When promoting the payments industry — the web of companies making things work behind the scenes when you swipe your credit card — Atlanta boosters often mention the fact that 70 percent of U.S. transactions pass through companies in Georgia.
That may sound impressive, but it could be understating the future opportunity in the industry: About 95 percent of consumers live outside the U.S., and the market for outsourced card-processing services internationally is slated to grow twice as fast as in the U.S. in the coming years.
Now more than ever, some of the big names anchoring Georgia’s Transaction Alley are looking abroad, with implications for the growth of a legacy sector that is gaining increasing prominence as its helps reshape Atlanta’s technology landscape.
Overseas, the opportunities seem boundless. Asia has 55 percent of the world’s people but less than 30 percent of its card transactions. Brazil’s 200 million people have steadily moved from cash to card over the last decade. And in the European Union, new regulations are helping create a true common market of 500 million people and 28 countries from a payments perspective.
In merchant-acquiring, a sector where companies like Atlanta-based First Data Corp. and Elavon help sellers accept card payments, international revenues were nearly four times higher outside than in inside the U.S. in 2013, according to research firm Raymond James Associates Inc. In five years, that disparity is projected to widen: $69 billion overseas to $15 billion domestically.
On the other side of the business: providing processing services to the banks issuing payment cards, the international market is slated to grow by 4.1 percent to $29.8 billion while the domestic market contracts by 1.2 percent to $2.6 billion, according to the same study.
Many Atlanta-based firms, then, face an enviable problem: prioritizing between modest growth in their substantial home market and potentially exponential growth cumulatively overseas.
“There aren’t that many bad markets. It’s really that there are better markets, and the reason is that transaction volumes are all positive,” said Wayne Johnson, an analyst at Raymond James in Atlanta covering transaction processing companies.
According to a study by MasterCard Advisors, 60 percent of the world’s payments are still paper-based, and that’s just those that can be measured. By nature, electronic transactions grow along with electricity infrastructure, and they go hand-in-hand with developing countries’ efforts to bring more consumers into the formal economy.
That said, it’s not always easy for large U.S. firms to crack new markets in a highly regulated industry where they have to be attuned to widely varying consumer buying habits and merchant needs.
While some promising countries like China are hard to access due to regulations that favor local companies, payments firms are learning how to strike deals all over the world.
Jason Oxman, CEO of the Electronic Transactions Association in Washington, said the organization counts among its members foreign firms like China’s Alipay and Brazil’s EBanx, both of which look to provide e-commerce solutions for U.S. merchants in their complex markets.
Conversely, American firms are finding less competition abroad than on the crowded playing field at home.
“There are more than 13,000 card issuers here in the U.S. It’s just an incredibly robustly competitive market. You look outside the U.S., and there are some countries where there are one or two, so it definitely is an opportunity,” Mr. Oxman said.
Working with those banks allows processors to build scale quickly, which is hugely important in an industry that relies on taking a tiny fraction of fees generated by millions of transactions, said Mr. Johnson.
“The good news going to some of these countries is that there is bigger bang for the buck,” he said, citing Brazil and other locales. “You go to one financial institution, and the positive operating leverage from that one contract is much larger than it would be in the U.S.”
The flip side is that big banks in many countries have a lot of pricing power and can squeeze margins. Within the “interchange” fee charged to a merchant to accept a payment, processors often have the smallest and most elastic portion, and regulations in some countries have introduced caps. While banks can raise interest rates to increase revenues, processors’ potential is limited.
“The downside is all these institutions know they represent 25-30 percent of that market, so they totally play it,” Mr. Johnson said of big banks.
Partnerships Key When Entering New Markets
Global Payments, a $2.6 billion company by revenues, has used both acquisitions and joint ventures in Asia and Europe in an effort to live up to its ambitious brand name as it seeks to grow into the Fortune 500 list (it’s now on the Fortune 1000 at No. 851).
“The name foreshadowed the vision — what the company was working toward and all the worldwide growth that was to come,” CEO Jeffrey Sloan wrote in Technology Association of Georgia’s HUB magazine in February.
