Ontario Teachers’ Pension Plan’s Deal for First American Underscores Profitability of Merchant Processing

An investment consortium led by the Ontario Teachers’ Pension Plan is buying First American Payment Systems L.P., a Fort Worth, Texas-based payment processor and independent sales organization, in a deal that observers say highlights the profitability of merchant processing, despite ongoing margin pressure.

First American says the Toronto-based pension plan is the lead investor in the company, with participation from some First American executives. Terms of the deal were not disclosed.

Currently, New York-based private investment firm Lindsay Goldberg LLC owns First American. In February, Bloomberg reported Lindsay Goldberg sought buyers for the processor that was valued then at as much as $600 million. Lindsay Goldberg made its initial investment in First American in 2003.

First American would not comment beyond a statement in the press release about today’s deal that it looks forward to “collaborating with our new financial partners to identify and pursue attractive opportunities to drive our next phase of growth, both through organic expansion and strategic acquisitions,” said Neil Randel, First American chairman and chief executive.

In addition to its U.S. operation, First American also operates iATS Payments, an ISO based in Vancouver, British Columbia, to serve Canadian merchants. Overall, First American says it has more than 140,000 merchants.

Ontario Teachers’ Pension Plan has investments in other financial services companies. Its Premier Lotteries Ireland Limited recently received a 20-year license to operate the Irish National Lottery. This is the first payment processing acquisition for the pension plan, a spokeswoman says. “We believe the company has a solid business model and is well positioned to accelerate its growth while continuing to deliver a high level of service and support to its customers,” says Jane Rowe, senior vice president of Teachers’ Private Capital, the lead unit with the pension plan for the acquisition.

The deal is evidence of the allure of continued profitability in the payment processing business, despite weighty issues like margin compression, says Adil Moussa, principal at Adil Consulting, an Omaha, Neb.-based firm.

“The payment industry and processing industry is still profitable in spite of what everybody’s saying about margin compression,” Moussa tells Digital Transactions News. “The profits are still there.”

The deal also demonstrates the value of operating one’s own front and back end processing platforms. A front-end platform typically handles the transaction processes that take place prior to settlement, and a back end handles post-settlement transactions.

That is the case with First American, Moussa says, and that makes it easier to control costs and manage growth, attributes welcomed by investors. First American can tailor its platforms for its needs rather than be subject to the needs of the majority of customers if it used an outsourced system, he says.

The pension plan’s investment in First American also indicates this could be a long-term endeavor, he says. “It’s showing that First American Payment Systems is being valued or perceived as having staying power,” Moussa says.