British Competition Regulators Probe PayPal’s Takeover of iZettle

The United Kingdom’s Competition and Markets Authority announced Monday that its initial investigation has found that PayPal Holdings Inc.’s September acquisition of Swedish processor iZettle AB could reduce competition or raise prices in the payments market. But whether the antitrust regulator will unwind the deal is far from certain.

“While iZettle is a relatively recent entrant to payment services, it has already established a market-leading position in mobile point-of-sale devices and was well-placed to compete against PayPal in other emerging markets,” Andrea Gomes da Silva, the CMA’s executive director of markets and mergers, said in a statement. “That’s why we are concerned that PayPal’s takeover could lead to higher prices or reduce the quality of the services available to customers.”

The CMA in early October said it was investigating the $2.2 billion deal for its possible anti-competitive effects. Now, the probe will be referred to what the authority calls a Phase 2 investigation “unless the parties offer acceptable undertakings to address these competition concerns.” The CMA said details of its decision to proceed would be available soon.

A U.K. spokesperson for San Jose, Calif.-based PayPal could not be reached for comment Tuesday morning.

The acquisition brought to PayPal a network of almost 500,000 merchants in 11 markets, nine in Europe plus Mexico and Brazil. They are served by iZettle’s Square-like POS system, which aims to make payments and related functions fast and easy for small and mid-size sellers often ignored by larger merchant acquirers.

The CMA’s announcement said that Phase 1 of its probe found that “PayPal could face insufficient competition in the U.K. after acquiring its market-leading rival.” In addition, the merger could affect the “emerging market for ‘omni-channel’ payment services, where PayPal has already established a strong position,” the CMA said. “The investigation found that had iZettle not been taken over, it could have provided strong competition for PayPal and potentially benefitted customers by driving future innovation and lower prices.”

Exactly what would allay the CMA’s concerns is unclear at this point. But a research note by New York City-based investment firm Keefe, Bruyette and Woods says PayPal and iZettle have until Dec. 3 to respond to the CMA before the investigation moves into Phase 2. “Although not a positive headline, the fact that PayPal and iZettle have an opportunity to address the U.K. CMA’s [concerns] before moving on to Phase 2 is promising as KBW analysts continue to believe that the combination of the two businesses does not pose a significant threat to the competitive landscape,” the report says.

The report says iZettle’s core market consists of physical small and mid-sized businesses whereas PayPal “is almost solely online in this region.” KBW also said the CMA had questions about Mastercard Inc.’s $920 million acquisition of U.K.-based VocaLink Holdings Ltd. in 2017, but Mastercard was able to address its questions satisfactorily.