Mergers and aquisitions (M&A) activity is widespread across the U.S. fintech industry, with deal sizes increasing meaningfully, according to a new report from Fitch Ratings.

The industry is absorbing more than $25 billion of deal activity YTD. Fitch said it expects transactions to continue, with a focus on increasing scale and key capabilities related to digital/mobile technologies, integrated payments, software, banking-related services, and security due to an uptick in data breaches.

According to the report, the U.S. Fintech industry is on a positive growth trajectory due to healthy economic trends and beneficial secular changes that results in a revenue opportunity for global payments that exceeds $2 trillion.

Robust cash generation, healthy balance sheets and the still relatively low cost of debt are supporting M&A activity. Buybacks also remain a primary use of capital for companies, particularly larger issuers such as Visa and Mastercard that are flush with cash. Analysts expect FCF trends to remain strong across the industry, supported by healthy fundamentals, low capital intensity, limited working capital requirements and benefits from US tax reform.

The payments (including money transfer) segment is a key area within the broader Fintech universe that is benefiting from these trends. Fitch expects a favorable economic backdrop, the continued shift to digital payments, increased e-commerce penetration and strong fundamentals for many firms in FinTech to support credit fundamentals in the coming years.

Growth of electronic payments, including credit and debit cards, mobile solutions, etc., is outpacing that of global cash spending. The increase in consumer credit, internet/mobile adoption, and cross border payments is facilitating organic growth while regulation, pricing pressure in some segments, and innovation is driving M&A and convergence across a highly fragmented industry. Segments include electronic payments, merchant acquiring, remittances, card issuer and payments processing, peer-to-peer payments, gateways, and point-of-sale devices.

"Credit profiles across our universe of FinTech companies are stable to improving, with ratings and credit opinions fairly evenly split between investment grade and high yield," said Fitch. "We project strong revenue and EBITDA growth for most companies we track in the space in 2018 and 2019. Leverage averages about 3.0x across the industry but ranges from below 1.0x for PayPal and Mastercard to 5.0x to 6.0x for Worldpay and First Data, due in part to M&A. Highly levered issuers are expected to execute on leverage reduction strategies over the next couple of years."

Downside credit risk is mitigated by strong operating profiles, high EBITDA margins largely in the 25% to 40% range, strong cash flows with high incremental flow-through on top-line growth, and operating models that benefit from the recurring revenue nature of the industry. However, there are certain risks worth monitoring including technology disruption, potential regulatory changes and integration and execution risk tied to M&A.

Fitch subscribers can view the report in its entirety here.