Fiserv acquiring First Data Corporation is a huge deal in the fintech world. This deal impacts not just the payments space but the whole financial services ecosystem, and the implications will take a while to unpack. In the meantime, and with an expected closing later in the year, our initial reactions:
Follow the money. Twenty-two billion dollars is a monster-size deal, but at 2X First Data’s annual revenue, the price is a way lower revenue multiple than the growth-oriented digital mashups lining up in the market. There are new capabilities here for Fiserv (like merchant acquiring), but it’s $900 million in cost saves versus $500 million in expected revenue synergies.
Even while $500 million in new expected investments over five years is a LOT of coin, this is really a roll-up with diversification. This deal is very typical of the buy/integrate approach we have seen from Fiserv: Buy a strong revenue stream and reduce expenses. It’s also a reality check that what Fiserv is largely known for – core and core ancillaries – is just not where the growth is. Look at what happened to check processing and will happen to bill pay. The story is to combine and consolidate the mature to free up more for the new. Whether you are a community bank or a fintech provider, that makes sense. The deal isn’t done yet, so maybe it’s a little early for a congrats, but the numbers make sense on the surface.
Diversification versus Concentration. Taken in total with the recent Elan acquisition and the lending spin-off with Warburg Pincus to what became Sagent Lending Technologies, Fiserv may be diversifying within payments on the First Data deal, but at the same time, it’s getting more concentrated in payments as a part of its overall mix. Revenue diversification moves are rarely about the customer first and foremost, but it is fair to ask what the impact will be on Fiserv’s core banking client base.
In the short term, it’s hard to see why this acquisition makes things better for Fiserv’s core banking clients. Even if banks and credit unions could end up on a better, more consolidated platform, it will be years before it happens. The largest chunk of the acquisition, the merchant acquiring side, won’t affect them at all. Yet, this diversification gets Fiserv into more of the business/merchant side of payments. So many of Fiserv’s core clients are commercial community banks, and those banks (as well as credit unions getting into business services) need increasingly more help with business payments. Maybe some of those First Data experiences will help.
Ecosystem and Resellers Impact. The payments reseller market has already been under pressure (case in point, the FIS acquisition of reseller CSCU), and it is going to get even more interesting with several ecosystem implications from this deal. In the very short term, it’s hard to see any big negative, but down the road it could be a different story. It’s that weird competitor-who-is-a-client-or-reseller game, which just got harder to track without help sheets. CO-OP, Jack Henry, PSCU and Worldpay are all First Data resellers. How will the Jack Henry/PSCU relationship be impacted in the future? Perhaps the economics of this deal change the industry a little?
GonzoBankers out there who have leveraged resellers know that it’s not just about the impact of acquisitions on their contracts, but also about a vendor’s overall reliance on certain types of pass-through revenue versus its own intellectual property and services. How do my providers make money and stay stable and how is that changing? Does the vendor risk profile of some providers change? Will their ability to perform well and be cost-competitive change?
Beyond Payments into Digital. Cornerstone Advisors Managing Director Jim Burson pointed out that while small relative to its payments revenue, in 2018 First Data partnered with Live Oak Bancshares to establish the Apiture Digital Banking offering. With a new UI/UX in Apiture, coupled with the established online banking and payments capabilities of the legacy First Data digital solution, some were expecting that Apiture would see increasing momentum in the digital banking market. With Fiserv’s acquisition of First Data, Apiture would be a direct competitor to the Architect and Retail Online Banking solutions already offered by Fiserv. No matter how you read the tea leaves on that, there are potential implications for Architect and Apiture.
Biggest deal announced this year. So far. But it’s only a few weeks in, GonzoBankers. So, put the coffee on. It’s just getting started.
Thanks to Ron Shevlin, Jim Burson, Ryan Rackley and Terence Roche for their input to this article.