Payments observers are tempted to think of the $21.5 billion proposed merger of Global Payments Inc. and Total System Services Inc. (TSYS), announced last month, as the latest megadeal in a series initiated in January when Fiserv Inc. said it would acquire First Data Corp. That announcement was followed by the news in March that Fidelity Information Services Inc. (FIS) had struck a $43-billion deal to acquire Worldpay Inc.
To be sure, processors are using acquisitions to achieve the scale they need to remain competitive in pricing and technology. But some experts reacting to the Global-TSYS deal, which results in a combined company that will use the Global Payments name and will take in a projected $8.6 billion in annual revenue, could herald a completely new trend in third-party transaction processing, and on a huge new scale.
“What’s different about this merger is it’s a major issuer platform and a major acquiring platform” coming together, says Patricia Hewitt, principal at PG Research and Advisory Services, a Savannah, Ga.-based consultancy.
Atlanta-based Global Payments is just about as close to a pure-play acquiring processor as can be found in the payments business. Columbus, Ga.-based TSYS, on the other hand, draws just over one-third of its revenue from acquiring, with the remainder coming from issuer processing and prepaid card support.
That combination could have far-reaching effects, some observers say. “[Global Payments] will be a major credit-card issuer processor and acquirer in the [United States] and [the United Kingdom] and therefore process many payments for both the merchant and the issuer (cardholder). Therein, maybe an opportunity for game-changing synergies, delivering closed-loop benefits over open-payment systems,” notes Eric Grover, principal at Minden, Nev.-based consultancy Intrepid Ventures, in an email message.
For years, non-bank processors have tended to specialize in either merchant-acquiring operations or support of card portfolios for financial institutions, but rarely managed both on anything approaching an equal footing. One major exception is First Data, which bills itself as the “number-one” acquiring and issuer processor.
The “synergies” Grover points to include the ability to more efficiently authenticate cardholders at the time of transaction at merchants whose accounts are under the same roof. Global Payments chief executive Jeff Sloan highlighted this capability during the merger announcement in reference to an upcoming regulation in Europe that will mandate strong authentication. “The user ID will be more important as we go more digital” in payments, notes Hewitt.
And, for all the merger mania going on, it will be hard for other third-party processors to match this combination by acquisition, Hewitt notes. “Most [issuing platforms] are banks. I don’t think Capital One is going to sell that off,” she says.
Others agree there will be advantages to having a major issuing and acquiring operation under one roof, but argue this edge could be exaggerated. “The TSYS issuing and prepaid businesses are a net new for Global, so there won’t be economies of scale to be had there,” notes Rick Oglesby, principal at Mesa, Ariz.-based consultancy AZ Payments Group, in an email.
“There may be some opportunities to reduce network costs by connecting merchants and banks directly, or to complete peer-to-peer transactions,” Oglesby adds. “But those opportunities are speculative at this point and are probably nice-to-haves in the deal.”
The added economies of scale from the merger will have a definite effect in the acquiring business, Oglesby contends, though it will take time for that effect to be felt.
“This [merger] will help drive merchant prices lower,” he says. “Because competitors are increasing in scale also, we’re likely to see continued price competition. However, there’s a lot of effort to be done to consolidate these businesses before economies of scale are truly realized.”