The payments M&A wave could hit debit networks next
As major payments M&A deals mount, some free agents are awaiting deals of their own — and one area where that’s most apparent is in debit and ATM networks.
The combination of FIS and Worldpay and Fiserv and First Data are mashups of card issuing and merchant acquiring services that are designed to eliminate the need for companies to have distinct vendor relationships for both functions. In addition to creating new avenues for open banking, generating data for incentive marketing, and providing a boost to automate supply chain transactions, the deals also bring together large ATM and debit networks that currently compete with each other and serve as a competitive alternative to Visa and Mastercard.
That also makes it more likely that remaining core vendors that don't have direct control over a debit network will be players in the next big merger.
First Data's Star debit network provides surcharge free ATM access, debit card processing, a debit payment network, exception processing, transaction research and marketing. It's available at more than one million point of sale sale locations. Fiserv's Accel offers a similar mix of services.
NYCE offers financial services and biller products in addition to its ATM and debit network, and Worldpay's Jeannie supports 2.5 million point of sale terminals and more than 7,500 ATMs. Mastercard's debit and ATM services include Maestro and Cirrus; while Visa's network is Plus. Other networks include Discover's Pulse and Shazam, a member-owned network.
Even before this year's acquisitions were announced, debit networks were making upgrades to lure merchants in an already tight acquiring market, such as Star’s dual PIN or PINless messaging that allowed it to capture more of Walmart’s business. Accel also added routing options to cut costs for card acceptance. Debit networks have additionally collaborated with merchant groups on security to curry favor with those stores and provide another nudge against the card brands.
The networks have gaps that could be addressed through consolidation, such as FIS' prior lack of merchants to feed its NYCE network, or First Data's potential to add more merchant services and card issuing services to Star.
Post merger, the debit networks could be combined or allowed to operate separately. Fiserv’s Star/Accel combo, or FIS’s NYCE/Jeannie tie up, potentially create larger debit networks that could pressure the international card brands to make acquisitions of their own; or force remaining merchant acquirers and bank technology companies into merger talks.
Either way, the market probably won't look like it does today for long.
“Merchants shouldn’t make long-term commitments or partnerships with any of these incumbent networks until the smoke clears on this consolidation,” said Mark Horwedel, a strategic consultant for CMSDI. “There’s going to be potentially a lot of different entities bidding for your business if you're a merchant. I can see the global card brands getting into the merger action if they feel threatened."
Even if regulators don’t allow FIS or Fiserv to use their own debit networks as the required “second merchant routing option” under the Durbin Amendment to the Dodd Frank law, their respective bank clients will still have more heft against Visa and Mastercard than before the mergers.
“Every Fiserv bank will have a Star or Accel,” said Richard Crone, a payments consultant. “It won’t say Visa or Mastercard.”
Fiserv and FIS should be able to wrap additional value around debit transactions, because with more issuers and merchants they can deliver some closed-loop benefits, said Eric Grover, a principal at Intrepid Ventures.
“In practice, however, it’s not easy. Chase, with ChaseNet, has struggled,” Grover said. “And First Data since 2004 has a national network and a national roster of issuers and merchants, and hasn’t managed to deliver compelling closed-loop benefits.”
Discover, with its Pulse network, and core vendor Jack Henry could be part of future mergers, Crone said.
“This requires a competitive response by the remaining core vendors. Jack Henry has to do something. If you don’t have a payment network you don’t have it,” Crone said.
Jack Henry, Discover, FIS, Fiserv, Visa and Mastercard did not return requests for comment.
The expansion of the OEM mobile wallets could also pressure further consolidation among bank core vendors and merchant acquirers. Apple Card is relying on Apple Pay's base of consumers and merchants to drive adoption. If the Apple Card's partnership with Goldman Sachs picks up steam, it will put more pressure on other companies to offer a similar mix.
“The recent consolidation does bring together three elements of front- and back-end financial services, including core processing, card processing and merchant acquiring, all in the hands of a few organizations,” said John MacAllister, principal at Dorado, a payments consultant. That's a potential threat to competition, he added.
Grover contends that even the possible consolidations of Star and Accell and NYCE and Jeannie still leave the U.S. with more competition among debit routing firms than most countries.
“The mergers do eliminate some choice for merchants," MacAllister said, "but by the same token it allows these larger players to leverage their relationships with financial institutions, which could be a good thing for merchants. The jury is still out on that.”