The Megamergers’ Subtle Impact

More than a year has passed since three giant mergers promised to change the payments world. Change has come, but not where many expected to see it.

Alone, any of the six companies involved in the round of megamergers in 2019 is huge. Recall that Global Payments Inc. acquired Total System Services Inc. (TSYS) in a $21.5 billion deal and Fiserv Inc. merged with First Data Corp. in a $22 billion deal. And, in a transaction valued at $43 billion, FIS Inc. acquired Worldpay Inc.

Now, the scale of these three combined companies transcends previous notions of big. And in payments, scale is paramount.  The three companies—Fiserv, FIS, and Global Payments—had combined 2019 annual revenues of $25.4 billion. Annual reports for 2020 were not yet available in mid-January.

The two most pressing questions are, with a full year of operations as merged companies completed, how have these companies changed the payments arena, and what impact have other payment-processing players experienced? The answers, for now, are the same: it’s mixed.

In the 18 months since the last of the megamergers closed, the three companies have largely made the leadership changes in the c-suite and lower levels necessary to put their next steps into action, says Peter Michaud, director of consulting at The Strawhecker Group, an Omaha, Neb.-based consulting firm.

“Now it’s about implementing the tactics as part of their strategies,” Michaud says. With very strong financial positions, they can continue to absorb the lessons from their first full year, he says, while they move forward on their plans.

Synergies And Growth

For example, a year ago, when just six months had passed since the Fiserv-First Data merger, Fiserv reported that First Data accounted for 61% of the combined company’s $3.67 billion of internal revenue in 2019’s fourth quarter. Nearly a year later, merchant acceptance led Fiserv’s 2020 third-quarter results with  6% growth.

A big contributor to that was Clover, the point-of-sale system First Data acquired in 2012. Systems that offer payment processing in addition to important operation services like scheduling and inventory management have only gained in popularity, especially as merchants add order-online amidst the Covid-19 pandemic.

Much of what may lie ahead for these behemoths will have to do with the ability to sell products across their customer categories. In mid-2020, for example, Jacksonville, Fla.-based FIS said the integration was largely complete and its ability to cross sell was helping shape new product development (“The $43 Billion Payoff,” July 2020).

No doubt, that tactic and many others are anticipated. Not only can it boost growth, but it can reduce costs, too. “The merged companies report substantial revenue synergies (e.g., from cross-selling deals and referral agreements between the issuing and acquiring side of the house) and cost synergies by saving on operational expenses,” reports Ron van Wezel, a senior analyst at Boston-based Aite Group. “The combinations also profited from the strong growth in digital payments, accelerated by the pandemic.”

Buoyed by their vast resources, these large entities are bound to exert all kinds of pressure on the market. Van Wezel doesn’t have data on their effects on pricing, “…but given the strong competition among the giants as well as other competitors in the space, transaction pricing is under pressure. Companies focus more on value-added services to compensate.”

Strategic Moves

At North American Bancard LLC, a Troy, Mich.-based payments provider, Ryan Malloy, senior vice president of partner sales, has not witnessed much change in pricing. “When I look at new accounts coming in, thus far things have been pretty similar to where they were,” he says.

While changes may be coming from the card brands—they postponed planned 2020 interchange adjustments because of the pandemic—current pricing has been rather consistent, he says.

Michaud, though, has seen some opportunities in pricing. Beyond the big three processors, Elavon, the processing arm of Minneapolis-based U.S. Bancorp, appears to have found some pricing maneuvers to increase its competitiveness, he says. “Elavon has made strategic moves to capture some of this,” Michaud says.

Generally, however, the ripples these giant mergers have created so far have been subtle. “In the merchant acquiring/payments processing business, not much has changed as a result of these mergers,” van Wezel says. “The former Worldpay/First Data/[Global Payments] businesses continue compete with the Stripes, Adyens, Worldlines of this world. All have deep pockets and competition remains fierce.”

France-based Worldline S.A. itself is no stranger to mergers. It acquired point-of-sale manufacturer and payments provider Ingenico Group S.A. in an $8.6-billion deal in late 2020 (“Worldline/Ingenico Is Just Getting Started,” January).

Malloy has a similar view. “From our perspective, you’re seeing consolidation at the top end and at the bottom end, but it’s not as public,” he says. “You’re probably getting close to where there won’t be a ton of more top-end consolidation.”

It’s a pattern that is not unlike what happens in other industries connected to consumers and retail. How consumers and businesses are buying merchandise is changing, he says. “We’re seeing a lot of consolidation to try to improve bottom-line results,” he adds. “We may see more at the top end.”

In particular for NAB, which relies on partners to resell its services, it’s on the smaller end that more opportunities seems to be forming. “We are seeing smaller players finding more opportunities than they had before,” Malloy says, allowing many of NAB’s partners to grow their portfolios and do well.

All in all, the megamergers have had a positive impact on NAB, he says, adding, “There are so many opportunities in this business to grow your portfolio and grow your partner base.”

Speaking of partners, the independent sales organization channel remains important. Most processors are reluctant to disclose how many ISOs they work with, but some will talk about overall partner numbers or provide an approximate number. What has been the impact of the megamergers on ISOs?  “I don’t think we know yet what the long-term effect is,” Michaud says. “In this ecosystem, the ISO serves a purpose. They have the feet on the street.”

