Fiserv, First Data and the staggering fintech threat

The numbers behind Fiserv's deal to acquire First Data are huge, particularly considering each company's existing tonnage still makes consolidation the best play when faced with nimble fintechs and mobile startups.

Fiserv's $22 billion deal to acquire First Data creates a company of massive scale. First Data alone processed 6,000 transactions per second during the recent holiday season, and has 4,000 financial institution clients and 6 million merchant locations in 100 countries. It spends $1.5 billion a year on technology, and has the heft to partner with the likes of China's Alipay. Fiserv controls a third of the U.S. core banking market and has more than 12,000 clients, and the deal with First Data provides a doorway to the international markets where Fiserv had only dabbled strategically before.

Yet the number that's the biggest shadow over the market is probably $20 billion: the most recent valuation milestone for Stripe.

Fintechs like Stripe are forcing companies with longer-established histories such as Fiserv and First Data to spend billions to keep up. Quite often, this means consolidation — and the official end of any semblance of traditional merchant acquiring or payments hardware as a viable business model.

“The ISO model is dead. The reseller model is dead,” said Richard Crone, a payments consultant.

During a Wednesday morning conference call, Fiserv President and CEO Jeffery Yabuki praised First Data for becoming a diverse and scalable payments company, yet his words suggested that even it needs more scale and a larger umbrella. In the end, First Data’s the plug-in rather than the portal.

“First Data has historically had a reputation of ‘big-box tech,’ but it has technology like Clover,” said Yabuki, who added that he did not think the market “fully appreciated” all First Data has done. “First Data’s platform is advanced. It’s all cloud based and you don’t have to lug wires or cable around.”

First Data’s tech diversification began under KKR’s private equity ownership in 2007, and continued after First Data’s IPO in 2015. First Data's shares slid after that IPO on concerns it would have challenges keeping small businesses in the fold. The company’s earnings have been stronger in recent years, but it still carries about $17 billion of debt. (During the conference call, Yabuki assured investors First Data’s debt would not adversely impact the combined company.)

KKR's ownership and subsequent spinoff were designed to make First Data a buyer, and the company did make several deals. First Data acquired card-not-present payment company BluePay in 2017. It also spend $750 million to buy CardConnect to improve its ability to integrate with independent software vendors that sell innovation to merchants. Another acquisition, Acculynk, added P2P and e-commerce technology.

But over the past few years, investors have become increasingly drawn to merchant and e-commerce focused fintechs such as Stripe and Square, which compete directly with Clover as a point of sale and merchant technology portal. These fintechs have also moved into point of sale lending and merchant credit, placing more pressure to combine banking and merchant services for a one-stop shop.

“Private equity ownership really squeezed First Data’s development capabilities,” Crone said.

To encourage innovation at First Data and Fiserv, the combined company will invest $500 million in development over the next five years, focusing on digital integration, machine learning and advanced processing.

“Our hand just improved exponentially,” First Data CEO Frank Bisignano said during Wednesday's conference call, adding that the $500 million investment improves its pace of development. “Our ability to pivot and create is better through this combination."

Fiserv's strong core banking bench will add integration capabilities, and a way to counter the fintechs with a one-stop shop. One of the things Bisignano mentioned, Yabuki said, was, " 'How do I get access to the core platform? How do I get access into digital platforms?' "

These banks have merchant clients for business banking, placing Fiserv in a position to add Clover and other First Data technology to create a full suite of merchant products, financial services and payments.

"The big banks had been partners with First Data, though those relationships eroded over the years … Fiserv is making a strategic move toward banks and credit unions. It costs a lot, but it’s a survival move,” Crone said.

There are also risk and compliance issues that work against merchant acquiring as a standalone business, and potentially place traditional merchant acquirers at a disadvantage when pursuing AI-driven marketing.

Recent payment standards such as 3-D Secure 2.0, that will be deployed over the next two to eight years can be implemented more effectively if the deployment is implemented with a company that is connected with the issuer, acquirer and merchant, said Tim Sloane, vice president of payments innovation at Mercator Advisory Group.

“Visibility across these environments for collecting consumer data can feed machine learning tools that are better positioned to analyze identity, criminality, fraud, consumer behavior and loyalty,” Sloane said. “That data can then of course be used in myriad ways, the most commonly thought of being consumer incentive and cross-selling."