July 29, 2013

The volume of mergers and acquisitions among financial technology vendors slowed in the first half of 2013, with total value for M&A deals in the industry falling by more than $8 billion compared to the second half of 2012, according to a report recently released by investment bank Berkery Noyes.

The drop in M&A activity was largest among payments vendors, the report, which analyzed M&A activity in the first half of 2013 compared to previous six month periods, noted. The second half of 2012 saw an unusually high number of vendor mergers and acquisitions in the payments space, with the level of activity closer to the historical norm in the first six months of this year.

The big increase in the in the last six months of 2012 was because of tax changes, with entrepreneurs and companies trying to close deals before New Year’s to take advantage of capital gains treatment, John Guzzo, managing director of Berkery Noyes, said.

“The second half of last year was an anomaly,” Guzzo noted. “But I suspect that the second half of 2013 will be greater [in M&A activity] than the first half was.”

That growth in mergers and acquisitions will be fueled by a number of factors that are changing the payments vendor landscape, Guzzo predicted. A number of payments vendors are pursuing a single vendor model that can supply a broader range of payments capabilities, and are leveraging acquisitions to provide those extra capabilities, Guzzo said. Many payments vendors are also using acquisitions and mergers to pursue a SaaS business model instead of a licensing model for more recurring revenue, he added.

Big data is also driving vendor M&A in payments, with many companies trying to gain revenue from the transaction data they collect. “Acquirers are looking to purchase data and analytics companies… so they can take their data and try to package and resell it,” Guzzo observed.

The level of vendor M&A activity in the banking space stayed far more steady in the first half of this year compared to the payments space, the report found. The banking sector also had the biggest vendor acquisition in the financial technology space: Fidelity National Financial’s $3.83 acquisition of lending technology provider Lender Processing Services.

Compliance in mortgage services and customer interactions will continue to spur vendor M&A in the banking space as it becomes a greater concern for banks dealing with regulatory and internal compliance, Guzzo predicted.

“A big driver is software to help control and monitor customer communications so banks can be transparent internally about those communications,” he explained.

Many larger bank technology vendors are also acquiring smaller companies to expand their customer base, Guzzo added. That was one of the big drivers behind D+H’s acquisition of Harland Financial Services last week, Guzzo noted. The deal added 5,400 institutions (about 40% of the U.S. market, according to Berkery Noyes) to D+H’s customer base.

Big data will also drive vendor M&A among bank technology providers in the near future as smaller banks, which often lack the resources and talent to handle big data projects, look to utilize their data better. “Historically [data and analytics companies] have been more focused on bigger banks. Smaller banks need to outsource big data management so there’s going to be growth there,” Guzzo forecasted.

ABOUT THE AUTHOR
Jonathan Camhi is a graduate of the City University of New York's Graduate School of Journalism, where he focused on international reporting and interned at the Hindustan Times in Delhi, ...