The Possible Effects of Fiserv’s First Data Acquisition

The creation of a fintech mega-firm shaped by Fiserv’s acquisition of First Data in a $22 billion stock transaction, left some speculating about the deal’s effect on the financial services industry.

Myron Schwarcz, EVP at Memphis, Tenn.-based Strategic Resource Management, a full-service consulting firm for credit unions and banks, indicated the new entity could generate some interesting consequences in the credit union space.

Fiserv – which serves over 12,000 clients worldwide including financial institutions, billers, retailers, merchants, and building societies – is an established leader in banking technology. First Data, which handles 45% of all U.S. credit and debit transactions, is similarly positioned as a leader with a greater emphasis on payments, includes some 4,000 financial institution and 6 million merchants.

Schwarcz explained there are some potential advantages in the long term, most notably, because Fiserv was never quite as strong in the card payment space as some of its competitors. This resulted in many credit unions with a decision, either accept card processing as a consolidated offering under Fiserv or try to pick a best-of-breed approach based on the capability of another provider and have more integration work to do.

“With the acquisition, the more and potentially better payment functionality is going to be brought in under the Fiserv roof,” Schwarcz said. “Therefore, smaller credit unions, which do not have extensive IT budgets or resources dedicated to integration can now get more services from one supplier developed in a single or simplified front end for members without having to do a lot of behind the scenes work. It makes my operation or a little bit easier to manage.”

Fiserv’s core banking platform and payments clients trend toward credit unions and smaller banks. First Data on the other hand has a diversified client base ranging from some of the country’s largest banks to very small financial institutions (through its reseller relationships), Schwarcz specified in a separate blog. “In theory this creates attractive synergy opportunities, enabling both parties to cross-sell into the other’s base. The combined organization has also promised $900 million of expense savings through the elimination of redundancies.”

Schwarcz stated realizing such cost savings will likely require extensive platform rationalization and integration. “First Data operates multiple processing platforms in the United States alone, and Fiserv already faces the challenge of integrating the debit processing and MoneyPass, network businesses it acquired from U.S. Bank’s Elan unit last fall. “It’s easy to see stalled product development while they harmonize existing projects, putting clients at a disadvantage relative to competitors working with other processors.”

Partnerships are also in question. Schwarcz said It will come as no surprise to see Fiserv in the near term focus its client outreach on large financial institutions since both Fiserv and First Data have established a variety of value-added reseller relationships to extend their reach to smaller clients.

Schwarcz also noted while channel conflict is a common concern in VAR relationships; several First Data VARs compete head-to-head with Fiserv offerings. “Unfortunately, the smaller the financial institution, the less leverage it will likely possess to influence the timing and outcome of these transitions, making their vendor management efforts more challenging.”

None of these effects will be noticeable immediately, Schwarcz added. The Fiserv/First Data transaction won’t be finalized for several months, a period of internal planning and shuffling will likely follow its closing. “It is a complex business arrangement with numerous intertwined parts, and financial institution clients of both companies, large and small, should watch closely for signs of long-term impact and retain the flexibility to respond as needed.”

Schwarcz pointed out, “Essentially two channel partners focus in the credit union segment, CO-OP Financial Services and PSCU. They also compete with Fiserv, particularly in the debit card processing space.” Additionally, they don’t really compete against First Data, which doesn’t sell directly for the most part in in the credit union space, whereas Fiserv does. “Now both these organizations, who are focused on payments, on reselling First Data platforms are now going head to head with the owner of the best platforms. I don’t know exactly what’s going to happen, there’s not a lot of alternative options out there.”

Chuck Fagan, PSCU President and CEO, of St. Petersburg, Fla.-based PSCU, said, “PSCU is aware of last week’s announcement that Fiserv is acquiring First Data. Given that First Data is PSCU’s payments processing partner, we are closely monitoring the merger and will keep our owner credit unions updated on opportunities and outcomes surrounding the merger.”

Todd Clark, president/CEO, of Rancho Cucamonga, Calif. CO-OP Financial Services, stated: “Fiserv’s acquisition of First Data was not unexpected as we’ve seen consolidation trending in the marketplace. Major industry players are teaming up to offer a more diverse menu of services to clients looking to streamline multiple vendor relationships. CO-OP’s 2017 acquisition of TMG has strengthened our delivery, creating a fully-integrated, comprehensive payments services company. In addition, our multi-platform strategy, size and scale, provides choice for our owners and flexibility for the long-term vitality of the credit union movement.”

Schwarcz maintained, “What it means for us? Fewer vendors, less competition, right.”