age where Amazon can enable “pay by hand.” The mobile device is the chief conduit toward staging transactions, to getting goods delivered curbside or to the house. On the B2B side, we’re (slowly but surely) moving beyond the age of the paper check.

“If you think again about the innovation over the last 10 years,” he told Webster, “the last place I would have said we would have seen all this innovation” would have been on the merchant side of commerce. Not because those firms didn’t want to innovate, but because they were so constrained from doing so by being tethered to green screens, hardwired devices and long depreciation cycles. Against such resistance, good, innovative ideas died and continue to die quickly, he said.

Fast-forward to 2020, and the pandemic has shown, through the Stripes and Shopifys of the world — that the pivot to buy online/pickup/deliver has been facilitated by the innovations on the merchant side.

"I do see a ton of opportunity on the issuer processing side, the consumer side of this, where you're going to see a lot of innovation because it's where we've been stuck for a long time," McCarthy noted.

He added that a number of executives around the payments landscape have said they are on an M&A “hunt,” owing to a confluence of factors, including the fact that would-be acquirers are sitting on lots of money in the bank, and there is a significant number of distressed firms ripe for the taking.

Of the pandemic, McCarthy said: “Black swan events create a lot of opportunity for those firms that are in a good position. There are a lot of companies coming into this space that are very well-capitalized” and willing to make deals where, for example, venture capital firms may be pulling back a bit amid so much economic uncertainty.

For strategic buyers eyeing the payments space, the opportunity is to execute on initiatives that may have been on the back burner, but can now be pulled forward. Deal-making will prove inevitable, especially, for FinTechs, where McCarthy noted that though there are many good ideas, they may not be enough to build great, or even sustainable, companies.

In other words, innovation may not be enough to boost firms to a level where they can stand on their own — but they might compel larger players to open their wallets.

Drilling down into what might lure strategic buyers, McCarthy pointed to softPOS, which can help accelerate the move to digital and mobile payments that is already in motion.

“Getting rid of that hardware overhead could be very interesting,” he said. He noted, too, that companies that enhance card capabilities and security could be nice “add-ons” for incumbent, legacy processors, particularly in pushing credentials or tokenizing transactions.

The Road To Acquisitions

There’s a bit of a roadmap to acquisitions in the payments space, McCarthy said — borne out over the past 20 years, where deal-making is a natural outgrowth of commercial relationships. There’s not an issuer around that isn’t worried about moving faster to market with new offerings and technologies — thus, the eagerness to bank on FinTech and tech upstarts through partnerships. “It usually progresses from there,” he said.

In the ongoing rocky economic climate, noted McCarthy, at least some well-capitalized firms are leapfrogging commercial relationships and partnerships and are opting instead to buy these smaller, innovative peers.

That doesn’t mean there isn’t room for partnerships to work on their own, McCarthy cautioned. He pointed out that i2c has indeed been focused on forging partnerships with the likes of Visa and Mastercard rather than pushing ahead on the dealmaking route. It’s a form of what he termed “playing the long game” with a focus on secure remote commerce, application programming interfaces (APIs) and IoT, but more broadly on creating sustainable value for issuers by redefining the speed and flexibility with which financial products are designed, tested, launched and managed over their lifecycles.

Some Notes Of Caution  

The spate of recent deal-making, and the private market valuations and IPOs, have pushed valuations fairly high — eye-poppingly so, in some cases. McCarthy pointed to Chime as an example — a firm that operates as a debit card with some digital capabilities that commands a reported $15 billion valuation on the heels of a recent capital raise.

The blank check companies, he said, have been a way for firms to raise capital, and to compensate for some of the pull-back in private-equity funding in an environment where there’s about $2.5 trillion waiting to be put to work.

Of the SPACs, he said, “It’s kind of the flavor du jour — and it’ll be interesting to see how well it sticks.”

Looking ahead, said McCarthy, the legacy issuer/processors and financial institutions (FIs) that can quickly pivot to a complete range of digital capabilities across acquisition, issuance and payments wrapped around virtual and physical cards will emerge as winners — building partnerships where they can, and buying firms, too.

“It'll be interesting to watch it all evolve,” he told Webster.

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WATCH LIVE: HOW WE SHOP – TUESDAY, NOVEMBER 10, 2020 – 12:00 PM (ET)

New forms of alternative credit and point-of-sale (POS) lending options like ‘buy now, pay later’ (BNPL) leverage the growing influence of payments choice on customer loyalty. Nearly 60 percent of consumers say such digital options now influence where and how they shop—especially touchless payments and robust, well-crafted ecommerce checkouts—so, merchants have a clear mandate: understand what has changed and adjust accordingly. Join PYMNTS CEO Karen Webster together with PayPal’s Greg Lisiewski, BigCommerce’s Mark Rosales, and Adore Me’s Camille Kress as they spotlight key findings from the new PYMNTS-PayPal study, “How We Shop” and map out faster, better pathways to a stronger recovery.

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