Each December for the past few years, this author, along with many others, predicted further consolidation in the cross-border payments market. Competition has been increasing, more Fintechs are gaining scale and investors love the sector. Yet the numbers tell a different story.
According to investment bank FT Partners, since January 2019, there have been approximately 1,400 M&A transactions in Fintech. Just over 300 of these have been in payments but according to research at FXC Intelligence, we can count only five meaningful deals in cross-border payments and a handful more small transactions.
Last week, the CEO of Western Union
Will Western Union make an M&A play?
Western Union claims to have around 12-13% share of the remittances market. If Western Union wants to add to this, there are few options that could move the needle, at least from a revenue perspective. Both MoneyGram and Ria, the next largest players by revenue, would add only 3-4 percentage points of share at best. After that, from a revenue perspective, the market for remittances fragments away fast.
If Western Union chooses to stay focused on the consumer end of the market but wants to add FX flow, TransferWise would be the leading candidate. TransferWise currently processes over $5bn per month, a run rate of $60bn per year which is comparable with Western Union’s own $80bn of consumer FX flow (Western Union has a lot more in flow in its Business Solutions division). However, a TransferWise transaction would pose three obvious problems. The first is from a revenue perspective: the gain to Western Union would be minimal, no more than single digits percent-wise. Second, Western Union is a highly profitable but slow growing company with a shareholder base that is typically dividend, not growth focused. TransferWise is a fast growing company, with limited profitability and a growth focused shareholder base. In M&A terms, such a transaction would likely be too dilutive to earnings to make it feasible and it will bring together two very different sets of management and owners. And of course the third issue is simply TransferWise’s valuation – at $5bn at its most recent raise, Western Union simply wouldn’t spend around half its market capitalization for what it would receive in return.
This means Western Union may have to think more broadly in terms of other product-based revenue streams for a needle moving acquisition. Perhaps it could make an acquisition in an emerging market to buy a broader financial services company, especially one that serves its current base. Other players in remittances have been moving into banking and perhaps a market such as India or the Philippines could provide options but these are not straight forward markets to make acquisitions in.
If Western Union does become an active M&A player, it would seem most likely that it will be in the remittance segment and not in the B2B space. Its Business Solutions division makes up less than 10% of current revenue and Western Union has already had to write down acquisitions in this business line – it previously acquired Custom House and Travelex Global Payments.
Coming back to the reported MoneyGram deal which we covered in detail in an earlier Forbes article, everything about it makes sense from a synergy and combined company view. Yes, there would be some complexities around regulation in some markets, but few think the deal would hit any material hurdles. This means discussions are likely to be stuck on price.
What might Revolut’s M&A play be?
Revolut’s CEO stated their acquisition strategy could be driven significantly by the impact of the pandemic on competitors and may be opportunistic. Revolut has raised significant funds itself and has deep-pocketed investors who could fund even bigger moves.
When it comes to competitors struggling in the pandemic, no company comes to mind faster than Monzo, the UK based digital bank. Timing is everything – in its most recent accounts, Monzo had to admit that it is not sure it will survive. Monzo has around 4.5m customers and between Monzo and Revolut, they have led the digital banking revolution in the UK. An acquisition of Monzo would solidify Revolut’s position in the UK market and likely mean no other UK Fintech could catch it. Revolut has also built up additional revenue streams such as crypto trading and a premium subscription product that works (Monzo failed to get its premium business off the ground). In theory, these products could be quickly rolled out to Monzo customers to better monetize them.
In the US, it is reported that the European digital banks have been off to a slow start. Not only is the US very different to the UK and Europe in terms of banking with a highly fragmented regional market of thousands of players but it also has a number of already successful digital players, the leader of which is Chime. Chime, or perhaps alternatives such as a Varo or Current, would not be cheap but would jump start Revolut’s US position. Free money transfers, which helped fuel Revolut’s UK growth, is a far less relevant product for the US market.
In the money transfer space, UK Fintech TransferWise, which has over eight million customers, now counts the US as its second biggest market after the UK. That expat market would have been some low hanging fruit for Revolut but TransferWise got into the market early. At the remittance end of the market, Remitly’s Passbook product has targeted banking for the migrant community, especially those who are unable to open traditional bank accounts in the US. Even crypto-trading, a boon for Revolut’s UK growth, has plenty of coverage in the US with major players such as Robinhood and Coinbase offering trading – and both are out of Revolut’s price range.
Outside of the US and the UK, Revolut could gain a quick boost in any other geographic market with a digital banking acquisition, but these are also likely to come with high valuations unless Revolut can find another distressed player such as Monzo. It could also make a play in a travel related vertical with Storonsky noting in the interview (albeit in May) that many of the travel aggregators are in trouble and they could be a useful customer acquisition tool for them.
The alternative to these options though is to look to add some product or technical capability – less headline-making – but perhaps useful in the long-term. Some of the largest and most active acquirers in the market, Visa
Could private equity come to the rescue?
There are a number of private equity owned players in the cross-border payment space. The larger ones being Currencies Direct, Moneycorp, Banking Circle and Paysafe. The first two are already well into their investment cycles and though a handful of bolt-on acquisitions have been made, no major deals have been done. Currencies Direct did explore talks with publicly listed Australia based OFX, but it did not turn into anything. Banking Circle hasn’t made any significant follow on to date. Paysafe, which includes its fast growing Skrill brand, is backed by deep-pocketed CVC – they could certainly afford to make a splash but there are few obvious targets.
Will the status quo remain?
This leaves us to believe that for all the talk of M&A in the cross-border payment space, the odd deal may continue to be done, but there appears to be no catalyst to drive mass consolidation. A deep and painful pandemic could have triggered that but hopefully the slow recovery will remain a recovery. Segments such as remittances are holding on due to their necessity in the lives of so many consumers.
The global brands such as Visa, Mastercard, PayPal and Ant Technology remain those most likely to pick off further companies in the sector. They have more firepower than virtually any other player. Unless that is we bring in the tech giants…