Tag Archives: financial information

Payments 2012: Hindsight to Insight

16 Mar

Payments 2012: Hindsight to Insight

In terms of mergers & acquisitions (M&A), the payments (PMT) industry[1] is very active right now. These are exciting times for potential buyers and sellers. Deal values have risen, the number of transactions completed has increased, and most importantly, revenue and EBITDA multiples have fully recovered from the downturn in 2009. Large corporate acquirers, well aware of the industry’s changing landscape, are looking to acquire innovative and successful firms.

Berkery Noyes & Company LLC (BNC) has been closely tracking the PMT industry over the past three years. From 2008 to 2011, BNC recorded 242 M&A transactions. Compared with 2009, the number of transactions in 2011 and 2010 were up 38% and 73%, respectively.  VeriFone, the most active PMT acquirer during this timeframe, completed eight transactions.

The total value of these 242 PMT deals was $29.92 billion. Relative to 2009, transaction value in 2010 and 2011 improved 167% and 267%, respectively.  Advent International Corporation was the largest acquirer by value, paying $5.04 billion. The buyout firm acquired Card Systems and Identity Divisions from Oberthur Technologies, Prepaid Platform from Springbok Services, National Processing Company, RBS WorldPay, and Payment Processing Unit from Fifth Third Bancorp.

Transactions valued between $150 and $500 million (mid market) received the greatest median EBITDA multiple, which was 15.5x. Transactions valued less than $150 million (small-cap market) and greater than $500 million (large cap market) received lower median EBITDA multiples: 8.3x and 12.5x respectively.

In contrast to 2009, median EBITDA multiples in 2010 and 2011 were up 51%. Median revenue multiples in 2010 and 2011 were up 80% and 86% from 2009, respectively.  In addition, Private Equity buyers completed 14% of all transactions yet paid the highest per transaction value.

M&A activity continued at a robust level in 2011. The most active acquirers by volume were Fiserv with three transactions and VeriFone with four. Fiserv purchased Maverick Network Solutions, CashEdge and Mobile Commerce. VeriFone purchased Point Transaction Systems AB, Global Bay Mobile Technologies, Destiny Electronic Commerce Pty, and Point of Sale Solutions Business from Gemalto.

Total transaction value for 2011 was $11.26 billion, an increase of 19% from 2010. Barclays PLC completed the largest PMT transaction for the year when it purchased select assets from Egg Credit Card Unit, a subsidiary of CitiGroup, for $3.20 billion.

Upon further inspection, the top ten M&A transactions had a combined value of $8.86 billion, which comprised 79% of all completed M&A transactions in the space. Although the top ten deals encompassed 79% of the total completed M&A transactions in terms of value, the small-cap market constituted 89% of the total transaction volume.

 

Value Drivers

The discussion so far has centered on transaction values and valuations from an aggregate perspective. From a decentralized viewpoint, individual players in the PMT industry who are commanding high values tend to possess one or more of the following characteristics: (1) the “Dictator Effect;” (2) “Simultaneous Demand;” (3) “Product Extension into Underserved Niche Markets;” and (4) “Leverage Established Infrastructure.”

The “Dictator Effect” is achieved when participants control wide bands of infrastructure and markets. A player must have the power to dictate standards and payment types. For example, large incumbent participants who controlled railway system access, banks and mobile firms in Japan successfully launched and established the Suica market standard for public transportation payments. In this particular case, the large incumbents controlled all three of those components.

“Simultaneous Demand” refers to a participant who offers an option that fully satisfies the demands of both consumers and merchants. Consumers are reluctant to adopt new technologies if the value for them is unclear. For instance, the benefits of a contactless card may be clear for issuers, networks and merchants,  but its advantages over swipe cards is marginal and hardly sufficient to induce the most crucial change, a shift in a consumer’s purchasing behavior. On the other hand, a value added payment model, such as that provided by Starbucks, allows customers to pay with a registered prepaid card through a mobile application. The consumer is rewarded with free drinks, add-ons and promotions.

Product extension into underserved niche markets is often a major source of value growth.  Currently, Square is a provider of mobile Point of Sale (POS) acceptance equipment, which is providing simple and cost effective solutions that meet the demands of the rapidly growing mobile vertical of the PMT industry. Meanwhile, online social networks such as Facebook and Zynga are driving innovation through multiple payment offerings. These include virtual currency, credit and debit payments, social network currency, pay by mobile and prepaid gaming cards.

