ADS reported its May credit data this morning with NCOs of 6. 3%, down 10bps Y/Y and down 10bps M/M (relative to the 5-year seasonal average of down 26bps M/M). For reference, the Company expects net charge offs to moderate below 6% in 2H19, and result in approximately 6% for the full year.
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In this week’s Sunday’s Spotlight, we look at PSD2’s Strong Customer Authentication (SCA) which is scheduled to go into effect on September 14, 2019. The regulation will require additional authentication being added to merchants’ checkout flows. In turn, this should reduce fraud and increase security of online transactions. With eCommerce in the EU-5 (U.K, France, Germany, Italy and Spain) trending towards $500bn of annual volume, this could have an impact across the entire payments ecosystem as it introduces incremental friction to the checkout process. A 2017 Ovum survey pointed to 52% of U.K. respondents calling out checkout friction as the one of the top three factors driving cart abandonment (see Exhibit 3). Within our coverage, we expect 1) WP (we est. ~11% of its revenues is Europe eCommerce), 2) PYPL (~11% of revenues are U.K., and ~30% of its users are in Europe), 3) V (20% of volume is Europe) and 4) MA (26% of volume is Europe) to be impacted. While we suspect impacts to be relatively short lived, our checks point to meaningful friction in the quarters following roll-out. See page 2 for incremental data on SCA.
We see revenue synergy opportunities for GPN (in order of opportunity) as: 1) vertical specific cross selling of ISV or owned software, 2) combining GPN’s $600mn and TSS’s $300mn omni channel/eCommerce businesses and accelerating TSS’ growth toward GPN’s 15-20% Y/Y rate globally, 3) pushing GPN’s $100mn+ payroll business (40k employers) into NetSpend’s ~400k pay card employers (~10% penetration could double current payroll revenue), 4) cross selling issuer processing into GPN’s JV relationships, 5) leveraging TSS’s superior economics on their Aloha/NCR licensing rate, and 6) bank referral acceleration (we estimate GPN has a small business growing ~20% Y/Y and can help accelerate TSS’ merchant bank channel). See pages 2-6 for our model and further detail.
In this week’s Sunday’s Spotlight, we provide an update on the cross-border remittance market including a volume outlook for physical and digital methods; estimates of digital revenue among key money transfer operators and an overview of pricing trends and discrepancies across various methods. While on an aggregate basis, Y/Y remittance volumes are expected to be relatively muted in 2019 (up 3% in ‘19E vs up 10% in ’18), the market for digital continues to be robust with mid-teens to 20% growth for key players. Digital remittances represented ~10% of total principal sent in 2014, vs 37% expected in 2019 and 52% expected by 2023 (See exhibit 1). We see the recently announced partnership between V Direct and WU underscoring this demand.
We see the potential for upside to our merger model 2021E EPS of $5. 51 through 1) the realization of cost synergies faster than expected (35c+ of potential upside on 2021), 2) interest expense savings (15c+), and 3) the use of FCF (5c+ of potential upside) via buybacks or debt paydown. While we believe FISV’s revenue synergy guidance is conservative and the company could generate a pull forward of synergy realization vs. expectations and/or exceed the $500mn target over 5 years, we take more of a “wait and see” approach given the less concrete/objective nature of those targets relative to cost synergies. As a result, we see a ~$6.00 ‘21 EPS number as possible, which at a ~18-19x multiple would suggest a per share value of $110-$120. We believe that the magnitude of upside potential from interest expense savings is not yet priced into shares. See the body of this note for upside/downside analysis.
In the fourth edition of our Save a Cow, Use a Digital Wallet series, we take a deep dive into the state of financial inclusion and the un/underbanked population globally, key drivers of adoption as well as potential revenue opportunities. With 93% of adults in high-income economies and 79% in developing economies having access to mobile phones (2017 Gallup World Poll), bank account formation continues to increase (from 51% in 2011 to 69% in 2017). As subsequent products are introduced to mobile phone/internet enabled users, a significant increase in adoption, engagement and revenue per user is likely. EY estimates that greater financial inclusion could raise GDP by up to 14% in large developing economies and could also increase annual banking revenues by ~$200 bn, while Accenture points to up to a $380 bn opportunity. In this note, we look at where we are now and the progress that has been made over the last several years globally, the main drivers and benefits of adoption, and ultima
In the backdrop of increased questions around cross-border payments, we highlight takeaways from a meeting we recently had with Ripple’s CFO Ron Will and SVP of Product, Asheesh Birla. Ripple offers a frictionless experience to send money globally by utilizing blockchain, real-time messaging, clearing, and settlement of financial transactions. The meeting highlighted the company’s product suite, TAM, client traction, amongst other key takeaways. All in, while there are numerous solutions around cross-border evolving simultaneously (see our recent note around Visa Direct and WU titled Thoughts on Potential Partnership), we also continue to see Ripple’s suite of products as important for cross-border remittances and look for further signs of traction amongst its existing clients and prospects. See below and page 2 for further Ripple meeting takeaways.
Yesterday (06/05/19), FIS filed an amended S-4 ahead of its acquisition of WP. The company provided some notable updates, including the date of its shareholder meetings—both scheduled on July 24, 2019, closing timing expected to be during 3Q19, early termination of the HSR waiting period, notice of FCA approval (5/9) and notice of Dutch Central Bank approval (5/22). It also highlighted pro-forma interest expense of ~$500mn vs. the original S-4’s ~$800mn. We view these announcements as providing us with further conviction in an early 2H deal close (we believe potentially late July/early August closing) and upside to our modeled pro-forma estimates (2021E EPS of $7.57 – see Merger model on page 2).
Earlier today (06/04/19) at a conference, V noted that it would be announcing a “major collaboration” with WU tomorrow. While we are not entirely surprised as our May 29, 2019 note titled, “Visa Direct: A High Growth Game Changer for Visa” highlighted a potential partnership around Visa Direct and WU/remittance companies, investor reaction underscored the relatively low expectations for incremental opportunities at WU (and high short interest at 11.4%). Shares of WU traded up ~5% vs. the S&P up ~2% in today’s trading.
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