Half of the company’s revenues now come from the 28 countries where it operates.
“As we say in our offices, the sun never sets on Global Payments. We can wake up in Atlanta as someone is just ending the work day in one of our Asia offices, or they are in the middle of things in Europe. We go to sleep in the eastern United States and our team is getting started in Australia. Things just keep moving all around the world,” wrote Mr. Sloan, who was not made available to comment for this story.
Key to its global success is Europe, which has largely been tapped through a partnership Spain’s CaixaBank launched in 2010. Earlier this year the partners announced a joint venture with Vienna-based Erste Group to target Central and Eastern Europe. Separately, Global Payments also recently acquired Realex, an Irish firm with the top e-commerce payment gateway in Europe.
“The Realex and Erste Bank transactions highlight our commitment to maintaining a preeminent position in Europe,” Mr. Sloan said in a recent earnings call, as the company announced $278.4 million in profit for the fiscal year ending in May 2015, up 13 percent from last year, and that’s with negative currency impacts dampening higher growth from international markets.
Elavon, another Atlanta payments firm, has also benefited from partnerships designed to gain make quick headway in a market, Brian Mahony, the company’s chief strategy officer, told Global Atlanta. It’s also working in Europe through a partnership with a Spanish bank, Santander, and has deepened its reach into emerging markets. In Southeast Asia, where its international partners have weaker networks, Elavon will likely work through relationships with domestic banks, he said, much like Global Payments has done with its Bank of the Philippine Islands joint venture.
“When we enter an overseas market, there are two things that we’re looking for: access to distribution and knowhow to work in market,” Mr. Mahony said. “It’s unusual for us to enter a market de novo.”
In Brazil, Elavon has opted for a collaboration with Credicard, a subsidiary of Citigroup. Now it has about 1 percent of the Brazilian market and nowhere to go but up, Mr. Mahony said.
“There’s no question we’re going to grow,” he said, noting that despite the depreciation of the Brazilian real and the country’s ongoing economic woes, the march toward electronic payments isn’t likely to slow down.
First Data, the world’s largest processor by revenues, has taken a more direct approach to entering new foreign markets, establishing subsidiaries in 33 countries from Poland to India to Argentina.
The debt-laden company, which recently raised $2.8 billion in an initial public offering, is shining a new spotlight on global markets as it tries to ignite a turnaround under CEO Frank Bisagnaro.
Earlier this year First Data established an international advisory board chaired by former U.S. Sen. Bill Bradley of New Jersey. Also appointed was R.K. Sehgal, the former commissioner of what’s now the Georgia Department of Economic Development, who has experience in India and beyond.
Last year, the United Kingdom, Germany and Australia combined to make up about 42 percent of sales, but First Data is continuing to diversify geographically. International, previously its own division, has been incorporated into other business units.
A prime example of First Data’s approach is Brazil, where the company last August introduced Bin, its merchant-acquiring solution for the local market, after more than two years of research and development and an investment of $150 million. The launch was underpinned by a partnership with Bancoob, a credit union with the equivalent of 2,200 branches throughout Brazil, which will offer First Data’s solutions to its business customers. More than 200 team members were hired in Brazil to help develop and deploy Bin.
Executives said the timing was right in a market that had long been dominated by two major players, Cielo and Rede, legacy companies that basically formed a duopoly based on Mastercard and Visa acceptance until regulations encouraging competition were enacted about five years ago.
In Brazil, First Data could combine localized solutions with its global scale, building its on-the-ground presence while enhancing its ability to serve multinational clients operating within Brazil, Debbie Guerra, former general manager of the company’s Brazil unit, told Global Atlanta during a 2014 visit to the First Data offices in Sao Paulo.
“We’ve spent the time to launch with a full solution, and we’ve put a lot of force behind our sales and distribution channels in order to make sure that the growth comes with the investment,” Ms. Guerra said a few months before Bin was announced.
