This week, the consolidation wave continued as FIS and Worldpay announced their plans to merge, creating another behemoth in the financial technology industry.
But the fact that we’re running out of synonyms for “big” may create an even greater opening for payment facilitators than existed before.
FIS announced on Monday that it plans to acquire Worldpay in a stock and cash deal worth about $43 billion. This comes quickly on the heels of Fiserv’s January news that it plans to acquire First Data in a deal worth $22 billion.
According to Rick Oglesby, president of AZ Payments Group, the FIS / Worldpay deal has more in common with the Fiserv / First Data deal than timing. Also similar is the fact that Worldpay and First Data are huge merchant acquiring companies that are being acquired by companies that have traditionally focused on banking technology.
“Through these deals,” Oglesby told PaymentFacilitator, “Fiserv and FIS get to expand their target markets by extending their platform-as-a-service business models beyond banking services and into offering finance-related services in higher growth segments (to retailers and software companies).”
“That’s a strategy that makes sense for bolstering the valuation of their respective firms: expanding their business model into new, large markets with higher growth rates than their traditional businesses,” he said.
What makes sense for valuation doesn’t always make sense for the customer, however, and Oglesby believes service has the potential to suffer. As the merchant acquirers are swallowed into huge conglomerates, “they are likely to lose skilled staff, struggle with managing their many tech platforms, struggle to find synergistic strategies across their lines of business, and to incorporate new priorities driven by their parent companies.”
But Oglesby argues that this has the potential to create even more opportunity for payment facilitators, who are known for delivering more personalized, merchant-centric service.
“As the major processors consolidate and add scale, PF sponsorship and processing will be available at lower costs which increases the potential margin available to PFs,” he said.
Additionally, the larger companies will likely be focused on scaling their businesses, which could lead to a greater need for third parties to manage direct relationships with smaller merchants, Oglesby said.
“As these companies get bigger, they will naturally focus on larger business opportunities and increasingly concede smaller ones to third parties by enabling PFs and other integration deals. Specialized product offerings and niche-oriented distribution are not part of the program for a scale business,” he said.
For now, however, the merger continues a trend that is getting the attention of the broader business world, as evidenced by this article from CNN, which cites a McKinsey estimate that payments are expected to reach nearly $3 trillion in the next five years.
“It’s very hard to predict what it will mean this early—the size and scope is so vast it will take quite some time to see,” said Todd Ablowitz, CEO of Infinicept, which provides payment facilitator enablement software and APIs.
“What is clear, however, is that the payment processing business is consolidating again. This consolidation of players of increasing scale creates opportunities across the industry and will continue to bring attention to payments,” he said.