Payment processorVantiv (
) spun off from Midwestern regional bankFifth Third Bank (
) in 2009 and has been shedding its provincial roots ever
Vantiv went public in March, then completed a secondary
offering in August.
Cincinnati-based Vantiv handles payment processing for more
than 400,000 merchant locations and 1,300 financial institutions
in the U.S.
Formerly known as Fifth Third Processing, Vantiv has been
stepping up sales efforts to reel in customers beyond the
Its expansion focuses on small and midsize merchants and bank
customers, where margins are typically higher for card processing
service than large-scale clients.
Vantiv still has plenty of national merchant customers, many
from referrals from Fifth Third, including such Midwest-based
chains asKroger (
) andWalgreen (
Customer referrals from Fifth Bank account for more than 7% of
Vantiv's revenue, analysts say.
Though having a strong base of national merchants gives it
scale, Vantiv's focus on smaller customers is paying off.
"Smaller merchants are typically more profitable," said
JPMorgan analyst Tien-tsin Huang. "That has helped them grow at
above-average rates. It's pretty clear they are taking
In Q2, its first full quarter as a public company, Vantiv
earned an adjusted 32 cents a share, with net income jumping to
$23 million from $5.4 million a year earlier. Analysts estimate
full-year profit will rise 16% to $1.37 a share.
Net revenue, excluding network fees and other costs, rose 20%
to $260.4 million. Management expects net revenue of $1 billion
to $1.02 billion for the full year, for a 16% to 18% gain over
Vantiv works on behalf of merchants in two ways. First, it
signs on merchants to help them accept credit and debit payments
from card networks, such asVisa (
) andMasterCard (MA). Then it makes sure transactions using those
cards are valid.
Vantiv says it's the third-largest merchant acquirer in the
U.S. and the biggest in PIN-debit volume.
The company helps accept about 10% of all card payments in the
U.S., says David Koning, an analyst with Robert W. Baird &
Koning says clients skew to selling everyday kinds of items,
such as groceries and drugstore products.
"It's spending people do on an ongoing basis in good and bad
times," he said.
In 2011, Vantiv handled $426 billion in bank card purchase
volume at more than 400,000 merchant locations.
Vantiv's average merchant customer takes in $2 million to $2.5
million in annual card volume, says analyst Andrew Jeffrey of
Suntrust Robinson Humphrey.
"That's the sweet spot of the market," he said.
Vantiv boosted the number of small to midsize merchant
customers with its acquisition of National Processing Co. in
It's also been stepping up sales using direct reps as well as
third-party agents and resellers.
Two-thirds of Vantiv's revenue comes from merchants for
processing their card transactions. The rest comes from financial
institutions for providing them with debit, credit and ATM card
transaction processing and other service, such as fraud
The firm's single, proprietary technology platform "gives it
economies of scale" that most competitors don't have, said
Rivals includeHeartland Payment (HPY),Global Payments (GPN)
and privately held First Data, the largest independent domestic
JPMorgan Chase 's (JPM) Chase Paymentech is another large
Vantiv's bank customers include regional banks, community
banks and credit unions. Regional PIN-debit networks also use
Vantiv is following the same approach as in its merchant
business by going after small to midsize clients. Unlike large
banks, smaller financial concerns aren't as apt to bring
And they don't have the scale to negotiate prices down.
"By having more small and midsize banks in their customer
base, Vantiv has less risk from in-sourcing and it has higher
margins," Jeffrey said.
Vantiv's new customer,Discover Financial Services (DFS),
caused net revenue per transaction in the merchant segment to
edge down in the second quarter.
The reason: Its large scale gives it pricing advantages.
But the added revenue from Discover "more than offset" last
year's loss of another relatively large account, Sovereign Bank,
"Discover is a pretty big win this year," he said.
While the year-old Durbin Amendment cut bank interchange fees
on debit transactions by 50%, payment processors aren't
necessarily passing on all the savings to their merchant
customers, who pay the fees, analysts say.
"The industry is selectively trying to keep some of those
Durbin savings to themselves," Huang said.
Vantiv is one of several that keep at least some of the
savings to themselves as part of their bundled packages, analysts
Heartland, however, passes along 100% of Durbin savings to
merchants, Huang says.
"That is their guiding strategy on pricing," he said. "It's a
marketing message: We're the good guys, the merchant
Still, Heartland has a smaller share of the merchant market --
4% to Vantiv's 14% share, he says.
Vantiv hasn't expanded to faster-growing payment markets
overseas like some rivals. But management has indicated it plans
to expand outside the U.S. one day. No timetable has been
The company also plans to step up investment in mobile and