Tag: Fiserv

Lloyds Cardnet – higher prices cushion falling volumes

Geoffrey BarracloughLeave a comment

2024 was another difficult year for Lloyds Cardnet, the merchant services joint venture between Fiserv and one of Britain’s largest business banks. Lloyds owns 51% of Cardnet and has embedded merchant services firmly within the overall business banking proposition. Most customers are also customers of Lloyds Bank.

According to documents posted at UK Companies House, higher prices kept Cardnet’s revenue stable in 2024 but the business looks to be caught in a squeeze between Adyen/Stripe/Checkout taking enterprise customers and the “tap pack” of Dojo and others hoovering up small merchants on the high street.

Bar chart displaying Lloyds Cardnet's transaction volume and revenue per transaction from 2020 to 2024, highlighting debit and credit values.

Cardnet has been going backwards since 2021. In 2024, volume fell a further 4% to £52bn and transaction numbers were down a further 10%. ATV rose 7% to £57.57.

Cardnet sells Fiserv products such as Clover. At times, this gives early access to innovation but Cardnet’s ability to grow can sometimes be hampered by its partner’s multiplicity of platforms – a dependence on Fiserv technology that management itself flags as a key risk.

By contrast, Dojo – Cardnet’s most direct challenger at the SME end – saw volumes rise 8% last year to £46bn while also running at significantly higher take rates. Dojo’s model is based on slick onboarding, premium service and bundled terminals, a sharp contrast to Cardnet’s reliance on Fiserv’s legacy platforms.

After deducting interchange, scheme fees and Fiserv’s costs, Cardnet’s net fee and commission income (net revenue) was flat at £53m as management mitigated the impact of share losses by increasing its prices. Net revenue per transaction rose 12% to 5.8p. This is equivalent to a take rate of just 10bps, suggesting that Lloyds gets most of its volume from the bank’s largest (and lowest margin) customers.

Operating expenses rose 13% to £40m. Cardnet spent a further £15.7m in 2024 on its “strategic investment programme,” bringing the total to £38m over the past three years. This initiative is intended to improve onboarding, bring the product portfolio up to today’s market needs and develop new distribution partnerships.

The investment has begun to deliver results. Paypoint, probably Britain’s largest ISO, has selected Lloyds Cardnet as its exclusive acquiring partner. Paypoint chose Cardnet because of the wider banking product set which it brings, but the volume boost will be welcome..

Cardnet has also made some progress with enterprise merchants, cementing its partnership with Ryanair and winning a new supermarket customer. However, fraud losses grew by £3m, suggesting Cardnet is taking on more risk.

Cardnet has no staff of its own. All employees are managed by Lloyds or Fiserv and recharged to Cardnet. Salary costs rose 6% to £15.7m.

Bar chart showing Lloyds Cardnet's net income and profit (£m) from 2020 to 2024, with blue bars representing net income and gray bars representing profit before tax.

Pre-tax profit fell 32% to £15.7m, There was no dividend for 2024, after £87.5m had been paid out in the previous two years. This would seem to suggest the shareholders are committing to return Cardnet to growth.

Management remains optimistic about the future, saying “growth is expected in 2025… aligned with client acquisitions in key growth sectors such as food & drink and travel.” But Cardnet remains in a strategic squeeze: dependent on Fiserv for technology, losing SME share to Dojo, Square and the “tap pack”, and enterprise share to Stripe and Adyen.

AIBMS bounces back from pandemic with strong 2022 numbers

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AIB Merchant Services, the Irish joint venture between Allied Irish Banks and Fiserv (First Data) reported a strong performance in 2022 with profits up 31%. 

Dublin based AIBS is Ireland’s largest domestic merchant acquirer. It serves all business types, large and small, with lead generation primarily via the bank network. The product portfolio includes Clover and the business competes with Bank of Ireland Payment Acceptance (Global Payments) and Elavon.

 In the UK, AIBMS mainly supplies SMEs through ISO relationships such as Fidelity Payment, Card Saver, Cardcutters Adelante and Payment Plus. Post-Brexit, AIBMS can no longer serve its British clients from Ireland and has established a UK entity which is expected to receive its payment institution licence during 2023. 

