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.