10 transformative M&A deals in payments

Published
  • October 20 2017, 11:06am EDT

In recent years, there's been a lot of activity in payments M&A, but a few deals stand out — some for their size, and others for their ability to transform both parties in a fundamental way.

Visa and Visa Europe

Visa Europe Ltd., operating as an entirely separate company and a bank membership association for nearly a decade after Visa Inc. became a publicly traded company, came back into the fold in mid-2016.

Visa's global company will now serve 17,100 financial institutions and partners, more than 40 million merchant outlets and three billion card accounts.

The European Commission approved of the buyout after Visa had changed the terms of the deal to appease the commission's anti-trust concerns. To gain EC favor, Visa took out a planned earn-out facet of the deal in exchange for an extra 1.75 billion euros in cash.

Aside from the benefits of merging under one Visa brand, the companies have looked at the deal as a way to accelerate and improve technology advancements, as Visa Europe has a strong track record in the digital and mobile space.

Visa estimated that the merged company could generate up to $200 million in annual "pre-tax cost synergies" by 2020, representing about 30% of Visa Europe's operating expenses.

Visa branded cards and payment products enable approximately $6.8 trillion in global payments annually, Visa said.

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Mastercard and VocaLink

Purchasing VocaLink cost Mastercard more than $900 million and some regulatory headaches, but the investment has the to potential to spark new payment products and support the card brand's pursuit of faster processing.

"We'll have a combination that will allow us to facilitate customer choice and capture a new set of payment flows," said Ajay Banga, Mastercard's president and CEO, during the second-quarter earnings call for 2017.

Mastercard officially closed its VocaLink acquisition after making some concessions to overcome scrutiny over the deal's impact on ATM competition in the U.K.

Now that VocaLink has been brought in-house, Banga said the company's role in boosting payment processing speed in diverse markets will help Mastercard expand real-time or near-real-time payments in dozens of countries. Also, VocaLink will allow Mastercard to support payments to businesses and consumers that don't have a card account, allowing the card brand to approach a new set of clients.

"We can reach more endpoints. VocaLink can connect to ERP systems for B-to-B payables and receivables management, but it can also support bill payment because of its messaging component," Banga said. "We can offer card and bank account based payment solutions."

VocaLink has partnered with companies such as IBM, and played a major role in migrating the U.K. to near real-time processing to accommodate mobile and other digital payments. It has since supplied technology for similar initiatives in North America, Europe and Asia.

"VocaLink has demonstrated the ability to take software and apply it to markets as diverse as Sweden, the UK. and Thailand," Banga said, adding the acquisition will help Mastercard boost cross-border payments and support mobile wallet initiatives.

Amazon and Whole Foods

Amazon has been making some big moves in the grocery industry in recent months, but perhaps none so aggressive as its deal to buy Whole Foods for $13.7 billion.

The deal takes away a key differentiator that Walmart and Target have counted on in their competition with Amazon: a massive retail footprint. Whole Foods, an upscale supermarket chain focused with 465 stores in the U.S. and U.K., may not have the scale of Walmart (which has 4,692 stores in just the U.S.), but it's a massive change for Amazon, which previously only had experimental retail presences, mostly in Seattle.

Traditional grocery chains such as Walmart and Target have been working hard to keep up with the online behemoth’s forays into their territory with new initiatives such as in-store pickup and delivery, but until now probably didn’t take the threat seriously that Amazon was aiming to become a top 5 grocery retailer by 2025.

With ownership of Whole Foods, Amazon could rapidly deploy the systems it is testing such as AmazonFresh Pickup for order-ahead grocery shopping and Amazon Go for checkout-free shopping. Amazon also recently reintroduced its Amazon Dash wand, which ties into AmazonFresh and lets people reorder groceries by scanning bar codes in their kitchens.

Walmart and Jet

In agreeing to acquire Jet.com in 2016 for $3 billion as a way to strengthen its e-commerce position against rival Amazon.com, Walmart most certainly wasn't basing its decision solely on payments technology—Jet.com's e-commerce technology and large customer database pulled the weight on this deal.

It's been nearly two years since Walmart executives were clinging to their role in the Merchant Customer Exchange mobile wallet development. Since then, the MCX CurrentC mobile wallet experiment was shut down before a national launch, and Walmart released Walmart Pay for mobile payments in the store.

Any other type of payments technology that competes for speed or a seamless consumer experience will be measured against what Amazon offers in the future, but the door is open for Walmart to incorporate Walmart Pay as an option in a more powerful e-commerce setting, while continuing its mobile trend of accepting all card payments.

Jet.com has a similar setup with Android Pay through that operating network, and both Android Pay and Apple Pay have been featured in past temporary deals for 10% off Jet.com purchases made through those wallets.

Still, in the same manner Walmart has fought against credit card interchange rates, the Jet.com site, in part, echoes the same feelings by informing its customers that prices can be kept lower if transactions are completed with debit cards.

