1、North America Equity Research10 May 2019 Payment ProcessingPayments Market Share Handbook Tenth EditionPayments,Processors&IT ServicesTien-tsin Huang,CFA AC(1-212)622-6632tien-Bloomberg JPMA HUANG Reginald L.Smith,CFA(1-212)622-Puneet Jain(1-212)622-Connor Allen(1-212)622-J.P.Morgan Securities LLCSe
2、e page 109 for analyst certification and important disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should
3、 consider this report as only a single factor in making their investment This report is a primer and overview of the payment processing ecosystem,summarizing the latest market share,growth and penetration trends for card-based payments worldwide.Specifically,the report includes:An overview of the pa
4、yment processing services ecosystem and industry participants(i.e.,who are the players and what services do they provide?)a market sized by the Boston Consulting Group to be at$1,200B in revenues.A look at the payment processing and services value chain and economic model of various sub-sectors,incl
5、uding fund flow diagrams of card-based payment transactions.A look at historical volume growth trends and penetration measures for domestic and international card markets,highlighting(1)solid,but maturing mid-to-high single-digit growth in the U.S,and(2)faster double-digit growth overseas fueled by
6、low penetration rates for many years to come.We believe processors must expand overseas and embrace new distribution channels(like integrated payments,mobile)to sustain growth.Market consolidation remains a theme,and should continue,especially as distribution and consumption of payments shifts to di
7、gital and software models,forcing incumbents to embrace tech-based distribution or risk losing share to contemporary challengers.We continue to expect a growing divide between bank-based distribution and tech-based distribution models,and the bank side received a scale boost with two large merchant
8、processors agreeing to merge with bank processors.Tech-based distribution should continue to grow at 2x the market for years to come as it is still less than 10%penetrated in the U.S.An analysis of the international“green field”opportunity,focusing on international markets that most resemble the U.S
9、.(from a GDP per capita perspective)and the spread between mature and emerging market card-based penetration rates.We identified about a dozen key international countries that we think are the most immediate cash conversion opportunity.Market share breakdown of the payment networks(Mastercard gainin
10、g share),domestic acquirers(JPM and Worldpay gaining share;First Data losing),domestic credit and debit,domestic PIN-debit,prepaid,POS terminal providers and key issuers.We also touch upon the emergence of on-demand banking and the renewed interest in B2B payments.2North America Equity Research10 Ma
11、y 2019Tien-tsin Huang,CFA(1-212)622-6632tien- Table of ContentsPayment Services Overview.3Payment Processing Economics.13Domestic Card Market.19International Card Market.27Sizing the International Opportunity.38U.S.Credit Snapshot.41U.S.Debit Snapshot.45U.S.Merchant Acquiring Snapshot.48POS Terminal
12、 Provider Snapshot.56On-Demand Banking.64B2B Market.73Digital Commerce Snapshot.77Domestic Card Issuers.89The European Payments Market.91PSD2 and Open Banking.92The Canadian Payments Market.95The Latin American Payments Market.97The Asia Pacific Payments Market.101MA/V Tale of the Tape.1043North Ame
13、rica Equity Research10 May 2019Tien-tsin Huang,CFA(1-212)622-6632tien- Payment Services OverviewThe payment processing industry provides the infrastructure and services that facilitate and enable electronic payments.Key industry participants include merchant acquirers and processors,payment networks
14、,card issuer processors,card issuers,point-of-sale(POS)terminal manufacturers and gateway providers.The industry is characterized by recurring revenues,high operating leverage and robust free cash flow generation,driven by the continuing secular shift from paper to electronic forms of payment.Figure
15、 1:Card Transaction Fund FlowSource:J.P.Morgan.Industry Players Merchant AcquirersMerchant Acquirers are the“distribution and sales”arm of the payments industry.Acquirers sign merchants to card acceptance agreements and are typically the merchants first(and primary)point of contact,contracting direc
16、tly with the merchant.Acquirers earn a gross“discount rate”of roughly 2%of the sale amount,most of which is remitted to the card network and ultimately the card issuer as interchange income.Net acquiring revenues(net spread after subtracting interchange and payment network fees)are a fixed transacti
17、on fee(for larger merchants)and/or a percentage of the sale amount(for smaller merchants).Merchant acquiring spreads are inversely correlated with the size of the merchant.Publicly traded merchant acquirers include Cielo(Brazil),EVO Payments,First Data,Global Payments,Square,TSYS and Worldpay.Severa
