With fintechs nipping at their heels, the payment card networks are buying up companies big and small in a range of industries. How far will the networks venture beyond their core business—and at what price?
Mergers and acquisitions tend to come in fits and starts, and lately M&A activity involving the payment card networks clearly is on the upswing. Between them, Mastercard Inc., Visa Inc., and American Express Co. by early August had announced or closed more than a dozen acquisitions in 2019.
These deals, a few large but most small, enhance the networks’ presence in everything from real-time payments and electronic bill pay to cross-border and business-to-business payments, purchase financing, risk control, and travel services.
Visa and Mastercard, the bank card networks, have been especially active this year, while Discover Financial Services, the fourth-largest U.S.-based network, hasn’t announced any deals involving its Payment Services unit.
The biggest deal of the year came Aug. 6 when Mastercard announced its largest acquisition ever—€2.85 billion ($3.19 billion) for the account-to-account businesses of Nets Group, a Denmark-based processor that operates in the Nordic countries and other European markets. With Nets, Mastercard expects to augment its real-time payment capabilities should the deal close as expected in 2020’s first half.
Some of the acquisitions, indeed. enhance the card networks’ core card-related business with new services revenues. But others take them well beyond card payments, opening up potentially new lines of business and keeping the networks relevant as financial-technology companies seem to announce new payment services almost daily.
With some observers questioning whether banks can retain their leading role in payments in this new environment, Visa and Mastercard are striving to evolve to better serve the needs of financial institutions. Banks, after all, are their main customers.
“Banks have payment needs that go beyond cards,” says Michael Miebach, chief product and innovation officer at Mastercard. “We want to be a relevant partner—being that one-stop payments partner.”
Jared Drieling, senior director of business intelligence at The Strawhecker Group, an Omaha, Neb.-based merchant-acquiring consultancy, sees some commonality in the wide range of the recent acquisitions.
“It’s interesting that they involve financial technology in every corner of the payment system,” he says.
Mastercard’s $929-million acquisition of London-based Vocalink Holdings Ltd. in May 2017 could be considered the first big bust-out from the networks’ core card franchise. Vocalink is an automated clearing house and real-time payments provider whose technology underlies the real-time payments service from The Clearing House Payments Co., a processor owned by 25 large U.S. banks. Now Mastercard expects Nets to add to its real-time payments offerings.
Mastercard archrival Visa is pursuing a parallel path. In late June, Visa announced it had a deal to buy the token and smart-ticketing businesses of Rambus Inc., a Silicon Valley chip and software provider.
The tokenizing of payment card account numbers—replacing those numbers with strings of digits useless to fraudsters—is already a major service offered by both Visa and Mastercard. But the Rambus technology enables Visa to tokenize non-card payments, a potentially huge market.
The recent acquisitions also embed the card networks further in business-to-business payments, where they already have a growing presence through their issuers’ corporate and small-business cards.
Robert Napoli, an analyst at Chicago-based William Blair & Co. who follows payments companies, says in a recent report that the “cardable” global opportunity in B2B exceeds $20 trillion, while the accounts-payable and receivables market exceeds $80 trillion.
“Visa has about $1 trillion of B2B payments volume via its corporate, travel, and virtual cards,” the report says. “Visa is primarily focused on the small to mid-size businesses for most of the core B2B initiatives, but can add value for cross-border payments for large enterprises. B2B payments are about 11% of total payment volume but growing above the corporate average.”
All this opportunity may be mouthwatering for the networks, but there are risks.
“Neither Visa nor Mastercard have been terribly successful beyond the core,” says consultant and former GE Capital and Visa executive Eric Grover, principal of Minden, Nev.-based Intrepid Ventures. The core, however, “is god-awful good,” he notes.
As examples of weak performance “beyond the core,” Grover points to electronic bill payment, a market both networks were eyeing “decades ago,” he says. But along came Pete Kight, founder of the CheckFree bill-pay service, which became “enormously successful,” says Grover.
Fiserv Inc., a leading provider of core-processing systems for banks and now the new owner of card processor First Data Corp., acquired CheckFree in 2007. After that, “both Visa and Mastercard threw in the towel,” Grover says.
In a newer market, the networks’ electronic wallets never achieved great success, Grover assesses. And, despite gains, both companies still are trying to crack the hard shell around medical payments.
“You can go back 25, 30 years ago and both of them were talking about this enormous health-care opportunity,” he says.
But hope springs eternal. Highly profitable Visa and Mastercard are sitting on piles of cash and cash equivalents: $7.91 billion for Visa and $5.69 billion for Mastercard as of June 30, according to their most recent financial reports. They’re not hesitating to use some of that cash to go shopping.
