NCR, Diebold Nixdorf need more than new bosses in the fintech era
For NCR and Diebold Nixdorf's leadership, spotting the fintechs nipping at its heels is the easy part. Charting a path as a half-century-old market changes into something entirely new will be much harder.
In short order, NCR has appointed Michael Hayford as CEO, part of a personnel overhaul that includes an almost entirely new coaching staff. Its rival Diebold Nixdorf is facing headwinds of its own. Diebold Nixdorf also announced a new president and CEO, Gerrard Schmid, earlier this year.
The array of challengers is right before both companies—Square, Stripe, PayPal, Adyen, iZettle (which is being acquired by PayPal). All are relatively smaller companies with faster paths to market and a Silicon Valley panache.
But NCR, and its historic rival Diebold, have always faced competitors. What's different now is the nature of the marketplace itself is producing rival startups at a rate that threatens to be too fast, particularly since it's likely NCR and Diebold specialize in a part of the shopping and buying experience that's too close to the back of the train.
A CNBC report citing unnamed sources said that Diebold has hired advisors to pursue a sale of the company. Diebold has not confirmed the report.
“It has been a one-two punch against this company," said Richard Crone, a payments consultant. "They specialize in ATMs and branch automation. As the use of cash goes down, there is less need for ATMs, and with fewer consumers wanting to visit a branch there is less need for their software."
"Ultimately, a potential buyer could surface from one of the companies that service ATM fleets or a direct competitor," he added. "It would need to make financial sense to acquire this company since Diebold is a hardware company and Wall Street rewards sustained revenues. If you can leverage the hardware, parts, servicing contracts, etc., then there is value. Otherwise, it’s just industry consolidation.”
The process of paying for things is evolving from a 1950s-era data entry exercise done at the end of sale to one where it is integrated into the sale and service experience. Examples abound from an Uber ride, to a Fandango movie ticket purchase to a Starbucks latte order. And that’s only the tip of the iceberg.
While these legacy players have seen the writing on the wall, adapting is not necessarily easy due to their size, complexity and company cultures. Oftentimes, acquisitions and divestitures have played important roles in their diversification efforts and leaps in technology. Take, for example, NCR’s $1.2 billion acquisition of Radiant in 2011 to expand into the restaurant and hospitality POS market and its $1.65 billion acquisition of Digital Insight in 2014 to diversify into mobile and online banking, as well as it 2016 sale of IPS, its consumable print unit, to Atlas Holdings.
Despite NCR’s efforts to diversify and innovate, pressure from shareholders forced the company to put itself up for sale in 2015.
Unrealistic expectations on its valuation ultimately scuttled that plan. However, Blackstone did take a minority stake, valued at $820 million, in the business in 2015. NCR said at the time that the Blackstone investment would “accelerate NCR’s ongoing strategic transformation into an integrated software and services company.” Only two years later, in 2017, Blackstone sold 49% of its stake in the company for a substantial profit.
Square and Stripe usually wear the halo in this discussion, but it's more about where and when the payment is happening than who is processing the transaction. Fintechs are an interceptor more than a disruptor.
“Companies like Square and Stripe are leading the way in disrupting the space but Square’s focus is SMB and Stripe is only online/mobile at this time. They are more harbingers of change than actual change agents for companies like NCR and Diebold,” stated Thad Petersen, senior analyst with Aite Group.
So it was encouraging news when the new president and CEO reported in the NCR Q2 earnings release that he spent his first ninety days "engaging with customers and employees around the world and am excited about our long-term growth profile.” However, the upbeat tone lost some of its weight when it was followed a few sentences later by the statement, “Our focus on innovation will continue, but in the near term our priority will be on resolving our execution challenges.”
NCR did not respond to a request for comment by deadline. But the company may not have a choice in terms of when or how it innovates.
The recent face-off in dual-screen hardware between NCR and Square is emblematic of a newcomer disrupting the industry to the point where legacy companies are being forced to innovate and adapt just to stay even. First Data acquired Clover to compete in the small merchant space with Square when it didn’t have the right equipment in its portfolio.