18、l large acquirers are owned by banks like Chase Merchant Services(formerly Paymentech),Bank of America Merchant Services and Elavon(U.S.Bank).The terms“merchant acquirer”and“merchant processor”are often used synonymously,but they are,in fact,two distinct functions which,in some cases,are provided by
19、 the same entity but can be provided by separate entities.4North America Equity Research10 May 2019Tien-tsin Huang,CFA(1-212)622-6632tien- Merchant acquirers come in various forms and sizes,including bank subsidiaries,bank joint ventures,unaffiliated/independent direct sales firms,independent sales
20、organizations(ISOs),independent software vendors(ISVs),VARs,etc.See Table 20 for a list of the top 10 merchant acquirers in the U.S.We note the top 10 U.S.merchant acquirers capture 78%of bank card purchase volume,and we expect ongoing consolidation.Acquiring Is All About Distribution and ScaleMerch
21、ant acquiring is differentiated by sales approach,as there are many channels to access the fragmented merchant market.Key sales channels include banks,non-bank scale processors,ISOs and ISVs.It is common for large retail banks(e.g.,Wells Fargo,Citi,Bank of America,etc.)to have joint venture merchant
22、 acquiring partnerships with large processors.The joint venture structure allows banks to leverage/monetize their extensive branch network and small business banking/treasury relationships to reach and up-sell merchant acquiring contracts without the hassle or cost of building their own payment proc
23、essing infrastructure.Bank acquirers claim about 50%of the market,demonstrating the strong sales reach a bank can provide.However,non-bank entities are generally growing faster because they take a more proactive approach in adding merchants via direct(feet on the streetand in-house sales)or indirect
24、 sales channels(ISOs,ISVs and dealers).Aggressive ISOs with a hungry commission-based sales structure can grow at above market rates,but are quickly losing share to new-age ISVs that sell payments integrated intotechnology designed to help a store run their business better.Figure 2:Merchant Acquirin
25、g is All About Distribution Source:Company reports and J.P.Morgan estimates.Integrating Payments Into Software Has Been a Winning ModelIntegrated payments is the marrying of point-of-sale hardware,business management software and payment processing.There has been an increased focus on integrated POS
26、 as merchants are increasingly demanding(and benefiting from)integratedsystems,due to a number of trends,including(1)decreasing cost of technology(e.g.cloud),(2)demand for more payment options,(3)specialized industry specific software embedded in such systems to improve business operations,(4)new se
27、curity standards and(5)the proliferation of tablets.The winning distribution model for small and mid-sized merchants shifted from“feet-on-the-street”sales to technology-SmallProcessorSales ChannelMerchantNational Banks:50%ShareChase Merchant ServicesBank of America Merchant ServicesWells Fargo Merch
28、ant ServicesElavon/US BankNew Age ISOs:5-10%ShareSquareBraintreeStripeLightspeedLegacy ISOs&Regional Banks:10-15%ShareHeartland PaymentsPaySafeNorth American BankcardScale Processors(non-bank):30%ShareFirst DataGlobal PaymentsWorldpayIn-houseElavonFirst DataGlobal PaymentsTSYSWorldpayEVO PaymentsLar
29、ge5North America Equity Research10 May 2019Tien-tsin Huang,CFA(1-212)622-6632tien- led sales about five years ago,which has driven a wave of consolidation in the spaceFDC,GPN,TSYS and WP have collectively spent around$10bn on acquisitions to bolster their integrated payments efforts,which has sparke
30、d an arms race,as acquirers look for tech partners to embed their payment solutions into:FDC buying CardConnect;GPN buying PayPros and APT;WP buying Element,Mercury,Moneris,and Paymetric;TSYS buying TransFirst and Cayan,all of which collectively power over$150 billion in volume annually.But Power is
31、 Shifting to Software Providers Rise of PayFacsWith software being the“tip of the spear”in establishing a merchant relationship,an ISV can bring a merchant acquirer along as a payment module and generate incremental income by sharing merchant acquiring fees.However,savvy software providers are incre
32、asingly bringing the payment element in-house(becoming a“payfac”)to retain a bigger portion of the merchant acquiring economics,downgrading the payment processor to a cost of goods sold vendor as opposed to a revenue share partner under the integrated model.Recent IPO Lightspeed is an example of a r
33、ecent converter to the PayFac model,utilizing technology from Finix to take payments in-house with Worldpay as processor.We see software becoming more important as a means to engage with merchants,evidenced by the success of Square,which gives away its base software for free only to be monetized by
34、payments.Another example is Global Payments,which has begun acquiring software assets for its salesforce to distribute and penetrate payments.Moreover,companies like Braintree and Stripe have quickly gained scale by focusing on digital commerce and developing payment APIs popular with the developer
