Processors are investing billions of dollars to build huge menus of tools for retailers that may no longer have the time to work with multiple vendors. These transformations are years in the making, and each investment or acquisition has the potential to dramatically change the competitive landscape.
First Data's planned $750 million acquisition of CardConnect, a deal it expects to close in the third quarter, goes a step further by helping the processor accelerate a plan that was already underway.
With CardConnect, First Data can hasten its ability to integrate with independent software vendors that sell to the merchant industry, said Himanshu Patel, First Data's CFO. The acquisition will move up First Data's timeline in this area by about two years, he said.
"The environment is getting very complex, so the [business clients] don't want just a single entity," Patel said. "They also want a company that is 'solutioning' them rather than working like a vendor."
The broader strategy is to build to its own and third-party systems for payments processing and other services such as gift cards, check acceptance, debit, e-commerce, marketing, CRM, security and hardware.
"You can work with one very large trusted payment company that can integrate all of these activities, but in many ways also customize them," Patel said.
On the innovation end, First Data recently entered into a partnership with Silicon Valley Bank to locate and encourage early stage payments technology, part of a broad outreach to developers who build solutions for merchants through the use of programming tools and streamlined certifications for EMV and other technology. Another collaboration between First Data and FleetCor will add technology to power digital gifting. And First Data's acquisition of Acculynk earlier this year bulked up its e-commerce technology.
On the scale side, First Data has partnered with Jack Henry to extend its card processing reach; and has entered a pact with Alipay to expand usage of First Data's Clover point of sale system and reach the millions of Chinese residents who travel to First Data's geographic footprint.
CardConnect will ease First Data's ability to connect payment systems with enterprise resource planning systems such as those from Oracle and SAP, Patel said. That will will help merchants pair payments with general ledger, billing and CRM systems with extra security backed by First Data.
"A lot of mid-market and larger clients, particularly those in the B-to-B space have an increasing need to accept card payments," Patel said. "But CIOs are very wary of security risks of having cardholder data traveling around ERP systems, so we can solve for the security risks."
CardConnect adds about 67,000 merchant relationships, and an easier integration between First Data and CardConnect for distribution.
"This CardConnect deal is part of a continuing evolution of acquirers to diversify away from commodity type processing," said Raymond Pucci, an associate director at Mercator Advisory Services. "So we'll be seeing more of this."
CardConnect helps First Data set up a potential "trifecta," according to Pucci. It allows First Data to scale up processing volume for cost efficiencies, add more integrated technology solutions and business tools to customers that bring higher margins, and make further inroads into more enterprise scale relationships ideal for cross-selling across First Data's portfolio.
"The bonus is that CardConnect is already a First Data partner, which will help smooth coordination issues and challenges that inevitably accompany any deal like this," Pucci said.
First Data also needs to compete against processors that are making their own investments and acquisitions to diversify their services. TSYS in 2016 spent $2.4 billion to acquire TransFirst, a major addition that improves TSYS' ability to serve merchants across online, in-store, mobile and other channels. And Vantiv spent a total of about $2 billion in separate deals to acquire Moneris and Mercury Payments in recent years to reach merchants in different payment channels.
With these acquisitions, First Data, Vantiv and TSYS put the pieces in place to become providers of integrated payments, or a "one stop" to handle different payment channels and offer different merchant services through a single point of sale relationship. The move is necessary to compete against tech giants like Amazon and smaller disruptors that offer digital payment services.
"The acquiring business is tough, competition is forcing transparency and driving pricing downward while at the same time their merchant customers are struggling to accommodate the demands of an increasingly important customer base," said Thad Peterson, a senior analyst at Aite Group. "Processors need to be able to address merchant needs and at the same time add value to their offering to increase revenue opportunities."