Why Worldpay? The logic behind FIS' pick

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The FIS-Worldpay merger is the largest international payments deal to date, significantly topping the recent Fiserv-First Data merger that turned heads at the beginning of the year. But the FIS deal’s strategic implications could be more interesting than the raw numbers.

Worldpay was on the list of companies some predicted could be a good fit for FIS in the wake of the Fiserv-First Data deal, but it was far from the only choice. And Worldpay may not have even been the most attractive pick, given that it was still in flux from a $12 billion takeover by Vantiv that closed barely over a year ago.

Two large U.S. payment processors are often discussed as possibly going into play in the current M&A environment—TSYS and Global Payments.

As the world’s largest acquirer, Worldpay brings a deep stable of international and online retailers and a track record of experimenting with emerging commercial technology that could refresh FIS’ business model at a critical juncture.

FIS already had global reach, with operations in 130 countries. But the $43 billion deal (which counts $9 billion of Worldpay’s debt) will significantly expand the processor’s global reach and increase its market negotiating power, analysts say. This could particularly benefit small and midsize merchants that have long been the backbone of revenue for Vantiv, which completed its acquisition of Worldpay early last year and took Worldpay's name.

FIS has been interested in building more direct connections to merchants—evidenced by recent loyalty deals it’s cutting directly with retailers like Shell and BP—and Worldpay’s mix of merchants can bring them much closer to that goal, according to Richard Crone, an analyst with Crone Consulting LLC.

“Buying Worldpay is a vertical-integration move,” Crone said.

Toward that end, FIS will benefit from some of the technology Worldpay has recently adopted to expand merchants’ commerce and payment options.

Worldpay in July 2018 rolled out Mastercard’s Pay by Bank app for its merchant clients, leveraging Mastercard’s Vocalink technology enabling consumers to pay for online goods directly from their bank accounts through their bank’s app.

Through a collaboration with Klarna two years ago, Worldpay also has built up experience delivering instant-credit options to merchants, a fast-growing trend.

Buying Worldpay will also bring FIS into the expanding payment facilitator arena, where Worldpay is a key player. Payment facilitators take on merchants by enrolling them as sub-merchants, streamlining the complex primary-merchant enrollment process and off-loading certain risks.

Square and Stripe were pioneers of the payment facilitator concept, which is disrupting traditional merchant acquiring relationships. Worldpay handles the processing for about 80 percent of all payment facilitators, according to a report equity research firm Keefe, Bruyette & Woods published last month.

TSYS—through its 2012 acquisition of ProPay—ranks second in processing transactions for payment facilitators, followed by First Data and Chase Paymentech, KBW said in its report.

Global Payments, which has been buying many independent software vendors in recent years, is well positioned to survive any shocks from growth in the payment facilitator model, whose long-term trajectory is uncertain, according to KBW.

Combining FIS’ banking platform with Worldpay’s network of merchants also creates the possibility for FIS-Worldpay to route transactions from merchants directly to core banking systems for debit transactions, bypassing the payment networks, said Rodman K. Reef, a consultant with Reef Karson Consulting LLC.

This type of shortcut caused friction with Visa when First Data tried it in 2002, ending when Visa reached an agreement with First Data in 2006, with First Data agreeing not to route transactions internally.

But Reef said he doubts FIS would attempt such an end-around in today’s environment.

“FIS has too much invested in working with banks and other FIs,” he said.

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Payment processing M&A Point-of-sale FIS Worldpay U.S. U.K.