In the Wake of the Mega-Mergers

2019 saw three of the biggest combinations in the history of the electronic payment business. The deals closed months ago. What happens now?

Gotten over merger shock yet? Well, fasten your seat belt. The effects from last year’s trio of mega-combinations are likely to ripple through the payments industry for some time to come, reshaping business relationships, shifting market share, spurring innovation, and—at least for a while—spawning confusion and dysfunction.

In short, prepare for fundamental change in an industry already roiled by a decade’s worth of revolutionary technological overhaul. “There’s going to be a new normal,” predicts O.B. Rawls, chief executive of global payment processing for processor Paysafe Group.

And, to top it off, the mega-merger wave hasn’t exhausted itself. In February, two French behemoths, Worldline S.A. and Ingenico Group S.A., agreed to combine in a deal valued at $8.6 billion.

The agreement may have come in part as a reaction to the big combinations in the U.S. market resulting from the deals between Fiserv Inc. and First Data Corp., Global Payments Inc. and Total System Services Inc. (TSYS), and Fidelity National Information Services Inc. (FIS) and Worldpay Inc. But one thing is sure: it will have ramifications for U.S. processors and merchants. Ingenico is a major supplier of point-of-sale devices in America, and experts see Worldline using that position to launch an expansion play here.

‘Merger Hell’

But while the three completed combinations gear up with expanded sales forces, capabilities, and product lines, the immediate impact down the line on independent sales organizations, independent software vendors, payment facilitators, and the merchants they serve can be described in two words: “We call it merger hell,” says Trent Voigt, chief executive of Paynetworx, a Dallas-based processor.

Voigt and other ISO executives see opportunity in the momentary distraction caused by knitting six big operations into three even larger ones. The confusion largely results from disconnects between differing accounting systems, Voigt says.

“We’re getting numerous ISOs and ISVs [coming to us] that have built integrations around reporting structures, and now the reporting structures are changing. It breaks their automation,” Voigt explains.

Companies like Paynetworx are the beneficiaries of the new business. “I’m loving every bit of that,” Voigt adds.

He’s not the only one looking to benefit from what is likely to be momentary confusion while the big firms iron out system issues. Rivals are thinking the same way, and laying out the welcome mat for any straying players. “We’ll strike while people are looking around,” says Ryan Malloy, senior vice president of partner relations at North American Bancard LLC., a Troy, Mich.-based processor.

The opportunity to grab business will be short-lived. Paysafe’s Rawls gives it three to six months before the new combinations get their systems humming on a single standard. “Then things will settle down,” he notes.

Other long-time industry observers agree, arguing too much business is at stake to long neglect system incompatibilities or enforce new formats that annoy clients. “I heard about it on the street. I don’t think the window is going to be open that long,” says Rod Hometh, a former Ingenico executive who is now a partner with the payments-advisory service RPY Innovations.

For their part, the big processors aren’t likely to take key reseller relationships lightly. FIS and Global Payments did not respond to a request for comment for this story. “We have the top program out there for ISOs,” says Jason Williams, a long-time payments executive and senior vice president and head of ISO solutions for Fiserv.

He points out that Fiserv has already committed to spend $500 million over the next five years to support innovation in merchant solutions and risk-management technology, among other priorities.

But in the meantime? “There are opportunities everywhere you turn” to leverage “client dissatisfaction,” notes Robert Carr, chief executive of merchant-service provider Beyond Inc. Carr formerly was chief executive of Heartland Payment Systems Inc., which Global Payments acquired in 2016 for $4.3 billion.

“This is where ISOs, and even big companies like us, feel a little lonely as a client,” says Paysafe’s Rawls. “Roles change, people change, pricing changes. It takes a while to figure all that out.” Some players will figure it out, others will make a move, he says, and that movement creates opportunity for nimble players. “I think you’ll see share shift in the light of the three mergers,” he adds.

The Upside

That’s the downside risk. There’s upside, also. Fiserv, Global, and FIS have acquired considerable financial and technological muscle with these deals, and won’t be afraid to wield it. Fiserv, for example, now controls Clover, a highly promising line of app-based POS devices that First Data acquired in 2012.

Payments volume running through Clover’s installed base rose 40% year-over-year, Fiserv reported last month, without naming figures. In a conference call to discuss Fiserv’s fourth-quarter results, company chief executive Jeff Yabuki called out Clover’s performance as “stellar.”

Meanwhile, the ISV partnerships First Data brought to its new owner yielded 25,000 new merchant locations last year, Fiserv said. And the First Data unit’s ISO connections are net new to the company. “Fiserv did not have an ISO channel, so there’s not much noise there,” notes Williams, who came to Fiserv through the First Data deal.

Indeed, now that it’s fully integrated, First Data has become the tail wagging the Fiserv dog. Its sales represented 61% of Fiserv’s $3.67 billion in total internal revenue (revenue adjusted for currency fluctuations and acquisitions and divestitures) for the fourth quarter. The merger closed in July.

Global and FIS also gained significant advantages. Through its acquisition of TSYS, the largest such deal in its history, Global picked up two key POS product lines, the Vital brand smart terminals and the Genius POS software. Vital competes with Clover in the crucial market for app-based devices. Genius will give Global an edge with ISVs in the all-important restaurant market.

Global’s plan with Vital is to start rolling out the devices this month through its Heartland unit. “We think it competes very well for that register-replacement market,” noted Cameron Bready, Global’s president and chief operating officer, during the company’s earnings call last month. All in all, because of the merger, Global’s expanded merchant-solutions unit now accounts for fully 65% of its total revenue.

