In this week’s Sunday Spotlight, we look at mobile banking adoption, including penetration rates, reasons behind the lack of adoption, and the revenue/attrition benefits of mobile users. Coming out of the recent Wolfe FinTech Forum, it has become more evident that digital adoption by consumers in the U.S. remains under penetrated (~35-45%), as evidenced by our fireside chat with CEO of FISV, Jeff Yabuki as well as some industry estimates. Our recent day of meetings with FIS and WP CEOs, CFOs and IRs also confirmed this. Despite retail mobile banking being ubiquitous, with ~90%+ of Federal Reserve FI respondents estimated to be offering mobile banking services, eMarketer’s analysis suggests that only ~45% of the U.S. population is estimated to use mobile phone banking services. Importantly a Federal Reserve analysis suggested that >80% of banks and credit unions rely on core deposit processors (FISV, FIS, JKHY, etc.) to deliver mobile banking services.
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Wolfe Research Senior Payments, Processors, & IT Services Analyst, Darrin Peller, hosted a webcast to discuss key takeaways from NDR with CEOs, CFOs, and IR of both FIS and WP; updated thoughts on timing and strategy; and incremental thoughts on merger model.
While the portfolios are expected to reach normal profitability in 2H, Chevron and Shell will be dilutive to earnings in 1H19. Its Brazilian subsidiary’s asset misstatement created noise in an otherwise clean story, however, it should not have a material impact on the go-forward business. Additionally, we note that 1Q has 2-less fueling days Y/Y which should pressure trends in Fuel. As it relates to the quarter, strength continued to be led by Fuel and Travel (up ~15%/18% and ~29%/35%, respectively for 4Q/FY), with volume trends continuing to impress. Health Solutions fell 4% as U.S. strength (12% Y/Y) and SaaS account growth (17%) was more than offset by Brazil weakness.
As a reminder on Tuesday (2/19/2019) we hosted FIS’ CEO, CFO, and Head of IR and WP’s CEO, CFO, and Head of IR for investor meetings in NYC. Since that time, we have received investor feedback around some key points that we have since clarified with FIS. Below are some of those incremental points.
On Tuesday (3/19/19) we hosted FIS’ CEO, CFO, and Head of IR and WP’s CEO, CFO, and Head of IR for investor meetings in NYC. Key takeaways below.
Earlier today Instagram announced checkout, which will enable consumers to purchase products directly on Instagram. As we've hypothesized in the past, PayPal will be the engine processing these payments (link) and consumers will be able to pay with PayPal, Visa, Mastercard, American Express (Not Covered), and Discover (Not Covered). The partnership will encompass PayPal’s full-stack processing platform (PayPal for Partners) and will enable One Touch Seller Signup. This is a significant opportunity for incremental TPV as 130 mn Instagram users tap to reveal product tags in shopping posts per month. By enabling checkout directly on the application, users will no longer be directed to a browser to make purchases. Putting that into context, as of 4Q18, PYPL's total active users reached 267 million (including ~21 million merchants). Over the next few weeks, several brands will be able to checkout in app, including Adidas, Nike, Warby Parker, Zara, among others and we suspect that there are other opportunities for PayPal across Facebook and other large marketplaces. For reference, PYPL has spoken to its top 20 marketplaces growing 41% in 2018 and already representing more volume than eBay.
Following SunGard, FIS has been looking for another large-scale acquisition that would make sense both strategically and financially. While there had been chatter across much of our universe as to potential targets, this combination offers material synergies on both the top and bottom-line that we believe may be underappreciated. Both FIS and WP have a history of being conservative when it comes to deal accretion. FIS has achieved/exceeded its original synergy target in its last 7 large M&A deals, including SunGard’s >$325mn vs. its original expectation of $200mn. We believe the combined entity will trade at ~20x forward earnings with a balance of integration risk more than offset by conservatism in synergy targets.
In this week’s Sunday Spotlight, we look at the evolution of cross-border payments and the impact from large banks becoming increasingly selective on emerging market operations and scaling back investments in the correspondent messaging network, SWIFT. The FSB reported that from 2011 to 2017, the number of active correspondents declined by 15.5% and active corridors by 7.3%. The World Bank found that 27% of 300 global banks surveyed reported a drop in total correspondent banking relationships. As eCommerce continues to open more businesses to global trade, demand for more efficient and transparent cross-border payment solutions has increased. At the same time, AML, KYC and other country specific regulations are becoming increasingly costly and complex for banks to manage efficiently. This is particularly true in remote locations viewed as higher risk. Considering the EU continues to add more countries to its tax haven blacklist (10 new countries were recently proposed), we do not expect the cost of doing business in these regions to abate near-term. This friction has created increased demand for tech-based payment solutions, which either build around the existing SWIFT infrastructure or circumvent the network altogether. On page 2, we illustrate the decline in correspondent banking, existing challenges, and initiatives of FinTech aiming to reduce cross-border friction. We expect this shift coupled with strong eCommerce trends to drive outsized growth for innovative private companies such as Payoneer, Transferwise, Remitly, and public incumbents such as V, MA, PYPL, WP, WU, and others.
ADS reported its February credit data this morning with NCOs of 6. 3%, down 60bps Y/Y and down 30bps M/M (relative to the 5-year seasonal average of down 12bps M/M). While February’s M/M change was ~20bps better than seasonal averages, this improvement is partially attributable to a higher than expected January NCOs of 6.6%. For the two months ended February 28th, charge offs are trending to 6.5% for Q1 vs. the 6.3% in our model.
On March 12th and 13th 2019 we hosted the Wolfe FinTech Forum in NYC. Nearly 60 public and private companies across the space presented and/or hosted meetings. The event was filled with both broad thematic and company/stock specific takeaways (page 3).
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