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Few foresaw this combination, but the deal is far from baffling once you understand Fiserv’s history and long-term strategy.
Every so often, a deal comes along that makes the market take notice. One such moment was the announcement in January of the Fiserv Inc.-First Data Corp. multibillion-dollar acquisition/merger. Essentially, the reaction was “What!” But having spent almost 10 years as an executive on the inside of the Fiserv payments business, the deal makes perfect sense to me. Here’s why.
A Little History
Fiserv is a technology company with a business model based on recurring revenue from processing core financial transactions. It traces its origins to the combination of two data-processing platforms back in 1984. Rumor has it that its original leaders, Les Muma and George Dalton, flipped a coin to see if its headquarters would be located in Milwaukee, Les’s hometown, or St. Petersburg, Fla., George’s hometown. George lost.
The company set out on a strategy to be number one in any market it entered by offering a plethora of platforms and solutions designed to appeal to any type or size of financial institution. The management structure was made up of vertical corporate business segments containing like solutions. With a focus on core banking systems and traditional banking technologies, it took a few years before Milwaukee set its sights on filling its holes in the payments industry.
In 1997, the company acquired a small Florida entity known as Florida Infomanagement Services, which, among other assets, had a license to use the VisionPlus software and, importantly, was capable of managing and processing credit card accounts.
In 2002, the company acquired Computer Network Services, a credit union-focused division of EDS, which brought with it a range of EFT, debit, and ATM-processing technologies and platforms, including the Accel/Exchange network. Additionally, there were some smaller acquisitions, for example in the prepaid card segment. These combined assets were folded into a payments-business vertical within the company.
However, even when combined these assets weren’t big enough to get the company near the number-one spot for payments processing in the United States. And there was still one big piece missing: merchant acquiring.
Cracking the Acquiring Nut
The acquiring business can be a cash cow if you’re looking for recurring revenue, and it carries with it the multiples to back up a hefty valuation. Over the years, Fiserv looked for an acquiring business to pick up, but making an acquiring-platform-only acquisition meant two things. Fiserv would be on the hook to pay a much higher multiple than it normally would for any business, and it would have to deliver on cross-selling this business into its existing financial-institution clients.
The cost-of-acquisition hurdle could be overcome, but selling merchant services into mid-tier and smaller institutions was a very high bar in a banking market that had long ago turned its back on acquiring.
Preparation Meets Opportunity
Fast forward to the present day. The financial-institution market in the United States continues to shrink in absolute numbers, driving the consolidation of core-banking solutions and the processors that service those banks.
Differentiating on a commodity business like processing has long been a challenge. It’s in the expansion of services that sustainability lives, but the future is fintech and payments-centric solutions. Thus, Fiserv’s strategic moves lately to buy its way into the large-scale payments-processing market—first Elan, and now First Data—make perfect sense.
Within this context, let’s review all the value Fiserv receives from the First Data acquisition:
– An industry-leading, global merchant-services and processing business, including such technology as the Clover POS system;
– A top EFT network, Star, which, combined with Accel (formerly Accel Exchange), now ranks among the top three or four networks in the United States;
– The legacy Omaha platform, which is the number-one group service provider in the United States serving much of the credit-union industry, and which, combined with Elan Financial Services, also likely places Fiserv now in the number-one position for this segment;
– The VisionPlus platform, including all the private-label and bank card business currently processed on it from around the world, complimenting the VisionPlus platform Fiserv already licenses and runs domestically;
– A leading prepaid card program, including significant strategic alliances with companies like Walmart;
– The extensive payments experience and resources of the First Data team.
In other words, this acquisition puts Fiserv on the payments map with a much stronger position in the global market overall. Also, First Data gives Fiserv an expansive set of payments assets, enabling it to address the needs of the future fintech-enabled financial-services market.
Synergy Comes Slowly
With all this, the synergy potential of these two companies combined is significant. But not in the short term. It will take a few years at least for the newly created company to find its balance points and grapple with which technologies will live on.
In the meantime, First Data finally gets the financial breathing room and corporate governance to unlock its debt-burdened value.
What remains in the market is the next question. There’s one major payments business that’s often not part of the acquisition conversation but should be. Now under new leadership, Discover is a company I’m watching closely. I believe that, eventually, it will need to get into the third-party processing business. I like a Discover-TSYS mashup, but we often don’t get what we want in this world.
In the meantime, I’m glad to see two great names in our industry join forces.
—Patricia Hewitt is principal of PG Research & Advisory Services. Reach her at patricia@paymentgal.com.
