Deal Thoughts – First Data Acquires CardConnect

Earlier today, First Data, a global leader in payment processing announced that it had entered into an agreement to acquire CardConnect, an innovative provider of payment processing technology for $750,000,000. This transaction comes less than ten months after CardConnect’s acquisition by FinTech Acquisition Corp., a Special Purpose Acquisition Company (SPAC), for $438,000,000, which took CardConnect public in August of 2016.

This is an especially interesting deal as it further supports KoreFusion’s observations about the evolving payment service provider/payment processing industry.  In particular, it is illustrative of 3 trends we see shaping the industry going forward:

• Continued Shift Towards Retail Intelligence – In November of 2015 we released a white paper highlighting an emerging trend we call Retail Intelligence. We posited that the commoditization and eroding margins of core processing/acquiring services would push payments providers to move beyond payments-oriented value-added services (VAS), and drive interest in enhanced payments technologies that enable new types of VAS. CardConnect’s, innovative technology platform offers just these types of VAS and will enable First Data to offer these higher margin services to across its massive client base.
• Processors Are Looking to Acquire Innovation – In addition to illustrating the desire for innovative technology within the processing space, the deal also illustrates that most large payments processors are not interested in developing their own technology, but rather, will look to small and mid-sized processors to fill their innovation pipeline externally. Developing new solutions and technology in-house requires time and specialized resources, as well as a long runway for development and iteration, which may not end successfully. This deal further illustrates that most large processors would prefer to acquire a proven technology at a premium versus developing their own.  As one of the largest payment processors both in the US and globally, First Data, can bring scale to innovative technology. We expect to see this trend continue across the payments processing space where large volume processors look to acquire innovation and plug it into their network, rather than develop it themselves.
• The Emergence of SPACs and Alternative Financing Vehicles – SPACs have historically been considered a “second class option” for less attractive companies to list publicly.  However, over the past decade, SPACs are garnering increased attention due to the lower cost and administrative friction required to go public via a SPAC transaction, versus a traditional IPO.  Additionally, the return on investment (approx. 65% in under 10 months) for those involved with the FinTech Acquisition Corp will serve to drive further interest in alternative financing vehicles. (In fact, a larger FinTech Acquisition Corp II has already been launched – NASDAQ: FNTEU.)  While attention has been on ‘unicorns’ like Stripe and Adyen, or rapidly growing fintech looking for large venture rounds, there are a number of high-quality mid-sized payments and fintech companies that proven business models and are growing steadily. While these may be less exciting stories, they are strong businesses and represent real investment/acquisition opportunities. Look for further acquisitions from the investment community SPACs and other alternative investment vehicles.

If you would like to discuss KoreFusion’s perspectives on the payment service provider/payment processing sector, other implications of this deal on this industry, or the opportunities available through SPAC transactions, please feel free to reach out at information@korefusion.com.