"It is cheaper to go through debit than it is for credit for Walmart," said Larry Berlin, vice president with Chicago-based First Analysis Securities. "This will really be Walmart steering the customer to the cheaper payment mechanism, and puts them right back in the disputes with the card networks and PayPal over rates."

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PayPal and Braintree/Venmo

PayPal has a long history of buying brands that it could not defeat in the market, and Venmo is no exception. Other examples include BillMeLater (now PayPal Credit) and Braintree (Venmo's owner at the time of the acquisition). But PayPal never seemed particularly threatened in its primary mission of online and P-to-P payments — until Venmo came along.

Venmo somehow succeeded where years of upstarts failed, to the point where PayPal is now comfortable putting Venmo's own brand before its own. In a new setup, PayPal is testing dynamic payment buttons that swap in the Venmo brand for Venmo users when visiting merchant websites.

While this gives Venmo users the option of shopping at more than two million merchants, it also concedes that PayPal may never convince Venmo consumers to think of themselves as PayPal users. Despite the risk to the PayPal brand, the company sees this as a positive development.

"We're seeing in some instances that the appeal of Venmo has prompted some of the largest and most influential U.S. merchants to expand existing, or begin new, processing relationships with PayPal," Bill Ready, chief operating officer at PayPal, said in an Oct. 17 blog post.

As much as anything, it puts Venmo in the forefront of a promise that mobile payments has made since its inception — that it is easy for users to split the cost of purchases among friends and share payments on the Venmo feed.

"My kids go out and buy things jointly a lot, sometimes as a gift, or something for themselves, but someone wants to pay for part of it," said Steve Mott, principal of BetterBuyDesign, a Stamford, Conn.-based consulting firm. "It's very easy to do with Venmo, and that's a different lifestyle that the payments industry really hasn't stepped up to."

Venmo has grown to the point where the PayPal.me P-to-P service created two years ago to lure older age groups may not even be necessary. It appears PayPal realizes by leveraging Venmo and its infrastructure it is "creating a new conduit into the future of digital payments where it is more of a social interaction," Mott added.

And that also appears to be a major selling point for PayPal and Venmo as it expands retail reach. The move allows merchants to connect with a new audience of shoppers, many of whom engage with Venmo multiple times a day, Ready said in the blog post.

Google and Softcard

Google announced in 2015 that it was buying some technology and intellectual property from the rival Android-based mobile wallet Softcard, giving Google a chance to finally put to bed several business problems that have plagued the company since it launched its mobile wallet in 2011.

Google's biggest issue was that its Android-based mobile wallet was in direct competition with the mobile carriers who sell most of its Android smartphones in the U.S. The carriers behind the Softcard venture — Verizon Wireless, AT&T and T-Mobile — refused to allow Google Wallet on their handsets, citing security concerns, until Google changed the way it enabled wireless payments.

Under this new arrangement, Google Wallet would come pre-loaded on Android handsets sold by these carriers.

Softcard had faced several issues of its own since launching in 2013. Notably, the product had to abandon its earlier brand name, Isis, after the name became more prominently associated with a violent militant group.

JPMorgan Chase and MCX, WePay

JPMorgan Chase acquired the payments technology behind CurrentC, the mobile wallet that never had a public rollout, from the retailer joint venture Merchant Customer Exchange in early 2017.

The deal meant that Chase Pay, which was already in place as part of a planned MCX wallet through a partnership in October 2015, would get a boost from the technology needed to connect to the major retailers that are members of MCX as well as with non-MCX members. Chase Pay hopes to avoid requiring major technology projects to deploy Chase Pay.

The existing partnership between Chase and MCX started shortly after MCX revealed its plans to start testing CurrentC in Columbus, Ohio. Testing took place for nearly a year before MCX pulled the plug on the initiative, which had the goal of reducing credit card fees by setting up an ACH-based wallet and keeping consumer purchasing data in the hands of the retailers.

Chase Pay made its debut in late 2016 with Starbucks and Best Buy, and it has commitments from MCX members like Walmart, Shell, Phillips 66 and others over the next year or longer.

The acquisition of MCX technology came three months after Chase plunked down a $10 million investment in LevelUp, a sign of its increasing interest in the Boston company's loyalty program technology.

And this month, Chase reportedly paid about $200 million to buy WePay, a company that serves primarily smaller businesses and communities that sell products online on behalf of micromerchants. It has bulked up considerably in the past year, adding support for Apple Pay and Android Pay for mobile checkout and introducing offline services to ward off competition from mobile point of sale providers such as Square.

"We think this is a game-changer — we’re combining the global brand, scale, capabilities and distribution of one of the world’s largest and most respected financial institutions with our world-class talent and technology to build the future of fintech," said Bill Clerico, founder and CEO of WePay, in an email.

For JPMorgan Chase, it's a substantial commitment to its fintech investment strategy.

