In the payments space, mergers and acquisitions (M&A) and external fundraising have been evolving rapidly, particularly over the last 12 months. This shift has highlighted a new phase of market movements that will likely be remembered as a key part of the post-COVID-19 fintech and payments story. In this article, we aim to review recent trends in M&A and financing within the payments ecosystem, which we believe are likely to continue throughout 2024. In addition, we will make some predictions about the future of M&A activity in the payments sector, based on our exposure to various transactions and analysis of these in our internal database.
Overview of mergers and acquisitions trends over the past 12 months
2023 was a year of significant volatility in global deal activity across all sectors. Across all sectors, global M&A volume and value fell 6% and 17%, respectively, compared to 2022. This was the slowest annual period for M&A in a decade. All markets struggled, particularly in the first half, but Europe and Asia fared less well than the US.
The global decline in M&A activity can be largely attributed to the technology sector, which saw a 51% reduction Year-over-year merger and acquisition volumesMega-deals (values greater than $5 billion) were the slowest year. This was true across the payments industry, with the exception of a few notable deals, such as the acquisitions of Shift4 Payments and, more recently, the proposed acquisition of Discover. Mid-size deals are now the focus of M&A activity in the payments industry. This trend is expected to continue through the end of 2024, and can be attributed to the current turbulence in the global economy.
Monthly fundraising numbers in the fintech and payments sector have fluctuated significantly in 2023, but the year has not seen a significant and sustained spike or decline in deals. The summer months saw a high volume of fundraising and acquisitions. Despite this, early-stage companies looking to raise seed and Series A funding have seen the underlying value of their fundraisings drop significantly over the past year. In Q2 2023, the average Series A fundraise raised $25 million for investors. In Q4 2023, that number has dropped to $18 million. However, there are signs that this number will recover throughout 2024.
M&A deals are not only focused on pure value and size, but also on the intrinsic nature of the companies involved and receiving the financing. At EDC, we track all external financing deals in the payments and fintech sectors and carefully attribute these activities to their most relevant and respective verticals. Investments in B2B payments companies, for example, have been trending proportionally downward, while other verticals fluctuate significantly from month to month. The chart above shows the total funds raised across the ecosystem over the last 12 months, broken down further by specific payments-related verticals (e.g., card issuing and point-of-sale terminals).
External investment in AI in payments
Within the payments and fintech sector, artificial intelligence (AI) is one area that has received significant attention over the past 12 months. Since the use of generative AI tools exploded beyond our periphery early last year, we have seen an increase in external funding directed towards AI players and products in the payments sector.
March and April 2023 were a busy month for external funding for AI in the payments and fintech sectors. Much of this funding was focused on conversational AI tools and how they can help end users in the payments journey. Mid-2023 saw a decline in external funding for AI, while the latter months and early 2024 saw a rapid increase to new highs. In both sectors, $352 million in external funding went to AI initiatives in February. We believe that funders and venture capitalists are beginning to realize the abundance of use cases for AI tools in the payments ecosystem (beyond a simple customer service chatbot) – and the startups developing them.
Our M&A forecast for the rest of 2024
At EDC, we regularly engage with payments companies as well as investors engaged in M&A in one form or another. It is clear that many financial investors currently have significant amounts of cash sitting idle over the past 12 months. These funds will inevitably be deployed, particularly as interest rates decline and the fintech and payments sector looks increasingly attractive again.
The underlying motivations for engaging in M&A activity often vary from company to company. We have seen these motivations evolve over the past few months and believe these trends are predictive of the rest of 2024.
First, we believe that broader consolidation will occur across the payments ecosystem. While this is not a new trend, we believe it will play a larger role in M&A activity over the next 12 months. Established payments and fintech companies are looking to fill gaps in their product offerings by acquiring smaller companies with complementary capabilities. Vertical integration can help streamline operations and reduce redundancies across the payments value chain. Ultimately, this often leads to cost savings that can be critical in a more challenging economic environment like the one we are experiencing today.
Second, we expect acquisition demand to be stronger in certain markets. Inevitably, during an economic downturn, some markets are still relatively stable or even growing. Emerging markets, for example, have growing digital penetration and affordability rates that more than offset broader economic headwinds. More established payments companies view these markets as opportunities to make strategic acquisitions. In addition, with demand for cross-border payments increasing each year, payments companies are looking to make acquisitions in new markets to strengthen their cross-border capabilities.
Regulatory environments are expected to continually evolve the payments ecosystem this year and beyond. These changing requirements are driving payments companies to engage in tactical M&A activities that help alleviate regulatory pressures. For example, which we explored in depth earlier this yearwas that of China’s Ant Group. The general and centralized oversight and regulatory changes are pushing these companies to make more international acquisitions to reduce the impact on revenues of any future regulatory fluctuations. Frequently, payment companies under the regulatory microscope acquire/are acquired/merge with a more regulatory-friendly company to get closer to better practices. This is a phenomenon that is expected to increase in the coming year.
Conclusion
In conclusion, the payments industry has seen a significant shift in M&A activity over the past year, with a focus on mid-market deals and consolidation to fill gaps in functionality and vertical integration. Looking ahead, we expect to see further consolidation, increased M&A to access high-growth markets and build cross-border capabilities, and increased regulatory-driven M&A activity. As the payments ecosystem continues to evolve, these trends are poised to shape the remainder of 2024 and beyond.
This article was first published in «Global Payment Providers Overview 2024‘, the latest market overview and analysis of the leading payment providers in the B2B and B2C commerce payments ecosystem.
About the authors
Volker is a Director at EDC and leads the European Acquiring practice. Volker has been providing payments consulting for over 20 years, developing significant experience in digital financial services across different geographies. He has deep expertise in strategy development, profitability improvement, strategic planning, financial modeling and benchmarking.
Euan Jones is an Associate Consultant at EDC. Since joining EDC in 2021, Euan has successfully completed a wide variety of consulting projects for EDC’s global client base. He is a key member of EDC’s M&A Advisory team and has gained in-depth knowledge of the latest transactions and activities. Prior to joining EDC, Euan completed a Master’s degree in Physics.
About Edgar, Dunn & Company
Edgar, Dunn & Company (EDC) EDC is an independent global payments consultancy. The firm is widely regarded as a trusted advisor, offering a full range of strategic advisory services, expertise and market insights. EDC’s expertise includes M&A due diligence, legal and regulatory support across the payments ecosystem, fintech, mobile payments, retail and corporate payments digitization and financial services.