M&A deals in payments sector pick up steam in 2016

Eleven deals took place in the sector during 2016 as compared to eight deals in 2015

The mergers and acquisitions (M&A) activity in the payments sector has been picking up steam, and the way forward for this sector is consolidation.

Some of the top M&A deals in the sector have taken place in 2015 and 2016, with the number increasing year-on-year. For instance, of the top ten deals sealed between 2012 and 2016, seven were inked last year, according to financial database and research platform VCCEdge.

Eleven deals totalling $289.38 million took place in the payments sector during 2016, compared to eight deals worth $717.81 million the year before. The value of deals touched a new high in 2015, with Alibaba Group Holding and RNT Associates acquiring 41.03 per cent stake in One 97 Communications, which runs Paytm, for $709.62 million.

While the deal size was smaller in 2016, the increased number of deals shows a flurry of M&A activity in the sector. One of the top deals during the year was of worth $130-million where Sequoia Capital, Econtext Asia, Beenos Asia, Ascent Capital Advisors sold their stakes in Citrus Payment Solutions to PayU Payments. 

Other major deals in 2016 include Net1 UEPS Technologies investment of $40 million in One Mobikwik Systems, Bharti Airtel’s sale of 20 per cent stake for $14.33 million in Airtel Payments Bank (Airtel Money) to Kotak Mahindra Bank, and Blue Label Telecoms’ acquisition of 6.54 per cent stake in Oxigen Services India for $10.4 million.

“I think the next theme in the payment scheme is consolidation. There are lots of smaller players, and merchant-side consolidation is going to be the trigger. The innovation is yet to show up, on what kind of addition the companies can bring in on top of the infrastructure that is available,” said Rahul Chandra, co-founder and managing director of Helion Venture Partners.

IMAP, a global M&A advisor firm, in a report on the payments industry in India in the quarter ending December, 2016, has said scale is critical to make a payments business model viable, and building a world-class payments business requires significant investment in technology, infrastructure and partnerships. Participating players, it said, must look to build a sizable scale over the next few years.

“The nature of the industry will allow only limited participants. As a result, with the industry maturing, M&A activity has seen a pick up in this sector, with smaller businesses being acquired by larger multinationals, which look to gain critical size for outperformance,” it said.

The opportunity in the segment is high, considering that the number of internet users in the country is set to double in five years from 300 million to 600 million in 2020 and about half of them are expected to transact using digital payment methods.

“It is estimated that the total payments via digital payment instruments will be in the range of $500 billion by 2020, which is 10x the current levels in India,” added the report. Currently, the total payments through these instruments are worth around $40-50 million.

The key driver for this rise will be an increase in the user base. The number of users in the digital payments instruments segment is estimated to be about 50-60 million, which is expected to reach 300 million by 2020. Digital payment users will comprise 50 per cent of all internet users by 2020, said the report.

The government is also taking efforts to digitise the payments in the country to bring in accountability to the transactions and reduce the extra cost on issuing currencies.

However, the private equity investment into the segment during 2016 has declined almost 61 per cent to $175.23 million, compared to $447.49 million in 2015, which was the highest investment since 2012.

“Investment in the segment has come down and the main reason for that is, the investors are confused with the kind of activity, both the regulatory and.... the changes in economics of the service providers,” said Chandra. 

Critically, the final word on MDR (Merchant Discount Rate) is not very clear.

Earlier, it was clear on how a business will operate in this space, but now it is not that clear. 

There is no certainty about how the payment infrastructure is going to settle down. 

BHIM app developed by the government is a substantial competition to any private initiative because it is getting widely adopted.

The volume of investments also fell 55 per cent to 12 deals during 2016, compared to 27 deals in 2015. The key PE deals in the payment sector has also seen a drop in 2016. 

There were five key deals including that of IndiaIdeas.com (Billdesk.com), Accelyst Solutions (Freecharge.in), Electronic Payment and Serives, Citrus Payment Solutions and Ezetap Mobile Solutions raising funds from investors including General Atlantic, Temasek Holdings, Sequoia Capital India Advisors, Sofina Societe, Valiant Capital, Tybourne Capital Management, Helion Venture Partners, among others. Billdesk raised around $200 million in the biggest deal during then from General Atlantic and Temasek Hodling.