In a surprising but not really that surprising move announced Monday (March 18th), banking technology provider FIS is slated to merge with merchant and payment services provider Worldpay. The Wall Street Journal’s reporting is typically breathless:
A global shake-up in the humdrum business of payments has set off a merger frenzy among the giant but obscure companies that connect banks, merchants and consumers. The latest deal is Fidelity National Information Services Inc.’s FIS -0.70% roughly $35 billion acquisition of Worldpay WP 9.96% Inc. The merger, announced Monday, comes just a few months after Fiserv Inc.’s $22 billion deal to buy First Data Corp.
What’s, supposedly, behind this latest round of fintech industry consolidation? Here’s the WSJ again:
FIS and Fiserv provide a wide array of technology to banks. Historically, they have sold systems for banks’ core day-to-day functions, such as tracking individual accounts, calculating interest and issuing debit cards. They have moved into areas such as mobile banking applications, cybersecurity and wholesale banking. FIS acquired SunGard, a provider of technology for banks’ vast trading operations, in 2015.
“You have all these …things that we aren’t aware of yet that will come up,” Fiserv Chief Executive Jeffery Yabuki said after the First Data deal was announced in January. “We don’t want to be constrained.” Through the Worldpay deal, FIS will get access to the 40 billion e-commerce and other types of transactions it says Worldpay processes yearly. FIS said it serves 130 countries, while Worldpay operates in 146 countries
That’s enough, perhaps more than, from the WSJ. There’s a couple of things to unpack from this which you won’t hear in the patsy media coverage.
Firstly, as alluded to in the WSJ’s reporting, the technology companies have simply run out of ideas to bring new and innovative product or service offers to market. They’re now in the consolidation game – buying up each other in the hope of finding that most mysterious commercial elixir – “synergies”. To quote FIS’ CEO, “macro factors conspiring to change the way people and businesses move money and information“. So much for white heat of technology. This is supposed to be progress through science? Hardly. It’s a business strategy of let’s just mush these two things together and hope that something, currently unknown and unspecified, emerges. Somehow.
Secondly, the notion that you can even merge FIS and Worldpay’s product lines is delusional. Fidelity National Information Services has been going around and buying up everyone in the bank technology platform sector they can get their hands on, but that doesn’t give them a consolidated single product line. It gives them a mish-mash of legacy product lines with no common components and not even any particular base from which to develop an integrated all-encompassing bank IT platform to hawk around.
And core banking platforms, like recently acquired First Data, have absolutely no overlap with those which Worldpay provide. These are payment “acquiring” services (when you present your credit or debit card at a merchant, Worldpay makes sure your card can stand the hit and routes the payment authorisation back to your card issuer then gives the merchant the money if all is good). The combined group will never be able to have a common code base for these products.
Thirdly and finally, while FIS tell a tale to not-especially-well clued in investors and media that they sell a banking technology application – and most of the audience will go away thinking that’s like someone buying an iPhone, only a little bigger – that’s not how it works at all. While a typical bank will initially buy (or be sold) a promise of a single banking platform which does everything, a “bank in a box”, the temptation for the bank to then insist on introducing tweaks, quirks, features and so-called enhancements to the core product offer is irresistible.
For one thing, there’s no such thing as a bank in a box – there’s inevitably interfaces to other upstream and downstream systems which need to be custom built out and bolted on. And for another, if every bank used the same core application in the same, non-customised, way then every bank would offer exactly the same financial products and services and present exactly the same customer experiences. It’s hard enough to differentiate commodity services like a credit card or checking account. Impossible if you use the same unmodified core system as everyone else does.
So what FIS and Worldpay end up with is a common kernel but endless customer-specific bells and whistles tacked on to it. After running FIS’ or Worldpay’s platform for, say, 10 years or so, a big client (such as your typical Too Big to Fail Bank or large merchant with tens of thousands of EPoS terminals) will have added so many client-specific deviations from the mainline core code, they’ve got what is essentially a bespoke system. Any economies of scale which were supposed to be obtained through the reuse of a common platform are toast – bespoke systems need one-time-only designs and documentation, specific use cases, craft industry test packs, non-standard product knowledge in the dev team and so on. The vendors like FIS and Worldpay are actually quite happy to see this state of affairs emerge –- they make far more margin selling the customisations and the subsequent support of these one-offs than they do on the Plain Jane licencing. But in the process, they destroy their USP of supposedly offering a standardised product.
What’s really going on in the merger, then? Tech’s real business model – trying to establish a monopoly then install toll booths around it. By offering a vertically integrated core banking and payment services platform, the merged corporation hope to say to banks, merchants and the card networks “Hey, why are you sending your payments round all that spaghetti? It’s our EPoS systems talking to our banking core systems. Let us do the transaction routing and the ledger settlement!”
Aside from the fact that with all that customisation there is in the installed user base meaning there’s no such thing as a single core system any more even if it started out life that way, the big banks, the card networks like Mastercard and Visa, the big merchants (a lot of the smaller ones, too) plus the freeloaders like Apple Pay and PayPal are dumb, but they’re not that dumb. Letting FIS/Worldpay embed itself at both “ends” of the payment system means dismantling their own toll booths in order to allow FIS/Worldpay to create a new one with its name on it. Not for the first time, the industry is seemingly determined to have investors pay for its remake of Godzilla vs. Mothra. You’d have to be CalPERS to be dumb enough to buy it.
