In recent years, PE firms have been paying to play in the payment processing sector. From Worldpay and Nets, to Bambora and Paysafe, payment processing companies have proven to be attractive investments for European PE. In our view, a wave of regulation in the FinTech sector will unleash further growth potential, and PE firms may be well-positioned to take advantage of this.
The number of M&A transactions in the payment services industry has increased in Europe over the past five years, and we believe the sector will remain hot. A wave of regulation has been designed to stimulate competition and encourage new market entrants. Chief among this is EU Directive (EU) 2015/2366 on payment services in the internal market (known as “PSD2” since it replaces the existing EU payment services directive). PSD2 came into effect in EU Member States in January 2018, and has been designed to help newer market entrants (including FinTech startups) compete with traditional banks. Under PSD2, banks must open up their consumer data to FinTech companies. This is designed to allow these companies to use the data to take a bigger slice of the payment processing market, which has been typically dominated by banks and more established payment processors.
In our view, PSD2 will result in the creation of innovative financial products and potential investment opportunities. It allows FinTech companies to launch financial services products that link into banks’ infrastructure. The two key business models contemplated by PSD2 are: (i) “account information service providers”, who provide consolidated account information to consumers (e.g., via a smartphone app on which users will be able to see their various balances all in one place); and (ii) “payment initiation service providers”, who facilitate online payments from consumer bank accounts (while avoiding the costs associated with maintaining the account itself).