The third leg of the business is internationally focused and high-risk with domain expertise in gambling and gaming. AIBMS can pay out in 18 currencies and offers multi-functional Merchant IDs (MIDs) which greatly simplify multi-currency and multi-channel operations for complex merchants.

The company’s focus in 2022 was “managing merchant charge back risk and negative balance risk” arising from the pandemic and the economic recovery. This was successfully achieved although management report “some inflationary pressures but no slowdown in merchant sales.”

AIBMS does not report payment volume but does disclose gross fee and commission income – the total amount it billed to merchants including interchange and scheme fees. This figure grew 44% to €780m with particularly strong performance in Ireland which remains the company’s largest market. Although merchant service charges grew 41%, revenue from other fees which includes terminal rental was up just 8%. 

Management points to to “economic activity returning to pre Covid-19 levels” and the continued consumer shift from cash to card. Volumes also benefited “substantially from the boarding of large corporate merchants via wholesale independent sales organisations” such as Payzone, the Irish ISO acquired by AIB and Fiserv for €100m in 2019.

Net fee and commission income – after deducting the changes passed through to the card schemes – rose rather more slowly, and was up 16% at €112m. This likely fall in take rate could be due to a growing proportion of enterprise customers in its portfolio or an unfavourable mix of transactions processed by customers on fixed price contracts. Or both.

Operating expenses rose 13% to €57m. Total staff costs were up 16% to €12m. Employee numbers grew from 108 to 135 at an average of €91K each. Credit losses grew 23% to €2.1m or 1.9% of net revenue, modest for a business with a number of high-risk clients. 

Net operating income grew 31% to €62m with operating margin up 7%pts to 55%. 

Unlike Cardnet, Fiserv’s JV with Lloyds Bank in the UK, AIBMS is still not paying a dividend to its parents “due to the potential for chargeback loss events arising” from the pandemic and “the uncertain economic outlook.” However, AIBMS has made a €75m loan to Fiserv at commercial rates.

Cardnet grows revenue 5% despite loss of key clients

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Cardnet, the JV between the Lloyds Bank of the UK and First Data, grew net revenue 5% to £60m in 2022 despite a fall of 10% in total payment volume to £59bn. The business was hit by the loss of two key clients processing £10bn between them. Underlying payment volume rose 6% 

Cardnet is a merchant acquiring joint venture between Lloyds Bank and First Data (Fiserv) with the bank holding 51%. Cardnet has no staff and is recharged for services provided by the parents. This means its financial accounts are not always directly comparable to more conventionally structured acquirers.

Lloyds provides sales and marketing through its business banking network. First Data is the processor and supplies card acceptance products including Clover. Cardnet also has relationships with 3rd parties including Liberis for Merchant Cash Advance and Qikserve for a mobile ordering app.

Overall debit volumes fell 18% to £44bn due to the loss of the two clients. These were financial institutions which processed £10bn annual volume between them at a very high average transaction value (ATV) of £476.. This transaction profile is typical of the sector, was most probably very low margin and would have contributed little to the bottom line. 

In contrast, higher-margin credit volumes, driven by a resurgence in the travel sector, grew 24% to £15bn. Airlines, hotels and cruises contributed an incremental £2.4bn volume at an ATV of £406 and more than made up for the loss of the financial institution clients.

The more favourable credit/debit mix combined most likely with price increases, drove net fee and commission income up 5% to £60m. This is a good performance in the context of the fall in volume processed. But neither Lloyds or First Data would be happy with revenue lagging UK inflation which was almost 12% for 2022 . Net take rate ticked up 1bp to 0.1% while net income per transaction was steady at 5.3p.

Despite the growth in net fee and commission income, higher costs hit profits. The increased number of transactions drove higher service fees from First Data, Cardnet was recharged an extra £3m staff salaries by its parents and the company spent £6m on its “Strategic Investment Programme.” As a result profit before tax fell 9% to £39m. Nevertheless, management felt confident enough to resume dividends with payments to the shareholders of £53m in 2022 and a further £35m after the financial year end.

