Big Moves in Payments

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.

  1. Visa, Mastercard, Paypal, Global Payments and others are at ALL TIME HIGHS today.
  2. Worldpay to be acquired by FIS for $43B
  3. 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?

  1. Specialized payment networks (example in Healthcare, Government, eCommerce)
  2. On Us Payments. Both FIS and FISV host core banking for over 5,000 small banks and credit unions
  3. New Global Payment Networks (FIS best positioned here)
  4. Combining issuing and acquiring to create integrated payment platforms (Competing against Adyen, Paypal)
  5. Create a new commerce networks (See blog Transformation of Commercial Networks – Unlocking $2T of Value)

Example

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.

 

Payments and Rocket Science

My Forbes Article Last Week

What We Can Learn From Rocket Science About Closing The Sales-Marketing Loop

Payments plays a key role in trust, not only during the sale.. but also in providing transparency to merchants on marketing effectiveness. Sales is the ultimate report card on what happened.  Using this data in real time can double marketing effectiveness.

While Commerce Signals has taken me away from my Space Analyst stuff (see link), I’m very proud to know that my old team is landing Elon’s rockets (see Wiki).

Paypal is on a TEAR.. iZettle and hyperWALLET

Note: I’m not subjective on this one as I’m both an investor and former BOD member of hyperWallet. Of course I’m biased on all of my others too.. but just don’t have much of a financial stake.

Paypal has been on a tear in 2018, and is the leading payment stock performer in last 12 months – up over 60%. Continue reading “Paypal is on a TEAR.. iZettle and hyperWALLET”

Tokens and the Trojan Horse

I can’t believe I’ve been writing about this stuff for almost 10 yrs. If any of you have suffered through my 20 blogs (on tokens) I certainly don’t want to rehash anything.. just bring everyone up to speed on what I see as major issues on the horizon for V/MA, Issuers and Merchants.trojan-horse-small

Headline: Visa and Mastercard have made it easy for millions of businesses and billions of consumers to work together consistently. V/MA are a thing of beauty, creating incentives for multiple parties to invest in payments (and grow network). Continue reading “Tokens and the Trojan Horse”

PayPal surpasses Amex in Market Cap

WSJ Friday – Paypal Passes Amex in Market Cap

Paypal’s stock has been on an absolute tear this year up over 70% and pushing their market cap over $80B, with 55x P/E (compared to Visa’ 40x and Mastercard’s 36x)paypal-stock

eCommerce and payments are both hot sectors…. PayPal combines both. Most would tell you that the “real progress” for PayPal’s stock started July of last year with the V/MA peace treaties (blog).

Paypal’s biggest advantage is focus… they are 100% focused on payments. This gives them advantage in both innovation and execution, particularly when they are not dependent on getting the “permission” of anyone else. Venmo’s massive success is a great example of speed and finding a niche that no one else saw.

I tell Dan that I see 2 primary vectors for further growth: long tail (small retailers) and international (particularly small merchant acquiring). Wirecard sees the later as well given they just purchased Citi’s acquiring business in Asia.

Paypal’s competitive environment, the bundling of payments, and tech (new authentication/payment in OS ) creates a very challenging environment for growth. Their ability to focus and execute is what will differentiate them as a new tech standard is meaningless if no one uses it. Example is Apple Pay in store continues to be a flop.. where as apple pay in-app is a crushing success.

What most impresses me this week? Paypal’s partnerships (see Dan present on this topic – CNBC). Parnterships are a HUGE driver of volume (look at eBay’s impact). Consumers just want the easiest/default payment approach.

Congrats to Bill, Dan and team.. making this progress while REMAKING a technical infrastructure in a highly competitive environment is tough!

CORRECTION
In a post entitled “What to expect from Money in 2020” posted on October 5, 2017, I stated that Bank of America had “pulled out of their relationship with Cardlytics”. Cardlytics has informed me that this is false and that there is no change in the relationships with Bank of America or Citi. I
apologize and regret this error.

I look forward to getting another update on the CLO space from both banks this quarter.  It sure is nice that someone reads page 3 of a blog on Money 2020 to notice this stuff. I’m always open to correcting errors or omissions.

 

Chase Net 2017

Its tough to find time to Blog as a CEO…. Most of you my blogs are sometimes snarky and tactless (making NOT offending someone a new consideration).

I was taking a look at JPMC’s latest investor presentation and noticed that ChaseNet is gone.. Why? I’ve written on JPMC and ChaseNet a number of times over last 6 yrs. Today I’ll cover my views on the latest developments and my views on JPMC’s ChaseNet strategy. Lets recap first: Continue reading “Chase Net 2017”

Trust – Part 1

No one reads my long blogs.. so my 2017 resolution is to break them up into smaller thought “chunks”.

I can’t believe its been 2.5 yrs since I wrote Brokering Identity. The central element of that blog, and today is to take a “trust” view of Network and Platform strategies. The rules, standards and processes by which trust is managed are critical to the success of networked businesses and markets from eBay to Visa/MA to the NYSE. Continue reading “Trust – Part 1”