21 March 2019
Happy First Day of Spring! I don’t know how many people still read this silly blog. I’m in a CEO time warp and just realized I haven’t written anything since NOVEMBER!! This will be a short blog with some random thoughts.
Big moves in Payments this quarter.
- Visa, Mastercard, Paypal, Global Payments and others are at ALL TIME HIGHS today.
- Worldpay to be acquired by FIS for $43B
- First Data to be acquired by Fiserv for $22B (all stock)
What is acquiring?
While investors/Silicon Valley know about Stripe and Adyen, the business of acquiring may be the most overlooked part of payments. As most of you know, the only members of the Visa and Mastercard networks are banks. Issuing banks take care of consumers receiving cards, acquiring banks take care of merchants accepting them.Within the eCommerce world there are gateways (like Adyen, Stripe, Visa/Cybersource, Braintree/Paypal, …et) that provide services to manage card storage, checkout pages, fraud, .. on top of the acquirers.
Per the picture below, the acquirer takes about 50bps from a typical credit transaction and $0.05-0.10 for debit. Picture from US GAO
Acquirers are the closest entity to merchants in the payments world. They have a heavy role in deciding what payments are accepted (example discover card, ChasePay or applePay) how payments are routed, how new payment instruments can be created (example Private Label), and how merchants consumer commercial banking services (ChaseNet, BAMS, Worlpay.. see blog on ChaseNet).
What is the case for Acquirer M&A/Consolidation?
- Specialized payment networks (example in Healthcare, Government, eCommerce)
- On Us Payments. Both FIS and FISV host core banking for over 5,000 small banks and credit unions
- New Global Payment Networks (FIS best positioned here)
- Combining issuing and acquiring to create integrated payment platforms (Competing against Adyen, Paypal)
- Create a new commerce networks (See blog Transformation of Commercial Networks – Unlocking $2T of Value)
Let me start off with an example. FIS was the payment infrastructure of Citibank’s CGT and Citishare. They ran our technology and allowed us to move money (in real time) across bank accounts globally. FIS provides similar services to government agencies and in healthcare. In the healthcare world they manage the payments between doctors, hospitals and insurance providers ($3.5T market in US). FIS also owns the debit network NYCE, and provides management of core banking services for 3k-5k small banks and credit unions. What is the one entity that they do not serve (substantially)? Yep… merchants.
Worldpay is the largest merchant acquirer (in the world) with a tremendous footprint in “everyday” spend (ie groceries and gas). What new mecrhant value propositions could a combined FIS/WOrldpay deliver? There are so many places.. and the combined group’s new challenge will be deciding where to start. Their best bets should be around “network” and creating a new value equation. This means new services in existing networks or new nodes in existing networks.
Big Picture – Network Transformation
Inefficiency cannot hide. There is a re-alignment of resources guided by consumer behavior, value delivery and information flow. These forces are driving out inefficiencies (both internally and externally). Thus we are in the midst of a massive transformation of networks. Little has changed in Retail, Banking and Commerce in last 150 years beyond Scale Wins. Consumer behavior and new networks are disrupting traditional economies of scale (asset intensive) as well as new information economies of scale.
Effective networks are wonders of business and social interaction that largely re-inforce an existing pattern, product, or social structure. Networks are resilient to as they create value to all those connected… and this value expands as the network grows (network effects). The reinforcing nature of networks has proven effective in insulating participants from being impacted by change and keeping disruptive forces at bay. Profitable companies are seldomly drawn to models that circumvent them or operate at a different margin/scale (ex innovators dilemma). New networks have reshaped how every entity can both consume and create services; thus resetting the forces that shape the design of a company (ie outsourcing/specialists).
Value in a network is created at the intersection thus value of the network = f( number and type of participants, # of services ) which roughly correlates to the number of intersections. Most of today’s networks focus narrowly on solving a specific problem for a group of similarly situated participants (ex Mastercard, eBay, AT&T, NYSE, …) and creating substantive standards for the participants to follow. The most valuable company in the world (Google) has created an open democratic network of heterogeneous nodes and services that have connected consumers and businesses in new ways. Thus demonstrating that there is more value created in connecting heterogeneous participants than peers. There are 1000s of companies with better data than Google, but with none with overarching network or rules for data exchange (ie principally focused on privacy and control concerns, not the “how” of technology transfers of data). This is the problem my company is focused on.
Traditionally, business networks are UNICORNS. After all, competitors rarely agree on any standard to interact unless there is clear business incentives that lift all (big players) equally (think NASDAQ/Visa), or to the best of their ability. In this traditional world, economies of scale (assets and information) have kept profitability with large participants who themselves have their own networks of suppliers and standards. We are about to see many more Unicorns, as new business networks form that have far greater value (ie Google) from intersections of dis-similar nodes.
This is what FIS and FISV just bet on.