FIS: The MCX Opportunity for PayNet


FIS will allow merchants participating in the MCX payments system (which we expect to pilot in 2014Q1 and roll-out nationally before year-end) to accept card payments for an all-in cost of 4 cents/transaction versus the network fees charged by Visa/MasterCard (excluding interchange) of 6-7 cents for debit and double that for credit. The all-in cost includes 2 cents paid to the bank maintaining the funding account to contribute to the cost of an ACH withdrawal (since ACH will initially be used for settlement) and 2 cents to FIS (since the NYCE network path will be used for authorization).

Given FIS faces negligible marginal costs and up-front development costs are covered separately under a 5-year contract with MCX, the per-transaction fees will drop to the bottom-line. Our base case is for MCX volumes to reach $225 billion by 2018 (representing 15% penetration of assumed aggregate purchases of $1.5 billion – see Exhibit below). With an average $40 ticket, this represents ~6bn transactions generating earnings to FIS of ~$120 million or a lift to annual firm-wide earnings growth of 2-3%. Our estimate excludes:

  • Additional fees as, over time, MCX migrates settlement from ACH to direct bank identification number (“BIN”) routing over FIS’s proprietary PayNet network which can access ~80% of US checking accounts and will allow real-time settlement as opposed to the 3-4 day settlement of ACH. MCX is likely launching with ACH because PayNet settlement requires bank permission for access to the funding account. Over time, however, we expect banks to accede; if 50% of volumes migrate from ACH to PayNet and FIS collects an incremental 1 cent/transaction in network fees, there is a further lift to 2018 earnings of $30 million.
  • Potentially substantial earnings from FIS support in the design and implementation of rewards and e-coupon programs leveraging in-store merchant payment data; we expect FIS to deploy the mobile capabilities arising from its March acquisition of mFoundry which provides the backbone for Starbucks’ mobile app.
  • MCX wallet-penetration beyond our 15% estimate (which is based on the 14% penetration of Target’s RED cards in the US). Overseas, real-time solutions have higher share; for example, in Australia, 70% of debit transactions settle over the EFTPOS system (which allows a consumer to select between a checking, savings, or credit account at point-of-sale). EFTPOS cards are typically also enabled for Visa or MasterCard to provide overseas utility and a domestic fallback.  

The FIS opportunity depends on consumer adoption of MCX products in a crowded market for mobile wallets. In joining MCX, merchants are asked to follow WMT’s example of committing not to support any (not-already-deployed) non-MCX mobile wallet for 3 years. Beyond this exclusivity arrangement, MCX is well-positioned to gain share as payments shift to mobile and hence become increasingly integrated with the broader shopping experience through merchant mobile apps and increasingly driven by the ability of merchants to offer personalized real-time e-coupons. Three sources of merchant advantage are:

  • First, as illustrated by TGT (whose proprietary cards offer a 5% discount), merchants are comfortable with a cost of rewards substantially higher than Visa interchange provided the rewards are associated with their brand and not just a card-issuer brand; the payoff of new/retained customers, greater visit-frequency, and ticket-lift creates the business case.
  • Second, merchants can source rewards more cheaply than issuers; this is the motivation for co-brand programs in the current payments environment so that, for example, United Airlines can generate a valuable miles benefit for consumers at low marginal cost.
  • Third, merchants have access to SKU-level purchase data allowing for targeted and personalized rewards programs (“e-coupons”) that a mobile wallet enables and that will likely generate a higher ROI than more generic rewards programs.

Please see our published research for the full note.

Print Friendly, PDF & Email