Recently, the companies that processed payments were the underrated donkeys of the financial system that worked behind the scenes to send money around the world. The rise of digital money and the fintech industry changed that. More than 80% of purchases in countries such as Sweden and South Korea are made without cash, due to the proliferation of mobile applications and card payments. In the United Kingdom and the United States, they represent 66%. Payment processing is a high-growth, high-tech industry with high valuations.
Investors are pricing companies
Worldpay – one of the main companies that links commercial stores with credit card companies and banks – announced that it will be acquired by its rival FIS for US $ 43,000 million. The offer represented a premium on an already high market price. Investors are pricing companies like Worldpay at twice the rate applied to banking giants, from JPMorgan to HSBC.
This operation is part of a trend in which the payment processing groups use acquisitions as a shortcut to scale and consolidate a still very fragmented industry. After a bidding war with MasterCard, Visa will buy Earthport, a British payment processing firm. Last year, PayPal bought the Swedish unicorn iZettle. In the last 20 years, FIS has made an operation per year and has catapulted to the highest levels of the payment processing industry.
All this reflects the natural growth of a new dimension of the economy
Prices are high considering that the expansion of the payment processing sector is slowing down. Although in recent years there have been strong increases in volumes in many developed markets, the shift from cash to digital payment is limited, so it is inevitable that the pace slows down as the progression enters its stages. endings
At the same time, the speed and magnitude of operations are creating complex groups that may lack the sophistication necessary to manage them. In the case of Worldpay, the director of FIS will be chairman of the board, president and CEO of the huge group.
The size and complexity also entail technological challenges
The payment processing industry is among the most vulnerable to cyber risks. An attack directed against a dominant payment processing company could incapacitate large sectors of the economy without warning.
The largest operators must have more capacity to invest in the best defenses against cyber risks. But this has a double edge. The larger the size of the payment processing group, the higher your systemic risk. Even a brief interruption in Visa Europe’s operations last summer caused chaos for millions of people.
It is clear that the approach towards banking regulation conceived after the financial crisis of 2008 does not coincide with that of other dynamic areas of the finance sector. Global policy makers have already come to the conclusion that large insurers and large asset managers should not be considered systemically important. With a similar lack of vision, they fail to see the growing risks in financial technology.
The regulatory system that governs payment processing groups is incoherent and lacks weight
It is not in line with the supervision of the banks, which leaves doubts about the soundness of the companies financed and the quality of their defenses against a serious cyber attack.
Policy makers did a good job regarding banking regulation. But they seem to be forgetting a secondary lesson of the 2008 crisis: regulation must keep pace with financial innovation.