After Fiserv-First Data, who's merging next?
Fiserv’s $22 billion deal to acquire First Data creates pressure to scale core banking and payment processing that may force further industry consolidation.
That puts M&A bullseyes on companies like FIS, TSYS and myriad bank IT and merchant services companies.
“A deal has been brewing for years and it was no secret that Fiserv has been on the hunt for a merchant processing company for quite some time,” said Patricia Hewitt, CEO of PG Research & Advisory in Savannah, Ga., who predicts more deals involving payment processors and bank platform providers that will be tailored to fill specific gaps.
FIS, based in Jacksonville, Fla., draws interest because it has operations in 130 countries and a headcount of 52,000—a bit more than double the total number of employees of Fiserv and First Data’s combined. It also has its own track record of snapping up complementary companies in recent years to round out its services to 20,000 clients.
“For years FIS has gone head-to-head with Fiserv on core banking services, so it stands to reason FIS will need to beef up its capabilities in response to the Fiserv-First Data combination,” said Myron Schwarcz, executive vice president at Strategic Resource Management, a consulting firm in Memphis, Tenn.
One move that wouldn’t surprise Schwarcz is FIS acquiring TSYS, which has vast reach to banks and merchants through its broad processing, acquiring and issuing operations.The Columbus, Ga.-based TSYS has been working through layoffs and management turnover in recent years while trying to modernize its legacy systems to keep pace with defter new digital startups.
“I think FIS will actually have to take a look at acquiring TSYS, because its capabilities and sizable merchant business could put FIS on equal footing with Fiserv,” he said.
Like First Data, TSYS has legions of small and midsize merchants attached to its platform through acquirers. One of the powerful lures for Fiserv in buying First Data was the potential cost reductions for both sides in eliminating redundant services through consolidation, and the same logic would apply if FIS and TSYS combined forces, Schwarcz said. “FIS and TSYS both have big debit card processing operations, and bringing these together could potentially reduce costs by hundreds of millions of dollars,” he said.
FIS and TSYS declined to comment on speculation about their futures.
TSYS may not be an easy fit with another company. Beginning as a card-processing operation within a Georgia bank in 1959, TSYS has a broad merchant base and a large commercial card authorization processing business known for its stability. The company still leans heavily on legacy mainframe technology, which stands in sharp contrast to the new generation of digital-first fintechs and startups serving emerging payments companies and merchants.
“TSYS isn’t nimble, but in commercial card processing no one is better in the market,” said Rodman K. Reef, a payments analyst with Reef Karson Consulting LLC.
Despite a rock-solid reputation, TSYS still needs to become more agile to keep pace with rapidly evolving payments technology, and any merger could pose challenges, according to Reef. “It would be very difficult for any acquirer, other than a Georgia company with a similar culture, to acquire TSYS and get profitable synergies through integrating the two businesses,” Reef said.
TSYS could go a different direction and work on expansion through partnership or acquisition, proposed Rick Oglesby, president of AZ Payments Group.
“The First Data acquisition may create some opportunities for TSYS and other large ISO processor-acquirers, because [First Data] will undoubtedly adjust its focus. That could create opportunities for TSYS to fill some gaps and grow,” Oglesby said.
Another older mainstream payments provider, Ingenico, also could become an M&A target this year. Last year Ingenico briefly entertained a buyout offer, but it has since regrouped under a new CEO, promoting cross-border e-commerce payments as the successor technology to its longtime POS hardware focus.
“Omnichannel payments are still a gap in the market and Ingenico is well positioned to serve that need if it can unify its technology into a single, cohesive offering,” Oglesby said, noting that Ingenico must race Stripe and Adyen, which are going after the same global omnichannel market customers.
Smaller bank-technology platforms serving credit unions and smaller financial institutions—such as CO-OP Financial Services, PSCU and Jack Henry & Associates—could possibly join forces or go into play soon as partners for larger operators, according to Reef.
“Look at a company like Jack Henry—which typically addresses the same market as Fiserv on the issuer side—and its focus on debit, not credit. They could be a good match for a company whose strength is on the merchant side, like Worldpay or Global [Payments], but they could also be a good match for a company like FIS or a smaller processor that wants to build scale,” Reef said.
Jack Henry & Associates declined to comment.
PSCU is keeping a neutral stance regarding future moves.
“Given that First Data is PSCU’s payments processing partner, we are closely monitoring the merger and will keep our owner credit unions updated on opportunities and outcomes surrounding it,” said Chuck Fagan, PSCU’s president and CEO, in a statement.
CO-OP Financial Services struck a tone of independence for its immediate future serving credit unions. “Fiserv’s acquisition of First Data was not unexpected, as we’ve seen consolidation in the marketplace,” said Todd Clark, CO-OP’s president and CEO.
Acknowledging larger industry players are teaming up to enrich their offerings through a single pipeline, Clark suggested that CO-OP has followed that trend with its 2017 acquisition of TMG. “Our multi-platform strategy, size and scale, provides choice for our owners and flexibility for the long-term vitality of credit unions,” he said.
Despite the potential for M&A deals to help older payments companies compete, any mergers will be increasingly tricky in the fast-changing payments ecosystem, according to experts. Even the Fiserv-First Data merger, which still requires regulatory approval, has raised doubts about its long-term effectiveness.
“I’m cautious on the ability for these companies to execute effectively and create new and unique value—combining two large companies with legacy technology, disparate platforms and varied business models is very hard,” said Ali Raza, managing principal with Atlanta-based Blue Leviathan.