technology m&a in acquiring - pse consulting...
TRANSCRIPT
Peter Jones
The Merchant Acquiring Conference 2011
Technology M&A in Acquiring
Topics for Today
Is Technology the next step for
acquiring M&A?
What are the key drivers for
Technology Innovation?
What do Merchants want from an
Acquirer?
Why Acquirers find technology
innovation difficult!
Owning a Technology Company –
benefits and issues.
What are the Strategic Options
Acquirers can follow?
Source: PSE Consulting 2011 MSC Survey
2
What the Newspapers Say!
Worldpay adds Envoy services
to its WorldPay and Bibit
payments offer!
Amex $100m investment fund
buys Sometrics and invests in
Payfone!
MasterCard buys DataCash.
Visa buys Netbanks!
Digital River/NetGiro and
SafetyPay apply for PI
Licences!
Ingenico buys out Xiring
Commidea/Point buys Paybox
and TS3
Verifone buys Point
and entry into
Northern Europe!
3
Visa takes stake in Data
Analytics!
iZettle launches in Sweden
and win 5% of POS market
in three months
Pressure
On Acquirers
To Innovate
4
Competitive Drivers for Investment in
Payments Innovation
Key Reasons for Change in Acquirers Vision
• Search for increased revenues, profits and
volumes
• Consumer migration to e-commerce
• Convergence of payments onto personal
technology devices
• Increased merchant outsourcing of payments
processes
• Regulatory intervention and new legal
frameworks
• Scheme Security Mandates
• Increased competition from technology
players
• Demand for new methods of payment
New Concepts and
Propositions
Increased Competitive Edge
Retention of Merchant
Relationships
New Revenue Streams and
Profits
Increased Volume and
Economies of Scale
More Competitive Pricing
Increased M&A from Private
Equity
How Change Drivers are Impacting the Value Chain!
POI Software/
Hardware Gateway
Providers
Acquirer
Processors
Third Party
Services
Card
Schemes Acquirers Issuers
Issuer
Processors
Merc
han
t
Co
nsu
mer
Price Compression Price Compression
Mobile Payments Mobile Payments
Card Schemes Card Schemes
Non-Bank Competition Non-Bank Competition
eCommerce eCommerce
Cross Border Acquiring & Payments
Regulation
Convergence
Issuer Innovation
5
Each change driver has a differential impact on the cards value chain and is altering the traditional relationship
between banks and their suppliers
Why Acquirers need to
Keep Up with Innovation!
Merchants demand for greater integration, multi-channel solutions, common pan-EU platforms and
value added services.
Growth in non bank player competitiveness, new technology entrants - using Payment Institution
(PI) regulations to become acquirers.
Need for modern, flexible delivery platforms to support new business models and reduce support
costs.
Front end processing migrating to new platforms – traditional FEP’s potential to become obsolete
– e-commerce and IP/POS creating change.
PCI compliance highly complex/expensive – increased burden on acquirers and merchants –
seeking new solutions.
Changes in the POS/POI and development of non-traditional payment methods and acceptance
devices.
Merchant demand for integrated issuer/acquirer online redemption loyalty reward/couponing and
data analytics.
Need for skills and resources to innovate and compete.
Bank Acquirers struggling to use technology as a competitive differentiator?
6
Acquirers Need to Align with Merchant Acceptance
Strategies
STEP 1. Simple
Payments
“Consumer
Convenience - a cost
of doing business to
be minimised”
Credit & Domestic Debit Card Acceptance (all cards)
MOTO/eCommerce
Settlement
Cash handling
Cheque acceptance
100% availability
Utility service
Minimum cost
Rapid settlement
STEP 2. Margin
Contribution
“Extracting more from
every transaction”
Top-up services and vouchers/gifting
VAT/Tax rebates
DCC
Bills Payment
Merchant ATM services
Recurring payments/ loans at the POS
Size of contribution/ share
Ability to increase footfall
Attractiveness to customer base (eg
traveller, unbanked etc.)
Revenue sharing with banks
STEP 3.
Increased
Customer Sales
“Understanding and
rewarding my
customers’ buying
habits”
Loyalty schemes – single merchant & walled garden
Private label (gifting and accounts) and voucher
processing
Direct/targeted marketing (offers/promotions on the
receipt) – SMS/email
MIS/ data mining
Ability to increase footfall, spend per
customer and brand loyalty
Ability to profile customers
STEP 4.
Improving
Operational
Efficiency
“Driving out cost from
my core payments
functions”
Multi-country currency treasury management (CBA)
Cash displacement (LVP, contactless, mobile etc.)
eInvoicing
ERP/General ledger integration
Employee incentives
Vertical industry workflow for payments
ACH transaction pooling (x-border & domestic)
Multichannel payment provider solutions
Internal cost reduction
Business case driven investment
Single supplier
Integrated common solution
Merchant Benefit Typical Payments
Requirements Typical Assessment
Criteria
7 7
Why Technology Innovation can be Difficult for Acquirers
Two sided market works against individual bank
initiatives – business case difficult
Scepticism over co-operative interbank initiatives –
decay of “Compete Co-operate Model”
Preference to leave innovation and R&D to Visa and
MasterCard
Very high cost of implementing change into old legacy
platforms
Some history of failed innovations (stored value), cost
overruns, slow take up, high cost of building/retaining
skills
Impact on bottom line of costs of R&D and piloting
Preference to be followers not leaders – outsource to
third parties – some lack PSP ownership
Conclusions: Acquiring/Technology initiatives most often amongst the non-bank players
8
Consequences of Hands Off Approach
Slow response to meet changing needs of merchants
Fewer in-house technology skills/resources to support
ambitious strategies and propositions
Potential disintermediation by more nimble and adaptive
technology players – particularly in e-commerce and
mobile sector
Loss of a significant share of the payments value chain
Unable to deliver new multichannel gateway based
solutions
Relegation to the provider of back office clearing and
settlement processes
9
The Good and the Bad - Owning a Technology Asset
Benefits
• Focus for specific technology initiative
• Managed hands off as a profit centre
• Flexible and able to serve merchant clients
• Innovative, adaptive, first to market
But…
• Integrate or run with internal IT?