What Worldpay has done for FIS is even more dramatic. The enormous $43 billion deal (including assumption of Worldpay debt) creates huge leverage in e-commerce processing, a key Worldpay strength, as well as in integrated payments. The latter is a crucial market involving close relationships with ISV partners who fold payments functionality into business software they’re writing for specific business segments.

In the fourth quarter, e-commerce and integrated-payments revenue grew to 45% of sales in the company’s merchant unit, up from 37% a year earlier. All in all, the addition of Worldpay grew revenue in the company’s merchant-solutions unit to $1.12 billion in the fourth quarter, up from $71 million a year earlier. The merger has been “the most significant and transformational acquisition in our history,” pronounced Woody Woodall, FIS’s chief financial officer, during the company’s earnings call last month.

Niche Plays

A key unanswered question is the extent to which the sheer hugeness of these new companies will confer pricing strength. Naturally, the firms won’t comment on a matter this sensitive, but questions did crop up during the most recent earnings calls regarding impending interchange-rate revisions planned by Visa Inc., including increases for card-not-present transactions.

Both Global Payments and FIS said the changes will simply be pass-throughs to merchants. “We’re not in the business of absorbing that,” noted Global’s Bready.

One thing remains clear: the era of the mega-merger, inaugurated by these six companies, is just getting under way. Observers say more such deals are likely soon, and not necessarily where you might expect them.

One ripe market could be remittance, observes Patricia Hewitt, principal at PG Research & Advisory Services, a Savannah, Ga.-based consultancy. “There’s a lot of juice in remittance,” she says. “We’ll see some M&A there.” And, without naming targets, she speculates that consolidation in acquiring is bound to grow more intense. “There’s still a lot of cheap acquiring out there,” she says.

But with the large growing suddenly larger, what can mid-size and smaller players do to find growth? For some observers, the best strategy is playing to strengths in niches such as health care, high-risk merchants, or even something as specific as parking.

Consolidation by the big players “always opens the door for competitors,” notes Hewitt. “For smaller acquirers, the best go-to-market strategy is specialization. There are dozens of specific markets that are very large. You can do a good business as a niche player.”

But be forewarned: in the era of the mega-merger, “pricing is a commodity,” says Hewitt, “you’re not going to differentiate on that.”

 

Mega-Mergers at a Glance

Fiserv-First Data

Closed: July 29, 2019

Price Paid: $22 billion (stock)

Merchant Locations: 6 million plus

Revenue Q4 2019: $4.05 billion

Revenue Q4 2018: $1.55 billion

 

FIS-Worldpay

Closed: July 31, 2019

Price Paid: $43 billion (90% stock/10% cash)

Merchant Locations: 1.3 million (U.S.)1

Revenue Q4 19: $3.34 billion

Revenue Q4 18: $2.17 billion

 

Global Payments-TSYS

Closed: Sept. 18, 2019

Price Paid: $21.5 billion (stock)

Merchant Locations: 3.5 million

Revenue Q4 2019: $1.99 billion

Revenue Q4 2018: $880 million

 

Worldline’s $8.6 Billion Deal for Ingenico

In one of the latest signs that the mega-mergers aren’t over yet, Ingenico Group S.A. said last month it has agreed to be acquired by Worldline S.A. for cash and stock consideration totaling approximately $8.6 billion. The two firms are French, but the combination is a global move with potentially major implications for the U.S. payments market.

Indeed, the transaction, expected to close in the third quarter, brings together two companies with far-reaching stakes in the electronic payments business. Ingenico is a principal supplier of point-of-sale terminals in North America and other regions that has in recent years expanded its reach in e-commerce transaction processing.

Its worldwide terminal base totals 30 million, accounting for a 37% share of installations, Ingenico says. It processes for 550,000 merchants either online or in-store, or both, across 170 countries.

Worldline is a top provider of payments processing in Continental Europe that has not shied away from acquisitions to expand its business. These targets have included Digital River World Payments, a Swedish processor that had been a unit of U.S.-based Digital River Inc.

When the deal for Ingenico closes, the new Worldline will boast $331.6 billion in annual purchase volume, good for a third-place ranking worldwide, according to data the companies released at the time of the merger agreement.

With major assets in North America, Ingenico offers Worldline “a footprint in the U.S. market,” notes Jared Drieling, senior director of consulting and market intelligence at The Strawhecker Group, an Omaha, Neb.-based payments consultancy.

That footprint could expand quickly. While the combined Worldline-Ingenico is likely to have a more immediate impact in Europe, it also sets up the newly expanded company to exploit hardware and online-processing capabilities in other regions, Drieling says. “It’s a pretty big deal from an international standpoint. However, they do have their sights set on North America,” he adds.

Verifone Inc., a chief POS terminal competitor to Ingenico, was taken private in 2018.

Drieling sees the merger as a “scale play,” at least partly in reaction to the trio of huge U.S. processor mergers that sent ripple effects last year far beyond American borders. These combinations included Fiserv Inc.’s acquisition of First Data Corp., Fidelity National Information Services Inc.’s deal for Worldpay Inc., and Global Payments Inc.’s merger with Total System Services Inc.

This latest combination will produce a company with $5.85 billion in annual revenue, of which $2.76 billion comes from merchant services. Ingenico shareholders will own approximately 35% of the combined company, with Worldline shareholders owning the remaining 65%, according to the announcement from the companies.