World's Largest Payment Processor First Data Acquires InComm - Valuation Trend Implications for Global Payment Systems GPN, MV, V, MA and TSS and hundreds of smaller payment technology players

Implications: Visa's IPO was the largest in history and payment companies like Global Payment Sytems (GPN) and First Data are rising along with the tide. FDC’s choice of Incomm is likely a positive indicator of things to come. Who is the next Incomm? How will the Incomm acquisition affect the valuation of payment card processors, card acquirers, issuers, closed loop and open loop gift, debit, credit and General Purpose Reloadable (GPR) prepaid card plays? undefined undefined

Analysis:

First Data had a $25 billion market capitalization before it went private. They now have the luxury of looking beyond the quarter towards growth opportunities on the relatively distant (9 months and beyond) horizon and what do they see?

I think they see what Capital One saw when they looked at NetSpend. They see triple digit growth in General Purpose Reloadable (GPR) cards (aka Visa and MasterCard prepaid reloadable cards), and the emergence of open loop (Visa or MasterCard branded) gift cards as the preferred form of gift cards. They see governments adopting GPR cards as the preferred method of benefit disbursements (almost every state in the US as well as foreign government agencies in Canada and abroad). They see triple digit year-over-year growth in the issuance of payroll cards as an alternative to checks and direct deposit in service industries and industries that employ seasonal and transient populations. They saw Visa pull off the biggest IPO in history in the midst of a relatively lack luster if not moribund market.

GPR cards are still a relatively small proportion of Visa’s and MasterCard’s business and of the payment industry overall but it is the fastest growing segment and the technology/business model is very well suited to meet the growing demand for secure, convenient, manageable payment alternatives in the emerging markets of the world. Incomm’s competitors like Euronet and Blackhawk may also become appealing acquisition targets but there are many other companies who are being lifted by the rising tide. Like First Data, well-established players at the center of the payment-processing wheel such as Global Payment Systems (GPN), Elavon (formerly Nova Systems), Metavante (MV), eFunds and TSYS (TSS) have very strong momentum and along with Visa and MasterCard are perhaps among the most recession-proof companies in America. Whole ecosystems of innovative companies have grown up around these juggernauts and if one wants rapid growth, this may be where the upside is. A few to watch will be Galileo, NetSpend, Greendot and Comdata; also specialist banks like Palm Desert, West Suburban and Metabank may begin to see rising valuations as the industry attracts more attention.

Further towards the periphery of the payment ecosystem lie sectors composed of hundreds of companies. These companies provide a plethora of services and enabling technology including money transfer, bill payment, remittance, mobile payments, compliance, authentication, risk detection and assessment, ewallets and shopping carts. I’ve been trying to stay on top of this dizzying array for more than twenty years. I won’t say that is getting easier but at least the hierarchy in the payment food chain is coming into focus.