By Adam T. Hark, Co-Founder, Preston Todd Advisors
A little background is in order. As a payments consultant, I’ve spent over a decade advising payments service providers on growth strategy and value creation. For many years, much of the growth and enhanced shareholder value was created inorganically through successfully executed horizontal acquisition strategies whereby payments service providers have acquired other payments service providers.
Roughly five years ago however, things changed. The strategy changed. The more forward looking payments processors and merchant acquirers went vertical by acquiring integrated POS and end-to-end business management solution platforms, and they’ve never looked back.
The commoditization of the credit/debit transaction has turned the payments industry on its proverbial head. The prodigious number of payments service providers offering the same product — transactional processing — has resulted in backbreaking margin compression, to the point where the traditional payments processor and acquirer model has become almost non-viable. Low margins and the inability to grow through successful penetration into specialized verticals has left the payments community seeking new value added products and services to lift margin, increase sales, enhance customer retention, and chart long term sustainable growth. And they found what they were looking for in ISV and VAR partners.
This convergence of payments processing and software technology has had profound implications for both industries, especially as it relates to enterprise value creation. For the payments processors and service providers, their future depends on this convergence; they need to access and embrace the ISV community for viability. For ISVs in particular, this convergence is much less of a need, and much more of a want, at least it should be with a better understanding of today’s market dynamics and how ISVs stand to benefit from this confluence of payments processing and software technology.
So it’s time to pull back the curtain and expose the payment industry's big secret as it relates to its relationship with its ISV and VAR partners: they need you. It’s not that the ISV community doesn’t benefit from the symbiosis of payments and software technology too, but ISVs seem to be under the impression that they need payments when in fact it’s the payments world that needs them.
Traditional payments processors and merchant acquirers are scrambling to change the perception of their platforms because the markets view companies that possess payments and technology much more favorably than companies that only process payments. More specifically, the markets assign a higher multiplier (valuation) to technology companies than they do to pure payments processing companies. Thus, payments companies which have acquired and successfully integrated ISV platforms are fetching higher valuations.
To better illustrate this phenomenon, look no further than a one-year comparison stock chart of Vantiv (NYSE: VNTV) vs. First Data (NYSE: FDC). The difference is stark. Vantiv, through its acquisitions of Mercury Payments and Litle & Company, both integrated technology platforms, is perceived as a technology company and payments processor. First Data is known only as a payments processor. Granted the stock comparison chart exhibits this point writ large, but it’s applicable on the smaller scale as well.
Here’s what’s really interesting though: this very same dynamic has lifted enterprise valuations for ISVs and VARs. How so? The cause and effect is a bit more nuanced, but I’ll provide a detailed breakdown in my next article.
Adam T. Hark is Co-Founder of Preston Todd Advisors. He is an industry leading strategic advisor with over a decade of consulting experience in payments, payments technology, and FinTech. Adam advises clients in M&A, growth strategy, exits, valuations, and provider contracts. Adam T. Hark can be reached at firstname.lastname@example.org or 617-340-8779.