Investors are clearly favoring fintechs as legacy vendors suffer the stigma of being outdated and outmaneuvered. Smaller headcounts and lower overhead are providing heftier margins for e-commerce and cloud-based acquirers to spend on customer acquisition and moves into physical point of sale.
But when these players move into the physical world, it’s with a different strategic point of view toward their customers’ business. They are not just selling terminals or boxes. They’re integrating themselves into the core of their clients’ business and bringing with them an ecosystem of products to support the clients' success.
Diebold Nixdorf is the result of merging two legacy acquiring infrastructure and ATM businesses. It faces many of the same competitors as NCR plus, others in its branch automation business. Diebold did not respond to a request for comment by deadline.
Beyond direct competitors, such as NCR and Korean ATM player Hyosung, Diebold faces myriad indirect competitors that deal with digital cash. For example: Venmo (owned by PayPal), Zelle (owned by the banks that buy Diebold ATMs), Square Cash and Alipay. Also, there is the war on cash being waged by governments, such as the Indian government, which has declared plans to become a cashless society.
Diebold, like NCR, has had its own transformation story as it has tried to modernize its business. In March 2015, the company announced it would acquire Phoenix Interactive Design to become more of a services-led, software enabled company. However, just a few months later, the company did an about-face by doubling down on its ATM and POS terminal manufacturing by completing the acquisition of Germany-based Wincor-Nixdorf.
Diebold signaled in its Q2 earnings release that more terminals will be shipped in the future. But it is unclear how these terminals will deliver value and become integrated into the core of its customers’ businesses.
For example, when banks realized millennials were using PayPal’s Venmo P2P service to send each other digital cash instead of pulling money out of the banks’ ATMs to fulfill small debt obligations, they banded together to launch their own digital P2P service, Zelle, to compete with Venmo and also serve other generations as well. This will likely impact future shipments of Diebold’s Windows 10 ATM upgrades at some point. Zelle has been in business for just under two years and its last quarter saw $28 billion in volume being transacted, up from $25 billion in the prior quarter.
“NCR and Diebold started out as data entry companies outside the core. When you reside outside of the core, it always allows you to be marginalized," Crone said. "This has dominated not only their corporate culture and heritage, it’s also impacted their view of their customers and the market opportunities. They are very inwardly-focused companies."
Merchants want an acquirer or payments processor that can help them grow by inserting themselves into their business to solve their problems, whether it’s selling Lyft rides, Fandango tickets, pizzas or managing carryout, dine-in and delivery.
Using payments as the entry point, the processor becomes the system of record and can help build a CRM strategy. This is how Stripe has inserted itself into so many online and mobile businesses with just a few lines of code. It enables the ability to process a payment, thereby monetizing an app (giving it value). Once an app can generate money, Stripe offers add-on services that can improve its business, including CRM, accounting, analytics and more that can be built off the payments data stream.
Building your business around the customer is not a unique or new strategy. It is, however, what separates how the fintech companies are approaching e-commerce and physical small to medium businesses. As companies such as Square venture into larger businesses such as restaurants, they are taking that same approach.
Square has acquired or built businesses that offer catering, web design, pickup and delivery, and larger-scale POS systems specifically for the restaurant business. It is in the middle of the restaurant helping to run the business. It is not the terminal partner positioned next to the exit door with a box of mints on top of it looking in, asking how it can help. Square knows how it can help. Much of its new business is generated by merchants’ word-of-mouth.
The problem for a legacy company arises when corporate culture gets in the way. When it fails to truly understand its customers’ businesses and how its role can enable their success or even survival. That’s when it lacks the ability to create and execute a meaningful strategy.
Take for example, Diebold’s initial food order kiosk announcement. It seems out of place given trends such as Starbucks announcing that it would be building smaller stores, with 80% or more of them having drive-thrus. Kiosks are certainly a part of streamlined store design, but the market is already moving away from the kind of hardware legacy companies specialize in.