In a regulatory filing, Mastercard reports having entered into commitments in 2019’s first half to buy businesses for total consideration of $1.2 billion, most of that in cash. All of those deals had closed by late July, and they didn’t include the pending Nets acquisition.
“Keep in mind Visa and Mastercard are so large that $1 billion of acquisitions only represents one-third of 1% of their market capitalization,” analyst Gil Luria, director of institutional research at D.A. Davidson & Co. in Portland, Ore., says by email. “With that in mind, Visa and Mastercard are always looking for interesting payment technologies and payment businesses that they expand by leveraging their scope and scale.”
Even with Nets included, the recent network acquisitions don’t come close to the size of 2019’s recently completed mega-deals among payment processors. Fidelity National Information Services Inc. (FIS) acquired Worldpay Inc. for $43 billion and Fiserv acquired First Data for $22 billion.
Still pending is the proposed $21.5 billion buyout of Total System Services Inc. (TSYS) by Global Payments Inc. (“How the Global-TSYS Deal Is Different,” July).
But Visa at least has been in that high-roller club before. In mid-2016, Visa Inc. shelled out $23 billion to acquire its London-based franchise Visa Europe.
‘A Network of Networks’
What the relatively small recent deals do is support the networks’ card-based franchises while once again letting them dip their toes into non-card waters. With the pending acquisition of the Nets account-to-account businesses, Mastercard is now calling itself a “multirail payments company.”
“The acquisition for Mastercard does boost non-card-area focuses,” says Drieling in an e-mail to Digital Transactions.
Vocalink provided Mastercard with modular real-time payment services best suited for large markets, according to Miebach.
“Nets on the other hand … is perfect for smaller markets, emerging markets,” he says. “It gives us two different solutions for two different types of markets.” The Nets user experience provides billers with easy access to payment technology as well as information related to the payments so “they don’t have to do the heavy lifting,” he adds.
Nets said in a press release that the sale to Mastercard will “unlock the potential” for the account-to-account services to grow globally as Nets concentrates on its payment services in Europe for merchants and processing services for banks. The deal does not include Nets’ so-called “e-ID” and digitization services.
Visa, meanwhile, is looking to its $75-million acquisition of the Rambus technology as one way to leverage its security services for cards into non-card payments.
“This tokenization acquisition will enable Visa to extend the security and convenience of tokenization to all types of transactions, including the ability to support domestic card networks, account-based and real-time payment systems,” Visa chief executive Alfred Kelly told analysts during the company’s quarterly earnings call in July.
“Before this acquisition, Visa could turn a 16-digit Visa credential into a token, but now we can tokenize a bank account, a domestic card-network credential, or a ticket,” Kelly continued. Visa did not make an executive available to comment for this story.
Competition among the card networks for promising technology is strong, and in some ways the recent deals mirror each other. Visa was rumored to have been interested in Nets, and the networks butted heads early this year in cross-border payments.
In May, Visa closed on its $320.4 million acquisition of London-based cross-border B2B payments processor Earthport PLC. Visa upped its original offer for Earthport by 23% after Mastercard unexpectedly topped it by 12%.
Before bringing Earthport into its fold, Visa could reach about half of the bank accounts in the 88 countries Earthport serves through channels such as its Visa Direct near-real-time service and its ATM network, Kelly said on the call.
“With Earthport, we’ve become a network of networks, and have extended our reach to over 99% of bank accounts in the 88 countries, including the top 50 markets,” he said.
Instead of trying to one-up Visa again, Mastercard in March announced plans to buy New York City-based Transfast Remittance LLC from a private-equity firm. Transfast provides B2B and person-to-person payment services through a network linking more than 125 countries and offers direct integrations with more than 300 banks and other financial institutions.
Miebach expects Transfast’s technology to help smooth out cross-border payments, a niche in which he says transactions too often are “entirely unpredictable.”
Another recent Mastercard acquisition—that of Austin, Texas-based Vyze Inc.—gets the network into an area that’s seen a lot of activity by fintechs such as Klarna and Affirm: software and systems to provision point-of-sale financing of purchases.
In a press release, Mastercard said the Vyze acquisition, which links merchants with multiple credit providers, makes Mastercard “a more strategic partner to both lenders and merchants.”
