Why are European payments companies struggling Vs their US counterparts?

Yesterday Payments Cards & Mobile covered the seemingly unstoppable growth of the Payments Industry big 3. Once again the posted stellar results either for Q3 in the case of Mastercard and American Express and for end fiscal year in Visa’s case.

Why are European payments companies struggling

However, despite what seems like Tradewinds pushing the American contingency along, in Europe the largest payments companies seem to be flapping into headwinds.

Nothing sums this up more than the announcement by Worldline last week which saw their share price fall off a cliff.

Worldline crashed 60% after it downgraded its sales outlook and said it was clamping down on fraud in the sector by cutting off some clients.

Shares collapsed to €9.4, giving the company a market capitalisation of €2.7 billion, down from a value exceeding €11 billion.

Italian rival Nexi closed down more than 13% in Milan trading, while Adyen fell 6.2% in Amsterdam.

The warning sparked a rout in the payments sector, dragging down shares in European and US peers.

It now predicts growth of 6% to 7%, from 8% to 10% previously – this is hardly a catastrophic about turn, so what sparked the fallout?

Jefferies’ analyst, Hannes Leitner said part of the concern rippling through the sector was that the outlook had been too bullish on the back of a post Covid-19 boom in consumer spending.

“We came out of the pandemic, it felt like all this consumer behaviour would follow through in an explosion . . . To a certain extent that stayed but there’s a normalisation.”

The secular issue is that new entrants are pushing down prices and there is less differentiation in services than those outside the industry suppose.

Payments capacity may become commoditised in the same way that telecoms bandwidth has. Through that lens, an explosion of takeovers by consolidators would look destructive rather than transformative.

The market is already writing down the value of the deals, informed by an $18 billion hit taken by FIS on Worldpay, acquired for $43 billion in 2019.

There is still plenty of room for growth, with around half of European payments settled through banks, these too are under pressure to lower their fees.

Companies that have built scale — Worldline’s has €400 billion of processed transactions — have high margins and something of a moat.

Unfortunately, unlike physical infrastructure networks, the moats that exist for technological infrastructure can be vaulted by the next wave of innovators.

As for margins, they can only go one way…