“A unified company that’s better than the sum of its parts” – Fiserv reports broadbased growth

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Fiserv, the financial technology company, has reported strong Q4 2022 results, offering a glimmer of hope to investors who have been unimpressed with the financial performance of quoted payment companies as of late. In contrast to its peers, FIS and Global Payments, who are struggling to explain why bank and merchant processing sit well together, Fiserv reported broad-based growth across all three of its business units. 

CEO Frank Bisignano stated that the business heads into 2023 “as a unified company that’s better than the sum of its parts … our vision for the cross-sell opportunity between Fiserv and First Data offerings has become reality.” He went on to say that “synergies are apparent, for example, between acquiring and core banking and embedded finance and card issuing services across multiple verticals.”

Revenue rose 9% in the fourth quarter to $4.6bn, with solid increases in turnover across the Merchant Acceptance, Fintech, and Payments/Networks divisions. Although the company does not break down its revenue by geography, CFO Bob Lau noted growth in EMEA, particularly in the issuer space, and added that the Deutsche Bank joint venture is now live and beginning to contribute to growth. See Deutsche Bank’s Vert looking a little green.

Profits were driven by effective cost control. The company saw a 7% year-on-year decrease in expenses, with a particularly sharp drop in the cost of processing and services. This was accompanied by a 1% reduction in SG&A expenses to $1.49bn compared to the 6% rise reported by FIS.

With revenues up and costs flat, operating income for Fiserv more than doubled to $1.179bn, although the year on year increase was flattered by some large acquisition-related expenses from 2021. Adjusted operating income growth was 20%.

Looking at divisional performance, Merchant Acceptance, the unit of most interest to Business of Payments, grew its processing volume by 5%, lagging a little behind the 7-8% reported by Visa and Mastercard. Total transactions only grew by 3%. However, Fiserv management aims to present itself service provider, with a focus on metrics such as average revenue per user (ARPU) and customer lifetime value (LTV) instead of volume growth.

Revenue in the Merchant Acceptance division increased by 9% or 16% at constant currencies. Adjusted net income grew 22% to $648m in the fourth quarter with margins expanding by 350bps to 35%, as a result of “operating leverage and productivity“.

The SMB proposition, Clover, and the enterprise proposition, Carat, both outperformed, with sales growth of 23% and 15% respectively. The number of Clover merchants rose 9% in 2022, and payment volume increased by 16% in the final quarter. 

Clover’s KPIs are all moving in the right direction. The penetration of value-added services reached 16% in the quarter, up from 13% last year, with ARPU growing 12%. For example, where Clover customers subscribe to BentoBox (a restaurant ordering/payment solution that has been part of the Fiserv family since the end of 2021), the company is seeing three times increase ARPU. The new Clover Capital merchant cash advance product is said to be “growing rapidly and favourably impacting customer attrition.” Bisignano noted that Fiserv is on track to reach $3.5 billion in Clover revenue by 2025.

Fiserv is investing in the independent software vendor (ISV) channel, which it considers a low-cost way to onboard fast growing merchants. The company added an impressive 174 ISV partners in 2022 and is building its PayFac, marketplace, and software platform with technology from the newly-acquired UK-based NetPay.

The company also announced two more acquisitions: Merchant One, a long-standing Fiserv ISO based in Miami Beach, which will strengthen Fiserv’s direct channel and offer more opportunities to sell Clover, and Yacare, an Argentinian QR-based payment wallet.

Fiserv – Clover, Carat contribute to solid Q3 results, Europe underperforms

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Fiserv reported a solid quarter of reasonably broad-based growth with its Q3 results. “This demonstrated the resilience of our business model and should position Fiserv well to withstand current uncertainty,” said Frank Bisignano, CEO.

Of Fiserv’s three operating units, it is Merchant Acceptance which interests us at Business of Payments. This division accounts for 41% of total revenue and profits. 

Merchant payment volume was up 8% in Q3 and transaction growth up 5%. Volume was impacted 2 ppts by loss of a processing client. Although operating worldwide, only 14% of Fiserv’s revenue is outside the US so currency translation causes less distortion than at many of its competitors.

