By Adam Atlas
Attorney at Law
A few weeks ago, I published a chart on my LinkedIn feed of the U.S. processor family tree: www.linkedin.com/posts/adamatlas_us-payment-processing-family-tree-activity-6575023887879331840-IJjc. I put the chart together because with all the recent mergers and acquisitions, I could not keep track of who owned whom.
It turns out I was not alone; the chart's popularity almost broke my LinkedIn account. The purpose of this article is to give ISOs legal perspectives and strategies in a market that, despite all the innovation, is arguably less competitive than it was only a few years ago.
WorldPay, Vantiv, NPC and Litle used to compete with each other; now they are under common ownership. Similarly, Global, TSYS, Heartland, TransFirst and Cayan have fallen under a common umbrella.
The Sherman Act, enforced in part by the Federal Trade Commission, prohibits anticompetitive agreements and unilateral conduct that monopolizes or attempts to monopolize the relevant market. So what is the relevant market? A number of markets are relevant to an anti-trust claim in our industry – which is precisely why there might never be such a claim.
The relevant markets are those that procure services from processors, such as merchants and banks, and those that supply services to processors, such as ISOs, payfacs, card issuing program managers and others.
It's possible today's extreme concentration of processing services may result in a decrease of competition, which would be evidenced by reduced pricing competition or reduced competition in the variety of product offerings.
If this did happen in the market for the supply of processing to merchants, merchants could come together and claim that the concentration of suppliers was so great as to be illegal. Merchants, as any ISO knows, are notoriously difficult to corral on any topic, let alone a highly technical, legal and business analysis of possible correlations between a reduced variety of suppliers and price or product offerings. The chances of such a claim happening anytime soon therefore are not high.
What about the banks? Banks rely on processors to process transactions in acquiring and issuing. Increased concentration of processing supply is probably causing some chatter around bank boardroom tables about whether banks are cuckolded by an ever-smaller collection of processors who are ever less motivated to compete for bank business as bank choices decline in number.
If an anti-trust claim comes out of the recent mergers, it might first come from the banks, which have more and bigger law firms advising them (I know this because I work opposite these firms for ISOs and other fintechs).
Looking only at the processors named above, there was a reduction from nine to two. When shopping for a new ISO deal, an ISO has fewer places to go, therefore reducing the ISO's ability to play one processor off of another. Simply put, each processor has fewer competitors against which it must compete to earn the business of a given ISO.
Regardless, any litigation in payments – even over unpaid residuals to an ISO – is so complicated that the chances of a claim making it to court and to trial are greatly reduced by the difficulty in explaining any piece of our business to a judge or jury.
I do not have the resources to determine whether the recent mergers have reduced competition in the payments space, but it does not take a rocket scientist to ask the question.
Another question that arises is why the mergers are happening in the first place. One obvious answer is that processors see an opportunity to create efficiencies, increase revenue and reduce costs by eliminating redundancies. A less obvious answer is that processors are, perhaps, spooked by novel competitors like Square, Stripe, Apple Pay and bitcoin, and are circling the wagons to protect the processing turf they have owned since the dawn of processing technology.
Whatever the reason, making large processors into mega processors is not necessarily a recipe for spurring the creativity and agility needed to take on the new players in the market.
With technology being increasingly commoditized, there has perhaps been no better time over the last decade to start a new processor. Even if the recent consolidations do (defy logic) and create nimble, creative mega processors, the time for that to occur will be long, no matter how much money is spent on expensive external consultants. In my recent interactions with some of the mega processor reps at Money2020, there was consistent confusion among them regarding who they were within their organizations and what the overall post-consolidation direction ought to be. Leaping past the legacy behemoths, a new processor could emerge that is purpose-built for agility and technical flexibility. Although not processors themselves, Synapse, Evolve Bank & Trust, Prime Trust and BBVA are examples of new players in the U.S. market that put technology solutions first and do not rely on size to get ahead.
It's a good time for ISOs to be vigilant in discerning whether processors are using their market strength to reduce competition. If an ISO observes this to be the case, they should call the processor out on that behavior. For example, if an ISO is negotiating with Processor A (that is part of a mega processor), and Processor A says, 'There is no point in going to Processor B (that is part of the same mega processor) because they won't beat this deal'," the ISO should tell Processor A that that is effectively reducing competition for the ISO and that places the ISO in a tougher bargaining position.
I've always been counsel to ISOs and agents; it would hurt to imagine them playing in any market that was anything but free and competitive.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For further information on this article, please contact Adam Atlas, Attorney at Law by email at email@example.com or by phone at 514-842-0886.
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