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With a clear strategy and deep pockets, an American giant is making a big impact on the European payments arena.
First Data, a Fortune 500 company with annual revenues in excess of 10 billion has been quietly building up its presence in Europe, particularly over the past two years. In early 2004, the company had a physical presence in just three countries but today, less than 2 years later, its footprint extends across 27 countries (including the Middle East) supported by 8 processing centers located in Germany, Greece, Italy, Lithuania, Latvia, Slovakia, Spain and UK with Austria to follow. Ownership of Western Union, its money transfer division that accounts for more than half of its profits, has presumably provided a useful springboard to fund this ambitious expansion strategy.
First Data plays in a space that causes frustration amongst bankers – the area of payments – and they look set to continue to be winners. Even though a bank’s payment franchise normally represents 20-30% of income (if net interest income is included), it is an area that can present challenges in terms of understanding how it supports underlying profitability. Many bankers see it as a cost of doing business, one that is rising with the increasing sophistication of payment and credit products, which in turn is driving the need for functionally and technically advanced processing platforms.
In response, First Data seeks to enter long-term partnership agreements with banks, offering a full portfolio of systems and banking services for:
- Card issuing and merchant acquiring
- ATM and POS terminal management
- Switching and authorization services
- Operational and back-office services
This range of offerings is helping to make European payments a more dynamic arena. It creates increased competition amongst banks by enabling smaller players to enter segments where they previously could not support a competitive product. It also challenges the traditional ground of national processing providers by acting as an alternative source for these services. Change is clearly occurring. In the UK for example, national processing provider, Voca Ltd, formerly the member-owned BACS, became fully independent a year ago and has recently announced that it is building an infrastructure that will be able to accommodate pan-European payment schemes alongside the domestic payment schemes that it already manages.
First Data believe that there is a need for a payment provider positioned to offer European cross-border payment services as any cross-border expansion in Europe will have to cater for incompatible systems and operational infrastructures. Indeed with the EU’s SEPA (Single Euro Payments Area) initiative gaining momentum there is reason to go along with this, but this is perhaps a longer-term view. Currently cross-border payments amount to around 2% of payments made in Europe and evidence of cross-European retail banking consolidation, although increasing, is still not hugely compelling.
The reality is that competitive and regulatory pressures are making the business of payments within banking expensive and First Data with its intimate understanding of the space is able to offer the services cheaply and effectively. The company seems well positioned to deepen its footprint on European payments however the future develops.