Payments M&A Outlook Through 2023

The bumpy macroeconomic conditions in the past few months have caused valuations to compress across every industry. With uncertain times ahead, it is important to understand how macroeconomic trends affect the payments space. Although intuitively one might start to save money during these times, in the payments space quite the opposite is occurring.

With increased competition between larger payment processors and startup technology companies like Stripe, there has been increased pressure for acquisitions by the larger players. With payment processing volume being "stolen" by growing technology startups with advanced intellectual property, larger processors are stuck between a rock and a hard place. Some are navigating this by hiring in-house software developers to develop intelligent payments processing, while others have turned to investment banks to advise them on possible M&A targets.

733Park has previously covered transactions like JP Morgan's acquisition of Renovite, an example of M&A activity in the payments space. With interest rates rising, there has been a significant slowdown in economic activity. Fewer consumer transactions mean less merchant revenue for global payment processors. However, since the payments industry exhibits mostly inelastic demand for the software, exceptionally low churn rates are seen, around 2 to 3 percent for B2B SaaS companies within payments. Payment revenue, although slowing, will not cause a complete collapse in sales. This decrease in revenue combined with rising interest rates leads to overall multiple contraction and thus increased buy-side activity.

With cheaper companies, larger payment processors are looking to capitalize and double down on technology. Larger companies that grew their cash position over time have the advantage to buy smaller companies that might be struggling with stalling sales growth and rising financing costs. Being integrated with traditional processing companies might also offer a chance for these smaller companies to live on as venture capital dries up.

Another possible outcome is the increased deployment of private equity and other capital partners. The investment thesis for many of these firms revolves around buying high cash-flow-generating businesses without much cyclicality. With multiple contraction in the past few months, private equity investors might look at the payments industry, which tends to be anti-cyclical with stable cash flow generation. With strategies such as M&A roll-ups or tuck-ins, these funds hope to create larger technology conglomerates to sell to larger players or take public after the holding period. Although times are uncertain, there have been significant buying opportunities for larger payment processors.