Leverage established Infrastructure due to the high fixed costs of building a scalable, secure and convenient payment infrastructure. The majority of successful payment providers have therefore chosen not to build new infrastructure systems, but rather leverage ones already in existence. For example, instead of competing against banks, Alipay partners with them for clearing and settlement as a means of running a large payment platform that processes cross-border online transactions.

New payment offerings rarely succeed, which proves a better method of paying does not guarantee success.  Looking back on the dot-com bust, fewer than 400 payment start ups came and went.  It should therefore not come as a surprise that many essential factors are often overlooked. Companies with the highest values tend to demonstrate at least one of the four qualifying features discussed above.

What the Future Holds: 5 Key Insights

Mobile PMT (M-PMT)

There are several important, nascent trends shaping the industry.  For instance, mobile payments (M-PMT), demand in emerging markets, strategic partnerships and regulations are heavily influencing valuations and growth projections.

Mobile payment transactions are considered to be at a tipping point. According to IE Market Research, the global volume of M-PMT’s is expected to grow from $37.4 billion in 2009 to over $1.13 trillion in 2014, a compound annual growth rate (CAGR) of 94.8%. In addition, the number of mobile payment users worldwide is expected to increase 38.2% from 2010, surpassing 141 million in 2011 (2.1% of all mobile users worldwide), and reach 1 billion by 2014. The low percentage of users of M-PMT’s relative to the amount of mobile device users shows the rapid potential for growth.

Success in Established & Emerging Markets

There are significant differences between developed and emerging markets pertaining to regulation, technology standards, and consumer demands based on the relevance of existing payment models. Success is attained when new players within an emerging or established market modify their business models to reflect marketplace differences. For example, in the case of mobile payments, smart phone technology is being used in developed markets while emerging markets are focusing on SMS-based technology to fulfill very basic payment needs that were once unattainable due to a nonexistent payment model.

New Entrants and Strategic Partnerships

The development of M-PMT’s has altered the actions of key stake holders, a category that includes mobile network operators (MNO’s), handset manufacturers (OEMs), technology providers, and power players such as Google and Apple. There has been an emergence of strategic partnerships shaping the industry’s future. ISIS’ payment network consists of MNO’s like Verizon, AT&T and T-Mobile, as well as electronic payment networks such as Visa, Mastercard, Amex and Discover. Another example is Google Wallet, a strategic partnership of Mastercard, Citi, FirstData, and Samsung.

Regulation

Merchants have expressed concern over the rising cost of swipe fees that the Federal Reserve enacted under the Durbin Amendment, a provision of Dodd-Frank that went into effect on October 1st, 2011. Regulation II regulates interchange transaction fees, giving banks and electronic-payment networks such as Visa and Mastercard the power to determine the cost of swipe fees and rules for payment card transactions. Due to Dodd-Frank’s costly regulations, a new signature payment network will most likely emerge that would be cheaper for merchants to accept payments. The new network will develop from the rising demand within mobile payments. Past history shows that an alternative network will replace existing networks if the former provides similar or better services, as with email versus traditional mail and mobile phones versus landlines.

Lower Cost Service Providers will Win

Despite lingering economic uncertainty, there appear to be several signs of an upturn in consumer confidence and spending in the United States. Nonetheless, there is a high likelihood that consumers will move away from high-cost banking payment services to lower cost ones. Consumers and merchants will adjust their financial behavior and use of credit in response to industry events such as mobile payment alternatives and rising service fees. To circumvent higher fees, many consumers and merchants will seek new providers, or in some cases shun traditional banks altogether. According to an unidentified business source, “for business to business transactions of $5,000 or less, PayPal was a better option than a bank. The payment was faster, the cost was less, and was more convenient.”

It appears as though the PMT industry will remain exceedingly active in the near-term. This predicted level of activity is based primarily on the continuation of growth in mobile platforms, and by the integration of mobile with online and traditional landline offerings. The participants that meet the aforementioned drivers of demand will be the long-term PMT winners. Berkery Noyes & Company LLC believes the robust level of M&A activity and strong valuations for PMT companies looking to buy or sell will continue over the next 24-48 months.  

For more information on exit and growth strategies pertaining directly to your company, please contact Christopher Young at Christopher.Young@berkerynoyes.com or via phone at 212-668-3022.

