Why the Pandemic Is A ‘Black Swan’ That Will Spur Payments

In an interview with Karen Webster, Jim McCarthy, President at i2c, said that the digital shift will continue to spur tie-ups of all sorts – from partnerships to outright buyouts – as incumbents seek to move quickly to modernize their tech stacks.

This interview was the first in a series of multiple conversations about the ‘race‘ that is bringing stakeholders in the payments processing, credit and financial service industries together through a continuing spate of mergers, acquisitions and partnerships.

Due to the pandemic, numerous strategic financial deals have or are taking place. If you look through recent headlines, it’s even more evident. Some players have been bought out directly whereas others have been public about its desire to be acquired. Special purpose acquisition companies (SPAC) have been in the news frequently and found to be involved in many of the latest top mergers and acquisition (M&A) deals.

Many of the mergers are a result of the realization that customers have ever-rising expectations and are increasingly shifting over to digital payments where they have more control. According to McCarthy, companies must deliver – or risk being rendered obsolete.

We are entering an age where Amazon can enable “pay by hand.” Mobile devices are being used as the main conduit towards staging transactions, to getting goods delivered to your house or even picked up curbside. On the B2B side, businesses are slowly but surely moving beyond the age of paper check.

“If you think again about the innovation over the last 10 years,” he told Webster, “the last place I would have said we would have seen all this innovation” would have been on the merchant side of commerce. Not because those firms didn‘t want to innovate, but because they were so constrained from doing so by being tethered to green screens, hardwired devices and long depreciation cycles. Against such resistance, good, innovative ideas died and continue to die quickly, he said.

It nothing else, the pandemic has shown, through the Stripes and Shopifys of the world, that the pivot to buy online/pickup/deliver has been facilitated by the innovations from merchants.

“I do see a ton of opportunity on the issuer processing side, the consumer side of this, where you’re going to see a lot of innovation because it’s where we’ve been stuck for a long time,” McCarthy noted.

He added that many executives in the payments ecosystem are looking for M&As due to a confluence of factors, including the fact that would-be acquirers are sitting on a lot of money in the bank and there is a tremendous amount of distressed firms ripe for the taking.

Of the pandemic, McCarthy said: “Black swan events create a lot of opportunity for those firms that are in a good position. There are a lot of companies coming into this space that are very well-capitalized.” More importantly, these firms are willing to make deals where, for example, venture capital firms may be pulling back on acquisitions due to economic uncertainty.

For strategic buyers looking into the payments space, the opportunity to execute can now be pulled forward. Deal-making will prove inevitable, especially, for Fintechs where McCarthy noted that though there are many good ideas, innovation may not be enough to boost firms to a level where they can stand on their own – but they might compel larger players to open their wallets.

Looking into what might lure strategic buyers, McCarthy pointed to softPOS, which can help accelerate the move into digital and mobile payments that are already in motion.
“Getting rid of that hardware overhead could be very interesting,” he said. He noted, too, that companies that enhance card capabilities and security could be nice “add-ons” for incumbent, legacy processors, particularly in pushing credentials or tokenizing transactions.

The Road to Acquisitions

There’s a bit of a roadmap to M&As in the payments space, McCarthy noted – borne out over the past 20 years, where deal-making is a natural outgrowth of commercial relationships. Every issuer in the world is always worried about moving faster to market with new offerings and technologies – thus, the willingness to bank on FinTech and tech upstarts through partnerships “usually progresses from there,” McCarthy added.

In the current economic climate, some well capitalized firms are leapfrogging commercial relationships and partnerships and are opting instead to buy smaller, more innovative peers.

However, that doesn‘t mean there isn‘t room for partnerships to work on their own. He pointed out that i2c has been focused on forging partnerships with the likes of Visa and Mastercard rather than pushing ahead on the deal-making route. It’s a form of what he termed ‘playing the long game‘ with the focus being on secure remote commerce, application program interfaces (APIs) and the Internet of Things (IoT). Broadly speaking, it’s about creating sustainable value for issuers by redefining the speed and flexibility by which financial products are designed, tested, launched, and managed over their lifecycles.

Notes of Caution

The flurry of recent deal-making, and the private market valuations and IPOs, have pushed valuations very high – eye-poppingly so. The blank check companies, he said, have been a way for firms to raise capital, and to compensate for some of the pull-back in private-equity funding in an environment where there’s about $2.5 trillion waiting to be put to work.
Of the SPACs, he said, “It’s kind of the flavor du jour – and it’ll be interesting to see how well it sticks.”

Looking ahead, McCarthy says that legacy issuers/processors and financial institutions that are able to pivot by providing a complete range of digital capabilities across acquisition, issuance and payments wrapped around virtual and physical cards will emerge as winners – through building partnerships where possible, and buying firms, too.

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