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DT, July 2017

Acquiring-Industry Acquisitions Focus on the ISV Niche
July 1, 2017

Two notable merchant-acquiring industry acquisitions in the late spring involved such prominent names as First Data Corp. and Sage Payment Solutions. Both focused on the growing integrated software vendor (ISV) niche.

Leading processor First Data months earlier indicated it wanted to become a player in payment services for software firms that create applications for merchants. First Data rivals Global Payments Inc. and Vantiv Inc. have been active in the niche for several years. The company late in May made good on that promise when it announced it has a deal to buy CardConnect Corp., an ISV-oriented merchant processor, for $750 million.

“CardConnect has been investing in technology, dedicated sales, and specialized integration teams for the ISV space in recent years,” First Data chairman and chief executive Frank Bisignano said on a conference call. “We believe its ISV business is at an inflection point, with its pipeline starting to now grow rapidly.”

King of Prussia, Pa.-based CardConnect serves 67,000 merchants and posted $22.3 billion in bank card processing volume last year, up 31% from $17.1 billion in 2015, according to information disclosed with the announcement. CardConnect’s gateway processing volume jumped 179% to $5.3 billion.

Currently a First Data distribution partner, CardConnect posted revenues of $156.5 million last year, up 29%. Until its name change in 2013, CardConnect had been known as Financial Transactions Services since its 2006 founding. At that time, the company said it had 45,000 merchants.

“What really excites us about this transaction is the opportunity to scale our solutions across a much larger base of customers, and First Data brings that and more,” Jeff Shanahan, CardConnect’s president and chief executive, said on the call.

CardConnect has been developing its ISV products for more than two years, and now, through its distribution partners, offers merchants various business-management and reporting tools through such products as CoPilot and CardPointe.

Bisignano said those products not only help businesses run their operations better, but also increase merchant retention for the partners that offer them. Retention of small merchants has been a problem for First Data, though company executives said it has been improving recently.

“We think these tools will be very valuable for all of our distribution channels,” Bisignano said.

CardConnect also offers payments integration into so-called enterprise resource planning software programs from SAP and Oracle, which are large-scale applications for mid-size to large merchants. The ERP products can reduce merchants’ cost of compliance with the Payment Card Industry data-security standard and their exposure in cardholder data breaches, according to Bisignano.

CardConnect represents the second significant acquisition of the year for First Data. In March, the processor announced a deal to buy Acculynk Inc., a 9-year-old Atlanta-based company that markets technology called PaySecure to enable buyers to use PIN-debit cards to make purchases on the Web via laptops or smart phones.

Just a few days after the First Data-CardConnect announcement, Chicago-based private-equity firm GTCR LLC revealed that it bought Sage Payment Solutions, the U.S. merchant-services arm of Sage Group plc, for $260 million. Reports of a possible sale of the processor, which serves approximately 100,000 merchants, first surfaced in January.

Sage Group is a United Kingdom-based business-software provider. It entered the U.S. acquiring industry in 2006 when it bought independent sales organization Verus Financial Management Inc. for $325 million. Now, its exit creates an opportunity for GTCR, long an investor in payments and financial-technology companies, which account for approximately one-fourth of GTCR’s portfolio.

While Sage Payment Solutions is abreast of trends in merchant acquiring, “it’s a business that could be better,” Collin E. Roche, GTCR managing director, tells Digital Transactions. “It has some capabilities it doesn’t really bring to market as well as it might.”

In addition to credit and debit card processing, Sage Payment Solutions offers automated clearing house, check, and gift and loyalty card processing services.

GTCR is allocating up to $350 million in equity capital that can be tapped to develop new products, make acquisitions, and otherwise improve Sage Payment Solutions. “We’ll reinvest in this business,” Roche says.

As part of the deal, Sage Payment Solutions will be the preferred acquirer partner for Sage Group customers, which could help jump-start its growth.

“This business had lost a growth imperative,” Roche says. “Now we have an independent business and it’s growth-oriented.”

Much of that growth could come via providing services to software developers. Sage was one of the first merchant acquirers to actively court ISVs, says Peter Michaud, director of project management at The Strawhecker Group, an Omaha, Neb.-based payments consultancy.

“Through Sage Group’s [enterprise resource planning] products and other ISV partners, Sage Payment Solutions is positioned to expand into new ISV verticals and partnerships,” Michaud says by email. The merchant acquirer also supports the ISO and bank channel.

—Jim Daly and Kevin Woodward

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