The need for scale, continuous investment as well as constraints on capital are pushing banks to reconsider whether they need to keep their merchant services divisions in house, or allow a non-bank player to step in.

Merchant acquiring is transforming, and in the process is becoming less dominated by banks. In an industry that needs scale and continuous investment, selling off the merchant acquiring division is increasingly becoming an option for banks. 

Similar to the evolution of the payment networks Visa and MasterCard, merchant acquirers are changing their relationship with the banks, and are challenged by the rapid development of alternative payments. 

“When you walk into a retailer and pay for something, or buy something on the internet, everything that is related to that transaction is driven by the acquirer,” says Ron Kalifa, CEO of the card processing business WorldPay. “At the simplest level, we capture, authorise, process and settle transactions.”

Deal or no deal? 

The role of the acquirer is perhaps only noticeable to consumers when things go wrong. But to banks, acquiring divisions are noticeable for the investment they need, especially at a time when there are competing demands on banks’ capital. Banks are having to decide whether to keep the acquirer in house, or allow a non-bank player to come in. 

The UK market has been witnessing this trend, and two major acquiring banks – HSBC and Royal Bank of Scotland (RBS) – have sold off their merchant services divisions.

Chris Davies, managing director at HSBC Merchant Services, explains that the business was formerly the in-house acquiring division at HSBC in the UK. He explains that the systems were out of date and required significant ongoing investment to ensure that the company remained competitive in the market. The bank decided the division was non-core and so entered into a joint venture with US-based processor of credit and debit card transactions Global Payments in 2008. At that time, Global Payments took a 51% stake, and the remainder was sold in 2009. Mr Davies says that there is a contractual agreement in place for HSBC to refer all its merchant customers to Global Payments for their acquiring services. 

When you walk into a retailer and pay for something, or buy something on the internet, everything that is related to that transaction is driven by the acquirer. At the simplest level, we capture, authorise, process and settle transactions

Ron Kalifa

Although HSBC has no shareholding in the business, the operation is currently dual branded. However, the HSBC branding is being phased out and will be totally replaced by Global Payments in 2013. “Like a teenager growing up, we have to stand on our own two feet,” says Mr Davies. 

WorldPay similarly became separated from its bank parent, RBS, when it was sold in 2010 to private equity firms Advent International and Bain Capital, a transaction that was likened at the time to the selling of the family silver. Although it did retain a minority stake, RBS was forced to sell this asset as part of the European Commission’s conditions of allowing the bank to receive state aid. 

Adapting to the landscape

Now that WorldPay is independent from RBS, it can be more nimble in adapting to the changing payments landscape. It has acquired CardSave, an independent sales organisation that signs up merchants to accept electronic payments, and in May 2011, WorldPay acquired Envoy Services, which gives the acquirer more opportunities in alternative payments. 

Aside from investing in the acquisitions and its technology platform, WorldPay has also invested in its staff, and Mr Kalifa estimates that 65% of the senior leadership team of about 60 have joined the organisation since WorldPay was spun off. 

“We are now a very different organisation,” says Mr Kalifa of the changes at WorldPay since the RBS transaction. “We are more responsive and have a faster time to market,” he says, adding that margins have also improved as WorldPay operates more efficiently. 

Although RBS’s sale of WorldPay was a consequence of the bank’s part-nationalisation, the divestiture does fall in line with a trend that is happening elsewhere in the industry. “Our situation was slightly different as we were required to sell,” says Kevin Brown, RBS’s head of global product management. Pointing to the broader trends in the industry, Mr Brown gives the example of Fifth Third Bancorp. The bank’s acquiring division, Fifth Third Processing Solutions, sold a 51% stake to private equity firm Advent International in a joint venture that was announced in March 2009. The division was later rebranded as Vantiv – thus removing the association with Fifth Third Bancorp – which then became a publicly traded company in March 2012. 

Elsewhere, there are other examples of banks changing their ownership structures of their acquiring and card processing divisions. For example, in November 2010, the acquiring division of Spanish bank La Caixa entered into a joint venture with Global Payments, in which the US-based company acquired a 51% stake. 

Size matters

One acquirer that has bucked the trend and continues to do its acquiring in house is Barclaycard. Eduardo Vergara, Barclaycard’s managing director of global business solutions – the division that oversees the acquiring – says that scale is necessary and Barclaycard has achieved this as the second largest acquirer in Europe. 

On the question of why Barclaycard has kept its acquiring in house, rather than follow the trend of other banks, Mr Vergara says: “Barclaycard Global Payment Acceptance is an important part of Barclaycard. It’s a world-class business and it plays an important part in helping Barclaycard provide a full range of payment services to our customers. It is a business division that we have invested heavily in and we are well positioned to benefit from growth in the payments market.”  

Another acquirer that has been focused on building scale in Europe is Elavon Merchant Services, which does not operate as a division of a bank. “Our relationship with our customers is with payments, and payments only,” says Guy Harris, managing director of western, central and southern Europe for Elavon. This relationship can be directly with the merchant or through a partnership with a bank. As a global acquirer, Elavon can offer a single relationship for multinational retailers, for example, across multiple countries in Europe.

Increased competitiveness

Cross-border acquiring has, in theory, been made easier because of the standardisation of payments with the introduction of the Single Euro Payments Area. And under Europe’s payment services directive, non-banks are able to compete in the industry as they can be regulated as ‘payments institutions’. 

Cash Flows, part of payments company Voice Commerce Group, is an example of such a non-bank payments institution in this space. Nick Ogden, founder and CEO of Voice Commerce Group, explains that the merchant bank account has traditionally functioned as a postbox into which the card payments’ funds are sent. And the merchant would typically have multiple bank accounts for other purposes. 

Cash Flows allows businesses to use the same account to make other payments, such as paying their bills, paying overseas suppliers or making their salary payments. Mr Ogden says that many cannot believe that Cash Flows is not a bank, even though it performs many of the functions that merchants would expect of their bank. “The benefit that we have got is that in Europe we are able to build new business models,” says Mr Ogden, who is also the founder of WorldPay.

It would perhaps be going too far to suggest the regulations in Europe have allowed Mr Ogden to launch his latest venture. 

“The UK is one of the most sophisticated payments markets, not just in Europe, but globally, and is evolving rapidly with new entrants and technologies emerging all the time,” says Mr Vergara at Barclaycard. 

Mr Kalifa says: “I do not think the regulatory environment is driving innovation. Increasingly, innovation is being led by organisations to drive efficiencies and to respond to demands from customers.” Mr Harris at Elavon agrees, and points to examples of innovation beyond Europe, such as Square in the US, which allows small merchants, such as plumbers or market-stall owners, to accept payments with a card reader that attaches to their smartphone. “It is an acquiring opportunity or threat, depending on how you treat it,” says Mr Harris. Players such as Square still need an acquirer to sit behind and process the transactions. “You have got to embrace all the change and the competitors,” he says. 

On the question of whether acquiring will no longer be the mainstay of banks, Mr Brown argues that RBS has a strong relationship with the acquirer. “We believe this remains a strong part of our proposition to our clients,” he says, adding that the difference now is that the service is offered by WorldPay rather than done in house by RBS. “This is a market that is continuing to develop and innovate,” he adds.

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