Sunday , May 19, 2019

The Acquiring Industry Wonders if BofA and First Data Are Heading To Divorce Court

A report that Bank of America Corp. might not renew its joint merchant-acquiring venture with leading payment processor First Data Corp. left observers wondering Thursday what the break-up of one of the payments industry’s biggest players would mean for the companies involved, and the wider industry.

The joint venture, Bank of America Merchant Services, or BAMS, is the nation’s third-largest acquirer, having processed $840 billion in volume last year, according to rankings from Omaha, Neb.-based merchant-acquiring consulting firm The Strawhecker Group. A recent First Data regulatory filing says the venture settled $205.6 billion in volume in the first quarter.

First Data owns the majority of the venture, which was formed in 2009, and provides the processing systems that power it. BofA’s chief roles are merchant sponsorship, referrals of business customers from its vast branch network, marketing support, and other services.

Citing unnamed sources, The Wall Street Journal reported Thursday that Charlotte, N.C.-based BofA might end the joint venture when it comes up for renewal in June 2020 and possibly develop its own payment business. The newspaper cited increasing interest within the bank’s top leadership in payments, and operational problems that have upset merchants at times, but said BofA had made no decision.

The parties must give a year’s notice to terminate the venture. BofA declined to comment, and New York City-based First Data did not respond to a Digital Transactions News inquiry.

The report came as First Data is preparing to be acquired by core bank processor Fiserv Inc. for $22 billion. Brookfield, Wis.-based Fiserv did not respond to a request for comment.

Losing BofA theoretically would make First Data less valuable because of the hit to revenue and profits.

“We estimate that Bank of America Merchant Services represents approximately 10% of total revenue to First Data, or approximately $950 million of total revenue,” analyst Thomas McCrohan of New York City-based Mizuho Securities USA LLC tells Digital Transactions News by email. “The joint venture with Bank of America represents the largest of their three joint-venture relationships. (The other two are with Wells Fargo & Co. and PNC Financial Services.) The company does not provide profitability metrics for their joint ventures, but we believe the joint-venture bank channel has margins above the corporate consolidated average.”

The Journal report triggered speculation that BofA simply might be angling for more favorable terms before re-upping with First Data. 

“I’m inclined to believe it’s more of a negotiating tactic,” Aaron McPherson, vice president for research operations at Maynard, Mass. Mercator Advisory Group Inc., tells Digital Transactions News. “It’s a good time to get a better deal if you want a better deal.”

But if BofA chooses to process merchant transactions itself rather than transfer its business to a First Data rival, the move would stand as a major exception to a long-term trend, and perhaps spur other banks to re-join acquiring. About 30 years ago, big banks began outsourcing merchant processing to third-party providers such as First Data because of the low margins and technology investments required. U.S. Bancorp with its Elavon subsidiary eventually became one of the nation’s very few banks doing soup-to-nuts acquiring.

JPMorgan Chase & Co. took the outsourcing route with First Data for a while, but eventually began processing itself by licensing technology from First Data rival Total System Services Inc. (TSYS). And Citigroup Inc. in March said it was building a service within its treasury unit for institutional payments. 

After the banks’ rush to get out, “now it seems like they’re trying to get back into it,” says McPherson. He notes that banks with big card-issuing operations, particularly Chase, are now seeing the value of having the in-house ability to offer rewards and incentives to affluent customers through tie-ins between the merchant and issuing sides. The banks are looking to emulate American Express Co. with its direct hand in issuing and acquiring, he says.

“To me, the opportunity to do proprietary deals with merchants to deliver to your cardholders is very attractive,” McPherson says.

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