A Mixed Payoff for the Megamergers

When six powerful payments companies separately merged into three organizations in 2019, it signaled that one end of the payments spectrum had dramatically shifted. But the actual payoff seems to have been inconsistent.

Think about the before time. Before the pandemic. Before the lockdowns. Before the cliff-dive of in-store payments. The payments industry in 2019 was about to go through another massive change, one that might have continued to garner headlines in 2020 and 2021 had the Covid-19 pandemic not materialized as it did.

That change was the consolidation among some of the largest payments companies in the world. First Data Corp. and Fiserv Inc. announced their merger in January, followed by FIS Inc. and Worldpay in March and Global Payments Inc. and TSYS in May. The First Data/Fiserv and the FIS/Worldpay deals would close within days of each in July and the Global Payments/TSYS combination in September.

More than three years on, what’s been the impact of these mergers—the companies are known as Fiserv, FIS, and Global Payments now—on these players? On the payments industry?

First, two of the three seemed to weather the pandemic as well as could be expected. The exception was FIS. The Jacksonville, Fla.-based processor announced in December not only a change in its board of directors and the accelerated departure of chief executive Gary A. Norcross, who had spent 34 years climbing the ranks at the company, but a wholesale review of its business.

FIS said that review will include examination of the company’s strategy, businesses, operations, and structure.

Brookfield, Wis.-based Fiserv, by contrast, renewed Frank Bisignano’s contract as chief executive and chairman through December 2027. And Atlanta-based Global Payments expects to close in a couple of months on its latest deal, a $4-billion acquisition of EVO Payments Inc.

All three companies continue to provide services and sell their products to thousands of clients, but their sheer size has proven to be no guarantee of an easy path.

Two Big Questions

So now two big questions loom. Have these megamergers paid off as their proponents said they would? Also, how have they affected the payments industry overall?

“It has definitely changed the playing field,” says Thad Peterson, strategic advisor at Aite-Novarica Group in Boston. “The mergers have helped the industry because the combined companies can take the best-of-breed solutions from their partner organizations and also identify synergies that might arise between traditional banking platforms and their payment acquisitions.”

Even with all that activity among these very large companies, their shadows don’t extend across the entire payments industry, often leaving opportunities for creative organizations to develop new products and services.

Indeed, the big mergers “also created opportunities for emerging players to capture market share by offering solutions on newer platforms or with different capabilities or functionalities,” Peterson says.

The results of the megamergers are felt even among smaller companies. “Oftentimes, the impact falls upon small- and mid-sized companies,” says Tim Russo, senior director of liquid fintech partnerships and business development at Palo Alto, Calif.-based TripActions, a card, travel, and expense-management services company.

“As the acquirer portfolios grow, these companies can fall by the wayside to larger enterprise companies that require high-touch services,” Russo adds. Larger payments companies compete fiercely for enterprise customers.

“In the wake of these mergers and the support gaps, doors have opened for existing companies to expand their footprints and for fintech[s] to move into the marketplace,” Russo says. “Companies like Stripe continue to grow based on their successful business model, while new players like Checkout.com can also enter the space and modernize legacy payment infrastructures for modern e-commerce companies.”

Even if opportunities open between the shadows of the expansive reach of these companies, those shadows still enjoy a massive reach in the industry.

The virtues of leaner companies are just as easily discerned by larger players. “The merger has reinforced the importance of certain trends and key needs,” says Casey Klyszeiko, Fiserv’s senior vice president and head of global e-commerce and Carat. “Across our client base, the need to deliver a single-stack architecture that maximizes choice and optionality while minimizing complexity is clear.”

‘Strategically Pivoting’

With the emergence of fintechs, competition in general, and general economic issues to contend with, no company—regardless of size—has an easy time. But some may have more challenges than others.

FIS is experiencing that.

The company’s business review is another indicator that size alone will not stave off all, or even most, challenges. FIS did not make an executive available for this article, instead referring Digital Transactions to its November earnings call, in which Stephanie Ferris, the new president, and other executives participated.

In the call, Ferris tried to assuage equity analysts’ concerns about FIS’s performance post-pandemic. “First, despite a fair amount of noise around disruption and market-share shifts, Merchant Solutions’ revenue and volume growth in aggregate, when indexed to 2019 levels, has remained stable, showing steady revenue growth and high single-digit volume growth,” Ferris said, according to a transcript.

Merchant Solutions is one of three divisions making up the Jacksonville, Fla.-based company’s business, with the other two being Banking Solutions and Capital Market Solutions.

In the third quarter, Merchant Solutions recorded $1.18 billion in revenue, up 1.6% year-over-year. By contrast, the 2021 third-quarter result, $1.16 billion, represented a 15% increase from $1.01 billion in 2020’s third quarter.

The other two processors, in their respective merchant-services units, had similar growth in the same quarter. Here, Fiserv recorded $1.9 billion in 2022 revenue, up 11.7% from $1.7 billion in 2021, which was up 13.3% from $1.5 billion in 2020. Global Payments generated $1.6 billion in merchant-services revenue in the 2022 third quarter, up 6.6% from $1.5 billion the year-prior quarter, which was up 25% from $1.2 billion in the 2020 third quarter.

