The Bank/Non-Bank Acquiring Alliance Phenomenon
In July, Capital One and Vantiv announced the formation of an acquiring alliance in what is the latest in a long string of such alliances formed in the acquiring business stretching back over two decades. First Annapolis was Capital One’s exclusive financial advisor in this arrangement. In these alliance relationships, banks sell part or all of their merchant business to a non-bank partner and enter into a long term, collaborative sales and marketing arrangement with the non-bank partner. While not without problems, these alliance have been highly effective business structures.
Alliances of differing sorts between banks and specialized non-bank acquirers emerged in the late 1980’s but took on substantial momentum in the mid-1990’s as a small group of non-banks focused on partnerships as a primary strategy. First Data was a key driver of the phenomenon but was joined by NDC, NPC, and NOVA (now Global Payments, BA Merchant Services and Elavon, respectively). Organizations like Vantiv and TransFirst have also become significant options for financial institutions.
These arrangements take the form of a literal joint venture or contractual referral arrangement, and today, fifteen of the top 20 banks (and 20 of the top 30 banks) are in such acquiring alliances. These 20 banks in the top 30 represent some 28,000 branches and millions of business relationships.
The market has been particularly active, and in the last 24 months, nine of the top 30 banks have renewed with their non-bank partner, changed partners, or launched an alliance relationship for the first time. These banks represent nearly a third of the branches, for example, among banks in the top 30.
These ventures between banks and non-banks have proven to be a highly effective business structure. Whereas in business at large, joint ventures fail more than they succeed, in acquiring, these ventures have a strong track record of producing favorable results and growth characteristics.
These relationships do have some recurring shortcomings, however:
- Acquirers can be single product sales cultures whereas most banks are relationship sales cultures, leading to potential conflict and sub-optimization.
- Banks are generally interested in a wide range of clients (e.g., small through very large customers), whereas acquirers tend to be more focused in specific verticals and/or size of clients.
- Bank product arrays and acquiring product arrays have evolved so that they overlap in areas such as pre-paid and check services, which can create conflict.
- Banks increasingly are trying to establish a certain customer experience that can be hard to effect through a venture in which the bank’s partner has its own servicing norms and procedures.
- Banks increasingly are using product packaging, particularly in the small business arena, which can be a harder strategy to effect if there is a partner in the mix who has an economic interest in the acquiring piece of the package but not the other pieces.
Although effective and though alliances have largely met the needs of the bank partners and have been share winning and margin expanding, these ventures between banks and non-banks have not been perfect. A careful and thoughtful process to negotiate the right arrangement is prudent.
For more information, please contact Marc Abbey, Managing Partner, firstname.lastname@example.org, specializing in Merchant Acquiring.
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