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TSYS and TransFirst

The pressure on merchant acquirers to enable transactions in more channels for more merchant types is accelerating, and TSYS has turned to the M&A market for its digital diversification, announcing an agreement in early 2016 with Vista Equity Partners to acquire Vista portfolio company TransFirst for $2.35 billion in cash.

"Thirty percent of [TransFirst's] revenue is in the integrated payments space, and their e-commerce operation is bigger and more robust than ours," said M. Troy Woods, president and CEO of TSYS, adding e-commerce and integrated payments are the two fastest growing parts of the merchant acquiring business.

The purchase price of the TransFirst acquisition well exceeds the price of TSYS' 2013 purchase of prepaid card marketer NetSpend, a $1.4 billion acquisition that the processor described as "transformational" both for its scale and for being TSYS' first consumer-facing business.

TransFirst has more than 1,300 technology and referral partners in areas such as health care, integrated software vendors (ISVs), not-for-profit, referral banks, associations and e-commerce. The ability to offer integrated payments is considered a key element for merchant acquirers in the digital commerce age, and TSYS has also partnered with FPS plus to reach more health care merchants.

Vantiv and Worldpay

The mid-2017 announcement that Vantiv has agreed to buy Worldpay Group quickly quashed rumors of an impending bidding war between them and JPMorgan Chase, with Chase stating that said it wouldn’t be placing an offer to compete with Vantiv’s 7.7 billion pounds ($9.9 billion).

By picking up Worldpay, Vantiv is gaining valuable strength in two areas of utmost importance to merchant acquirers: Cross-channel transactions and providing grocers with a way to counter Amazon's incursion into the sector.

“Worldpay’s focus on e-commerce will be an accelerant to Vantiv’s overall top-line revenue growth rate," said Thomas McCrohan, a payments analyst at Mizuho. "Moreover, the competitive dynamics in grocery has changed with the acquisition of Whole Foods by Amazon, and we believe Vantiv is now much better positioned to support their grocery store client base as this channel embraces omni-channel."

While Vantiv has been a powerhouse in U.S. acquiring, it has made little progress into European and other global markets. Conversely, since its divestiture from RBS, Worldpay has grown to be a top European acquirer and major payment services provider globally, with strong presence across merchant channels (both in-store, particularly in the UK, and online). However, in the US its market share remains relatively small (~2-3%).

“The deal points to a number of synergies.” says Zilvinas Bareisis, Senior Analyst at Celent. “With relatively little overlap in the U.S., the Worldpay acquisition gives Vantiv an even stronger presence online and access to international customers”

Over the last several years, Vantiv has acquired a number of companies in the digital payments space including Litle & Co. in 2012, Element Payment Services in 2013, Mercury Payment Systems in 2014 and Canadian payment processor Moneris Solutions in 2016. Vantiv’s experience in bringing companies under its umbrella could have been a deciding factor in taking on an acquisition of the magnitude of Worldpay. According to Thad Peterson, analyst at Aite Group, “My impression is that Vantiv has shown their ability to effectively integrate acquisitions into their culture and quickly benefitting from the transaction.“

While some of these acquisitions could be considered a thinning of the competitive herd, it’s also about preparedness for the fusion of offline and online transactions.

“The Vantiv/Worldpay announcement continues a significant trend in deal activity across the payments ecosystem.” said Jason Oxman, CEO of the Electronic Transactions Association. “Driving much of this activity is the changing sales channel, as commerce solutions that encompass brick and mortar, e-commerce, and mobile become more important to retailers.”

First Data and Acculynk

When most of the payments industry was working to find a way to accommodate the Durbin amendment's routing rules for EMV debit cards, First Data acquisition target Acculynk had its attention focused elsewhere.

The company already had an e-commerce method in place for dual authorization transactions at that time, and Acculynk CEO Ashish Bahl, who initially got involved in the various alliances and conflicts governing debit routing and real-time payments, figured out fairly quickly that the best strategy was to simply play a different game.

"I made the executive decision that this was not a good use of our time, as we were trying to get so much done in a short period of time," Bahl said. "We had a consultant monitor it for us and if anything noteworthy came up, we would be in a position to participate. We had a patent portfolio to bring to the table that would be more than the average participant."

That sort of focus, from about 2011 through 2014, allowed Acculynk to set up several clients — from independent debit networks to financial institutions, merchants and airlines — with the PaySecure online PIN debit service. And First Data took notice, announcing a deal to acquire Acculynk and its key technologies of PaySecure routing, Payzur P-to-P payments and electronic payments for municipalities.

First Data has been active with Acculynk for several years, including having executive Mark Herrington join the Acculynk board in 2012.

To be sure, First Data and Acculynk have had much more in common the past decade than both being based in the payments hub of Atlanta.

"The biggest pain point with our merchants has been the cost of payment acceptance, and now we have a unique and secure way to provide low-cost routing for them," said Chris Foskett, executive vice president and head of corporate and business development at First Data.

And just this week, First Data announced another meaningful acquisition: A $760 deal to buy BluePay, which focuses on card not present payments and software developers in North America.