Ferris said that its merchant solutions revenue and volume growth, in aggregate—when indexed to 2019 levels—has remained stable. “Further, revenue and volume growth rates and yields have remained consistent by sub-segment, albeit they are very dependent on the merchant size and vertical in each category,” she told analysts.

But while FIS may be able to pinpoint positive highlights, it’s still undergoing a thorough business review, one that could rewrite its priorities or, potentially, the makeup of the company itself. FIS has said it will not provide updates on the review, and it does not intend to disclose developments “unless and until it determines that further disclosure is appropriate or required by law.”

E-commerce and platforms are certainly part of FIS’s future. In the same analyst call, when asked about weakness among small businesses in the company’s merchant solutions segment, Ferris said the company wants to service small businesses via platforms and be more focused on e-commerce. The independent sales organization (ISO) and independent software vendor (ISV) segments, however, may not be emphasized as much as in the recent past.

“So, that piece of our business, whether it’s our ISO business or ISV business, we are strategically pivoting away from that,” Ferris said. “It’s just not a high-growth business for us.” This despite the fact that ISOs and ISVs have been widely seen as vital to recruiting and servicing small and mid-size businesses.

‘Increased Complexity’

Being agile enough to adapt is something large companies sometimes are thought of as having a tougher time doing than a smaller company. It’s not the size of the organization that’s so critical in this instance as it is the personnel employed by the organization, suggests Ben Jackson, chief operating officer of the Innovative Payments Association, a Washington, D.C.-based trade organization.

“The agility of bringing a new product to market is oftentimes less about the size of the organization and more about the people who are in it,” Jackson says. “When people are free to leverage their experience, they can make things happen not only quickly, but well.”

For Jackson, a company’s ability to compete well comes down to the personnel it uses. “Put together a good team, and you can get things done very quickly,” he says. And large companies can tap vast resources to help.

Being able to compete is a constant goal. This is as true now for the three giants as it was before their big mergers. By contrast, competitive activity by and among other players has only increased, observers say.

“The market has continued to become more competitive,” Fiserv’s Klyszeiko says. “The number of new entrants and new money coming into the space has increased since the mergers.”

Russo sees a similar phenomenon. “Enterprise merchants seemingly hold all the cards in this space—large companies only need two to three strong solutions to get the best discounts for their payments business,” he says. “The real question is whether there are enough downmarket alternatives for merchants of all sizes and if those alternatives offer the same level of technology and customer support that large-scale merchants receive.

“In this case, the continued growth of Stripe and the emergence of Checkout.com meet the needs of those companies just under that large-enterprise segment,” Russo continues, adding this is true even “while independent sales organizations—like Payroc—are investing in their own solutions to provide modernized payment infrastructure in the SMB space.”

Indeed, competition for merchants and their payments business has only intensified, says Peterson. “Competition has changed significantly in the past few years as new types of processors like payment orchestrators have emerged to simplify merchant payment-acceptance decisions,” he says. “Add to that the increasing complexity of the space driven by tender type and cross-border among other factors, and any potential opportunity to lessen competition that the large processor expected to receive has probably diminished.”

For its part, Global Payments touts several mergers since acquiring TSYS that have helped it compete. These combinations have “enabled us to accelerate our technology enabled, software-driven strategy, announce groundbreaking partnerships with industry-leading technology providers, and win new issuer clients, many of which have been competitive takeaways,” a spokesperson says in a statement.

It’s the combination of payments and banking services that was central to the megamergers. As Frank Bisignano, Fiserv’s chairman, president, and chief executive, said in 2019 when the merger was announced, “For years, we have had aspirations to deliver a compelling core-processing platform.” The combination with Fiserv fulfilled that ambition, Digital Transactions reported then.

“Increasingly, merchants are embedding banking services into their offerings, so the complementary qualities of our broad portfolio of merchant and bank services is more evident every day,” Klyszeiko says.

‘Innovation Happens’

The other big question is, have these megamergers paid off for the companies? That answer may need more time to evolve, especially for FIS. Fiserv said its merger with First Data generated more than $700 million in revenue synergies and $1.2 billion in cost synergies, a 33% increase from the initial $900 million commitment, and did so in two-and-a-half years instead of the original timeframe of five years. “Our operating profitability has improved each year since the combination, while our top-line growth has exceeded that of the individual companies pre-merger,” Klyszeiko says.

“2019 is really not that long ago,” says Peterson, “and it takes years to fully integrate and combine resources. 2023 will probably be one of the more telling years for profitability as they gain cost savings.”

Judging the success of these mergers requires context, argues IPA’s Jackson. “To say positive or negative would depend on who you are and where you sit,” he says. “On some levels, it’s been very good for some players and tougher for others. The big stories in tech are always about a scrappy upstart and smart coders who found new ways to do things.”

“The problem is we forget that a tremendous amount of infrastructure is required to make good and interesting things happen,” Jackson adds. “Sometimes innovation happens and a group of people get together who have the tools to do something interesting.”