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For all the “speedy” tech, these suckers still put holds on money transfers …just like it was 1962.
Actually underlying a fundamental issue which is systemic and intractable.
Where there is a party and a counterparty (and there always is, you can’t “pay yourself” within a context of the same ledger) plus an intermediary, which there usually is (what are the chances of you and Walmart sharing the same bank — pretty slim) then you have a credit risk with the intermediary (so-called “cleared for fate”) in terms of the intermediary putting a time limit on any messaging on the transaction such as a revocation and “cleared for value” in terms of the sender saying they’re going to bounce the debit.
So someone has to be paid for those risks. There is, unless the entire system is publicly owned, potential for rent seeking due to barriers to entry and monopolies or oligopolies.
The notion that tech, however it is portrayed, is magically going to obviate any of that is fanciful. A Post Office bank type of arrangement is the obvious fix, certainly for retail customers. No unicorns required and guaranteed to address the issue. Which is probably why it never happens.
So it isn’t that FIS CEO was bored. Just he thinks he can suck more from banks after the merger. All in all, that is what “technology” is turning once accommodated: not a solution but a way to suck more and more from the economy.
If they succeed this means the balance of power is shifting from financial services to tech providers.
Clive,
I agree completely with your comments on IT. I would also like to add (I did a year of consulting at First Data in 2015) that the organization was balkanized into a number of very powerful and large scale semi-independent “holons”. The idea of collective action in order to make the organization more efficient and productive was politically impossible. Furthermore most of the development had been outsourced at an immense level. This also led to considerable thrashing around new product development as well as maintenance. I could go on but FD was not a particularly productive organization.
The idea of slamming together these three organizations with their different institutional postures, rules, norms, strategies and expect some sort of magical phoenix to rise from the ashes is absurd and read like more mendacious financial capitalism; E.g KKR got out from under and other players are making a ton of money somewhere else.
Here is a simple example of how difficult this will be: FD had a very robust and intrusive (for employees as well) corporate security department. I expect that the other companies have similar structures. The point is that each company will have a different set of rules, norms and processes that have to be followed for compliance, risk management, product development and so on. These are probably intractable problems if one wishes to actually integrate the companies and not just run them as subsidiaries.
I’ve had to watch, Hell, if only it had been just as a spectator, in fact I had to wrestle with the beast to try to get any kind of forward momentum out of them, FD descend down the slippery slope of crapification.
And yes, sometimes there are little islands and enclaves of competency and even proficiency.
But then you get into management and P&L turf wars and it’s enough to have you looking for a quiet room to have a nice lie down in. For about a week. As if any of this is going to be helped by a merger.
With so many companies vying to blow smoke up investor’s asses, how do you choose?
In this kind of market, I think I would want to go long on toilet paper.
Thank you, AS.
A friend / colleague did that. The toilet paper manufacturer he invested in suffered from a fatality on the factory floor and dodgy accounting, so the company and share price collapsed.
Tech’s real business model – trying to establish a monopoly then install toll booths around it.
Winner! Create dependence, make change impossible, dictate price.
Sprinkle in some well placed relationships with people whose vast compensation relies on the possibility of enormous fees for managing a monopolies wealth. We don’t even have to reward them with actual business, just dangle the carrot at the right time. If your IT can’t figure out how to make it work, we’ll send in our best people to sort it out. We’re experts in these sorts of things. No budget? No worries. Look at the ROI! We’ve done all the math for you! Partners figure out a way to make these things work.
+1. I’m glad to see, in print, the real meaning of the word “synergy”, as used by tech companies. Sounds so much better, futuristic even, than the word “monopoly”.
Thanks, Clive, for an excellent post.
Having spent nearly 20 years at one or another (pre-FIS) SunGard company, it’s exactly as described, only more so. During my time there, SunGard acquired more than 100 companies, nearly all of them smallish players in the more arcane bits of finance IT. Far from making any effort to knit newly purchased businesses or technology together, doing so was for years the opposite of actual policy. Preventing systems from working together (‘bank in a box,’ indeed) meant many millions for “integration,” which the-then CEO once said routinely accounted for 70% of the money spent on a typical project.
I started out with Moneris processing my retail business credit card transactions. They had a decent system.
If you had a problem they could find it and fix it easily. This worked very well. Then the Bank of Montreal sold Moneris to Vantiv. And that’s when the problems started. Suddenly I need to give up the terminals I owned for terminals I rented. I was told my old terminals were no good. Then they sent the new terminals which had problems from the start. They changed the terms on how my account was debited for fees, they occasionally lost credits which took hours on the phone to find, they changed how and when the money was credited to my bank accounts. Now Vantiv gets bought out by World Pay. They say I need new terminals. I get the new terminals they are the same as the old terminals only they work in a more confusing pattern for the sales people and point of purchase transactions become a problem for the customer watching the sales people trying to manipulate the payment system. Sometimes the system just decides to fail during a transaction. Instead of talking to someone I can understand from Canada, now I am talking with very hard to understand people in Indonesia with apparently not much leeway to help customers. Bigger is not better, it is worse.