That distribution channel has a role in merchant acquisition and retention. The sales agent can have the benefit of providing a little more instruction or attention, Michaud says. “That will be very beneficial for any merchant,” he adds.

That can really come into play when a merchant wants to use a point-of-sale system or PC-based system with integrated payments. Processors may view ISOs as if they were value-added resellers, Michaud says.

Independent software vendors are another coveted channel. These are companies that cater in providing PC-based systems, often for specialized merchant types, such as dry cleaners, medical practices, and craft breweries.

‘A Scale Play’

ISOs likely won’t be affected all that much by the megamergers, van Wezel says, though Fiserv offers the Clover POS system and Global Payments sells the TSYS-developed Vital line of devices. “ISOs are already broadening their services to compete with Stripe and other payment facilitators. There won’t be a lot of impact on them from the mergers, but the increased competitiveness in the space is definitely impacting their business,” he says.

“The processors would like more ISVs because they’re dealing with a company,” Michaud says. “The ISOs serve a purpose. They provide one-to-one service and should enable them to get to higher-margin business.”

For example, Atlanta-based Global Payments formed an integrated payments unit in 2014 following the acquisitions of PayPros in 2014 and Accelerated Payment Technologies in 2012. A commentator on SeekingAlpha.com in 2017 suggested the APT acquisition altered the merchant-acquiring industry by serving as the starting point of big acquirers pairing up with integrated software vendors and value-added resellers to deepen their relationships with merchants, Digital Transactions reported then.

At the end of 2020’s third quarter, Global Payments counted more than 4,000 ISVs in its partnership portfolio. “Our integrated business, as we noted in our prepared comments, is tracking to budget for the year notwithstanding the pandemic,” Cameron Bready, Global Payments’ president and chief operating officer, said in an October call with analysts to discuss the 2020 third quarter results.

“New partner production is up 70% year-over-year,” Bready added. “And I would say the overall partner pipeline is as strong as it’s ever been in that business. And we’re pretty optimistic about the momentum we have heading into [the fourth quarter] and 2021 in our integrated channel.”

Combining sales agents with integrated-payments products works well for NAB, Malloy says. “We have found by combining feet on the street with some of the technology we have seen a ton of success,” he says. “They have that personal relationship. Where we’ve seen ISVs struggle in the past is there is no one there to translate that value to the merchant.”

Van Wezel suggests the three combined companies may not compete more strongly than when they were six individual ones. “I am not sure that the combined entities are better able to compete for merchant business than the individual companies,” he says. “There is no major differentiator for the combinations compared to the individual companies.”

The other big question is if there is room for more large-scale mergers. The answer, apparently, is yes. Though it didn’t materialize, FIS and Global Payments allegedly had merger talks last year, but, as The Wall Street Journal reported, these talks broke off (“The Megamerger That Wasn’t,” Trends & Tactics). As Michaud’s colleague Jared Drieling, Strawhecker senior director of consulting and market intelligence, put it at the time, “It’s an example of a continued scale play.”

The Next Round

Big mergers, especially when scale is the paramount goal for many payments companies, are still possible. “There are definitely a lot of companies that could fill any niches coming,” Michaud says.

The likely next round will include companies with front-end authorization and back-end settlement in place, he says. He argues consolidation will continue if only because, even if the big five processors—Michaud includes Chase Paymentech and Elavon along with FIS, Fiserv, and Global Payments—garner, say, 80% of the market, there’s still 20% of the merchants they’re not reaching, and the providers to those merchants could be acquisition targets.

Say a buyer rolled up payments providers Clearent LLC, based in Creve Coeur, Mo., EVO Payments Inc., and Repay Holdings LLC, both based in Atlanta, Michaud suggests. Together, they don’t come to even the smallest of the big five, he says. But that doesn’t mean these positions are fixed.

“It’s an always-changing flux,” Michaud says. “The smaller ones are going to get bigger. The bigger ones have flattened on growth, but still can grow in margins and earnings.”

Likewise, van Wezel sees no end to the M&A trend. “We will certainly see continued consolidation in this industry, but I would expect FIS, Fiserv, and [Global Payments] to acquire smaller competitors in key markets rather than merge among themselves. Scale is great, but organizational complexity has a downside, too,” he says.

Likewise, NAB’s Malloy sees no end to M&A activity. Without getting into any NAB-specific perspective, consolidation will be easiest on the processing side of the payments business, he says. It’s the most obvious pat of the business, he says, and caters directly to scale.

“That’s where we’re going to see the massive, headline deals,” Malloy says. “We love the consolidation because it forces everyone to up their games and make their solutions for both partners and merchants as good as they can be.” Indeed, the trend so far has been a positive for NAB, he says.

2021 may be a critical year for FIS, Fiserv, and Global Payments, as they work to wring out of their big mergers the results they claimed the deals would generate.

“I still think the dust is settling,” Michaud says. “I don’t know if it’s fully settled yet. You come out of the chute with your strategies and then you implement, and then you adjust.” But, at some point, he adds, “you have to look and see if you’re meeting the goals.”