The domestic view
It seems that many third party license holders are keen to crack this space alone. In some cases, they have enjoyed support from venture capitalists and private investors who see promise and potentially large returns from technologies and innovations already emerging from these new entrants. However, as these venture capitalists and investors divest their holdings, we expect to see an increase in M&A activity.
China’s big banks and payment majors are also taking a measured approach before placing any bets on potential acquisition targets. This is understandable; given their size and dominance, most of these players can afford to wait it out until it becomes clear which technologies and start-ups will deliver value and which will ultimately fail. That being said, they are excited about online payments, and many commercial banks are now actively promoting online payments by way of discounts and other promotions. Many in China are probably already well aware that Ping An Bank, Bank of Communications, and China Merchants Bank have recently launched online payment promotions with partner payment gateways.
The challenge for foreigners
For foreign acquirers, the M&A environment is more complex. The biggest challenge relates to ownership and regulation. For example, new third party licenses contain stipulations that they must remain fully owned by Chinese interests. As a result, most foreign organizations looking to participate in China’s payments ecosystem will have to settle for structured options such as Variable Interest Entities (VIE) or make strategic alliances with Chinese third party processors looking for overseas collaboration to secure a position onshore.
Most foreign investors may also be somewhat intimidated by the four big payments players in China - AliPay, TenPay, Union Pay and 99bill; collectively, they account for an estimated 80 percent of the domestic payments market. Those inexperienced in China’s marketplace may also be concerned about the potential risks when undertaking a venture in such a massive and (for those in the West) foreign market.
Opportunity on the horizon?
While currently, many of the largest players in the volume payment sector maintain in-house platforms, this trend will not last forever. This is particularly true for some of the financial services sector and those major retailers who have experienced massive growth in their payments business as a result of the explosion of online shopping volumes which, in 2011, exceeded RMB750 billion
Indeed, it seems increasingly clear that the next tier below these major players also require specialist third party payment service providers. For these license holders, the long-term alternatives seem fairly clear: acquire, partner or be acquired.
With almost 200 players, it is inevitable that the market will go through significant consolidation over the short to medium term as smaller companies merge. As such, we expect that the larger in-house groups may be key players in this consolidation as they reach critical mass, are spun-out by their parent groups, and seek to acquire the independents in a bid to access niche market segments or technologies. In one such move, Alipay acquired OnCard Payments, a private equity-backed payment gateway that specialized in handling transactions for the travel sector.
Certain regulatory actions may accelerate this process. But while the People’s Bank of China has committed to opening the market to foreign companies – for now – foreigners are effectively shut out. Opening the payment processing and settlement market to foreign players would spur a significant increase in M&A activity as third party settlement providers seek to access and process transactions for domestic banks as well as bring innovation and best practice to the market.
While the current market may seem subdued, the bottom line is there are strong undercurrents taking hold that seem likely to surge into a wave of activity in the not too distant future.
What to expect at Sibos
Those attending this year’s Sibos conference in Japan will undoubtedly see a frenzy of activity related to the China market, with scores of new Chinese players busy building their networks and hunting for partnerships. Foreign players would be well advised to come to Sibos with a clear view of the value that they can bring to China and a strong mandate from their boards for exploring and establishing partnerships with local players.
|| Globally, we have seen a brisk pace of M&A activity within the payments space – particularly in areas related to mobile payments, cloud computing and payments analytics – as organizations seek to gain scale or capabilities in these emerging areas. However, much of this activity has tended to stay within individual regions as organizations look towards ‘safer’ and more familiar markets close to home. So while we are seeing some activity within the Asian region itself, there are few examples of European or North American banks swooping into Asia to grab a piece of the market through traditional M&A.|