As big fintech mergers close, let the customer feeding frenzy begin
Two of the three multibillion-dollar payment mergers announced in 2019 closed this week, and these global giants must now fend off the invigorated fintechs eager to nab unhappy merchant and bank clients.
The competitive field is already changing. The same day Fiserv closed its purchase of First Data, Bank of America announced it would end its merchant services joint venture with First Data, a reminder that all six companies involved in this year's M&A wave have thousands of clients and partnerships that could be in play.
As FIS absorbs Worldpay, it will work to retain these partnerships by leaning on prior modernization efforts at both companies.
"The industry is moving ahead at light speed. To be successful today, we have to continue to push and bring in new partnerships," said Bruce Lowthers, president of banking solutions at FIS. "These partnerships will be the key to accelerating products to market."
FIS and Worldpay will have more than $12 billion in pro forma revenue and 55,000 employees. Mark Heimbouch, former president and COO at Worldpay, is joining FIS as president of the company’s Merchant Solutions division. Stephanie Ferris, former CFO of Worldpay, is joining FIS as its COO. And Charles Drucker, former executive chairman and CEO of Worldpay, will join the FIS board of directors as vice chairman.
Executives from both FIS and Worldpay have said the companies can respond faster to new technology by combining. The new company also hopes to address the tough PSD2 compliance burden in Europe through an existing partnership between Mastercard and Worldpay. There are also benefits in areas like B2B payment automation, digital ID and pushing digital payments in cash-heavy emerging markets.
Based on the time frame given at the deal's announcement, the integration of FIS and Worldpay should take about three years, Lowthers said, adding work on the conversion is already underway. "There's so much work that goes into getting to this point," Lowthers said. "Now, all of that planning that's been going on in the background is coming to fruition."
Global Payments/TSYS, FIS/Worldpay and Fiserv/First Data will quickly get to work trying to nab clients from each other, but that could be complicated since six companies are being melded into three. At the same time, Square, Stripe, PayPal and myriad startups are using the cloud, blockchain and other innovation to offer merchant acquiring and nominal financial services.
"These are big, complex organizations and integration will be challenging," said Thad Peterson, a senior analyst at Aite Group. "There are a lot of businesses within these organizations that will be able to support their clients and sell new business on a standalone basis, but we're looking at massive bureaucracies trying to combine for efficiency and to create new strategic value propositions."
Teams from FIS and Worldpay have spent the past few years modernizing the companies' respective platforms, and that could help the combined company retain existing partnerships and lure new collaborators.
"The 3,000 APIs that we have will come to bear here," Lowthers said. "We feel we are positioned well."
Throughout this process, merchants have the chance to go bargain hunting, but the rosy outlook probably won't last long.
"Merchants of all sizes should benefit in the next six months as acquirers will offer attractive pricing packages to grab market share," said Raymond Pucci, director of merchant services at Mercator Advisory Group. "In the long run, merchants will have less choices as the field of large, established merchant acquirers has gone from 9 to 5 since 2015. A future BofA merchant acquiring unit would be the sixth major player in the U.S. market, assuming that no other consolidations will occur — not something to bet one’s house on."
The big companies entered into mergers with scale in mind — the opportunity to offer a single source for card issuers and merchant acquirers to serve needs for banking, payments and merchant technology.
It's possible that for many merchants and banks, these combinations will be too large and result in too few options for price comparisons. The combination of multinational mega payment processors and bank IT vendors will leave even more space for alternative players, giving a boost to the fintech startup trend the mergers were partly designed to counter.
"Banks and credit unions, particularly smaller institutions that are very dependent on these large providers for their technology, have expressed concern that the merger activity will mean less attention to building new solutions to keep them competitive, particularly with the largest 'mega banks' that differentiate themselves through tech," said Sarah Grotta, director of debit and alternative payments at Mercator Advisory Group. "Some smaller financial institutions will turn to fintechs to provide them with the attention and services they believe may be missing."
In an environment in which non-network payments are growing faster than network payments, merchants need to be able to sell globally and focus on a "universal acceptance" or risk client attrition, Peterson said. "The speed of change in the payments industry isn't just affecting processors. Now merchants can change payment processors much more easily with the use of APIs and inertia is less of a factor in selling payment processing that it used to be."
Rivals such as Stripe can provide processing similar to large competitors and can move quickly, Peterson said.
"Disruption from outside traditional processors will continue to be a challenge," Peterson said. "These new organizations need to figure out a way to respond quickly and effectively."