Four key trends driving the trillion $ payments industry

Our global payments team have been examining recent trends in the payments sector and identified four key themes:

01 Heightened levels of M&A 
  • Global growth in M&A: Heightened levels of M&A continue in globally. The Financial Times reported on Dealogic data showing payments sector M&A transactions of $46bn in H1 2018, higher still than the 2017s full figure of $32.9bn.

    This is driven by continued investment by financial sponsors, existing players acquiring new technology or seeking cross-border acquisitions to increase their geographic footprint and a drive to create regional champions. 
  • Investment in tech: As the other trends indicate, investment in new technology remains important. This may be achieved via bolt-on acquisitions as businesses look to deliver “one stop shop” services, enhance their offerings to their customers and seek to remain ahead in the cyber-security arms race. 
  • Regulatory developments: Meanwhile, regulatory changes such as open banking will impact on existing banks, who may look to partner with, or acquire, newer players to enhance customer experience as banks lose their monopoly over account data. 
  • IPOs: In the next few years we also expect to see a continued trend in payment sector IPOs, potentially run as a duel-track process as a key part of financial sponsor’s exit strategies.
02 Changes in regulation
  • Compliance investment: Regulatory developments will create innovation opportunities and challenges requiring additional compliance investment.
  • Open banking opportunities: The move towards open banking (including the EU’s Second Payment Service Directive implemented in January 2018) in response to ongoing innovation in the sector allows payment service providers to access customer account information from the banks and regulates the payment service providers.

    Such businesses can now access more date more efficiently and thereby enhance the services they offer, leading to increased choice for customers.
  • Data protection: However use of data remains in the spotlight – for example, the General Data Protection Regulation in the EU increases the compliance burden for payment services providers in respect of the personal data they use. As payment companies become increasingly regulated, they are likely to face more scrutiny from regulators (including on the use and protection of the data they have access to, as well as part of a driver for increased transparency in payments infrastructure.
03 Innovation
  • Innovation remains key: for both fintech companies and banks operating in the payments sector, even while existing technology such as mCommerce and eCommerce solutions continue to gather pace as alternative transaction channels for card payments.We expect incremental improvements to existing systems: including to the ways of structuring and development payments infrastructure, with benefits arising from digitalisation and new technologies (e.g. biometrics and retailer wallets).
  • Mobile banking and payment applications will continue to thrive and proliferate: driven by the requirements of the next generation of tech-savvy consumers (Generation Z).
  • Cyber security will remain a critical priority: driven in part by the increased regulation described earlier. Payments businesses will seek to improve systems-intergrity and develop (or acquire) increasingly sophisticated fraud prevention. This may include using biometric authentication solutions and tokenisation.
  • Fast, frictionless transfers and disintermediation are key themes: as companies also seek technology that allows real-time settlement, such as blockchain in cross-border payment systems. These solutions pose a challenge to existing architecture and may also be provided by technology companies that become new entrants to the payments sector.
04 Big Data
  • Central issue: As in other sectors, data analytics, data privacy and cyber-attached will remain a central issue for the key infrastructure provided by payments businesses. Consumers will increasingly look to make the best use of their data, including through account aggregation, apps and analytic services.
  • Compliance burden: Payment service providers will need to balance the benefits that access to more data brings them against the increased compliance burden that data regulation has tightened.

See our latest Insight publication “Change is the only constant in the payments sector” for more observations, details of the work we have been doing for clients across the sector and a view of our global payments team itself.