Worldpay’s Spinoff Is The Latest Sign Of Merchant Acquiring’s Changing Challenges
Last week, FISFIS, one of the world’s largest payment processors, announced it was spinning off its Merchant Solutions business back into standalone merchant acquirer WorldpayWP.
The move, which is expected to be completed by the end of the year, surprised some given that FIS only completed its purchase of Worldpay in 2019. So far, he’s met with a less than enthusiastic response from investors, although FIS maintains that development from the company will be crucial in helping Worldpay get back on track for growth.
But it’s not the only merchant acquirer — a company that processes payments on behalf of a merchant — that has drawn criticism for its recent moves. Last November, Stripe CEO Patrick Collison announced that the company was laying off about 14% of its workforce. The company had been “overly optimistic” about e-commerce growth in 2022 and 2023 and underestimated the economic slowdown that began last year.
While Stripe has received plaudits compared to other tech companies for being sensitive about its layoffs — its package included 14 weeks of severance pay; Payment of the 2022 annual bonus for departing employees; and ongoing career and immigration support – it drew some criticism for failing to anticipate the macroeconomic climate.
In particular, less favorable comparisons were made to Adyen, with industry commentators drawing attention to Adyen’s similar payment volume but lower employment costs. Adyen itself, however, faced criticism when it announced its FY22 results earlier this month.
While Adyen’s net sales rose 33% year over year, its EBITDA margin also fell below estimates, with the company saying it’s embarking on a significant hiring frenzy that will last through 2023. This didn’t bode well for investors, with the stock price falling around 15% after the results.
Worldpay and the changing merchant acquisition climate
The last few years have been something of a rollercoaster ride for merchant acquirers. During the pandemic, many companies experienced unexpected and outsized growth due to a boom in e-commerce, with those trading in the public markets experiencing a similar increase in market capitalization.
Stripe saw its revenue and payments volume triple during that period, while Adyen’s processed volume grew roughly 70% year over year in 2021. However, both had less than impressive 2022s as consumers tightened their belts in response to rising inflation and energy prices and expect a similarly difficult 2023s amid fears of a global recession.
FIS’ Merchant Solutions division, soon to be Worldpay in its own right, has followed a similar trajectory, albeit with less spectacular numbers. Between 2020 and 2021, the company posted revenue growth of around 20%, but this declined to 6% in 2022, and revenue growth is expected to slow to a low negative level in 2023.
Between 2018 — the last full year before FIS acquired Worldpay — and 2022, the company saw revenue grow just 22%. Importantly, while the volume processed by Adyen or Stripe is more than double, sales in 2022 were only about a third higher.
From this perspective, FIS’s reasoning that Worldpay is not doing well as part of the overall company is pretty clear. It claims it will be better positioned to invest in key product areas like its e-commerce segment and embedded financial platform offering if it’s not committed to FIS’ capital structure. In particular, the company wants to allow Worldpay to make more acquisitions to support growth, which will be a known return for the company – before it was bought by FIS, it averaged more than one per year.
Worldpay processed volume for 2022 compared to key competitors
Growth is still required – and that requires investments
Despite the economic downturn, there are undoubtedly significant opportunities for growth. Consumers may not be spending as much as they were at the height of lockdown, but there are new opportunities to capitalize on and evolving trends to respond to.
For some, the opportunities are geographical. Checkout.com, for example, sought to highlight e-commerce growth in the Middle East and Africa, where the number of consumers shopping online increased four percentage points to 91% between 2021 and 2022. In response, the company has increased its investments in the region, establishing an R&D center in Tel Aviv, Israel, alongside its existing offices in the UAE and Saudi Arabia.
Latin American player dLocal, meanwhile, expanded its coverage in Africa in 2022, adding payouts in Rwanda and Côte d’Ivoire.
The extended support for alternative payment methods also opens up new possibilities, especially as the use of digital wallets continues to increase. Meanwhile, a new generation of consumers continues to see greater spending power, and traditional markets are reportedly shifting from goods to services, with a concomitant shift in what retailers expect from retailer buyers.
All of these are growth opportunities, but they require adequate investment from companies to take advantage of them. However, this could put companies at odds with investors, who largely expect a focus on more leanness above all else. Investors want to see growth but seem unwilling to back plans to pay for it, from hiring Adyen to spinning off Worldpay.
2023 is just beginning and once 2022 is over there could be significant surprises in the coming year, particularly in terms of the macroeconomic climate. However, if merchant acquirers are to successfully navigate the changing times, they must help critics buy into the details of their plans.
follow me LinkedIn. Cash my website or some of my other work here.