CASE STUDY

PAYMENT PROCESSOR VANTIV GOES GLOBAL WITH WORLDPAY

TAKEOVER

Case Study Objectives: To illustrate how

• Changes in customer buying behavior can impact significantly an industry’s value chain
• The resulting disruption can force rapid consolidation among competitors

The so-called “Amazon effect” describes the shift in recent years in how people shop moving
away from traditional brick and mortar retail stores to online purchases. Traditional retailers
aren’t the only businesses feeling the squeeze from Amazon.com Inc. Vendors all along the retail
value chain are impacted from the accelerating shift to consumer online purchases. What follows
is a discussion of how this trend is sparking a consolidation not only among retailers but also
among their suppliers. The focus in this case study is on merchant acquirers. Figure given below
illustrates the value chain for credit and debit card processing industry. Key participants in this
value chain include the cardholder, merchant, merchant acquirer (merchant bank), issuing bank
(cardholder bank), and card association (Visa and MasterCard). A cardholder obtains a bankcard
(credit or debit) from an issuing bank and subsequently presents the card to merchants as
payment for goods or services. A merchant is the business providing the good or service willing
to accept the credit card as payment. Merchant acquirers provide merchants with equipment to
accept cards and customer service involved in card acceptance. The issuing or cardholder bank
issues cards to consumers. Card associations like Visa and MasterCard act as a clearinghouse for
their cards to effect authorization and settlement.

For merchant acquirers revenue is driven by the volume of transactions processed and fees per
transaction. The latter is a percent of the sale amount (merchant discount rate) or a fixed fee per
transaction. Due in part to the “Amazon effect” merchant acquirers are under substantial pressure
to combine to reduce costs in the wake of declining in-store transactions at traditional retailers.
The challenges facing merchant acquirers are compounded by rising competition from
technology startups which squeeze the fees merchants pay to merchant acquirers. The
combination of downward pressure on fees and lethargic growth in the number of in-store
transactions has constrained revenue and profit improvement.

To reinvigorate growth, merchant acquirers have been pursuing ways to reduce costs and grow
revenue. But with the market changing rapidly, they had to move quickly. That meant mergers
and acquisitions. The number of M&As has been running at a fever pitch in recent years. Global
Payments Inc. acquired Heartland Payment Systems Inc. for $4.3 billion in December 2015,
combining two of the largest US merchant acquirers. In January 2016, Total System Services
announced it would pay $2.35 billion for TransFirst. In April 2017, Mastercard Inc. received
regulatory approval to acquire payments technology company VocalLink Holdings Ltd. for $920
million. First Data Corp agreed to buy CardConnect Corp for $750 million in May 2017, two
months before industry leader Vantiv announced on July 5, 2017 that they had reached an
agreement to merge with Worldpay.

Vantiv’s share price fell by about 2% while Worldpay’s rose by 15% immediately following the
announcement on July 5, 2017. Valued at $9.94 billion, the stock and cash offer represented a 19%
premium to Worldpay’s closing price on July 3, 2017. At closing, Worldpay shareholders owned
41% of the outstanding shares of the combined companies.

The Vantiv deal to acquire Worldpay is one of the most significant in the payment processing
industry since the 2008 financial crisis. Payment processing has become increasingly important
for financial institutions as more people shop online and move money using cellphones or other
digital devices such as tablets. They need accurate systems to minimize fraud and networks
robust enough to handle the growing volume of online transactions. Vantiv became the largest
merchant acquirer with 20% share in the US in 2016, knocking First Data from the top spot for the
first time in 20 years, according to Nilson.

Totally focused in the US, four-fifths of Vantiv’s 2016 revenue of $1.9 billion came from merchant
services. The remainder was attributable to financial institution services. Merchant services
consist of processing electronic payments at point-of-sale or online, security and fraud services
for small to mid-sized merchants and top tier regional and national retailers. Revenue per
transaction was $.074 for each of 21 billion transactions processed in 2016. Financial institution
services consist of managing payment and security services, as well as card production,
acceptance and transaction processing for PIN debit and ATM cards for large and regional
financial institutions, community banks and credit unions. Revenue per transaction was $.089 for
4 billion transactions processed in 2016. Despite efforts to do more online transaction processing,
the bulk of Vantiv’s business is the offline (i.e., in-store) market in the US.

Worldpay is an international merchant acquirer, processing digital and in-store payments in 146
countries. By buying Worldpay, Vantiv acquires a huge international footprint, especially in
Europe. Worldpay will also help Vantiv out of the rut that large US retailers are in because of
Amazon. Currently only 15% of Vantiv’s business is with online retailers, the rest is with brick
and mortar stores. In contrast, Worldpay has 34% of its revenue from online businesses.

By acquiring Worldpay, Vantiv will be able to help its big retail clients looking to develop global
ecommerce capabilities. Vantiv is attractive to Worldpay because of Worldpay’s small market
share in the US. Both firms see many opportunities for cutting costs by sharing overhead
administrative overhead and technology development and revenue growth opportunities. For
example, the acquisition of Worldpay gives Vantiv international ecommerce capabilities that they
would be able to cross sell to their US “off line” (in store) client base.

Vantiv intends to become a leading global payment processor by differentiating itself from its
competitors through a comprehensive offering of traditional and innovative payment processing
solutions from a single vendor to merchants and financial institutions. The firm has moved into
such high growth markets as integrated payments systems, ecommerce, and merchant banking
through acquisition. In 2016, Vantiv acquired the US subsidiary of Canadian payments company
Moneris for $425 million; and, in early 2017, it acquired enterprise payments firm Paymetric for
an undisclosed amount. And most recently it acquired Worldpay.