February 2004 Transaction Processing and Technology Services Franco Turrinelli -- Principal, Senior Analyst Business Services [email protected] (312) 364-8166
Dec 26, 2015
February 2004
Transaction Processing and Technology Services
Franco Turrinelli -- Principal, Senior AnalystBusiness [email protected](312) 364-8166
Firm Overview
William Blair & Company
UniqueA research-driven, client-
focused investment philosophy managed by an employee-based ownership
structure
A history of experienced, career-oriented investment
professionals that have delivered continuity,
stability and low employee turnover
People
A consistent focus on high-quality, growth equities
throughout the history of the firm
Focused
Founded in 1935 and headquartered in Chicago, with global operations
100% active employee-owned; over 750 employees
Independent, full-service investment bank focused on the middle market and high-quality growth companies.
More than 100 Mergers & Acquisitions since 2000
10 Private Capital funds opened 1988-2001
Over $24 billion in client assets as of December 31, 2003
Wealth Management and Corporate & Executive services
Equity Research follow over 260 growth companies, taking a focused,selective, in=depth approach to coverage
Our focus on growth and emerging companies and the middle market differentiates us -- we are a recognized leader in growth equities
Sixty-nine year record of serving clients' financial needs
M&A Perspective - Public markets perception
A Well-Established Strategy
Mergers and acquisitions are a tried-and-true business strategy in the transaction processing arena
Two reasons
1. Scale matters (but not as much as most people think) leverage of fixed infrastructure costs and
overhead purchasing power market visibility and customer confidence cross-sales opportunities
2. Customer retention is very high
Transaction Processing Industry Structure
Transaction processing is dominated by “Supertankers” and “Jet skis”
Big! Use scale for cost efficiency as competitive advantage
Businesses evolve slowly need to start turning ahead of
time changes now affect future for a
long time strong momentum for positive
changes competitive advantages are
persistent large number of customers highly recurring revenue --
changes at the margin not immediately visible
Highly dependent on management Relatively stable environments
technology outsourcing decisions
Revenue model often transaction dependent
Small and nimble! Often use technology as competitive advantage
Businesses evolve quickly can turn on a dime can retrace steps have to win every day competitive advantages are
transient small number of customers revenue often less recurring
Highly dependent on management Best is rapidly changing
environments technology time-to-market decisions
Often use license fee model
Supertankers Jet Skis
Transition
There is an “awkward phase” when the successful “jet ski” grows too big to be a jet ski but is not yet a supertanker
Either:
have a long-term strategy for making it thorough this phase
get through the phase very quickly
have an exit strategy
M&A can be an essential component of any one of these three alternatives
Industry Environment
Changing Industry Landscape
We may be at a “Tipping Point”
Two fundamental powers/sets of interests in the payments industry are changing
Central role of the bankcard associations
Banks’ interest in the payments status quo
Increased attention (as a result of above) of new areas of electronic payments
Established methods receiving new life (e.g. ACH) and M&A is a big factor in these segments
4
Role of the Bankcard Associations
Bankcard associations’ (VISA and MasterCard) role changing Pressure from various sources
Multiple roles lead to conflicting interests
4
BankcardAssociations
First Data• Concord merger• FirstDataNet
DoJ• Duopoly lawsuit (AMEX)• Other initiatives
Wal-Mart settlementGovernment intervention
BankcardAssociations
As an independent entity
As representative of members
Risk of diminished role in:• market share (shift to Amex/Discover)• infrastructure (due to FDC routing
transactions away)• new product introduction (due to loss of
honor all cards rule)Loss of revenue due to lowered off-line
debit ratesLoss of revenue due to payments mix shift• credit/off-line debit shifting to online
debit• checks shifting to debit/credit
Payments at Financial Institutions
Payments are a vital source of financial institution revenue
4
Currently, between 30% and 50% of a bank’s revenue comes from
handling payments . . .
Source: First Annapolis
. . . but the payments mix is expected to change significantly
Cash43.0%
Check23.6%
Credit18.3%
Debit10.2%
ACH2.3%
Other2.7%
Cash41.4%
Check16.0%
Credit19.5%
Debit14.4%
ACH5.5%
Other3.1%
Source: Nilson Report
Consumer Payments 2002 Consumer Payments 2007
Payments at Financial Institutions
Severe pressure is likely on payment revenue1. Declining revenue from bankcard transactions
off-line debit lowered interchange rates and declining share (?)
credit cards online debit rate increases (?) fees to consumer
2. Checks become a challenge volume declines of 1% - 4% annually to 2007 are forecast
( 2 billion - 8 billion less checks) reduction in volume causes significant increase in per-unit
costs current revenue per check: $0.20 per check current: $0.06 - $0.10 per check (50%-66% margin) at projected volumes: $0.20 per check (0% margin)
4
Payments at Financial Institutions
Banks may abandon protectionism of checks Electronic bill payment and presentment
– Business to consumer; Business to business Deployment of electronic POS solutions
– POS check conversion; PIN terminals; Stored value cards?
Check imaging and electronification
– Check 21 Act; Lockbox conversion; ARC application
ACH applications Shift in payments may occur faster than projected Check outsourcing likely to benefit
4
Hot new segments
Stored Value is the hottest new area in payments
Surprising! (since previous initiatives unsuccessful)Olympics, New York trialmultiapplication/genericsmart-card based (need infrastructure)
Primary motivations for use very different dependent on application– replace existing paper-based systems (gift cards)– convenience (speed and avoid cash)– budgeting– loyalty (actual or associative affinity programs)
All-in cost less than other forms of prepaid– scratch-off cards/checks/vouchers or paper-based
certificates
4
Hot and Cold (Less M&A/More M&A)
4
Stored Value cards prepaid wireless other
Check electronification and imaging
ACH network applications New industries
mortgage insurance
Fraud and security inc. support for Verified by
Visa et al. Global commerce applications
dynamic currency conversion
Storage and compliance Email applications
Core processing applications
Aggregation EBPP ATM driving Online banking Wireless banking Person-to-person Merchant acquiring
(esp. consolidation)