The race to satisfy small and mid-sized businesses' demands for digital payments and other financial services is driving up acquisition activity across the payments ecosystem.
While some payments players are building up services for the small and mid-sized business (SMB) segment, others are paring those operations. The strategy chosen may depend on whether they're prepared to take on mounting competition in the arena.
This month, Western Union sold its business-to-business international payments unit that catered to SMBs for about $910 million to a U.S. private equity group. Meanwhile, U.S. Bank has been buying up businesses, including Bento Technologies this month, to target SMB’s payments needs.
The acquisitive interest from some corners of the payments sphere comes as small and mid-sized businesses become increasingly aware of the need to digitally upgrade their payment systems to remain competitive, and richly funded fintechs, like Square, step up the competition to court them.
“Cashflow management is a major challenge for many businesses, particularly for [small and mid-sized businesses],” a recent Juniper Research white paper report said. “An emerging range of products allows businesses to more effectively manage their cashflow via automation.”
US Bank is determined to meet those small and mid-sized businesses' new digital demands. To that end, the Minneapolis-based bank bought Bento, which sells payment and expense management services to small and mid-sized businesses, and earlier it acquired Talech, a software provider that buttresses SMB's point-of-sale systems. The bank's 2019 acquisition of Talech also onboarded Irv Henderson, now the bank’s chief digital officer for small businesses.
Those business customers may initially have come to the bank for checking account services, but now they’re seeking more software services that integrate other functions, like invoicing, credit card management, payroll processing and supplier expense management, Henderson said in a recent interview.
US Bank counts some one million such business owners that make less than $20 million annually among its clients, he said. “These customers are asking us to deliver more services,” Henderson said. “We see that as a critical evolution of the services we must offer to continue to be meaningful.”
Indeed, if they don’t offer such services, a pack of upstart fintechs are lining up to take away clients. San Francisco-based Square is moving well beyond the small plastic square reader to develop more financial and banking services, and a slew of other startups have followed in its footsteps.
Legacy payments players are also snapping up the businesses that court SMBs too as they look to compete. For instance, payments processor Fiserv has in recent years swallowed businesses, including Clover and Pineapple Payments, in its quest to court SMBs.
Meanwhile, Western Union sold off the B2B arm focused on small- and mid-sized businesses this month in an effort to concentrate on its consumer business and digital white label services, said Shelly Swanback, the company’s president of product and platform. This will allow Western Union to focus not just on consumer-to-consumer money transfers such as remittances, but also on providing other financial services for the company’s millions of users worldwide, she said.
The Denver-based company may also have understood that the growing appetite for payments companies that cater to small and mid-sized businesses made it an opportune time to sell a unit that offers cross-border payment services to SMBs. Western Union’s stock got an initial pop after it announced the Aug. 4 divestiture of the unit, though shares have drifted down since then. Representatives of the investment firms that bought the unit, Baupost Group and Goldfinch Partners, didn’t respond to requests for comment on their intentions.
“Right now, innovation is at a high with cross-border payments and the reason for that is we have seen how efficient we can be with domestic payments,” said Erika Baumann, a research director at the financial services consulting firm Aite Novarica.
Generally-speaking, the mid-tier banks realize they must up the ante to compete for middle-market business clients, especially with respect to cross-border and card services, she said in an interview this week. Banks are also engaging in partnerships to meet some of those client needs, she added.
“At this point financial institutions are recognizing there is a market opportunity there, and there may be an opportunity cost,” Baumann said.
For its part, US Bank remains on the hunt to buy more businesses that focus on small and mid-sized clients, Henderson said. The bank will continue to “aggressively” acquire, partner and build new operations that cater to that segment of business owners, he said.
Clarification: This story was updated to clarify the description of the business that Western Union sold.