Philip W. Tomlinson
Partner Insights

TSYS Sees Opportunities in Mobile and Prepaid, But EMV Will Be Slow

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Executives at processor Total System Services can't predict which of the many existing mobile payments technologies will dominate the payments landscape of the future, but they plan to aggressively go after the processing business that follows.

"I don't know who is going to win in mobile payments, but we sure are going to benefit from it," said Dan Henry, CEO of TSYS' NetSpend prepaid card business, at the processor's May 13 analyst day in New York.

As more shopping takes place on e-commerce and mobile commerce sites, it will become much harder to live a cash-only lifestyle, he noted. "Ninety percent of commerce happens on the Internet today. As more and more commerce moves to the mobile phone, unless you get an account or you can move money electronically, you're going to be trapped out of that sector of the economy."

NetSpend also benefits from the growing number of companies getting into prepaid, because many of those companies learn quickly that they can't go it alone, Henry said. Western Union was once considered a competitor to NetSpend, but the company recently decided to let NetSpend take over its prepaid card program.

"There's been a lot of players coming into prepaid, and a lot of people learn that it's not so easy," Henry said. "There is a secret sauce" that NetSpend can provide.

Henry was joined by several other TSYS executives at the Columbus, Ga., company's analyst day in New York, which began the day after rival processor Vantiv announced a $1.6 billion deal to buy Mercury Payment Systems. In its announcement, Vantiv talked up Mercury's integrated payments model.

Integrated point of sale relationships "tend to be sticky," said Mark Pyke, president of TSYS Merchant Services. Merchants get better pricing because "it's not necessarily an acquiring decision but a POS software/hardware decision and acquiring is part of that package when they make that decision," he said.

TSYS is investing in this model, Pyke said, but TSYS was not a suitor for Mercury.

"We quite frankly were not in on that transaction. We thought they were going public," Pyke said. "We like the business model, for sure."

EMV is another facet of the market where TSYS sees opportunity. There is a lot more consumer awareness of EMV-chip card technology in the wake of the massive Target data breach and other recent security incidents, said Philip W. Tomlinson, TSYS' chairman and CEO.

But that hasn't yet translated to a surge of issuers demanding EMV technology, which improves security over mag-stripe cards by making them harder to counterfeit.

Six months ago, TSYS had four issuers signed up for EMV. Today, it has 18. Most banks are waiting for merchants to respond to consumer demand and put in EMV terminals, Tomlinson said.

"It's a chicken-and-egg thing," he said. "The merchant community is going to have to put the terminals out that are chip-enabled … it's not going to happen overnight."

EMV terminals will take another two to five years to become widespread in the U.S., Tomlinson predicts. TSYS has experience with EMV in Canada and Europe.

TSYS is aggressively moving to diversify its business lines so that it is not vulnerable to any particular market. In 2013, 41% of its revenue came from North American issuers; ten years ago, it was 91%. The remainder today comes from international issuers, its merchant business and NetSpend.

Its indirect acquiring business serves a shrinking market, Pyke said. But TSYS remains committed because the margins are strong and its work in this segment fuels its direct acquiring business.

TSYS has acquired a number of its customers in the indirect market, and those clients have been good M&A targets because their merchants already use TSYS technology, Pyke said. This removes a lot of the integration hassle that would normally follow, he said.

That said, many clients in its indirect business are competitors who do business with TSYS out of necessity, such as requiring TSYS' point of sale certifications, Pyke said. "About … 25% of the revenue from indirect clients are actually from competitors, so it is not like they are dying to do more business with us."

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