Acquiring: Looking Overseas for Growth

Karen Epper Hoffman

Economic crises notwithstanding, U.S. payments companies are finding growth potential in Europe, South America, and Asia in traditional services and new niche offerings alike.

Despite the seemingly constant stream of bad news about the potential collapse of the euro, economic crises throughout most of Europe, and faltering currencies in Asia, overseas markets still present a better opportunity than ever for U.S. payments companies.

While most of the largest payment-processing companies have long since established a foothold outside the United States, these international markets now have become the areas of greatest growth for many players.

Case in point: Global Payments Inc., one of the country’s largest merchant processors, has more than doubled its business abroad over the past three years, growing its international business by 107% since 2008 from less than $400 million in revenues to more than $800 million, according to published reports.

Similarly, Fidelity National Information Services Inc. (FIS) does about 20% of its overall business—about $1.2 billion out of company-wide 2011 revenues of $5.7 billion—outside the United States, according to Gary Norcross, FIS president and chief operating officer.

With a focus on core bank processing in Europe (particularly the United Kingdom, France, and Germany) as well as card processing in Brazil, Norcross says that international is the “fastest-growing area of the business.”

‘Logistical Issues’

Payments-industry Goliath First Data Corp. goes to market overseas in a number of different ways, according to Paul Campbell, vice president of merchant alliances. One of the notable ways the privately held company has seen success is by striking alliances with local bank players and offering services under the bank brand’s name, he says.

While First Data does not have nearly “the kind of scale” internationally that it sees in the United States, Campbell says, the company still processes 2 billion transactions a year overseas. And the company’s international roots go deep: First Data and Lloyd’s Bank formed a joint venture in the United Kingdom in 1997, one of the longest-standing ventures in the field outside the United States. (First Data has been in Australia since the mid-1990s.)

Another processor with a strong international footprint is Elavon, a unit of Minneapolis-based U.S. Bancorp. Elavon has been in Europe since 2001, where they are seeing “double-digit revenue growth,” according to Simon Haslam, president for international merchant services at the company.

Elavon has built its business in Europe by having a single processing platform, which has given the company great economies of scale and made it attractive to multinationals that operate throughout the Continent since they can operate off one system.

Haslam sees big growth in Europe, particularly Eastern Europe and the Mediterranean region. Still, Elavon entered the Mexican market 18 months ago and will soon launch processing services in Brazil.

With a core business in remittances, The Western Union Co. obviously has a well-established commitment to the international operations. But that doesn’t mean the company is limited to traditional money-transfer services. Michael Hafer, senior vice president for the prepaid business at Western Union, points out that the company has been dabbling in prepaid since the mid-2000s, initially in the United States (“the most mature prepaid market in the world,” he adds).

But since 2010, the company has embraced “new aspirations for global prepaid and [has begun] looking to offer stored value all around the world,” says Hafer. Now, Western Union offers prepaid solutions throughout Europe, particularly in the United Kingdom, Germany, and Austria.

Not surprisingly, where a payments company will see the most success in its overseas efforts varies greatly based on the individual geographies, as well as the services being offered. Part of the trick for processors is figuring out which offerings are the best fit in which countries, based not only on the financial-industry needs, but the various cultural, regulatory, and economic factors.

“It’s a muddled picture, to be truthful,” says Campbell of First Data’s varying success overseas, “it varies by geography. It’s really a subdued set of characteristics.” For example, in Europe, where the majority of card transactions rely on debit cards, there’s not as much opportunity for profit as there would be in more credit-friendly areas of the world, he says.

India and emerging markets in South America, particularly Brazil, offer a great deal of promise, according to Campbell. First Data struck a partnership with a large bank in India more than three years ago, says Campbell, who architected the deal, and ICICI Merchant Services was created.

Under the deal, the merchant-processing entity (80% owned by First Data) inherited 1,000 staff members and an undisclosed number of processing clients that cover the spectrum of typical tier-one, tier-two, and tier-three customers. Among the issues First Data needed to handle initially was sorting out and “bringing some much-needed structure” to a processing business that didn’t operate the same way as most of its U.S. counterparts.

“There were all sorts of logistical issues,” Campbell says. “We brought rigor to the processes that were broken.”

Doing business in India, as Campbell points out, has also meant culturally having to work with clients who speak 18 different dialects.

