When even the Economist places an article “Terminal velocity – A mega merger intensifies the scramble to build global payment systems” in the front of its Finance section, you know that something interesting is taking place in the industry. Therefore there is no choice for us, in this monthly column, to look beyond the proposed $44bn merger of FIS, a provider of software and outsourcing services to banks, asset managers and insurers, and Worldpay, the largest merchant acquirer worldwide with processed volumes reaching 40bn transactions per year.

While this deal is still going through the process of being approved and finalised, let us look at two aspects: the rationale for this largest deal ever in the payments industry, and the future outlook. Firstly, the rationale. Some cynics might argue that FIS pursued this deal only in direct response to the merger of Fiserv and First Data, but there is more to it. FIS generates approx. $9bn in annual revenues and this is broadly driven by two main divisions: IFS (Integrated Financial Solutions) which provides issuing processing, digital and fraud management solutions (as an outsourced service) to North American banks and GFS (Global Financial Solutions) which provides capital markets and asset manager solutions. In 2017, IFS and GFS generated revenues of $4.26bn and $4.05bn respectively. By the end of 2018, IFS’ revenues increased to $4.4bn (an increase of 3%) whereas GFS revenues dropped to $3.72bn (a reduction of 8%). So overall, FIS’s revenues decreased. At the same time, the real growth in payments is on the acquiring side driven by e-commerce. Worldpay, therefore, provides FIS with an immediate opportunity to dip into this fast-growing market segment. As for Worldpay, whilst there is no obvious overlap in product capabilities, one has to suspect that FIS’s ability to develop digital solutions, outsource and host applications/solutions in the cloud are features that will become increasingly relevant in the merchant acquiring space as well.

Where does this leave us for the future? We still believe there will be plenty of activity at a much lower scale where payment players buy others to complement and enhance their service offerings (think acquirers buying gateways or value-add providers) but that there will also be further consolidation amongst the larger players to drive down costs. About 10 years ago, another consulting firm was doing the rounds at conferences arguing that it required 6bn transactions for an acquirer to have scale economies. That was well before the e-com wave and today we see a number of players that have reached this level already. However, reaching such levels in one geography / continent alone will be increasingly difficult so cross-geography mergers or investments are likely to happen (e.g. large European or US players buying into LatAm or Asia). But what if the next stage of consolidation is driven by the large Asian players (in other words Chinese) buying assets in Europe and North America? Or what if the big tech companies (in other words Amazon or Apple) buy payment players. Whatever it will be, the end of M&A in payments is nowhere near.‍

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