Fifth Third Processing Solutions LLC is executing on its strategy to establish itself in the small and midsize merchant market in a big way.
The Cincinnati processor's deal to buy National Processing Co., announced Wednesday, would not add a lot of dollar volume but would expand Fifth Third's merchant roster, providing it with new cross-selling opportunities.
NPC has about 242,000 merchant relationships. Fifth Third Processing counts about 180,000 locations, mostly at large, national merchants.
The combined operation would process about $344 billion in annual payments volume.
"We can leverage our single platform on our back end and front end to bring more products to those clients," Charles Drucker, the president and chief executive of Fifth Third Processing, said in an interview after the announcement of the deal, which is to close in November.
"Their distribution channel was very complementary to us," Drucker said. It gives Fifth Third Processing an independent sales organization channel through which to sell services, he said.
Going after small and midsize merchants also makes sense economically considering the ability to price higher.
"Given NPC's position as one of the largest U.S. merchant processors dedicated solely to the small and medium enterprise segment, we see the proposed deal as a strong sign that [Fifth Third Processing] aims to compete aggressively in SME, where merchant relationships are generally more profitable," John Williams, an analyst with Goldman Sachs & Co., said in a research note Thursday.
Williams said the deal could be "a negative" for Global Payments Inc., Heartland Payment Systems Inc. and Total System Services Inc., which "sit in the crosshairs of any" Fifth Third-NPC push in the SME market.
John Maldonado, a principal with the private-equity firm Advent International Corp., which bought a 51% stake in Fifth Third Processing from Fifth Third Bancorp in 2009, said, "there is a larger profit pool available to merchant acquirers focused on the SME space relative to the larger merchant space."
Fifth Third Processing is buying NPC from the Chicago private-equity firm GTCR Golder Rauner LLC.
Fifth Third Processing and its owners are not in a rush to do more buyout deals. "There have been a number of businesses that have been in the market in the last year and are coming to market for a variety of reasons," Maldonado said. "We have the luxury of being a selective buyer. We are typically looking to buy capabilities, products and distribution channels that bolster and supplement what Fifth Third already has today."
Adil Moussa, an analyst with Aite Group, said he expects consolidation in the merchant acquiring and processing sector to cut costs and increase sales. "It's all about scale," Moussa said. "You have to maximize the output of the platform."
Fifth Third plans to cross-sell to NPC's agent banks and sell NPC services to its own customers, Maldonado said.
"This acquisition of NPC for the first time gives us the toll to sell merchant acquiring to the customer base that Fifth Third already has" on the financial institution and electronic funds transfer side of the business, he said. "We, in coming into the investment, viewed it as something that was better bought than built from a time-to-market perspective as well as a cost-to-build perspective. We'll be able to begin thinking about cross-selling to those FI customers at Fifth Third almost immediately."