ACI To Expand Its Fraud-Protection Services Menu Through Its Acquisition of ReD

After beefing up its bill-payment services through two acquisitions in 2013, ACI Worldwide Inc. is now turning its attention to fraud prevention. The Naples, Fla.-based payments-software firm on Monday announced that it plans to buy prominent e-commerce fraud-detection and prevention services provider Retail Decisions Plc (ReD) for $205 million in cash.

Brookwood, England-based ReD offers a suite of services, including its flagship ReD Shield product along with ReD Fraud Xchange, ReD Prism, ReD Alerts, ReDi, ReD1 Gateway, and LiveProcessor. The company has 200-plus direct customers—retailers, payment card issuers, merchant acquirers, processors, and networks—and through them 1,500 end customers in 192 countries, according to an investor presentation. U.S.-based processors that offer ReD products include First Data Corp., Fidelity National Information Services Inc. (FIS), and EVO Payments.

London-based private-equity firm Palamon Capital Partners LP bought ReD in 2006. Under Palamon’s ownership, ReD shed its fuel and gift card businesses in Europe and Australia to concentrate on fraud prevention, according to a statement from Palamon.

While ACI, which refers to its integrated family of services as Universal Payments, has fraud-control services for brick-and-mortar retailers, it doesn’t have equivalent offerings for the fast-growing e-commerce space, says Gil Luria, a managing director at Los Angeles-based Wedbush Securities who follows ACI. “ACI’s vision is to try to bring payments tools to banks and retailers, and Retail Decisions helps them bring to online retailers fraud-reduction capabilities,” Luria tells Digital Transactions News.

An ACI spokesperson says executives from neither ACI nor ReD would comment beyond today’s press releases until the deal closes, which is expected later this quarter. “ReD has a compelling SaaS [software-as-a-service] and transaction-based financial model, with over 80% recurring revenue,” ACI said in a release. “The company, with its multi-dimensional detection engine and proprietary global fraud database, generates high customer retention rates and strong revenue growth.”

ReD chief executive Paul Stanley said in a statement that he is excited about the integration of ReD’s technology into ACI’s Universal Payments, an effort he anticipates will expand the adoption of such fraud-prevention services.

ACI wants to capitalize on the ongoing boom in e-commerce payments and be ready for the expected spike in card-not-present (CNP) fraud as the spread of Europay-MasterCard-Visa (EMV) chip cards makes point-of-sale fraud harder to commit. Researchers have documented large increases in CNP fraud in Canada, the United Kingdom, and other countries when they moved away from magnetic-stripe payment cards, and the same phenomenon already is happening in the United States as the migration to EMV cards gets underway. A recent Aite Group LLC study projected that U.S. online fraud losses will more than double from current levels to $6.4 billion by 2018.

“With ReD, ACI better equips multiple segments globally—issuers, merchant acquirers, retailers, and commercial banks—as they address disruption in the e-commerce market,” Philip Heasley, president and chief executive of ACI Worldwide, said in a statement.

Analyst Luria estimates ReD has annual revenues of $50 million and earnings before interest, taxes, depreciation, and amortization (EBITDA) of about $10 million. “It makes it an expensive acquisition, but in line with what’s been done in the past,” he says, noting Visa Inc.’s $2 billion acquisition of CyberSource Corp. and MasterCard Inc.’s buyout of European processor DataCash Group plc for $520 million, both in 2010. Palamon says it expects a return of 2.5 times on its invested capital.

Last year, ACI bought Official Payments Holdings Inc. and Online Resources Corp., making ACI a major provider of electronic bill-payment services.