Payments processors: Consolidation or fragmentation?

In this guest blog post Nick Senechal, Stategy Leader at VocaLink, looks at the trends in payments processors and clearing operations, with a view that there will be further consolidation in the sector over the next few years.

Over recent years the focus of many predictions around the future of payments has been on greater consolidation. In Europe the key enabling process was once Single Euro Payments Area (SEPA), which through its standardisation was going to enable Cards and Automated Clearing House (ACH) processors to consolidate (some even hailed the advent of the Single European ACH) whilst banks either took on the mantle of super transaction banks or gave up and exited the payments business altogether. Clearly as with many things SEPA this hasn’t happened to the degree foreseen. However, some players have seen consolidation as a holy grail: Equens with its multi-country business model was an early front runner across the ACH and processor services front, and as recently as last year merged its Montrada and Paysquare acquiring assets; STET has used its massive French volumes and focussed business model to extend low cost, high quality clearing to Belgium; the formation of NETS created a Nordic regional champion as an answer to the small scale of the Danish and Nordic markets. There is also a “distress” consolidation argument as smaller domestic card schemes (Finland, the Netherlands, Ireland) have closed in the face of the brand power of International Card Schemes such as Visa and MasterCard, and banks affected by the financial crisis have divested themselves of overseas subsidiaries and merged at home thus concentrating banking markets.

But now we appear to be entering an interesting time when there appears to be an equalising force that may balance further consolidation. Call it the fragmentation effect. In the UK we have seen HM Treasury’s impetus to open up payments reflected in new legislation and economic regulation. New players will be encouraged through reducing barriers to participation in the payment system. The multiplicity of new “digital”, e-commerce and mobile payments businesses from Sofort to i-Zettle have found the support of European Authorities to put them on more than an even footing with banks to enter the payments market, to some extent getting a “free ride” on bank rails. This is creating the kind of market potential that will continue to bring investment to the payments business. Much of this investment will see more successful start-ups merge and consolidate (e.g. Sofort) perhaps creating a range of new players with the power to compete with established “non-bank” players like PayPal. Banks of course will respond and have strong propositions like MyBank, Zapp and Ping-It in play already to do so.

Seldom have we seen such balance and interplay between the forces of consolidation and fragmentation. My bet is that they will not cancel each other out, rather both will drive significant change in the year(s) ahead.