Vantiv Steps Out Of Midwest And Fifth Third Shadow
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 Midwest.
Its expansion focuses on small and midsize merchants and bank customers, where margins are typically higher for card processing service than large-scale clients.
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 share."
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 last year.
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 ( V ) 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 & Co.
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 2010.
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 protection.
The firm's single, proprietary technology platform "gives it economies of scale" that most competitors don't have, said Jeffrey.
Rivals includeHeartland Payment (HPY),Global Payments (GPN) and privately held First Data, the largest independent domestic merchant acquirer.
JPMorgan Chase 's (JPM) Chase Paymentech is another large player.
Vantiv's bank customers include regional banks, community banks and credit unions. Regional PIN-debit networks also use Vantiv.
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 processing in-house.
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, Koning says.
"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 say.
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 advocates."
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 set.
The company also plans to step up investment in mobile and e-commerce technology.