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Analysts look for future consolidation in the payments industry

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Analysts look for future consolidation in the payments industry

Several payments companies have made acquisitions in 2017, and ahead of third-quarter earnings, analysts are looking for updates on new potential M&A deals in the space.

S&P Global Market Intelligence surveyed EPS estimates for the third quarter for 20 companies in several major financial technology segments: payments, digital lending, e-commerce and marketing technologies, financial media and data solutions, insurance and healthcare technology, HR and payroll technology, and business process outsourcing. On a sequential basis, earnings are expected to be higher for 10 of the 20 companies, lower for nine companies and flat for First Data Corp.

Expectations for EPS growth are mixed at the payments companies, which Credit Suisse analyst Paul Condra attributed to typical third-quarter seasonality in the space.

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Payments companies typically show steady, incremental progress, Condra said in an interview, adding that he is not expecting any big surprises in the space this quarter.

"The difference this year versus last year is we have a little bit more inertia toward consolidation," he said. "Last year maybe we had a little more of a tailwind as people were still upgrading to [Europay, Mastercard and Visa]."

In September, Global Payments Inc. completed its $1.21 billion acquisition of the communities and sports divisions of ACTIVE Network from Vista Equity Partners. Also in the third quarter, Vantiv Inc. agreed to acquire London-based Worldpay Group plc for approximately £8.0 billion. First Data completed two smaller acquisitions earlier in 2017.

KBW analyst Sanjay Sakhrani wrote in an Oct. 8 note that the focus for merchant acquirers remains "organic growth driven by integrated payments and consolidation within the industry." Sakhrani wrote that he is hoping for updates on future M&A opportunities across the industry.

Credit Suisse's Condra expects that similar big deals can continue, citing PayPal Holdings Inc.'s strong balance sheet and ability to do large deals. The payments industry has a long tail of small, private companies that Condra thinks the big players can acquire to get more scale.

"For the most part, these are scale businesses, and they will consolidate over time," he said.

The increase in new tech-enabled entrants and the changing payments ecosystem is not expected to disrupt the incumbent payments providers, as all the major public payments companies are expected to post year-over-year growth in earnings per share for the third quarter, according to S&P Global Market Intelligence data. An Oct. 11 Moody's report concluded that incumbent providers will remain at the center of the payments industry because they are "fully entrenched" in the existing networks.

"Despite these threats, a material displacement of traditional electronic payment providers remains unlikely," Moody's wrote. "Existing players have global networks, platforms that are easily scalable, and long operating histories that engender trust among their customers."

Many analysts have also agreed that cryptocurrencies, with their uncertain regulations, do not pose any significant threat to the payments industry.

"You have to get to the point where you're using something instead of your credit card to buy things, and we're just not there yet," Condra said. "You should see pretty stable, solid results for the better, higher-quality names in the space."

S&P Global Market Intelligence is owned by S&P Global Inc., which also has an investment in Kensho Technologies Inc.

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