Exploring Investment and Industry Analyst Reports for Trends in the Merchant Acquiring Space

Navigator Edition: September 2014
By: Nick Kaw

In a recent effort, First Annapolis examined equity analyst reports and industry commentary articles to understand the thinking about key industry themes in the analyst community. The reports either analyzed specific acquirers or evaluated the merchant acquiring space or larger payments industry in general. Drawing from a base of over 30 discrete reports from Credit Suisse, JPMorgan, and other analysts dating from late 2013 through mid-2014, we reached several key conclusions regarding the broader market’s opinions on the industry.

First, we examined the analysts’ takeaway opinions on acquirers and categorized these conclusions on a spectrum weighing the comparative focus on growth and margin. As shown in Figure 1, analysts were focused on growth and tended to make their recommendations based on the strengths or weaknesses of an acquirer’s growth, as opposed to the merits of its margins.

Figure 1: Analyst Conclusions – Growth vs. Margin

Fig-1_-Analyst-Conclusions-–-Growth-vs-MarginNote: Not all reports included an opinion on an acquirer, while other reports included opinions for multiple.
Source: First Annapolis Consulting analysis of reports from Credit Suisse, JPMorgan, and Digital Transactions.

Analysts are almost unanimously bullish on the independent software vendor (“ISV”) and value-added reseller (“VAR”) sales channels. Many combine that view with an explicitly bearish stance on the more traditional, feet-on-the-street distribution strategies employed by conventional ISOs. JPMorgan analysts cited the integrated payments solutions space as “one of the faster growing channels in payments and [being] generally characterized by stickier, less price sensitive merchants,” a finding with which analysts at Credit Suisse agreed.

Interestingly, analysts are linking the topic of EMV to this integrated payments strategy with the hypothesis that the EMV migration will benefit acquirers that partner with software developers. Credit Suisse analysts predict that “EMV will drive a gradual multi-year POS upgrade cycle that will cause merchants to re-evaluate their current terminal and processor relationships. We believe merchants, especially in the SMB space, will migrate to ‘smart terminals’ that seamlessly integrate payment solutions with various software applications in order to run different aspects of their businesses. This shift will drive merchants toward iPOS [integrated point-of-sale] solutions, and away from ‘dumb’ terminals that only facilitate payments.” In light of such trends, Credit Suisse prefers “acquirers such as [Vantiv] that are more aggressively moving into the SMB space.” Similarly, JPMorgan believes that “SMB adoption of iPOS will trend towards that of large merchants (1000+ store chains), where iPOS represents over 90% of installed POS devices, a trend that favors Mercury and other integrated payment processors.”

Analysts also noted other themes in their reports on a lesser basis, such as the “increasing demand for more omni-channel solutions” (Credit Suisse) and concerns over regulation. However, the reports did not indicate any substantial concern about any specific upcoming regulation. Instead, the analysts mostly issued warnings about regulation being an investment risk in the abstract.

For more information, please contact Nick Kaw, Senior Analyst, nick.kaw@firstannapolis.com, specializing in Merchant Acquiring.

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