How the pandemic—and consolidation—reshaped the acquiring landscape
If the mega payments deals of 2019 left the acquiring landscape somewhat scorched, the COVID-19 pandemic planted new seeds to allow ISOs to grow by quickly converting merchants to electronic payments.
The 2019 mega-mergers were a significant bombshell in payments, and not just for their price tags — The FIS purchase of Worldpay was one of the largest ever in payments and fintech at $43 billion, while Fiserv paid $22 billion for First Data and Global Payments bought TSYS for $21.5 billion — but also because they created a new category of "jumbo" acquirers.
The rest of the legacy acquirers were mostly concerned with what was happening downmarket, as newer outfits like Stripe, Adyen and Square took bigger bites out of the market. Long-standing acquirers/processors like Elavon and PayPal were also actively diversifying to win more merchant relationships.
With the advent of jumbo acquirers, legacy companies were being squeezed at both ends of the market. And while the coronavirus pandemic created far more complications for a business category that relied heavily on personal relationships and handshakes, it also gave those companies firmer footing to convert their customers to digital payments.
"I think what is going on right now is the great thinning of the herd, just because of what is going on at the macro level," Tim Willi, managing director and senior fintech analyst with Wells Fargo, said this week during the virtual Mobile Payments Conference. "There has been a lot of innovation and a lot of upstarts that were getting some traction over a variety of different industries and verticals now coming forward and we are seeing people's true color shine."
Conversely, companies that didn't have any commerce capabilities to begin with are likely to find themselves on the wrong side of history right now, Willi added, while those that do and have the ability to invest capital and pivot quickly are gaining share.
A significant shift in payments, processing and merchant acquiring has to do with the various payments and customer service platforms that have gained traction during COVID-19, from online shopping to pre-ordering and pickup, as well as contactless and in-app payments.
"It's amazing times for traditional processors, as well as watching the consolidation of smaller ISOs getting gobbled up by the bigger ones, and it has all been very fluid," said Lane Gordon, co-founder and managing director at Preston Todd Advisors.
"We are even seeing privately held companies with e-commerce platforms or links that are extremely desirable right now," Gordon said.
In that regard, companies like BigCommerce,Shopify and others have been pushing hard to get larger pieces of the market as consumers shift to online shopping. Shopify reported sales growth of 47% to $470 million during the first quarter of 2020 and just as significantly the company enjoyed a 46% increase in gross merchandise volume to $17.4 billion.
Upticks of that nature catch the attention of even the largest companies during the pandemic because they are essentially trying to keep their merchant accounts afloat during a time of drastic change and uncertainty.
"The market is agreeing with the notion that others are looking at companies like Square, Stripe, Adyen and Shopify," said Greg Cohen, principle at Payx Advisory. "Their stocks and investments are going up."
In response, the traditional players, especially those that were part of the mega deals, are looking to speed up integration processes and capabilities and expand into markets in which companies would typically need those integrations to adjust to the pandemic-driven commerce.
"You are seeing integrations with government entities and in education, as well as a few other areas," Preston's Gordon said. "When you look at Adyen or Shopify, you see a beautiful e-commerce platform, and some of the more traditional players have been trying to establish long-standing merchant relationships, while also getting in and locking down integrated players for needed add-ons."
It's not as if the jumbo acquirers are feeling somehow lost in the shuffle as smaller competitors nibble at or take big bites of market share. They actually have always been able to maintain top positions in the acquiring food chain.
"For the larger acquirers like Fiserv, FIS and Global Payments and others, they have always found a way to protect their turf, much better than most people have thought," Wells Fargo's Willi said.
There was a point in time before Square went public that market investors felt Heartland Payments was "going to go out of business because of Square," Willi noted. "But Heartland was able to pivot, concentrate on relationships and controlling the sales channel, and did well for themselves. Square did not put them out of business."
However, banks are finding themselves in a trickier situation in light of the changes in merchant acquiring — especially on the small-business front.
"If I was working on the small-business side of banking, I would be spending a lot of time worrying about other companies offering financial services," Willi said. "Small businesses can increasingly find what they want from Square, PayPal and a company like Wex, which initially had a payment card and has since broadened out its product line."
It is fairly easy to understand why or how a small business operation would possibly never even have to step foot in a bank, other than to maybe establish a deposit account, during the first couple years of business, Willi said.
"Square can help those small businesses get started, and then come back a year or two later and offer a $25,000 loan to borrow and expand the business," Willi said. "And these companies are not done building products or establishing charters."
The way some small merchant acquiring and payments providers focus on products and collect data that helps a merchant operate a business "is a lot different than how banks think about this stuff," Willi noted.
Ultimately, the payments industry may continue to see some significant mergers or acquisitions, though nothing on the scale of the mega-deal wave of 2019.
"I think we saw once-in-a-generation stuff happen early last year," Willi said. "Outside of that, we may start to see the midsize players trying to become that next $10 billion to $15 billion market cap in order to gain attention of the big players to maybe become the smaller acquisition they need to firm up a gap."
The industry can also expect to see product- or channel-driven acquisitions in B2B or in the restaurant POS sector, as that industry tries to get back on its feet.
"Investors will always have an eye on the payments companies when seeing this massive electronification of the digital economy taking place because of the virus," Willi added.