Fiserv does not publish its sales by geography, but has underperformed on our side of the Atlantic. Bisignano said “We did not have a great quarter in the European theatre.” Management is hopeful of an upturn. “[We] see new opportunity with the launch of our Deutsche Bank joint venture in the quarter,” said Bob Hau, CFO  [See Deutsche Banks’s Vert is looking a little Green]

Merchant acceptance revenue grew 9% to $1.88bn in Q3 split between 10% growth in processing and 7% in product sales. 

Management believes the uncertain macro environment has been helpful as merchants are looking to consolidate multiple vendor relationships. This favours full service providers such as Fiserv and explains the good performance of Clover and Carat (the rebranded enterprise segment) which grew revenues 19% and 18% respectively. More details below. It also explains the less positive performance of the remaining business lines – SMB (excluding Clover) and processing – which we calculate were up just c.3% in Q3.

Merchant Acceptance adjusted operating income [roughly equivalent to EBITDA] rose 11% to $610m as margins expanded 30bps to 32.5%. 

Fiserv “mutually terminated” its Korean joint venture and booked a $120m loss.

Merchant credit losses ticked up to $18m in Q3, roughly 1% of turnover. Fiserv keeps a very chunky $1.9bn collateral from merchants as security against future losses.

Cashflow has been impacted by supply chain issues in China relating to point-of-sale devices. Anecdotally, many acquirers are suffering from inconsistent deliveries from vendors but only Fiserv has called this out.

Clover had another good quarter. Payment volume was up 21% and revenue up 19%. Reflecting continued upselling beyond processing, software/services now account for 15% of Clover revenue, up 260bps year on year. New wins included Caesars Superdome in New Orleans, demonstrating that Clover can scale from single site to multi-lane high frequency use cases.  

Fiserv has extended Clover’s distribution by commercialising an ISV-friendly version – Clover Connect. This added a very impressive 37 new partners in the quarter including Salon Ultimate Software, a comprehensive solution for salons and spas.

Adding to Clover’s software ecosystem, Fiserv acquired NexTable in September. This table management and booking solution enhances BentoBox, which was purchased earlier this year. Management has been very pleased with BentoBox as merchants which take this software alongside Clover generated 3x ARPU versus a Clover only restaurant. 

Carat, the omnichannel operating system for enterprise clients also out-performed with revenue up 18% in Q3. In recognition of Carat, Fiserv won “Merchant Acquirer of the Year” at the MPE Awards in July. Carat is really just a clever marketing wrap for Fiserv’s existing capability but there’s no shame in that.

Deutsche Bank’s “Vert” looking a little green

Geoffrey Barraclough1 Comment

Deutsche Bank has returned to merchant services although its launch proposition looks rather limited. There are also questions about how easy it will be to cross-sell payments to the bank’s large SME base in Germany.

DB has changed its merchant payment strategy more than once. The German banking giant was initially slow to enter the market before later buying and selling an acquiring business and finally announcing its latest plan – a joint venture with Fiserv. 

The new deal with Fiserv represents a fresh start for DB which fully exited merchant services in 2015 after it sold both Cologne-based Deutsche Card Services and Frankfurt HQ’d POS Transact (Postbank’s acquiring business) to EVO Payments International.[1]

DB adopted a new approach in 2020. When Wirecard imploded, Santander bought its technology but Deutsche hired the product team. The German bank engaged Wirecard’s rockstar product chief, Kilian Thalhammer, and tasked him with building a new Deutsche Bank payments unit. 

Two years later, we see the fruits of the strategy. Instead of buying or building the capabilities needed, the bank has chosen to partner with one of the global processing giants. Deutsche Bank and Fiserv have launched “Vert” a joint-venture aimed at the German SME market. Fiserv is already present in Germany through Telecash which offers a full range of POS and eCommerce payment acceptance. 

According to Finanz-szene, Fiserv has control of Vert with 51% of the shares. Joint managing directors are Gerd Vido, former MD of Telecash and long term Fiserv exec and Thorsten Woefel, former head of payments as Adidas who has joined from Deutsche Bank.

