$20 Billion TSYS acquisition in the shadow of Alibaba’s $500B SME aggregation

The consolidation in the payments industry is happening all at once, with FIS buying Worldpay for $35 billion and Fiserv grabbing First Data for $22 billion. We are looking at nearly $80 billion of payments and banking system acquisition value. Why is this all happening? As digitization costs fall and technology become more freely available, and data more transparent, pricing pressure causes profitability to fall. The strategic response to smaller unit economics is to get bigger, shed fixed costs, and try to monopolize the industry. Payments processing is a commodity, and the brands providing the services have negative equity (i.e., people don’t like them).

But if you look one layer deeper, the comparison to Alibaba will start to make more sense. End of the day, these large American paytech platforms are all about a single product: getting a merchant to use a plastic widget or a web integration to get paid for selling its wares. TSYS, First Data, and the others power Payments. Their success is indexed to overall commerce enabled by their devices, and the level of rents they can extract from the process. Industry jargon like “network” and “merchant acquiring” suggest that there is value in aggregating the businesses that sell stuff to consumer, and that is something worth consolidating into large corporates. So what do these merchants look like?