The old payment networks circle their wagons
By Edward W. Mandel
The electronic payments industry, ecommerce’s less charming but harder working school chum, is experiencing a growing pain this season. Or more precisely, it’s experiencing the pain of no longer growing.
The number of companies that specialize in facilitating the flow of funds from buyer to seller to bank is dwindling due to worldwide consolidation. Wall Street’s mergers-and-acquisitions advisors have been taking players off the board at a frenetic pace, and their work has not yet reached the end. Hell, it might not have yet reached the middle.
At IOU.io, we take all this activity as a positive sign — positive for us, that is. It probably kinda sucks to be working at a recently acquired payments firm or one that is rumored to be a takeover target.
But the more the legacy payments firms eat their own in order to drive down costs and raise prices, the more attractive blockchain-native solutions look.
So pass the popcorn and let’s stream this disaster series together.
Previously …
The stage was set for this round of consolidation in 2013, when French financial services provider Ingenico bought a Belgian payment gateway Ogone, which became Ingenico Financial Services and in turn bought out Sweden’s Bambora for almost $2 billion in July 2017. Ingencio was far from done. The Bambora deal was the first of three Ingenico takeovers in less than six months.
Coincidentally or not, another French firm — Worldline — was buying another Swedish firm — Digital River — in the same space at the same time. Terms weren’t announced but, safe to say, it was a much smaller deal than Ingenico-Bambora.
Toward the end of 2018 NCR acquired JetPay for $184 million. Then, in the first weeks of 2019, Fiserv bought First Data Corp. for $22 billion. And most recently, on March 18, fintech company FIS bought payments processor Worldpay for $43 billion — about one-third more than the stock market thought it was worth. The Worldpay that fetched that price had been three separate companies –Moneris Solutions, Vantiv and a practically unrelated company also named Worldpay — three years earlier.
It’s notable that the frenzy started in Europe before crossing the Pond to the U.S. The European Union had recently passed some regulations which would directly impact the industry, so there was a burning platform there, as opposed to America’s perennial greed (bless the States — where would we be without its avaricious soul?). The Revised Directive on Payment Services, or PSD2, started coming into effect in January 2018 and is intended to provide extra layers of consumer data protection. Banks and payment gateways have until September before it’s 100% in place, but PSD2 compliance has been widely reported as causing technical challenges. So suddenly the payment industry wasn’t the place to be unless your heart was really in it.
Of course, money is fungible and ecommerce wants to be borderless, so it was only a matter of time before American companies joined the act, starting with Vantiv’s purchase of the then-British Worldpay. And that’s when the gloves came off. First Data’s multiple was 12x trailing-year earnings, and Worldpay’s was almost double that just a month or two later. I won’t say that valuations have reached the point of absurdity, but if there isn’t a ton of synergy in each of these 2018–2019 deals, then there are going to be a bunch of very displeased investors.
Next time …
At this point, most the good gateways are taken. Most, but not all. As of this writing the trade bait includes Elevon, Global Payments and TSYS. And I’m sure there’s such thing as enough money to persuade JPMorgan Chase to let go of its Chase Merchant Services unit.
As for where this money will come from, I have no idea. Maybe FIS and Fiserv will take over the world. Or maybe some freebooting merchant bank or private equity firm will decide it’s time to get into the game, considering that multiples appear to be doubling every quarter, and flip it like a Brooklyn duplex.
Plot hole
All these fish-swallowing-fish kind of looks like desperation from the distributed ledger technology side of the fence.
Just last year, as it was almost certainly already in discussions with Worldpay, FIS began working with permissioned blockchain provider Billion. There is a frequently repeated rumor that FIS is in a partnership with Ripple Labs, but I looked pretty hard and couldn’t find a press release from either company to that effect. In fact, A Ripple exec and an FIS exec debated their respective solutions as recently as October 2018 the Money 20/20 conference in Las Vegas.
“[Ripple CTO] David Schwartz [will take] part in a special ‘Oxford-style debate’ moderated by [Oliver Wyman partner] Tony Hayes,” according to Ripple’s October 19 blog post. “Schwartz will argue blockchain’s merits as the best solution to fix today’s broken international payments system, leaning on his deep knowledge of the space and his experience building Ripple’s products and technology. His opponent, Esther Pigg, the SVP of Product Strategy at FIS Payments, will defend the financial industry’s current approach to global payments and its reliance on legacy infrastructure.”
I think the confusion begins with some shoddy, lazy journalism which, in combination with wishful thinking, can be dangerous. Specifically, I think it stems from one time-constrained scribe finding Googling “Ripple” and “FIS” and coming up with a link to a PYMNTS article, which is headlined “Ripple’s Value Rises 20 Percent Post-Japanese Credit Card Partnership” and has a string of text which reads, “Ripple uses blockchain technology to develop a payments network for banks, digital asset exchanges and other financial institutions (FIs).”
I could be wrong.
If I am, then Smartereum may have scooped the world by predicting that Amazon will soon be accepting XRP. The logic: Worldpay, separate from the merger news, announced an Amazon deal (possibly part of the reason FIS wanted to acquire the gateway). Then Worldpay was bought by FIS, with whom Ripple has a partnership — unless that partnership is really with several (FIs) in Japan.
Next season
Even so, I’m confident that FIS, Fiserv and all the other surviving payment processors will soon be making some bets on blockchain. Why? Because you can’t consolidate forever, and sooner or later you need to improve cashflow from operations. You can add only so much from subtraction.
And there is room for clever payment processors at blockchain-native ecommerce sites such as IOU.io. There might no longer be a pressing need for acquiring banks to perform credit and debit card clearances, but there will still be a need for gateways, providing they’d be willing to take a smaller. That shouldn’t be a problem because, as transactions become more frictionless, there will be less for them to do. We expect to find some to do business with.
And we’d love to have a full partner in the payment processing space. If none step forward, we have other options. Considering the price tag these days, we are dissuaded from buying one. But if we can build an ecommerce platform, we can build a payment platform.
Edward W. Mandel is a strategic advisor for IOU.io , he is an Ernst and Young Entrepreneur of the Year Finalist, Blockchain Enthusiast and visionary behind many successful organizations. An avid entrepreneur, Edward has a knack for designing distinctive business models complemented with superior technology to deliver unparalleled service and profitability. Edward also has been advising and consulting for various successful Blockchain technology and ICO projects and recently launched his own BQT.io P2P Hedge Exchange helping traders connect with each other to leverage their crypto assets.
IOU is a blockchain-based peer-to-peer platform designed to unify ecommerce transaction and customer retention processes, incorporating trade-able IOUs. It is currently raising capital through ICO. The platform can be found online at IOU.io and its community on Telegram at https://t.me/IOUCommunity.
