Technology M&A in Acquiring Peter Jones The Acquiring Conference 2011
Topics for Today Is Technology the next step for acquiring M&A? What are the key drivers for Technology Innovation? What do s 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! MasterCard buys DataCash. Visa buys Netbanks! Worldpay adds Envoy services to its WorldPay and Bibit payments offer! Amex $100m investment fund buys Sometrics and invests in Payfone! Digital River/NetGiro and SafetyPay apply for PI Licences! Verifone buys Point and entry into Northern Europe! Visa takes stake in Data Analytics! Commidea/Point buys Paybox and TS3 Ingenico buys out Xiring izettle launches in Sweden and win 5% of POS market in three months 3
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 Pressure On Acquirers To Innovate New Concepts and Propositions Increased Competitive Edge Retention of Relationships New Revenue Streams and Profits Increased Volume and Economies of Scale Increased competition from technology players Demand for new methods of payment More Competitive Pricing Increased M&A from Private Equity 4
Consumer How Change Drivers are Impacting the Value Chain! POI Software/ Hardware Gateway Providers Third Party Services Acquirer Processors Acquirers Card Schemes Issuers Issuer Processors ecommerce ecommerce Mobile Payments Mobile Payments Cross Border Acquiring & Payments Card Schemes Card Schemes Non-Bank Competition Non-Bank Competition Price Compression Price Compression Regulation Issuer Innovation Convergence Each change driver has a differential impact on the cards value chain and is altering the traditional relationship between banks and their suppliers 5
Why Acquirers need to Keep Up with Innovation! s 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. 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 Acceptance Strategies Benefit Typical Payments Requirements Typical Assessment Criteria 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 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 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
Cardholder CASE STUDY Traditional PSP Value Chain POI Hardware & Software Transaction & Terminal Mgt Third Party Services Acquiring Scheme Management Settlement Traditional PSP Role Traditional Bank Role PC Purchases Website Payment Pages Payment Gateway Processing Contract Additional Services 11 Multiple Acquirers Acquiring Contract Card Schemes Bank A/C
Cardholder CASE STUDY - Card Present IP POS Value Chain POI Hardware & Software Transaction & Terminal Mgt Third Party Services Acquiring Scheme Management Settlement Traditional Role Acquiring Contract Traditional Bank Role In Store Purchases Point of Sale Switch Loyalty, ERP etc. Bank Acquirer Card Schemes Bank A/C CHP Gateway Service Role Traditional Bank Role In Store Purchases Point of Sale Hosted IP Service Processing Contract Mobile etc. 12 Multiple Acquirers Acquiring Contract Card Schemes Bank A/C
Cardholder CASE STUDY - Multi-Channel Gateways Become Retail Payment Hubs POI Hardware & Software Transaction & Terminal Mgt Third Party Services Acquiring Scheme Management Settlement Retail Payment Hub Traditional Bank Role Credit Transfer, Direct Debit, PayPal, Wallets Consumer Purchases Multiple devices Payment Gateway Additional Services Multiple Acquirers Card Schemes Bank A/C Processing Contract 13 Acquiring Contract
Innovation - Strategic Options for Bank Acquirers Option Advantages Disadvantages Option 1: In-house Innovation Option 2: Outsourced Innovation Option 3: M&A Innovation Option 4: Do Nothing 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 Low/no cost of development/asset purchase Potential for partnerships Faster to market Low management overheads Adding to shareholder value Strong competitive edge Ownership of technology assets Skilled team up to date with change Flexible, adaptive resources Low cost and risk Better strategy developed later 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 Less/no ownership of IP Complexity of JV/Partnerships Share of revenues/profits Lack of control priorities Potential competitor 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 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
Feasibility Low Cost and Risk Control and Flexibility Improved Competitiveness Relationship Retention Low Disintermediation Improved Speed to Market Ownership of IP Which Option Scores Best? Option 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
Peter Jones +44 (0) 20 8891 6244 info@pseconsulting.com 17