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Swiping Up E-Payments

Strategic buyers and PE firms fight for stakes in the emerging industry

It's no secret that mobile devices transformed how people communicate. When they started becoming mainstream it was revolutionary. However, going forward they will be doing much more than ever before. Mobile devices are on the verge of revolutionizing the shopping experience as the e-payment industry readies to soar. According to Forrester Research, U.S. mobile payments will reach $90 billion by 2017. In 2012, $12.8 billion was spent using a mobile payment system. (e-payments or mobile payments include in-store mobile payments, purchasing with a mobile device and mobile peer-to-peer payments.)

The growing use of smartphones, which makes it much easier for consumers to make e-payments, is the driving force behind the trend. According to Goldman Sachs (NYSE: GS), in 2012, 64 percent of U.S. phone users had smartphones, and by 2015 that number is expected to be 81 percent. The second driving force behind the e-payment movement is the consumer who wants his shopping experience to be as easy as possible. In fact, the number of U.S. mobile phone owners who have used 2D bar codes in the past three months increased from one percent in 2010 to five percent in 2011 and reached 15 percent among smartphone users, indicating that an increasing number of people are looking to their mobile devices to help them make purchases, according to Forrester Research.

These numbers add up to lots of opportunities for companies that want to reach today's consumers. Everything from the technology that's embedded on the actual smartphones to the point of sale (POS) terminals the merchants need to be able to collect payment, are in high demand as strategic acquirers look to grow their bottom line and private equity firms try to get in on the action.

Consider ACI Worldwide's (Nasdaq: ACIW) recent acquiring of Online Resources (Nasdaq: ORCC), a provider of e-payment services, for $263 million. That transaction, announced on Jan. 31, came the same day that Fidelity National Information Services (NYSE: FIS) agreed to buy the remaining 78 percent interest in mFoundry, a mobile payments technology provider, for $120 million.

"There are cultural and generational shifts as well as new technologies, which all play a role in the movement toward mobile payments. Consumers are using cash less and have moved toward credit and debit cards and will move more toward shopping with non-card present technologies," says Timothy Johnson, a partner in KPMG LLP's transactions and restructuring practice. U.S. consumers' use of cash is expected to decline by more than $1 trillion from 2012 to 2015, according to Aite Group.

Digital Wallet

Enter the digital wallet. The digital wallet in most cases is actually a smartphone that can store a person's credit card information and use wireless technologies to complete a financial transaction. Companies that have technologies in the digital wallet space have already seen their fair share of M&A activity. "Right now there are seven or eight guys [in the space] and not all will survive and win this high stakes game," says Linda Gridley, president and CEO of Gridley & Co., adding that she's not surprised to see M&A activity increasing and the winners will not only need key capabilities to build their wallets, but also differentiating and personalization components.

Traditional credit card players such as American Express, Mastercard, Visa and Discover are trying to secure a spot in people's digital wallets while new age tech companies such as eBay Inc. (Nasdaq EBAY) and Google Inc. (Nasdaq: GOOG) are also fighting for market share. In July, PayPal, a subsidiary of eBay, acquired Card.io, which provides technology that captures credit card information via the smartphone camera. During the last two years, Visa has spent more than $2 billion buying up companies such as CyberSource, Playspan and Fundamo to get its e-payment business off the ground. Both Visa and Starbucks (Nasdaq: SBUX) have invested in Square. Google went the organic route and has started building Google Wallet from the ground up.

Data

Consumer data is another key area within the e-payment sector that will continue to see M&A activity, as top players fight for market share.