Quick Thoughts – With Mercury Acquisition and Partnership with MSFT, VNTV Provides Critical Payments Capability to Next-Generation Retailer POS Platforms

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SEE LAST PAGE OF THIS REPORT Howard Mason

FOR IMPORTANT DISCLOSURES 203.901.1635

hmason@ssrllc.com

May 13, 2014

Quick Thoughts – With Mercury Acquisition and Partnership with MSFT, VNTV Provides Critical Payments Capability to Next-Generation Retailer POS Platforms

  • The announcement yesterday by VNTV (market cap ~$4bn) of the acquisition of Mercury Payment Systems for $1.65bn solidifies its leadership position in providing “last mile” access to the point-of-sale (POS). This had been potentially threatened by the development of the “ISV” channel  where independent software vendors bundle payments processing into retail POS solutions (typically in cloud-based SaaS form) that also handle other business applications including merchandising and loyalty offers, customer relationship management, business analytics and accounting, inventory control, and warehouse and logistics management.
  • CEO Charles Drucker cited a 2012 McKinsey study suggesting this “integrated” payments technology will account for 30% of payments volume by 2017, with Mercury being the pioneer and leader in offering payments processing through the ISV channel. The catalyst is the adoption by retailers of payments applications that are integrated into enterprise IT through PC-based and mobile POS rather than bolted on to traditional cash registers. Large retailers (with chains of over 1000 stores) have made the shift with “integrated” POS terminals accounting for 94% of installations, and the ISV channel is now catalyzing adoption by smaller retailers; integrated POS terminals account for half of installations at single-location establishments (up from ~40% in 2011).
  • Through focusing on the ISV channel, Mercury grew net revenue by 17% in 2013 to $237mm (vs. revenues of $838m in VNTV’s “merchant services” division that was growing organically at 7-8%); VNTV expects the acquisition to lift growth in revenue (pro-forma of $1.4bn including $335m in VNTV’s financial-institutions division) by 1-2% annually and to be EPS accretive. It dovetails with VNTV’s 2013H2 acquisition of Element (which uses an ISV-partner business model to provide EMV, encryption, and tokenization) to make VNTV the leading provider of payments processing and security technology through ISVs.
    • Element’s payments security offerings, which among other benefits relieve ISV partners of the burden of EMV device development and certification, are timely given the focus on retailer adoption of EMV technology following the data breach last November at TGT and the subsequent announcement by TGT that it will be implementing EMV-compliant chip-and-PIN at POS (albeit through a MasterCard, not VNTV, solution).
  • Mercury will increases VNTV sales through high-growth “strategic” channels from <25% of merchant services to ~40%; management expects these strategic channels, which include e-commerce and merchant-banks as well as ISVs, to grow net revenues at 20% annually. VNTV is the only acquirer that combines processing scale (sufficient to compete head-to-head for WMT’s business with share-leader First Data) with this distribution-reach to small-and-medium-sized or SMB retailers. VNTV has a 16% share of the acquiring business (up from 13% in 2009 and vs. an  18% share at market-leader, First Data – see Exhibit) and processed just over $600bn of payments in 2013 vs. $35bn at Mercury.
  • Furthermore, through its partnership with MSFT (announced this January), VNTV now offers critical payments capability to a nexus of technology companies (including IBM which collaborates with MSFT around enterprise retail solutions) that are looking to provide next-generation platforms for retailers and, in particular, enable mobile POS that integrates payments with support for front-office staff in providing a personalized customer experience (based on data gathered from previous interactions and, subject to customer opt-in, e-channels such as social media). The “omni-channel” objective is that mobile POS will enable this personalized experience to be offered more consistently across in-store and online channels.

Our research note of April 7th entitled “
A Primer on Merchant Acquiring
” provides details on VNTV and competition for POS relevance with incumbents such as First Data and new entrants such as PayPal and Square.

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