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    The Dutch PSP market is in motion: Two recent acquisitions, more transactions expected

    Last week, BlackFin Capital Partners announced that it acquired Dutch payment institution Buckaroo. This news followed the announcement that CM acquired Dutch payment institution Docdata Payments. The Dutch PSP market is clearly in motion! More transactions are expected. Let me explain.

    Setting the regulatory scene

    The provision of payment services is a highly regulated area. The EU Payment Services Directive (PSD) introduced a license regime for non-bank payment service providers (PSPs) and lead to a new type of regulated financial companies: payment institutions. A registration-regime for small PSPs was also introduced. A clear advantage of a full license is that a payment institution can operate on the so-called passport-regime in other jurisdictions with the European Economic Area (EEA) provided the proper notifications are made. A small PSP can only operate locally.

    Current state of payment institutions in the Netherlands

    There are currently about forty Dutch payment institutions: PSPs with a license of the Dutch regulator DNB. About sixty companies have a registration with DNB as small PSP. Therefore, the total number of Dutch PSP’s adds up to about Dutch 100 PSPs!

    The PSP market is a very competitive market, where on the one hand the costs of e.g. compliance with (new) laws of regulations increase continuously and, on the other hand, there is an ongoing pressure on the fees. It is not a secret that this worries the regulator. In 2016, DNB examined the business models of the Dutch payment institutions. The most vulnerable institutions were also identified.

    DNB made clear that payment institutions must take measures to ensure the long-term sustainability of their business models, or opt for an orderly exit. As market circumstances can be subject to rapid change and it is therefore essential to identify recovery options at an early stage, DNB asked payment institutions to draft both a recovery plan and an exit plan and to submit these plans in draft by 25 May 2017.

    Capital raises

    As all Dutch payment institutions will by now have prepared their recovery and exit plans and will have those plans examined by DNB in the coming period, payment institutions will of course think about business opportunities and strategic options. For many payment institutions, a steep increase in payment volume looks like a logical step-forward. Such increase will result in more fees, whereas the costs will of course also increase, but at a much slower pace.

    Increasing the payment volume on an incremental basis will, however, not be sufficient. The competition is too strong. Big steps on the terrains of technology and markets seem necessary, such as expansion into other European countries. Such steps do, however, not come cheap. Heavy investments will be necessary. Capital raises by payment institutions are therefore likely!

    Consolidation

    There are of course other options. Existing merchant portfolios can be bought from PSPs that have decided to exit the market.

    Mergers between PSP’s are also possible, but are more complicated and require more  regulatory attention. Merging with another PSP means that the regulatory legacy of the other PSP is brought onboard. This does not have to be a show stopper, but would of course require more regulatory analysis in e.g. the regulatory due diligence.

    Interest of VC and strategic investors - impact of PSD2

    Another trend is the interest of VC and strategic investors. Having a full license of DNB to act as payment institution has certainly great value. Not only in a broader European perspective, but also in light of new services under the revised European Payment Services Directive (PSD2).

    PSD2 caters for the regulation of two new types of payment services: payment initiation services and account information services. If a company decides to build a business-model on those new services, it could opt to either apply itself for a license to act as payment initiation service provider or registration as account information service provider, or to acquire an existing payment institution and have the license extended to cover the new services also.

    Contact

    If you are thinking of selling or buying a Dutch PSP, please reach out to my team and I, to discuss how Van Doorne can assist.