The consolidation in the payments industry has proceeded apace in 2020 with regional and even global consolidation, where the highly digital nature of payments makes a grand case for building scale and efficiencies, and broadening services beyond pure payments. However, consolidations in this category can only be considered truly successful if they achieve seamless end-to-end merchant and user experiences, and will otherwise always be under competitive threat.

A key driver for consolidation is to make the combined value proposition more attractive to regional or global merchants, who would like the geographical and payment method coverage with as few integrations to payment systems as possible, which can be hugely time consuming.

To some extent this can be achieved relatively quickly through payment aggregators who combine multiple payment methods and geographies, such as WorldPay (which covers the world except for Africa). But aggregation is fundamentally inefficient, with often multiple layers of aggregation and each party taking its margin.

Consolidation can do away with the multiple layers and inefficiencies of aggregation. However, if the result of a merger or acquisition is a hotchpotch of poorly integrated systems, then the merchant and user experiences will still be poor.

WorldPay’s acquisition by Fidelity National Information systems (FIS) last year for $36.2 billion to create a global leader in the e-commerce payments category is an example of global consolidation.

A regional powerhouse was created last month with the final closing of the Worldline $8.6 billion acquisition of Ingenico, making it the largest payments provider in Europe. This was a journey with Atos previously acquiring Worldline and Ingenico acquiring Six Payments of Switzerland.

Another recent case is LSE-listed Dubai-based Network International, focused on payments in the Middle East and Africa, acquiring Kenya-based DPO Group (Direct Pay Online) with a footprint of 14 African countries for $288 million in October, making it arguably the largest payments provider in Africa.

A company that has grown organically is hugely successful Netherlands-based Adyen with a market cap of EUR 47.7 billion. It has attracted many of the global platform players such as Uber and Spotify as customers based on its geographical coverage. Adyen was built from the ground up through a direct presence in its markets (so does not have to rely on multiple relationships) and a single platform with clean and simple propositions to its merchants and end-customers.

Stripe’s recent $200 million acquisition of Haystack in Nigeria, with 60,000 merchants in Nigeria and Ghana, is its way of building a direct presence in West Africa, a hole in its coverage that increasingly needed filling. No doubt Stripe’s merchants were asking it to be able to service and take payments from their West African customers.

Consolidation is often Private Equity (PE) fuelled, especially in the mid-market, where the PE firm acquires a payment company with the express intention of building it, often through a buy and build strategy, and selling it on, such as Apis Partners did with DPO before selling to Network International. It is often said that the PE firm already lines up the exit targets even before they invest .The advice to these PE firms is to ensure that their strategy includes unifying the platforms of their acquisitions to provide good merchant and end-user journeys.

The digital nature of payments is such that other financial services can and are being added to payments at the point and sale (POS) and other contexts. Again, it’s all about the user journey and introducing the right proposition at the right time, such as consumer POS instalment lending at checkout on an e-commerce site. Other financial services that can be associated with payments include savings and charitable giving (such as through the rounding-up of transactions), investment, merchant lending and cross-border remittance. The rationale is to create user-centric workflows.

This concept of providing multiple financial services with strong user journeys has unleashed intensive M&A activity. Klarna, the Swedish POS instalment lending and payments company (and rapidly becoming global), said earlier this week it is considering acquisitions to transform itself into “an all inclusive shopping engine” and extending geographically into Asia.

There are so many examples happening every day but to take a well-known payments company, PayPal, that has done 20 acquisitions in total according to Crunchbase. Its most recent $4 billion acquisition of Honey “helps people make smarter choices when shopping online”, its $400 million acquisition in 2018 of Hyperwallet “enables people to send money seamlessly around the world” and its $2.2 billion acquisition of mPOS provider iZettle enables it to serve people beyond online payments, moving into physical POS).

Customer experiences (for merchants and users) will ultimately be the arbiter of success, and hence any M&A transaction that creates efficiencies or a broader range of services that falls short of this, will be under threat from the tech-based players that manage to get this right.