To capture more data, RBS and Mastercard invest in merchant services

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Royal Bank of Scotland and Mastercard are targeting value-added merchant services with a £60 million investment in London-based Pollinate Networks.

Two investment funds, Motive Partners and EFM Asset Management, also invested in Pollinate, which they hope will generate new revenue streams for banks in the increasingly commoditized merchant processing market.

Pollinate’s cloud-based technology integrates with banks’ existing processing systems and offers data-driven services to help banks reclaim merchant acquiring business lost to non-bank processors such as Worldpay, Adyen, and Stripe. At stake for banks isn’t just the revenue generated by these disruptors, but also customer relationships and the data that allows for the delivery of customized information and value-added services to merchants.

“Banks still hold the relationship with commercial customers, but have sacrificed merchant data about consumer behavior to third-party processors,” said Fiona Roach-Canning, Pollinate’s chief product and marketing officer. “Data is the key to developing and delivering better services, but that data is in the hands of non-bank payments companies.”

Pollinate’s launch in November 2019 marked RBS’s re-entry into merchant acquiring, 10 years after selling its Worldpay subsidiary as an E.U.-imposed condition for receiving £50 million of U.K. Government bailout funds. The £39 million investment in Pollinate by EFM and Motive Partners underlines the attractiveness to financial markets of the highly regulated, bank-related fintech sector.

“We see Pollinate as an opportunity to participate in a potential global leader in merchant acquisition, with a strong data analytics platform,” said Jeff Emmanuel, EFM’s chief investment officer, who has joined Pollinate’s board. “Through combining machine-learning with a unique ecosystem of data assets, Pollinate offers banks a new service proposition for their customers.”

RBS holds 33% of Pollinate’s equity, with Pollinate management holding 11%, Motive Partners holding 22%, EFM holding 17%, and Mastercard holding 17%. Aside from RBS, which has two representatives on Pollinate’s board, the other investors have one representative each, in addition to Pollinate’s CEO, Al Lukies.

Mastercard’s Pollinate investment complements its involvement in the U.K. payments industry through core payments infrastructure operator Vocalink, which it acquired in 2016.

“In line with our strategy, we’re diversifying our business and have reacted dynamically to the changing payments landscape by acquiring, investing in, and partnering with national and international payment hubs across the globe," said Scott Abrahams, Mastercard U.K. and Ireland’s senior vice president for business development. "Our partnership and investment in Pollinate is an example of this, as we identify companies with which we see opportunities and synergies to work with to build the future of the payments ecosystem.”

RBS has a two-pronged interest in Pollinate: the growing value of payment companies as service providers to banks and merchants, and its own need to modernize.

The first deployment of Pollinate’s platform was the May 2019 launch of Tyl by RBS subsidiary NatWest. Tyl, which uses Fiserv as its processor, is available in England and Wales and will roll out in Scotland and Northern Ireland in 2020. Previously, RBS and NatWest had a referral agreement with Worldpay.

“Developing our own merchant acquiring and payments proposition is an important step forward and reiterates our commitment to harnessing the revolution in new technologies,” Alison Rose, NatWest Holdings’ deputy CEO and CEO Commercial and Private Banking, said at Tyl’s launch. Key elements of the intellectual property created for Tyl are owned by Pollinate, which will continue to develop and license them.

RBS’ Pollinate investment responds to the growth of payment processing after it sold Worldpay.

“The landscape has changed,” said Pollinate’s Roach-Canning. “In the aftermath of the 2008 financial crisis, banks began narrowing their focus to core activities. Payments weren’t seen as core, but as a utility that they had to provide, which could be supplied via third parties. Many banks divested their payments businesses as a result. Since then, the payments industry has evolved and bank-grown businesses such as Visa and Worldpay are now worth more than many banks.”

Worldpay, which was sold by RBS to Advent International and Bain Capital for £2 billion in 2010, was acquired in July 2019 by FIS for around $43 billion, including assumed debt, higher than RBS’s market capitalization of $37 billion. Other non-bank processors also have high valuations. In July 2019, Fiserv acquired First Data in a $22 billion all-stock deal, while Stripe’s $250 million funding round in September gave it a valuation of $35 billion, and Adyen has a market capitalization of €21 billion.

In a consolidating payments market, Pollinate faces steep competition from these players, although Mastercard’s involvement as an investor and board member makes a significant difference.

RBS has invested £7 billion over the past five years in modernization, chief administrative officer Simon McNamara told an RBS-hosted seminar in June 2019. The money was used to bring RBS’s legacy banking systems up to date, implement security, cloud computing and APIs, enhance the customer experience, prepare for open banking, and cut costs.

Pollinate’s selling point, said Roach-Canning, is that it integrates with banks’ in-house legacy systems and third-party processors, enabling banks to offer payments, business management, consumer marketing, and charitable giving services to their clients.

“We design for the end user, but go to market through banks, allowing them to continue owning the merchant relationship,” she said. “This enables banks to provide an end-to-end relationship with merchants, utilizing their expertise and new technology.”

Pollinate has global ambitions to offer its merchant services to banks outside the core markets addressed by RBS. Priority countries are Canada, South Africa and Australia, where Pollinate is already in advanced discussions with major banks.

“Pollinate was created to support the world’s leading banks as they endeavor to deepen and enhance their critically important relationships with business customers of all sizes, categories and locations,” said Pollinate’s Lukies.

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Payment processing Acquirers RBS Mastercard