For FTV Capital, the future of payments is in the (digital) cards

When Chris Winship, partner of FTV Capital, paid $35 million in private equity funds for a slice of the digital gift card player Tango Card in May 2018, he did so with the expectation that he would quickly find a buyer.

It’s the equivalent of buying the Boardwalk property in the Monopoly board game when another player already owns the pairing property, Park Place, just to make money off their need to buy you out so they can start building hotels.

While Tango Card serves employers in the rewards and incentives industry, it is a purely digital gift card player that has a direct connection to the consumer so it can thrive in an increasingly mobile world. This is exactly the technology that Winship predicted that a physical gift card distribution giant would need to adapt to a growing market for digital gifting.

It echoes the strategy that prompted FTV and other investors to sell the digital gift card company CashStar to Blackhawk Network for $175 million in 2017, giving Blackhawk a significant boost to its digital gift card business.

“We know who the next generation of winners will be and are willing to invest in those emerging companies,” Winship said. While FTV Capital is not the first investor to purchase equity or place debt into Tango Card, it is the most recent and it has placed the majority funds raised by Tango. According to Crunchbase, a website that tracks capital raised by fintech startups, Tango Card has raised $54.8 million in six funding rounds.

The FTV Capital funding isn’t a straightforward $35 million equity investment. According to the SEC Form D filed, it’s a $16 million primary (cash) and a $19 million exchange. Scotty Greenburg, director of marketing of Tango Card, refused to explain what was exchanged.

Tango Card reported $17 million in revenues for 2017 to Inc. Magazine. Tango is using the funding from FTV to finalize its RewardsGenius platform for small employers, anticipating a formal rollout later this year.

FTV Capital has notched up several wins using the “buy what someone else needs" strategy. The companies which FTV invests in tend to fill technology holes or product gaps that larger organizations are unable to plug or slow to recognize how the industry is changing until it’s almost too late.

After CashStar, other examples include FTV’s investments in WePay, which Chase bought for $220 million so the bank could compete more nimbly with Square in the small business segment. Then there is CardConnect, which sold to First Data for $750 million to bring technology to payment systems that are integrated with ERP programs. Going back further, the list includes the Internet billing and statement provider Blue Gill Technologies, which sold to CheckFree (now Fiserv) in 1999 for $250 million.

“Chris has the Midas Touch for the financial institutions that have entrusted him with their money,” said Richard Crone, principal of Crone Consulting.

The other major company in the prepaid gift card industry is Blackhawk's rival InComm, which notably acquired American Express’ prepaid card operation in 2017. That purchase made InComm the program manager for existing Amex prepaid programs that included gift cards, business-to-business rewards, tax disbursements and reloadable cards.

InComm, which is owned by Warburg Pincus, recently announced that its president, Phil Graves, is retiring at the end of the year. Graves had just been promoted to the position less than three years ago. Stefan Happ will succeed Graves as president and report to Brooks Smith, chairman and CEO. Happ comes to InComm from American Express, where ran the prepaid business that later sold to InComm.

It would make sense for InComm to buy Tango Card to add its digital capabilities. When asked if InComm plans to make a bid for Tango Card, an InComm spokesperson said the company does not comment on corporate strategy.

The consumer gift market has experienced significant disruption in the last few years as it has been beset by two major trends. First is the challenge the industry has faced a slump as consumers have begun to purchase fewer gift cards in favor of using P2P services such as Zelle, Venmo and Square Cash through mobile phones.

So Tango has set its sights on a different audience. It pursues the employer rewards and incentive market, which it views as more lucrative than the consumer market, where people buy gift cards only for annual events such as birthdays and holidays. Corporate clients instead disburse funds on a monthly or quarterly basis, with those purchases built into annual HR salary budgets.

"In an enterprise, these rewards are earned, they are not gifts," said David Leeds, founder and CEO of Tango Card.

This means the right gift card platform should be digital and integrated with HR platforms. “Integrating with employee engagement platforms is critical to building us into the enterprise,” Leeds said. Tango Card has integrations with Qualtrics and Kudos, which allow the company to be the resident recognition reward provider.

And even in the consumer market, there is a trend to digital gifting over physical cards.

This is when the gift card is sent digitally so it can be spent through a phone or online via a computer. This digital transition over the last three to five years has caused the major gift card players to go on shopping spree to fill technology gaps and even consolidate. For example, First Data acquired digital players Gyft and Transaction Wireless to gain needed technology, and then merged its gift card operations with FleetCor in 2017. Blackhawk Network partnered with Apple Pay to make its cards available on iPhones and then acquired CashStar to give it stronger digital capabilities before being acquired by private equity firm, Silver Lake, for $3.5 billion this year.