Morningstar | Worldpay is fortifying its moat via acquisitions.
Formerly a division of Fifth Third bank, Worldpay has taken several steps to get ahead of the competition in a fast-changing payment industry. The company is consolidating the industry, building its scale advantages, and increasingly providing integrated and omnichannel payment solutions rather than separate products for the physical, online, and mobile commerce environments. We believe competitive advantage in the payment processing industry is driven by cost advantages and switching costs, and think Worldpay is positioned well on both fronts. It is one of the largest transaction processors in the world, with scale to match its largest bank-owned and independent rivals. It's working closely with dealers and developers to embed its capabilities in complex enterprise software, raising customer switching costs. The company offers a middle ground between relatively slow-moving financial institutions and fast-changing technology companies, while offering some of the capabilities of each. Of course competition comes from both sides as well. Large banks can use payment processing as a loss leader, and software companies that own customer relationships are likely to squeeze the processing portion of the value chain. However, we think there will be plenty of profits left for Worldpay as the market for its services grows.Worldpay has executed its strategy with the help of an aggressive acquisition-based strategy. The company purchased e-commerce processor Litle and Co. in 2012 and Element Payment Services in 2013. As smaller merchants increasingly demanded more sophisticated software solutions, Worldpay purchased Mercury Payment Systems in 2014, obtaining access to a network of software developers and dealers and an extremely fast-growing market. Management believes that M&A is a core competency of the organization, and we agree that Worldpay's success so far bodes well in the event of any future deals. Its latest deal has been the largest so far, as two of the world's largest merchant processors were merged to create the current incarnation of the company.Worldpay is a holding company. Through its subsidiaries, the company provides electronic payment processing services to merchants and financial institutions. The company operates two segments: Merchant Services, which provides merchant acquiring and payment processing services to national merchants, regional and small-to-mid sized businesses; and Financial Institution Services, which provides card issuer processing, payment network processing, fraud protection, card production, prepaid program management, automated teller machine driving and network gateway and switching services that utilize the company's proprietary Jeanie debit payment network to a set of financial institutions.
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