If Bank of America had decided a few years ago to discontinue its joint venture with First Data, it would have been looked upon as just another instance in which a bank was either planning to handle its own payments in-house, or turning those tasks over to a processor.
But this week's announcement that the Banc of America Merchant Services venture — created between BofA and First Data —
That news came the same day that Fiserv closed its $22 billion purchase of First Data. With other sizable mergers closing in the same time frame, the BofA decision to drop First Data sends a more profound message — that banks are giving much more thought to their role in payments, and whether they want to empower a large vendor that they may someday view as a competitor.
Of course, big partnerships don't dissolve in a single day. First Data will continue to deliver products and services to BofA until at least 2023, and BofA's move isn't likely to trigger an avalanche of client banks backing away from third-party processors.
FIS officially closed its $35 billion acquisition of Worldpay on Wednesday, and the $21.5 billion Global Payments-TSYS merger is expected to close in the fourth quarter of 2019. In summing up the FIS-Worldpay deal, executives stressed the combination enhances the acquiring and payments services that clients value.
Such a development would seem to bode well for banks, but the decision to take certain payment tasks in-house is also a response to the disruption posed by non-bank processors like Square, Stripe, Adyen and PayPal.
After periods in which banks were "hot and cold" about how to handle their merchant acquiring business, some "are coming around to the view that payments are fundamental to banking and can be a terrific source of fee income and a nice complement to interest charges off credit portfolios," said Eric Grover, payments industry consultant at Minden, Nev.-based Intrepid Ventures.
"Payments are definitely a way to enhance commercial and consumer relationships," Grover added. "When the banks watch the enormous value creation of non-bank payment networks and processors, they start thinking that if they owned those activities and do some of the things others are doing, they could reap that valuation."
Fiserv did not elaborate on the reasons behind the end of the joint venture, but said it is looking forward to "continuing our longstanding relationship with Bank of America, supporting its global merchant and payments solutions and affirming our commitment to clients."
For its part, Banc of America Merchant Services stated its commitment to continue "conducting business as usual" in delivering payments, e-commerce and security solutions to its clients.
"It's fair to say that Bank of America has been reinventing itself in the past few years, and looking to play a more direct role in the financial lives of its customers — both consumers and merchants," said Steve Mott, principal of BetterBuyDesign, a Stamford, Conn.-based consulting firm. "To that end, it appears to have been hiring software developers to build out a more modern and differentiated front end for a number of retail verticals, independent of First Data."
It's potentially a win-win for everyone, as it is not likely that Bank of America will want to "unplug" from First Data's back-end services of authorization, clearing and settlement anytime soon, Mott added.
The sunset of the Banc of America Merchant Services venture was not a surprise. There had been speculation that the merchant services business would gain independence when BofA recruited Guy Harris, president of North America operations for Elavon, four months ago to help bolster merchant acquiring and enterprise payments.
JPMorgan Chase made its big move in 2008 in determining it could handle all aspects of payments from card issuing to merchant processing through the creation of Chase Paymentech. A key step in that process was ending First Data's role in what had been a joint venture.
Citi handles its own card issuing and processing, but uses First Data for retail cards. U.S. Bank, Discover and American Express process payments in-house, while Capital One uses TSYS and Wells Fargo uses First Data for processing.
BofA, meanwhile, has shown a willingness to go it alone when it can — only to go back to a vendor when that vendor's capabilities grow more capable than its own. A prime example is when BofA chose to bring its U.S. consumer credit card portfolio in-house after its 2006 purchase of MBNA. This ended a sizeable contract with TSYS, which reported 8.7% of its 2005 revenue came from its BofA relationship.
Six years later,
The bank also has to deal with its own vision and goals for what it wants to accomplish in merchant acquiring.
"Bank of America always had mixed feelings about the Banc of America Merchant Services, and maybe they felt the merchant acquiring process was maybe a distraction before," Grover said. "But times are good now and they are thinking about what they can do to bolster their story."
It also boils down to a simple business case for BofA, Grover said.
"Payments may not be sexy, but Bank of America understands it and have long had a role in payments," Grover said. "You can make a pretty good case that First Data has been a slow growth performer and, in terms of enhancing Bank of America, maybe it was time for each company to take care of their own thing."
