[FISV, GPN, FIS, SQ, Stripe, Adyen] On payment processors, distribution, and technology: Part 2 of 4
In the payments space, the difference between a distributor and a competitor can be so blurry as to lose functional meaning. Mercury Payment was a significant ISO for legacy acquirers before Vantiv acquired it from Silver Lake. Stripe offers many of the same services as the legacy acquirers to whom it outsources transaction processing. Ditto for Square, who processes to Wells Fargo Merchant Services, a JV between Wells Fargo and First Data, even as it competes with Clover, First Data’s single most promising growth vector. Demarcations within the value chain were bound to fade as legacy acquirers, to escape commodification, have been layering services atop transaction processing for decades.
Total Systems Services, which spun-off of regional lender Synovus Financial in 2007, was a notable laggard in this regard. Prior to 2009, TSYS was just a wholesale merchant processor, meaning it handled the commodity transaction processing on behalf of acquiring banks, merchant acquirers, and ISOs who took on the more value-added jobs like merchant underwriting and onboarding, fraud detection, reporting, authorization, etc. It was the only major third party pure-play processor at a time when processing prices were eroding and its customers (full-service merchant acquirers) were consolidating. So it came as little surprise when TSYS vertically integrated into merchant acquiring, first through its acquisition of First National of Omaha’s merchant services unit and a year later through its purchase of TermNet1.
By 2012, Total Systems was the 16th largest acquirer in the US, focused mostly on small/mid-sized merchants. But it wanted more. TSYS balked at Vantiv’s acquisition of Mercury as being too expensive at mid-teens x EBITDA, but then just a few years later, perhaps sensing it was being left in the dust by peers who were throwing billions at integrated payments and omni-channel acceptance, paid 16x EBITDA Cayan ($1.1bn) and Transfast ($2.4bn), the two largest acquisitions in the company’s history. Besides opening a new distribution channel, these deals more than doubled TSYS’ volumes and diluted the company’s exposure to wholesale processing, which in 2015 still accounted for ~40% of its merchant services revenue.
Vantiv, another US merchant acquirer, also transformed itself through a Cambrian explosion of acquisitions that carried it away from traditional bank and ISO distribution and towards growthier domains like e-commerce and integrated payments. As the merchant acquiring unit of Fifth Third Bank, Vantiv mainly catered to the top 100 US retailers – department stores like Macy’s and grocers like Kroger. Whatever SME business it had was largely confined to the mid-west. But then Advent International bought 51% of the company in 2009 and IPO’ed it three years later. Vantiv began to take advantage of its independence, securing SME referrals with merchant banks it had been barred from selling through when it was wholly owned by Fifth Third, and acquiring a series of integrated payments and e-commerce companies starting around 2012/20132.
Two acquisitions are worth pointing out: Vantiv’s $1.9bn acquisition of Mercury Payment Systems in 2014 and its $12bn merger with Worldpay in 2017.
Mercury was different from other merchant acquirers in that its approach to the market, right from the start, was to embed its payments into third party software used by SMBs. The company’s conceit was that its payments technology could function as the key integration point between developers and dealers who were mostly focused on creating and selling point-of-sale software and did not have the expertise or the will to handle all the gritty regulatory and service demands surrounding payments. The company insisted that its distribution network enjoyed a network effect (page 105 of Mercury’s S-1):