Regulation alarmingly lags consolidation in payment processing industry
Financial Technology

Regulation alarmingly lags consolidation in payment processing industry

As more and more customers turn to cashless payments for their purchases, enabled by improving digital financial ecosystem, the highly fragmented payment processing market is gaining scale and building momentum. However, regulation to control the industry is still stagnant.

The flurry of multi-billion dollar deals in a short span of time only underpins the confidence investors hold in the sector. However, with growing traffic and transaction volumes, the regulation and monitoring of the industry are only catching up.

Earlier this week, U.S. based Worldpay Inc – one of the leading companies linking retailers to card companies and bank – was acquired by rival Fidelity National Information Services for $43 billion. Firms have used deals to scale up quickly

Last year PayPal bought Swedish firm iZettle and U.S. buyout firm Hellman & Friedman agreed to acquire Denmark’s Nets AS for about $5.3 billion in the second half of 2017.

Almost all major private equity groups have been either involved in deals around payment processing companies or have unsuccessfully bid for them. The quick growth in this highly fragmented market has left room for both consolidation and regulatory oversight. Though, the latter has struggled to keep pace with the former.

However, the checks and measures put in place in the traditional banking sector in the aftermath of the 2008 financial meltdown are yet to be matched in these new high-tech and high-growth facets of the financial sector.

The regulatory system currently governing the payments groups is disjointed and toothless. With little or no information on the payment groups’ financial prowess and their ability or defense to fend off a malicious cyber-attacks, the companies have been allowed to grow and add users at an alarming pace.

Moreover, the large scale merger and acquisition in the sector have created complex groups that may lack the sophistication of governance to manage their data.

Last year, Venmo —  digital money-transfer service owned by PayPal Holdings Inc.—was targeted by fraudsters pushing the company into deeper-than-anticipated losses and forcing it to take down some user feature to check further damage.

A number of scams targeting elders – who tend to struggle more to keep up pace with financial innovations — have also shot up.

These incidents, and many more, show how regulators are yet to do their part to put in place solid regulation and oversight of this fast-growing industry.

Image via Shutterstock

Regulation alarmingly lags consolidation in payment processing industry
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