Acquiring

Acquirers
Why Insiders are Bullish on the Acquiring Sector

February | 2015
Acquiring Acquirers: Why Insiders are Bullish on the Acquiring Sector
2015 Double Diamond Payments Research, LLC. Confidential and Proprietary: All Rights Reserved.
Republication, redistribution or replication is strictly prohibited.

Executive Summary
u Despite rumblings to the contrary, merchant acquiring is a healthy sector that can only benefit from new
technology. Industry insiders are bullish, acquisitive, and aggressively investing in new products and
infrastructure.
u The sector has not only proven to be successful in mitigating risk, and able to provide cost savings through
scale, but it is also continuing to experience consistent increases in net revenue and margin despite
underlying pricing compression.
u Most acquirers already have margin compression controls in place to ensure that this continues. These
tactics, along with stringent approval processes and portfolio reviews, will help ensure these companies
realize strong future earnings.
u There are reasons to believe that historical growth will continue, or even accelerate:
+ Some 68 million Americans continue to use cash and checks, and many companies aim to convert this
market to electronic and mobile payment services, providing robust future growth opportunities for
the payments industry as a whole (including acquirers).
+ Several key merchant segments including micro-merchants, storage, education, government,
business services, and utilities are still underserved, providing another avenue for growth.
uS
 ignaling the positive outlook they have on this sector, few acquiring senior finance executives (CFOs) are
considering selling their merchant acquiring businesses or even divesting part of them, and, in fact, many
are willing to pay a premium for the right target firms. They are also investing in platform construction
and product innovation, enabling product expansion, economic scalability, and savings on transaction
processing.
uD
 ouble Diamond Payments Research (DDPR) forecasts that earnings before interest, taxes, depreciation,
and amortization (EBITDA) will grow from 6% to 7% per year moving forward, but the industry can benefit
even further through product expansion and from the efforts of other firms to convert unbanked/
underbanked consumers to prepaid and/or mobile payment solutions.
uT
 his DDPR report is based upon 10 interviews with CFOs who represent 15 Acquirer Operating
Organizations, and is written by independent and unbiased DDPR analysts/consultants with over 60 years
of collective experience in merchant acquiring.

Acquiring Acquirers: Why Insiders are Bullish on the Acquiring Sector

2015 Double Diamond Payments Research, LLC. Confidential and Proprietary: All Rights Reserved.
Republication, redistribution or replication is strictly prohibited.

Table of Contents
Executive Summary......................................................................................................................................2
Table of Contents.........................................................................................................................................3
Table of Figures...........................................................................................................................................4
Introduction..................................................................................................................................................5
Report Context ..............................................................................................................................................7
Why Acquire Acquirers?.............................................................................................................................11
Reason #1: Robust Valuation Growth........................................................................................................11
Reason #2: Acquirers are Investing in themselves and in Each Other...............................................12
Reason #3: There are Significant Opportunities for Cost Reduction..................................................14
Reason #4: Continuing Transaction Growth.............................................................................................16
Reason #5: Product Growth Opportunities...............................................................................................18
Reason #6: Risk Mitigations are Proving Successful................................................................................20
Conclusions and Recommendations.......................................................................................................25
Its a Good Time to Acquire Acquirers.....................................................................................................25
Strategies for Success...............................................................................................................................25
#1 Look for a Proven Track Record.........................................................................................................26
#2 Focus on Distribution Efficiency.........................................................................................................27
#3 Make Sure Risk Mitigation Infrastructure is Robust.........................................................................28
#4 Have a Plan for the Future.................................................................................................................29
#5 Focus on Execution..............................................................................................................................30

Acquiring Acquirers: Why Insiders are Bullish on the Acquiring Sector

2015 Double Diamond Payments Research, LLC. Confidential and Proprietary: All Rights Reserved.
Republication, redistribution or replication is strictly prohibited.

Table of Figures
Figure 1: CFO Participants by Market Size and Market Share.................................................................6
Figure 2: Merchant Acquiring Valuation Strength Compared to Major Benchmarks..........................7
Figure 3: Operating income and EBITDA Margin Increase......................................................................8
Figure 4: Opportunities for Incremental Growth......................................................................................9
Figure 5: Growth in EBITDA Multiples........................................................................................................11
Figure 6: Estimated Industry EBITDA Growth..........................................................................................12
Figure 7: M&A Interest...............................................................................................................................13
Figure 8: Top Components of Capital Expenditure and Resource Allocation.....................................14
Figure 9: In-House vs. Outsourced Transaction Processing...............................................................15
Figure 10: Bank Sponsorship Fees...........................................................................................................16
Figure 11: Unbanked and Underbanked Households in the U.S.........................................................17
Figure 12: Net Revenue Per Transaction Range ....................................................................................18
Figure 13: CFO Expectations of Net Revenue and Operating Margin..................................................19
Figure 14: Source for New Account Generation....................................................................................20
Figure 15: CFOs Top-Of-Mind Business Risks and Competitive Threats.............................................21
Figure 16: Blended vs. Interchange Plus Pricing Trends.......................................................................22F
igure 17: Key Attrition Components and Proactive Attrition Program Sucess Rates.........................23
Figure 18: Success Rates of Attrition Management Programs..............................................................24
Figure 19: The Foundation for Valuation.................................................................................................25

Acquiring Acquirers: Why Insiders are Bullish on the Acquiring Sector

2015 Double Diamond Payments Research, LLC. Confidential and Proprietary: All Rights Reserved.
Republication, redistribution or replication is strictly prohibited.