But the upside for First Data, he says, is that while India is “widely regarded as a poor country … [the country] has more than 100 million people regarded as middle class or wealthy, and one of the fastest-growing economies in the world.”

‘A Clear Winner’

Indeed, Campbell and other payments executives point out that many areas of the world have leapfrogged the United States in terms of their mobile-phone use in particular—often owing to a lack of landline communications. The embrace of mobile payments in the Kenyan market with a service called M-Pesa offers a sharp example of how conventional cash-oriented societies are becoming huge new processing business targets, Campbell says.

“There’s so much potential, so many prospects,” he adds, “it’s really exciting.”

Much like the M-Pesa offering, Western Union’s stored-value card efforts overseas are aimed at giving consumers in various countries a logical (and often necessary) alternative to using credit cards. Here again, though, Hafer points out the reason for needing stored value varies based on cultural differences.

In the European market, particularly the United Kingdom (where security concerns over e-commerce run higher), stored-value cards are seen as a way to shop safely online without using one’s debit or credit card. “Many consumers there don’t trust it enough to use their debit or credit cards,” Hafer says.

In Central America, a popular market for recipients of remittances where customers are “becoming more financially savvy,” the stored-value card represents a safe way to receive funds and also budget spending of those funds. “It allows them to be more conscientious in spending their money,” Hafer says.

Stored-value card developments are seen as an ideal jumping-off point for mobile payments offerings in the same locales, as they become ready, Hafer says. “Pretty much all the programs we’re putting into market have a mobile component,” he says, adding that some geographic areas may require both cards and mobile-phone payment options to satisfy the needs of the public there.

The Philippines, for one, is becoming a more “interesting” market because of a consumer base that has embraced mobile phones, combined with the fact that the country is also a strong remittance market for Western Union, Hafer says.

“Tying prepaid to the mobile phone there will be a clear winner,” he adds. “It’s got all the ingredients for a recipe for growth.”’

‘Global Headwinds’

Likewise, FIS sees promise in a wide array of countries—the United Kingdom, France, Germany, and Russia in Europe and many countries in Latin and South America and throughout the Pacific Rim, including India, Thailand, Kuala Lumpur, even China, where the payments giant has a “small but expanding” presence, according to Norcross. FIS has a strong foothold in Australia as well.

But the company has its strongest South American presence in Brazil, where FIS is starting to “see more [opportunities in] services wrapped around products” offered by that country’s biggest banks, according to Norcross. He says that FIS is seeing an “unbelievable” response in Brazil from financial institutions.

Elavon’s Haslam, too, is bullish on Brazil. “What attracted us to Brazil was the rapidly growing middle class. The economy is in a really rapid cycle of growth,” he says. Also, he says, Brazil is currently the sixth- or seventh-biggest economy in the world.

For the past five years [since 2007], FIS has seen double-digit organic growth across its international markets, according to Norcross. 2007 was the year when the company made a strategic shift to focus on aggressively cross-selling services where it saw the most opportunity.

The ongoing global economic turbulence might seem to give pause to these international developments, but payments executives claim it is creating opportunities much more than taking them away. “The global economic crisis is pushing our prospects to find more complete offerings at a lower price point,” says Norcross. “So they’re looking to companies like FIS to provide a solution.”

But it’s fair to say that, with or without the current economic woes, doing business in other countries can still be an uphill slog—one where payments companies need to tread more softly in some geographies. As Hafer says: “There are global headwinds that differ by market.”

Indeed, each market offers its own thorny nest of regulation and its own cultural and economic peculiarities. As Campbell points out, in some first-world markets, a combination of lack of price protection, competition from local brands (and often government), and small profit pools make them less compelling in the long run. Italy, Spain, and Greece—beleaguered by recent economic woes among other drawbacks—don’t present enough immediate opportunity to warrant pouring money into marketing services there, he adds.

On the other hand, processors need to take care when operating in a market that might offer great long-term potential but a less stable government or less welcoming cultural or business climate.

Norcross says FIS is investing in China, which has “tremendous opportunity”—but adds that it has also been cautious to grow the business organically, taking it gradually.

“There’s such a lot going on. The challenge is sorting out the wheat from the chaff,” Campbell says. “This is an interesting time.”