Visa, MasterCard … and Now Vantiv?

by Jon Markman | June 5, 2012 7:30 am

Visa (NYSE:V[1]) and MasterCard (NYSE:MA[2]) are two of the signature financial stocks of the past three years, up 140% to 200% since 2009, when the S&P 500 Index is up only 45%.

If you’re sorry you missed that, you might have another shot at that kind of upside with the latest debit and credit processor to go public: Vantiv (NYSE:VNTV[3]), which was spun out Midwestern super-regional bank Fifth Third Bancorp (NASDAQ:FITB[4]) in March.

Vantiv is one of the largest merchant- and card-issuer-processing firms in the country, though you’ve probably never heard of it. The company operates two primary business units: Merchant Services and Financial Institution Services, or FIS. The merchant-services unit, which generates about two-thirds of total revenues, facilitates credit- and debit-card payments for retailers and earns a percentage or a fee per transaction.

When consumers make a payment with their cards, about 1% to 3% of the price goes to firms like Vantiv for handling the processing. The firm services more than 400,000 merchant locations in the U.S., including nine of the country’s top 25 retailers.

Supermarkets make up about 40% of total transaction volume, followed by drugstores and restaurants. In addition, this unit generates revenues from equipment sales, fraud management and card-terminal rentals. Vantiv competes in this segment with well-known merchant acquirers such as Global Payments (NYSE:GPN[5]), Heartland Payments and market leader First Data, as well as divisions of big institutions such as Bank of America (NYSE:BAC[6]).

Aside from acquisitions and consolidations, the landscape hasn’t changed much in the past five years, though the overall market has seen steady transaction growth of 10% annually.

Vantiv’s Financial Institution Services unit provides card-issuer processing, PIN debit-switching, ATM processing services, bank-statement production and other services to financial institutions. It competes with First Data in this sector, as well as Visa and MasterCard.

Revenues generated by the FIS unit are largely transaction-based and represent about a third of Vantiv’s total. These include fees for each debit card transaction authorized and processed, as well as managing a bank’s ATM services, including both hardware and software. The PIN debit-switching fees come from transactions that route across Jeanie, Vantiv’s in-house PIN-debit network.

Despite the Jeanie network competing with larger providers such as Interlink by Visa and First Data’s Star network, Jeanie includes 15 million active cardholders, 700 member clients and more than 7,700 ATMs. While Vantiv is currently a small player in the debit-card network arena, the recent Durbin Amendment under the Dodd-Frank Act will create new opportunities for it to compete.

The gist of the changes is that debit-card issuers are now required to list at least two unaffiliated networks on all cards, giving merchants the choice of which to use for payment routing. So if, for example, MasterCard’s logo is on the front of the card, the issuer is now required to utilize a non-MasterCard-related network such as Vantiv’s on the back for PIN transactions.

The firm has done an excellent job with customer retention, with net revenue attrition historically tracking from 4% to 6% annually. Clients in this unit are primarily small and midsize banks and credit unions, but it also caters to some giants, such as Capital One (NYSE:COF[7]) and Pulse.

Analysts at JPMorgan Chase (NYSE:JPM[8]) estimate the total market size for third-party debit processing and switching in the U.S. at $1.5 billion, with Vantiv at about a 20% penetration rate.

The firm is led by Charles Drucker, who has been chief executive since 2009. He came on as president in 2004 after leaving the STAR Debit Services division of First Data. The firm has been quite active since breaking away from Fifth Third, acquiring several smaller firms, including National Processing Company for $623 million.

Vantiv’s single integrated processing platform has led to sector-leading operating margins. Combine that with double-digit transactional growth and new government regulation that favors the company, and you can see its appeal.

Shares went public in March at $17 per share and jumped to new high of $23 in late May after spending most of May around $22. IPOs are usually a good buy when they break out above their initial trading range, so that’s a great market signal.

Put this one on your shopping list for a time when stocks are under pressure later in the summer.

  1. V:
  2. MA:
  3. VNTV:
  4. FITB:
  5. GPN:
  6. BAC:
  7. COF:
  8. JPM:

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