35、community to power leading mobile apps and digital platforms.Merchant ProcessorsMerchant processors are the gateway to the payment networks,providing authorization,data transmission,data security and settlement functions as an outsourced service to merchant acquirers.Processing is a scale driven bus
36、iness,with only a handful of large players,and is often an outsourced service utilized by merchant acquirers.In other words,merchant processing is a cost of goods sold for merchant acquirers.Scale processors include:First Data,TSYS,Global Paymentsand Worldpay.Processors typically earn a flat fee per
37、 transaction processed and source their transactions from their own sales force,bank partners,VARs,and/or from independent sales organizations(ISOs)who outsource their network gateway and processing/settlement needs.Merchant Acquirers and Merchant Processors Not the Same Thing,But Can Be the Same En
38、tityThe terms“merchant acquirer”and“merchant processor”are often used synonymously,but they are,in fact,two distinct functions which,in some cases,are provided by the same entity,but can be provided by separate entities(see Figure 3and Figure 4 below).The top three merchant processors ranked by volu
39、me are First Data,Chase and Worldpay.6North America Equity Research10 May 2019Tien-tsin Huang,CFA(1-212)622-6632tien- Figure 3:U.S.Merchant Acquiring Volume Share 2018Source:The Nilson Report and Company reports.Figure 4:U.S.Merchant Processing Volume Share 2018Source:The Nilson Report,Company repor
40、ts and J.P.Morgan estimates.Chase20%BAMS13%Worldpay13%Wells Fargo8%Global Payments6%First Data6%Elavon5%Citi3%TSYS3%PNC1%Other22%First Data35%JPMC20%Worldpay13%GPN7%Elavon5%TSYS6%Other14%7North America Equity Research10 May 2019Tien-tsin Huang,CFA(1-212)622-6632tien- Table 1:Top U.S.Merchant Acquire
41、rs and Respective Processors-2018AcquirerBank Card Volume($bn)Market ShareProcessorChase Merchant Services1,04220%In-houseBank of America(BAMS)68513%First DataWorldpay65613%In-houseWells Fargo Merchant Services4218%First DataGlobal Payments3346%In-houseFirst Data2926%In-houseElavon(U.S.Bank)2675%In-
42、houseCiti Merchant Services1743%First DataTSYS1393%In-housePNC Merchant Services491%First DataSource:Company reports,The Nilson Report and J.P.Morgan estimates.Payment NetworksPayment networks are the backbone of the electronic payments system,connecting and switching transactions between acquiring
43、banks and issuing banks,enabling electronic payment authorization,clearing and settlement.Network providers govern interchange rates for their respective issuers,set rules and compete on the basis of merchant acceptance,reliability,price and additional value-added services.Network operators earn tra
44、nsactional fees based on the number of transactions processed and in some cases a licensing or assessment fee based on the notional purchase amount.Notable network providers include:Visa,Mastercard,American Express,Discover/PULSE,Interlink(Visa),NYCE(FIS),Accel(FISV),UnionPay(China),Interac(Canada)a
45、nd STAR(First Data).Card Issuer ProcessorsIssuer processors provide outsourced authorization,settlement,customer service/call centers,loyalty program administration and statement printing and mailing services to the card issuing community.Notable players include:TSYS,First Data and FIS.Issuer proces
46、sors have historically earned a nominal monthly service fee(per active account)from the card issuer,and in many cases a transaction fee,but can also sign licensing agreements with the largest card issuers interested in running this function in-house.According to S&P,the top six issuer processors(FIS
47、,FISV,TSS,FDC,JKHY,WP)capture 90%of spending.TSYS has sized the issuer processing market at$7B in annual revenues(includes North America and Western Europe),expected to grow at 3%through 2021.Issuer processors offer platforms unique to different products like credit cards,debit cards,private label c
48、ards,virtual cards and pre-paid debit cards.As such,the majority of customers utilizing card issuing services are represented by large banks.Card IssuersCard issuers market card-based products to consumers,generating transaction fees(e.g.interchange),nuisance fees(e.g.late fees)and net interest marg
49、in in the case of revolving cards.U.S.card issuers earn interchange,180bps of the purchase amount for credit card transactions and about$0.25 per transaction for regulated debit transactions in the U.S.Card issuers typically pay the network a negotiated transaction fee and a royalty fee based on the
50、 purchase amount,which together run about 5bps to 10bps(JPM estimate)in the U.S.8North America Equity Research10 May 2019Tien-tsin Huang,CFA(1-212)622-6632tien- Other Payment Service Providers POS Terminal ProvidersSee Figure 57 on page 57 for summary market share of POS terminalsPOS terminal provid