Localized Solutions in Brazil and Beyond
Brazil’s unique challenges exemplify how complexity can beget opportunity for payment solutions providers.
It’s common practice, for instance, for customers to pay for items placed on a credit card in installments, meaning the processor has to be ready to split the cost into multiple parts, which Ms. Guerra said isn’t as easy as it sounds.
On the merchant side, it can take 30 days or more to get paid by the banks after a credit-card payment is approved, so acquirers have begun releasing the money upfront with a product called “anticipation of receivables.” Merchants pay higher fees for the service, which helps them better manage cash flow.
Like Elavon’s Mr. Mahony, Ms. Guerra said the company sees itself as part of an inexorable move to electronic payments, which, while raising the specter of a consumer debt crisis, is also helping aid the poverty reduction that Brazil has achieved within the last decade.
“It’s not just about setting up a business, making money, though that clearly is part of it, being part of a growing market. But it really is about participating in the changing landscape financially for Brazil and being able drive a more inclusive financial system. That, to me, gives a lot of purpose to your job,” she said.
TSYS Inc., a $2.4 billion processor based in Columbus, Ga., has also taken its business to places where the industry is still immature, even as it grows its share in developed markets like Europe. Recently, for instance, a client in Vietnam worked with TSYS to provide biometric identification on ATM transactions.
TSYS’s Dubai office reaches into Africa, where banks had been reluctant to issue true credit cards, instead opting for debit cards or cash cards that could only be used at ATMs. TSYS helped banks in Kenya and elsewhere introduce credit cards, going so far as to install technology needed for authentication within bank branches, both to comply with regulations and to allay their fears about security.
“What we do in Columbus is set up operations and provide services to the banks directly. In Africa we actually put that technology in the bank. The predominate reason is that we want the banks to get educated in how to run the card business. Our view is that this will help them really understand the business and at some point they will get to a South Africa sort of capabilities; then the outsourcing makes sense,” said Malek Mroueh, who until February headed up the Middle East, Africa and Pakistan for TSYS.
Now head of international business development but still based in Dubai, Mr. Mroueh said the company is prepping for a future of “branchless” banking on the continent and other developing markets. In some ways it’s already here: Kenya’s M-Pesa service allows users to load cash onto their phones and then withdraw it from agents. Pakistan’s EasyPaisa is similar, and the number of agents for the service has surpassed the number of bank branches in that country, he wrote in a white paper on branchless banking for TSYS.
Bringing Back Innovation
TSYS and other companies have seen their competitiveness enhanced by exposure to international markets, as solutions created in one part of the world can often be adapted to another, strengthening their overall portfolios.
One example: Bank cards TSYS developed in Arab states to comply with Shariah laws could eventually be rolled out in Africa, said the British-born Mr. Mroueh, who early in his tenure spent two months in training in Columbus to learn its service culture.
Phil Tomlinson, the longtime CEO of TSYS who retired in 2014, told Global Atlanta that international expansion has been key to the company’s ascent since it went public in 1983. At the time, it had 1.5 million accounts and would have been ecstatic with 5 million just in the U.S. Now, it processes more than 750 million accounts worldwide. Needless to say, cross-cultural capabilities have had to grow as its reach has expanded, and training its overseas staff has become critical. The company now has service centers in South Africa, Cyprus and elsewhere and operates a joint venture with China UnionPay, the world’s second largest credit and debit card network behind Visa.
“We started stretching out to Mexico, Canada, England, Scotland, Ireland, China — we had to learn how to do business in different cultures. We found that they didn’t want to change their culture to American culture, but what they have all loved is that we have had great technology with a can-do attitude,” Mr. Tomlinson said.
Paying attention to employees also helps: When banks shut down in Cyprus a few years back, other companies wrung their hands about how to pay employees. TSYS sent in folks with cash in suitcases, Mr. Tomlinson said.
Prepaid card provider InComm, which recently decided to expand its downtown Atlanta headquarters and its Georgia operations, believes tailoring products is the only way to go in new markets, said Scott Meyerhoff, the company’s chief financial officer.