The Vert proposition looks a little rushed. There is no eCommerce or dynamic currency conversion (DCC) although these are promised soon. It’s not clear whether the online acceptance product will be Fiserv’s or based on Better Payments, a payment gateway acquired by DB earlier this year. Vert’s terminals accept just Visa and Mastercard. There are no other international schemes offered and no Girocard, the widely used German debit scheme. If a terminal doesn’t accept Giro, the transaction is processed as Maestro which attracts higher scheme fees for merchants. 

Vert is offering just three products at launch: 

  • PAX A50 at a very keen price of €4.99/month plus merchant fees  
  • Clover Flex at  €19.99/month plus merchant fees
  • “Go by Vert” a SoftPOS which is listed as “coming soon”

Boarding and customer service appear quite manual. Prospective customers are asked to fill out a form on the website and wait for a call-back. Vert’s address is a co-working office in Frankfurt which indicates it has not yet found permanent accommodation. 22 employees are listed on LinkedIn.

Longer term, the DB side of the venture hopes to integrate payments with banking products. “In co-operation with Vert, we can provide accounts, payment solutions and banking services to our SME customers,” says Kilian Thalhammer. DB has 800,000 SME customers; some with Fyrst, a neo-bank, but most with Postbank.

Both Postbank and Fyrst already offer Telecash products on a referral basis. Neither has updated its websites to push potential customers to Vert. One reason may be that Telecash’s standard product set (which includes Giro as standard) is considerably more extensive than Vert offers right now.

However, DB claims “some merchants already live” with Vert and there is an expectation of “rapid growth within its existing customer base”.

It’s not easy cross-selling payments to small business banking customers. Success requires strong and sustained senior management commitment, investment in staff training and incentives and, critically, seamless integration of boarding systems. A JV structure can make this harder. Business advisors in large banks have hundreds of products to talk to customers about and will sell the ones which are least hassle. Vert’s products will need to be easy to buy and easy to sell otherwise Postbank’s sales channels won’t deliver the volume of merchants needed to make Vert the success its investors are hoping for.

[1] I worked at EVO Payments 2015-2022 including on the Deutsche Bank & Postbank relationships.

Three way auction for Sabadell’s merchant acquiring business

Geoffrey Barraclough1 Comment

Banco Sabadell has confirmed a Reuters report that it is running a process to sell its merchant acquiring business for around €400m.  

Sabadell is believed to be insisting on a trade buyer for the unit. Having ruled out a sale to private equity, three international processors – Nexi, Worldline and Fiserv – are reportedly still in the running to buy Spain’s second largest merchant acquirer which accounts for 16% of the market. The EBITDA multiple is not available, but the suggested sale price of €400m suggests a very similar  valuation to Bankia, another merchant acquirer, sold to a Global Payments JV in 2021.

Spain’s domestic payment industry has had a difficult couple of years. The merchant acquirers are more tourism dependent than most. Many were badly hit by the pandemic and associated travel bans but business has since bounced back as borders reopened. With total payment volume of c.€258bn and strong cash to card trends, Spain remains a very promising market for inward investment. 

Sabadell’s payment volume was up 31% in the twelve months to June 2022 at €41.9bn with 14% of volume as eCommerce according to Nilson. Sabadell has 438K points of sale (physical and online) across 214K merchant outlets. Revenue for the whole cards business (issuing and acquiring) was up 14% in H1.

Sabadell is outsourcing merchant acquiring primarily because it needs to raise extra capital to support its transformation plans. Outside Spain, Sabadell partners with EVO Payments in Mexico and Square in the UK, through its TSB subsidiary. 

In Spain, the successful bidder will likely also get a long-term partnership arrangement with Sabadell for lead referral. This will help the bank maintain its customer relationships and prevent a competitor bank using merchant acquiring to establish a bridgehead with Sabadell’s merchants.

None of the three suitors has much business in Spain today. For each, the deal would represent a springboard into one of Europe’s largest payment markets helped by a strong distribution partnership with this leading retail bank with over 1,500 branches. For Fiserv, Worldline or Nexi, the business case to buy Sabadell’s merchant acquiring unit is primarily about cutting costs through consolidating processing and product development with their other European businesses. There will also be opportunities to sharpen up local sales and marketing and introduce leading products from other markets such as Clover. 

