First Data Announcement Highlights Increasing Integration of Payments and Marketing

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SEE LAST PAGE OF THIS REPORT Howard Mason

FOR IMPORTANT DISCLOSURES 203.901.1635

hmason@ssrllc.com

April 10, 2014

Quick Thoughts:

First Data Announcement Highlights Increasing Integration of Payments and Marketing

Yesterday, First Data (the leading US acquirer with 18% share – see below) announced the addition of support for loyalty marketing to its Clover platform which competes with Square Register, for example. Like Leaf from HPY and Square Register, Clover is an integrated point-of-sale (iPOS) solution replacing a traditional cash register for small-and-medium-sized businesses (SMBs) and integrating payments with marketing, revenue-tracking, inventory management and other business applications provided in a software-as-a-service (SaaS) format. iPOS is gaining share with one vendor reporting that 45% of single-location SMB’s had iPOS-capable solutions in 2012, up from 39% in 2010, and over 60% of new terminal shipments being iPOS-capable in 2013.

The strategic role of Clover is to create technology barriers-to-switching for merchant clients of First Data’s acquiring business, and provide the opportunity to sell add-on services. As iPOS becomes standard, channel-share in acquiring will move to direct salesforces and independent software vendors (ISVs) which can support the technology, and away from traditional “feet-on-the-street” ISOs. Mercury Payments Systems, which filed an S-1 on March 28th in preparation for an IPO under the ticker MPS, has ridden the trend to gain processing share (with 17% growth in 2013 versus 6% for the industry), but there are concerns about confusing sales practices. GPN seems vulnerable because of its distribution tilt to ISOs (only 20% of sales direct versus 60% at VNTV and 100% at HPY, for example) and because Mercury, which is a GPN ISO accounting for ~15% of volume, confirmed plans in the S-1 to in-source processing. This illustrates the broader vulnerability to acquiring processors of distributing through ISOs; they can be displaced either by another processor or as the ISO integrates back into processing.

We see the best play on the iPOS trend as VNTV. Aside from being a scale-player with one of the most best-integrated and hence most cost-efficient platforms in the industry (so that, for example, it is capable of competing head-to-head with First Data for the processing business of WMT), VNTV has chosen a distribution strategy with a likely reach-advantage in the SMB segment (where it is looking to expand from its core business serving large merchants). Rather than becoming a vendor of iPOS terminals like First Data or relying exclusively on a direct salesforce like HPY, VNTV made a July 2013 purchase of Element Payment Systems which has an industry-leading reputation as a service-provider to independent software vendors (ISVs). ISVs sell iPOS terminals and software to merchants but do not process transactions; Square, for example, is an ISV (although it uses Paymentech, not VNTV, for processing and also acts as a merchant-aggregator to simplify the on-boarding of micro-merchants who do not want the cost and compliance/credit checks of opening their own merchant account at an acquiring bank).

The shifting industry landscape is addressed in detail in
our primer on merchant acquiring dated April 7th
.

Exhibit: 2013 Share of US Merchant Acquiring

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