• Integrating with other assets?
• Different culture, risk and change control less
structured!
• How to distribute product – which channels – company
or group?
• Costs of integrating technology into core platform!
• Retention of asset value – revenue, management –
resource – skills!
10
CASE STUDY – Traditional PSP Value Chain
POI Hardware &
Software
Third Party
Services
Transaction &
Terminal Mgt Acquiring
Card
ho
lder
Merc
han
t
Scheme
Management Settlement
Traditional PSP Role Traditional Bank Role
PC
Purchases
Website
Payment
Pages
Payment
Gateway
Additional
Services
Multiple
Acquirers
Card
Schemes
Merchant
Bank A/C
Merchant
Processing
Contract
Merchant
Acquiring
Contract 11
CHP Gateway Service Role
CASE STUDY - Card Present IP POS Value Chain
POI Hardware &
Software
Third Party
Services
Transaction &
Terminal Mgt Acquiring
Card
ho
lder
Merc
han
t
Scheme
Management Settlement
Traditional Merchant Role Traditional Bank Role
In Store
Purchases
Point of
Sale Merchant
Switch
Bank
Acquirer
Card
Schemes
Merchant
Bank A/C
Loyalty,
ERP etc.
In Store
Purchases
Point of
Sale Hosted IP
Service
Multiple
Acquirers
Card
Schemes
Merchant
Bank A/C
Mobile
etc.
Traditional Bank Role
Merchant
Processing
Contract
Merchant
Acquiring
Contract
Merchant
Acquiring
Contract
12
CASE STUDY - Multi-Channel Gateways Become
Retail Payment Hubs
POI Hardware &
Software
Third Party
Services
Transaction &
Terminal Mgt Acquiring
Card
ho
lder
Merc
han
t
Scheme
Management Settlement
Retail Payment Hub Traditional Bank Role
Consumer
Purchases
Multiple
devices
Payment
Gateway
Additional
Services
Multiple
Acquirers
Card
Schemes
Merchant
Bank A/C
Merchant
Processing
Contract
Merchant
Acquiring
Contract
Credit Transfer,
Direct Debit,
PayPal, Wallets
13
Innovation - Strategic Options for Bank Acquirers
Option Advantages Disadvantages
Option 1: In-house
Innovation
• Receipt of all revenue/profits
• Ownership of the IP and technology asset
• Control of development and flexibility of future
change
• Development of long term application and
technology skills
• High cost of internal investment – business case
• High risk of failure to deliver
• Potential long lead times
• Scarce resources and skills to lead technology
• Complexity of legacy platform change
• High management overheads
Option 2: Outsourced
Innovation
• Low/no cost of development/asset purchase
• Potential for partnerships
• Faster to market
• Low management overheads
• Less/no ownership of IP
• Complexity of JV/Partnerships
• Share of revenues/profits
• Lack of control – priorities
• Potential competitor
Option 3: M&A Innovation • Adding to shareholder value
• Strong competitive edge
• Ownership of technology assets
• Skilled team up to date with change
• Flexible, adaptive resources
• High prices for buy out
• Potential cost of further development function
• How to control/retain innovative resources
• Complexity of integrating into legacy platform
• Integration into group IT and cultural issues
• High management overheads
Option 4: Do Nothing • Low cost and risk
• Better strategy developed later
• Miss out on new revenue streams
• Competitors erode merchant base
• Fall behind market requirements
• Acquiring assets decline in value
• Disintermediated by other players
• Follower rather than leader – left behind
14
Which Option Scores Best?
Option F
ea
sib
ilit
y
Lo
w C
ost
an
d
Ris
k
Co
ntr
ol
an
d
Fle
xib
ilit
y
Imp
rove
d
Co
mp
eti
tive
ne
ss
Re
lati
on
sh
ip
Re
ten
tio
n
Lo
w
Dis
inte
rme
dia
tio
n
Imp
rove
d S
pe
ed
to M
ark
et
Ow
ne
rsh
ip o
f IP
Total
Option 1:
In House
Innovation 33
Option 2:
Outsource 30
Option 3:
M&A
Innovation 34
Option 4:
Do Nothing 17
Scoring: = 1 = 5
15
Summary of Conclusions
Many drivers to invest technology assets in acquiring – impacting the value chain.
Regulators determined to open up markets changing basis of traditional commercial
acquiring models.
Acquirers struggling to keep up with pace of technology change and develop new
acquiring propositions based on new technology.
Acquirers need to re-align their strategies with those of merchants
Consequences of acquirers hands off approach – back office provider.
Technology providers have potential to enter banks acquiring domain.
Much innovation and new concepts by new players – but are banks in the game?
A reasonable case for more acquirer M&A.
16