Christopher Young is a Managing Director in Berkery Noyes’ Financial Technology and Information Group. He earned his MBA and Ph.D. from Rutgers University.

Justin Sheerin is a Market Research Analyst at Berkery Noyes and assisted with the compilation of this white paper.

[1] BNC defines the payments industry as payment processors, which includes credit and debit card networks, money transfer firms and prepaid card service providers, financial institutions, merchants, acceptance locations, mobile network operators (MNO’s), handset manufacturers (OEMs), technology providers, and consumers.

Kroll Ratings – A new disruptive entrant?

21 Jan

 

As I have been arguing over the past 6 months, the oligopoly of the credit ratings agencies will probably not be sustained in the long term.  Today, we have a new and welcomed competitor, Kroll Bond Ratings Agency Inc.  Founded by Jules Kroll, who has a background in corporate investigations, Kroll expects to dig deeper in credit ratings, moving beyond issuer information.  Kroll expects to lever his son’s security firm K2 Global to assist in uncovering anomalies or areas of risk that lie off the balance sheet.  Kroll is not a new company but rather the business evolution of Lace Ratings, which the company acquired in the summer 2010.

Over the past few months we have seen one new entrant and two acquisitions in the ratings marketplace:

New entrant: Meredith Whitney’s Advisory Group

Acquisitions: Morningstar acquisition of RealPoint LLC and Kroll’s acquisition of Lace Ratings.

These seem like three moves in an industry that is ripe for change, both organizationally and technologically.  The anticipation is that change will continue to happen, with ratings agencies acquiring more analytically sound and advanced mathematical ratings capabilities and many of the investor research firms which have such capabilities moving into the ratings agencies marketplace.

It seems like the only barrier to entry standing in the way of new product innovation  is related to the selection process for a new Nationally Recognized Statistical Rating Organization. Today, the SEC provides unclear information related to the application and selection process.  Once the SEC gets out of its own way and clears the path for more competition, we should feel confident that this marketplace will erupt in many different areas, creating quantitative qualitative, industry specific and many other different types of ratings.

Only time will tell but the trend is showing a positive move in the right direction.

Articles of Interest:

http://professional.wsj.com/article/SB10001424052748703951704576091683201498122.html?mg=reno-secaucus-wsj

http://www.bloomberg.com/news/2010-12-08/credit-ratings-can-t-claim-free-speech-in-law-bringing-risks-to-companies.html

http://professional.wsj.com/article/TPPRN0000020110119e71j004so.html

http://corporate.morningstar.com/us/asp/subject.aspx?xmlfile=174.xml&filter=PR4482

The End of the Market Data Desktop (Part 2)

1 Jul

Last week I wrote “The End of the Market Data Desktop”.  Since that posting I received more than a handful of emails from friends, colleagues and clients telling me that I am crazy and that there is no way that financial professionals can do without market data, analytical tools, dashboards, streaming quotes, etc…

I Feel the Need

Let me first say that I was referring mainly to retail broker dealers and wealth management professionals in my post and I was definitely not making reference to institutional brokers/ traders, algo / black box guys, or any other financial professional that takes security positions or makes markets at the smallest fraction of a percent.  The reason for my posting was mainly to say that wealth management professionals need new tools that help them build deeper relationships with their clients as they continue to offset the analytical work to their portfolio managers.

I think there is tremendous upside in building next generation relationship tools for the wealth management professional.  Rather than security dashboards and scrolling news, perhaps it makes sense to have a dashboard aggregating everything about a client.  Does it make sense in this social media world to aggregate items such as Facebook and or LinkedIn updates, changes in credit ratings, money in motion events, news about the client, their portfolio or their interests, twitter posts, blog updates, etc…? After all isn’t sales knowing about your client and understanding their needs?

The second part of my posting was related to communication tools.  How does a wealth manager communicate with their client regularly? Few do the obvious – talk.  In the age of social media perhaps wealth managers can do better by having a communication platform that allows instant communication in a one-to-many platform, all wrapped around a compliant rich framework.  How great would it be if wealth managers were able to Tweet, update LinkedIn, Facebook, their blog, their website all with a single platform?  What about knowing how many of their clients are reading their weekly or monthly newsletter or perhaps worse, those who do not.  Social media is opening a new world for sell-side financial professionals and financial technology firms need to address these needs if they want to maintain their market share of the wealth manager desktop.

