In August, Advent International and Bain Capital agreed one of the year’s most closely-watched buyouts, the £1.9bn acquisition of Worldpay, RBS’s payments processing business. The bidding for Worldpay has consistently made headlines over the past 18 months as it initially attracted around 30 bidders, many of whom were private equity firms. Further afield, Emirates NBD, one of the biggest banks in the Gulf, earlier this year invited the latest round of bids for a stake in Network International, its payment processing business.
Perhaps the most remarkable aspect of the bidding process for both Worldpay and Network International, and indeed a number of payment businesses, is the interest of private equity firms. These events raise two questions – why are banks divesting what are very profitable assets; and why are the sales of payment businesses generating so much attention from private equity?
Banks’ revenues remain depressed during the economic crisis so they are looking at cost reduction programmes, such as outsourcing back office infrastructure and payment processes. Payment businesses are fundamental to banks and, compared to the banks themselves, have attractive multiples. But they are also highly technical businesses that require considerable investment budgets. If this investment isn’t forthcoming then this leads to an expensive, inefficient business, which simply needs to deliver a better service.
The rise of the internet has also, by definition, transformed payments operations into global businesses, with an international reach that is simply beyond the often solely local market of the parent bank. If the bank doesn’t have similar international ambition, then strategically the only logical conclusion is to sell.
Regulatory pressure is also pushing banks into a position where the option of selling non-core assets becomes attractive. In particular, the new Basel III rules on capital requirements and the recent Dodd Frank Act in the US will probably mean more assets, such as payment businesses, come onto the market.
But back to those multiples – while banks’ recent profits have been in the single digits, those of payments processing businesses have hit double figures – that, of course, makes them very attractive to private equity. Steady revenue streams, coupled with the opportunity to upgrade, improve efficiency and ultimately deliver a better service, means that a successful bid would secure an asset with huge potential. Payment businesses are all reasonably similar in terms of infrastructure, making bolt-ons strategically viable. Importantly, as standalone ‘binary’ types of businesses, they come without baggage, so volume translates into remuneration.
Looking forward, while organically grown payments businesses do not always reach their full potential within the confines of the parent bank, having a payments capability is clearly fundamental to a bank’s business.
This is where the relationship between banks and private equity firms extends beyond the sales process in respect of payments. The industry is full of potential for outsourcing, as it makes sense for a bank that is perhaps not a leading global player in this space, to buy in its payments services. A private equity-backed business, which has been made lean and efficient by its new owners, makes a very attractive option. The private equity firm then leverages that asset to secure new opportunities to in-source business from other banks – a truly virtuous circle.
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