Plus, Mastercard is delving deeper into bill payments with its May deal to acquire New York City-based bill-pay platform provider Transactis Inc., whose technology enables small businesses and organizations—such as schools and property owners that mostly deal with paper bills and checks—to support online bill pay. Transactis’s distributors or partners include a number of banks and payments companies, including Worldpay (now part of FIS), PNC Bank, and Capital One.
The Transactis announcement came a bit over half a year after Mastercard unveiled a system dubbed Bill Pay Exchange that will allow consumers to view bills and then transfer funds to the billers within seconds through bank and credit-union apps.
Risk control, meanwhile, is an area where the networks traditionally have supported merchant acquirers and card issuers with various services. To enhance its offerings, Mastercard announced in March that it was buying Toronto-based Ethoca Inc., a fraud-mitigation firm, for an undisclosed amount.
Founded in 2005, Ethoca works with more than 5,000 merchants and 4,000 financial institutions. Mastercard said it intends to expand Ethoca’s capabilities and combine the company with its current security, data insights, and artificial-intelligence services.
Closely related to risk control is dispute resolution, which Visa is trying to enhance with its June deal to acquire Ethoca rival Verifi Inc., a 14-year-old, Los Angeles-based provider of tools that allow merchants, acquirers, and issuers to resolve chargebacks. Visa said it will integrate Verifi’s technology with risk-management capabilities from CyberSource and CardinalCommerce, companies the card network acquired in 2010 and 2017, respectively.
Less than a month after June’s Verifi announcement, Visa said it had acquired Payworks GmbH, a Munich, Germany-based developer of cloud-based point-of-sale payment-gateway software. Visa intends to integrate Payworks’s technology with CyberSource, and offer the combined service to merchants and acquirers.
The offering will support in-store, online, and in-app transactions and provide a single integration to allow Visa clients to accept POS payments through a range of terminal types, according to Visa. The payment network had first invested in Payworks in February 2018.
The ‘Line in the Sand’
Not only do some of the recent Visa and Mastercard acquisitions take the networks beyond card waters, but some potentially make them competitors to acquirers as suppliers of payment-related services for merchants, according to The Strawhecker Group’s Drieling.
He points to POS financing, such as that provided by Vyze and to be enabled by application programming interfaces being developed by Visa, as a type of service networks haven’t provided directly before—and one that is blurring the once-distinct boundary between acquirers and networks.
“Where is that line in the sand?” he asks.
Meanwhile, AmEx has also been active on the M&A front this year, though its deals haven’t gotten as much attention as those by the bank card networks.
In late July, AmEx announced it had a deal to buy the acompay B2B payment-automation platform from Acom Solutions Inc. AmEx said the platform helps businesses make supplier payments, manage their spending, and improve cash flow.
“American Express recognizes customers are increasingly looking for turnkey, automated solutions to pay their suppliers, and acquisitions like acompay help alleviate common pain points associated with the accounting process for businesses,” Dean Henry, executive vice president of global business financing and supplier payments,” says by email.
AmEx already has been in non-card payment services, particularly in the B2B realm, and is ready to expand further, says Henry.
“B2B payments is a market where we see a lot of opportunity for growth, not only for American Express but also for our commercial customers … many of our B2B solutions are non-card payment systems and we continue to look for opportunities to work with innovative companies in the non-card payment space.”
In a deal that bolsters its traditional travel-and-entertainment and loyalty base, AmEx in May announced it had acquired reservation-platform provider Resy Network Inc. Founded in 2014, New York City-based Resy offers software for restaurants that includes table management, customer-relationship management, and booking, as well as a consumer-facing restaurant reservation mobile app and Web site.
Resy works with approximately 4,000 restaurants in 154 U.S. cities and 10 countries, seating more than 2.6 million diners a week, AmEx said.
The Resy deal will support AmEx’s growing list of “digital-first” benefits and services for its cardholders, and drive volume for its restaurant merchants, Chris Cracchiolo, senior vice president of global loyalty and benefits, says by email.
Resy builds on some of AmEx’s other recent acquisitions “whose technologies and teams, combined with the backing of American Express, are enabling the development of new digital capabilities that further enhance our cardmembers’ lives in the areas they care about most,” he says.
Two of those recent acquisitions include LoungeBuddy, a digital platform for finding and accessing airport lounges, and Pocket Concierge, a restaurant-reservation service in Japan. Last year AmEx bought Mezi, developer of an app for planning and booking trips.
While most of the networks’ acquisitions this year have augmented their core, card-based businesses, the companies clearly are adding services in adjacent markets—and who knows how far they’ll venture.
“It’s hard to exist just on providing payment processing today,” says Drieling.
—With additional reporting by John Stewart