Nexi and Worldline are both highly acquisitive. Nexi has recently bought merchant service businesses from banks in Croatia and Greece. Worldline has made two purchases in Greece and set up a JV with ANZ in Australia. 

According to Reuters, the Sabadell board has already reviewed offers and will move quickly to the final stages of the auction.  

Strong cost and risk controls boost AIBMS

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AIB Merchant Services recovered strongly from the pandemic in 2021 with full year revenues and profits both up on the previous year.

Dublin based AIBMS is a JV between Fiserv and Allied Irish Banks. In Ireland, it is the largest domestic merchant acquirer serving all business types, large and small. Lead generation is primarily via the bank network. In the UK, AIBMS mainly supplies SMEs through ISO relationships such as  Fidelity Payment, Card Saver, Cardcutters and Payment Plus. Finally, there is a more internationally focused, high-risk business with domain expertise in gambling and gaming. AIBMS can pay out in 18 currencies and offers multi-functional Merchant IDs (MIDs) which greatly simplify multi-currency and multi-channel operations for complex merchants.

Merchant service charges rose 51% to €601m in FY 2021 with other fees (terminal rental, chargeback fees, DCC etc) rising 29% to €40m. Total fee and commission income for the international business rose 82%, in Ireland by 36% and in the UK by 28%. 

Excluding Interchange and scheme fees, net fee and commission income (net revenue) rose 19% to €97m. Management says the improved performance was due to “economic activity returning to pre Covid-19 levels…. And the consumer shift from cash to card.”

Strong cost and risk controls saw total operating expenses up just 2% to €51m. Staff costs rose just 6% and processing costs by 9%. Management had been worried about “merchant chargeback risk and negative balance risk” but credit losses were down from €2.7m to €1.7m. Cautious risk management saw merchant deposits (as protection against future losses) rise 49% at €19.6m.

This operational leverage drove net operating income up 40% to €47m with margins expanding 700bps to 49%. However, AIBMS does not yet feel confident enough in the future to resume dividends to its parents “due to the difficult trading environment and uncertainty.” 

Post Brexit, AIMBS still running on temporary regulatory permissions and is seeking a UK Payment Institution licence to keep trading. The company says this should be live in early 2023.

AIBMS sells Fiserv’s Clover POS products and has added a set of apps from Dublin-based Loylap covering gift cards, loyalty and order ahead. It has also launched a new merchant portal with deep insight capabilities including the ability for merchants to compare their sales with similar businesses located close by. The payment industry has been testing similar products for some time but it’s always proved tricky to get small businesses to access the data often enough to want to pay for it.

Fiserv hints at impact of inflation and supply chain troubles

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With its Q2 2022 results, Fiserv (parent of First Data) was one of the first payment companies to hint at the impact of both inflation and supply chain disruptions. Bob Hau, CFO, said that margins had been hit by “cost inflation for both labor and material, including point-of-sale terminals.” He went on to explain higher capex spending due to “buying significant amounts of inventory, both in terms of point-of-sale devices, but also in paper and plastic to protect our clients.” So, not only have payment terminals become more expensive but the large players have felt the need to hoard stocks to assure supply to their customers. 

In other news, Fiserv continues to report positive numbers for Clover. This is an all-in-one small business product that include software and payments which accounts for c.20% of Fiserv’s SMB revenues. Gross payment volume through Clover was an impressive $57bn in Q2. Fiserv’s revenue was reportedly up 15% year and it states that 15% of Clover merchants now take software/services in addition to the standard payment acceptance product. This was up 3.5ppts.  

Clover clearly works best when pitched as part of an integrated vertical offer. Fiserv said that BentoBox was now fully integrated to Clover for eCommerce payments. When sold together (Bento + Clover) “we see an over three times increase in average revenue per user versus a Clover-only restaurant.”

Fiserv also sounded bullish on Carat, its “operating system for enterprise clients.” Revenue was up 22% with strong growth reported in Petrol and Quick Service Restaurants. It’s not clear to the casual observer whether Carat is an actual thing or just a clever marketing wrap around Fiserv’s existing product set. Nonetheless, it boasts an impressive client list including McDonalds, Microsoft and Adidas.