– Need for Speed

I thought that while I am at it, perhaps it makes sense to address the trading needs of the wealth management professional, particularly those who service the Family Office and Ultra-High Net Worth individual.

Yesterday, Scott Patterson of the Wall Street Journal wrote an insightful article “Fast Traders Face Off with Big Investors Over ‘Gaming’”.  In this article Patterson recognized that high-frequency traders who tend to trade on algorithmic triggers are front running traditional traders, those who are not using algorithmic models and who are not dialed in directly with the exchanges.  So, this brings me to the second part of observation.

Today, low latency trading systems are typically used by the buyside investment management firms and or hedge funds and are not used by traditional traders or portfolio managers who tend to support wealth management practices — atleast not the smaller shops. So my speculation is that at some point low latency trading systems will have to be built and or purchased from technology firms who support retail brokerages and wealth managers.  I would imagine that at some point wealth management firms will be fed up with the idea of losing out to algo traders who are making a killing on very small movements in spreads and execution timing differences.  Are we getting closer to the time when LPL, RayJay, TD, RBC, Pershing and others offer ultra low latency execution?

Overall it seems as though the wealth management technology vendors will continue to go through major changes – with one change coming in the form of building relationship tools and other ensuring that their back end trading and execution systems are more closely competitive with those systems supported by ultra low latency execution.

There Is No Value In Yep

16 Jun

Most recently I have become overly sensitive to the manner in which customer service professionals communicate with their customers.  I am defining customer service professionals as those who interact with clients in any capacity, albeit over the phone, in person, the virtual world via email, blogs, social networking, webcasts, etc… This can be sales and marketing folks, technical support, training groups and the like.

I think my heightened sensitivity in this area started most recently when I entered and exited a new club that I joined.  I remember the first day the club opened and I said “Good Morning” to the nice girl working the front desk.  I looked at her name tag and noticed her name was Mary.  She took my card without acknowledging my presence and said “Sorry, the air conditioning is not working today”.  Not thinking about it at the time, I entered the club and did my thing.  As I was leaving the club that morning, I said “have a nice day Mary” and she responded, “Yep” – an awkward response.  The next day the same thing occurred, this time with Janice. She used the word Yep as well.

Then it happened, Wednesday morning Roberta was at the front desk. I did my usual. I looked at her name tag and said, “Good Morning Roberta”.  She pleasantly responded, “Good Morning Chris”. What did Roberta do differently? She simply looked at the computer screen in front of her and looked up my name, it took about 2 seconds.  As I exited the club that morning, Roberta said, “Chris how was the club today, everything working?” We exchanged some nice words and then she said, “Chris, have a wonderful day, hopefully I will see you tomorrow”.

Although this interaction was a minor part of my overall experience at the club and by itself would probably not make me cancel my membership, it did show me how the simple things related to customer service are very important.  I would not cancel because of this, but I can guarantee you, that if all of the workers were as nice as Roberta, I would become a big advocate recommending this club to all of my colleagues.

So how does this relate to financial information and technology companies and or the overall marketplace? Simply this, many (probably most) financial information and technology companies put all of their attention into their ‘hard values’, such as their technology but spend little time on the ‘soft values’, such as customer service.

Years ago, when I was working for a large financial information and technology company we did some really interesting competitive analysis and we recognized that one company above all of our competitors was exceptional at customer service. FactSet, the market data and analytics company was an industry leader in customer service and still are today.  FactSet provided the best of class training with experienced and kind staff.  This experience permeated the client relationship and because of this FactSet very rarely lost a customer.  Sure, their technology and information was fine and probably on par with some of the other providers, but because of their attention to the soft values, FactSet gained substantial market share.

Perhaps a good way to think about value is to bifurcate it into soft and hard values. Similar to the way Joseph Nye defines hard and soft power in international relations, conceivably hard and soft values are nothing more than assets of a company that provide it with the capabilities to entice buyers.  This translates into stronger cash flow, thus increasing shareholder value.

Financial Information and Technology companies, more so that many others sectors of market should consider enhancing its soft values.  When you compete with best of class customer service and great soft values, price competition becomes less of a factor.  Ensure that your staff are not “Yep” people, but rather those who engage with the kindest of words, such as “Please”, “Thank You”, “Your Welcome”. These simple words can permeate the entire organization and can be a substantial differentiator in your value proposition.  You may not lose customers because of average customer service and soft values but you can be certain you will not win any either.

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