Acquiring Banks: Another Change

Payments Source 2010Mar After Words.pdf [3]

In the late 1980s and early 1990s, the commercial banking industry went through a period of great instability. To put this into perspective, 140 banks failed in 2009 while 534 did in 1989.

As a consequence of this turmoil in banking, a string of banks, including Chemical, Chase First Lincoln, Central Fidelity, First City, First American, Signet and First Florida, divested their acquiring businesses in the early 1990s. Moreover, dozens of regional banks sold, and a relatively small number of nonbanks pursuing a strategy of bankreferral alliances were the primary beneficiaries.

In 2010, we face another period of bank instability and the related prospect of a round of acquiring divestitures as banks manage their capital and earnings through selective sales of nonstrategic assets. The question is, to what degree we will see a repeat of the 1990s?

Banks are an important distribution force in acquiring. We estimate referrals that originate from branches and other bank sources account for 60% to 70% of the merchants making a buying decision each year. This dwarfs the new merchants originated in the independent sales organization market, though ISOs are among the players on the receiving end of these bank referrals.

Bank-originated merchants attrit at lower levels than do merchants sourced through other channels, and they support higher price points.

They also tend to be lower risk. Branch channels offer a relatively lowcost origination option in an industry with intensifying sales competition and with attendant reductions in sales productivity and increases in acquisition cost.

And, of course, the acquisition of bank portfolios offers the buyer leaps forward in scale and share in an acquiring industry where it has proven difficult for most to grow share one merchant at a time.

However, times are different now in so many respects. Fewer deals will emerge this time around if for no other reason than scarcity.

Unlike the ISO community, banks are not regenerating in acquiring–they overwhelmingly tend not to re-enter once they have exited, and just fewer exist today. We estimate approximately 30 of the banks in the top 200 by number of branches continue to own their portfolios. Also, many of the banks remaining in the business consider acquiring strategic and are less inclined to divest than were their counterparts 20 years ago.

Fewer outright sales likely will occur than did in the early 1990s, in part, because the acquiring joint venture has emerged as an option whereas it was more concept than reality until Wells Fargo Merchant Services became operational in 1993-94.

Joint ventures did not proliferate until around 1995-96, years after the peak of the banking crisis. So financial institutions such as Bank of America Corp. now have an alternative to partially divest but remain centrally involved in acquiring. (First Data Corp. in June announced a joint venture with Bank of America Corp. called Banc of America Merchant Services.)

Finally, the current banking instability is more likely than in the 1990s to simply rearrange the referral map. The acquisition of Washington Mutual by JPMorgan Chase & Co. repointed those branches from Trans- First to Paymentech, for example, while the acquisition of Wachovia by Wells Fargo & Co. repointed the branches from Elavon to Wells Fargo Merchant Services. The events at BofA, Wachovia and Washington Mutual will have substantial ripple effects for years to come in this industry.

Probably eight or nine acquirers seriously focus on the bank channel, bankreferral deals and bank alliances, and another half dozen or so dabble in them. It is likely that, even if less extensive and revolutionary than in the 1990s, one or several of these acquirers will emerge with the bank partners and channels to propel them for years to come.

For acquirers today, a key strategic question is whether they realistically can play in this market and, if not, what alternatives are there to build lasting and competitive sales channels outside of the banking world.