There’s a method to the madness in the rush for M&A in the payments industry.

Marjan Delatinne, global head of banking, Ripple, writes in a post in Bobsguide that the payments industry is being transformed through mergers and acquisitions, innovation in technology and the new lessons from the coronavirus. (Bobsguide)

How M&A is shaping the industry

Industry dealmaking surged from $ 31.8 billion in 2018 to $ 116.6 billion in 2019 including transactions from FIS, Global Payments, and Fiserv.

Is this growth at any cost?

No, says Delatinne.

“This consolidation is driven by the need of incumbent players to remain competitive in a rapidly moving financial services market, where a lot of the latest innovations come from agile, digital start-ups that are not burdened by old legacy infrastructure,” she observes. “In this market environment, acquiring or partnering with digital disruptors can be a much more effective way of achieving a competitive advantage than overhauling old IT infrastructure.”

Changing transaction profiles in the payments industry

Delatinne observes that, for the first time, card payments have overtaken cash in the UK and parts of Europe.

Again, the horror of carrying possibly infected currency notes in one’s pocket or wallet has led to a demand for contactless transactions. Therefore, banks and fintechs are now raising these transaction limits amidst the coronavirus crisis.

Innovation and automation in invoicing and settlement technology are revamping traditional, manual processes. This is helping to accelerate remittances and speed up balance-sheet preparation.

However, these changes have exposed cross-border payments as a laggard in the adoption of new technology and processes. “How money has moved internationally has remained fairly stagnant since the 1970s,” says Delatinne. “It relies upon a correspondent banking model where money hops from bank to bank several times over to reach its destination account.”

She describes the system as slow, opaque, and costly, and warns that new technology is nipping at its heels. In the harsh business realities unleashed by the coronavirus, consumers will not tolerate payment delays. The incumbents must “move with the trend, forming industry partnerships or fall behind.”

“Emerging technologies such as automation, machine learning and digital assets, have upended international money transfers,” writes Delatinne.

New markets, easier regulation

Again, emerging markets have proved to be a fertile ground for innovative payment market technologies. Here too, businesses and individuals aspire for globally accessible payment networks, allow for high-velocity payments at reasonable costs.

In advanced economies, Delatinne observes that an “accommodating regulatory environment has allowed start-ups to grow and become influential.”

“The combination of disruptive technology and regulatory environment that encourages competition led to a bloom of new companies,” she says.

For larger incumbents, this is a huge opportunity to “take a leap of faith and embrace new technologies with both hands” – through M&A if necessary.

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