Ingenico is negotiating a business combination with BS Payone that would boost its profile in parts of central Europe and allow it to counter multichannel moves by other major payment companies.

Under a potential deal, BS Payone—a subsidiary of the Sparkassen FinanzGruppe—would combine with Ingenico retail assets in the DACH region (Germany, Australia and Switzerland).

The Paris-based Ingenico announced the negotiation on Wednesday afternoon New York time, adding the two companies hope to sign agreements by the third quarter. The negotiation is exclusive, and Ingenico would own 52% of the new unit while currency BS Payone shareholders would retain 48%. A representative of Ingenico would not comment beyond the company's release.

Bloomberg News

The combination would sell multichannel payment and merchant tools to retailers in the region. The Frankfort-based PayOne serves more than 250,000 merchants, making it one of the largest merchant acquirers in Germany; and it has partnerships with several German banks.

The two companies are positioning the deal as a collaborative long-term venture to build both online and offline technology. Ingenico's position in the DACH region will be strengthened, giving Ingenico extra omnichannel heft as Germany's traditionally cash-friendly market migrates to digital transactions. The German opportunity has already attracted First Data, which is pushing its Clover point of sale system in Germany and Austria.

The combination can also play a supporting role as Ingenico girds against encroachment by PayPal and Square.

Both PayPal and Square are making major investments in diverse services that are designed to expand their respective merchant acquiring businesses in Europe.

PayPal has reached a deal to acquire iZettle; while Square is raising about $750 million. Both of these deals are global, but have ramifications for central Europe.

iZettle has a major merchant acquiring business in Europe, large enough to fetch $2.2 billion from PayPal. iZettle was already expanding its merchant tools before the PayPal deal, giving it inroads into Germany, where iZettle has been available for about five years.

PayPal's iZettle deal was partly a response to Square's encroachment in Europe, where it has been building a market for the past three years.

Despite being an older point of sale vendor, Ingenico's rivalry with companies like Square and PayPal is relatively new. As Square and PayPal look to boost in-store technology, Ingenico is moving in the opposite direction by adding digital services to augment its traditional hardware business.

It's become a common trend: As companies diversify beyond older models—in this case Ingenico going digital—they confront younger fintechs head-on.

It's also an expensive trend. In 2017, Ingenico spent $1.7 billion to acquire Bambora, a company with a strong track record in onboarding merchants to online payment systems. That move was seen as a counter against third-party online payment tools from Stripe and Braintree (a unit of PayPal).

Ingenico has additionally acquired Airlink to add multichannel merchant acquiring expertise in Asia; and Paymark, a New Zealand-based processor. And Ingenico earlier this year added Google technology to its terminals in the U.K. to support incentive marketing on smartphones while consumers are making contactless mobile payments.