“What we’ve learned over the years is that each country is different, and if we try to go ahead with a U.S.-based model and stick it in another country, the only thing we’ll do is fail, so we’ve really morphed to local tastes, local views of the world, local products in many respects,” Mr. Meyerhoff said.
Japan provides an instructive example: There, Apple iTunes gift cards are purchased for one’s self rather than for a friend or relative, and they’re redeemed in a matter of minutes rather than weeks, Mr. Meyerhoff said.
“Sometimes you succeed in spite of yourself,” he told Global Atlanta. “I don’t think we went into Japan thinking that this was going to be used any differently, and we quickly realized it’s a self-use purchase and not a gift. Now we’re trying to change the culture of the way people think, that this product can be a gift as well.”
In Brazil, InComm has launched various partnerships, including one that allows players of the online game Minecraft to buy virtual goods with prepaid cards sold in stores.
While Atlanta firms are headed overseas, some foreign-based payments firms have also benefited from their international networks when accessing the American market.
Like InComm, London-based Worldpay has learned that a functional solution in one market can’t be “hammered” into another, the company’s U.S. CEO Tony Catalfano told Global Atlanta.
“You have to start with the customer and the customer’s business problems and what you’re solving that are specific, but there’s absolutely opportunity for leverage,” Mr. Catalfano said.
He noted that Worldpay, which is investing heavily in its new Atlanta headquarters, has had an advantage as new, more secure EMV chip cards come on line to replace the magnetic stripe in the U.S. Despite being the “hot new buzz” here, EMV is old news in Europe, where it was developed.
“One of the nice advantages for me was that our U.K. business has been (involved with EMV) for six or seven years. We pull on each other very strongly for what’s the best in security, data protection and those kinds of things, and there’s also a lot of learning around things we’ve tested in each market,” Mr. Catalfano said in an interview.
Steve Karp, Worldpay’s chief strategy officer in the U.S., agreed, saying he can easily pick up the phone and call people at the home base when dealing with a tough issue.
“They’re like our big brother in many ways,” he said, nodding to Worldpay’s 40 percent share in its home market.
Still, Worldpay U.S. has about 5 percent of a much larger processing market, and it’s working to help its domestic merchants here go global, especially in e-commerce.
“If they own a website, they want to make sure they can operate as globally as possible. That means that when a cardholder shops at my website, their card may be issued by a foreign bank, and I want to be able to accept that card. That isn’t a given; it doesn’t just magically happen,” Mr. Karp said, adding that Worldpay helps support “dynamic currency conversion,” the ability to display prices to the buyer in their home currency and settle the transaction in U.S. dollars.
Ultimately, Mr. Johnson of Raymond James says globalization, updates to point-of-sale devices, security enhancements, the increasing use of the mobile device in payments have created a “sweet spot” of volatility that will serve the industry well.
“It’s a big market; there’s lots of change right now, and that’s why the space is in demand. Change is good for outsourced service providers, because it’s a reason to contact your existing clients and potentially new clients,” Mr. Johnson said.
And with the U.S. and Europe occupying the dominant positions in the payments universe at the moment, they have a unique opportunity to bring innovations into less developed markets.
As the Raymond James “Investor’s Guide to the Payments Galaxy” says:
The least-penetrated geographies for electronic payments are the Middle East/Africa, Asia-Pacific, and Latin America. Lower penetration rates lead to higher current, and we believe, future growth rates for electronic payment metrics, as payment cards and transactions are both expanding at a faster rate worldwide than in the United States.
Or as the Atlanta-based American Transaction Processors Coalition put it in its 2014 annual report:
Future growth will be driven by U.S. and European product innovation and consumer demand in countries with low credit card penetration.
….
The world continues to migrate towards electronic payment processing for purchases as diverse as energy bills in sub-Saharan Africa to soda from a vending machine in Brazil. Building the security and technical tools and systems to meet this growing demand is a huge opportunity, and American companies are poised to play the leading role within the right regulatory and economic environment.