T he time when customers paid for their purchases by swiping their credit cards and signing a paper receipt is coming to an end. New cards with a microchip and PIN have made their inroads into the financial payments market. And October 2015 marks an important steppingstone in this transition.
Payment processorVantiv ( VNTV ) stands to benefit from this industrywide shift. The Ohio-based company operates on both sides of the same market: It provides a full suite of payment services to merchants on the one hand; and on the other, it produces the physical cards for financial institutions across the U.S.
Thanks to its extensive distribution network and access to both large and small merchants, Vantiv is the second-largest merchant acquirer in the U.S., representing an 18% market share in total payment transactions, overtaking a unit ofBank of America ( BAC ) in 2014. First Data ranked at the top. Vantiv also ranks as the No. 1 U.S. merchant acquirer in PIN debit transactions. An acquirer is a bank or other institution that accepts card payments in the merchants' behalf.
On the financial services side, Vantiv holds a 10% market share in the U.S., representing more than 1,400 banking and financial customers. "It is the electronic middleman that enables and links electronically retailers and point-of-sale systems to the card brands and to the card-issuing institutions," said Raymond James analyst Wayne Johnson.
Among its clients areMacy's ( M ),Office Depot ( ODP ),Kroger ( KR ),Walgreens Boots Alliance (WBA), In-N-Out Burger,Wendy's (WEN),Comerica Bank (CMA) andFifth Third Bank (FITB). More recent additions include Rabobank,Capital One Financial (COF) and the U.S. Postal Service.
Among The Big Processors
The company ranks fourth among 28 names in IBD's Finance-Credit Card-Payment Processing industry group. Other players in the group includeBlackhawk Network (HAWK),Total System Services (TSS)andHeartland Payment Systems (HPY). The group itself is ranked No. 29 among IBD's 197 industries.
Originally a spinoff from Fifth Third Bank, Vantiv loaded up on technology and additional distribution capabilities to conquer the fast-growing market of electronic payments. It expanded its growth organically via a strong referral business and inorganically through a few key acquisitions.
As a result, it's been able to grow revenue at a 40%-plus rate for the past nine consecutive quarters. Earnings per share increased 15% to 26% during the past six quarters. Its stock is up 36% so far this year.
The transition to chip cards, or what the industry calls EMV migration, has challenged the industry. October is the target for the so-called "liability shift." After the shift, when a transaction takes place, the party with the weaker technology will bear the cost of the possible hack or fraud.
That's why most national merchants, retailers and banks have been working hard to issue the EMV cards and install EMV card terminals. Those cards carry a chip and are accessible with a PIN instead of the classic magnetic cards that require a signature. The technology embedded in the chip is much more complex; it makes point-of-sale transactions a lot more secure and the cards nearly impossible to duplicate. The chip cards alone do not enhance online payment security, though.
This system has already been in use for many years in Europe and elsewhere in the world. EMV stands for Europay,Mastercard (MA) andVisa (V), the originators of the standard. The U.S. is the last payment market to migrate to it, mostly due to the vastness of the old tech and the cost and complexity of the transition.
The result is that more credit card fraud migrated to the less secure U.S. market over the years. Now that chip cards will enhance the security on that end, the risk may shift to the weaker links in the industry: small and medium-size businesses and online users.
That's where Vantiv comes in.
In addition to being a leader in the EMV transition, Vantiv also has taken steps beyond it. "We think that the best way for the merchants to protect information is to do what we call a security suite of products, which is accepting EMV cards but also encrypting the information and tokenization," said Vantiv CEO Charles Drucker.
Point-to-point encryption helps merchants protect client data. "If the data is encrypted from the point they swipe the card to the point that it's received by us as payment processor ... that data is now protected and virtually impossible to unencrypt, and that's a value-added service we make revenue on," said Andrew Ciafardini, vice president of Vantiv.
The other tool is tokenization, which removes the credit card number completely from the retailer's system. Instead, the retailer gets a representation of the number, which is called a token and is specific to that retailer, Ciafardini explained. "So even if the system were breached, a criminal could not use that token anywhere else."
Growth By Acquisiton
Vantiv has made three acquisitions in recent years. At the end of 2012, it acquired Litle, an independent e-commerce payment processor for Internet and direct-response marketing transactions. Its customer base includesOverstock.com (OSTK), Ancestry.com andWayfair (W).
"That was a technology-based acquisition," said Nathan Rozof, senior vice president of investor relations at Vantiv. "Today, we're using that e-commerce technology to win clients like the USPS, where they need help processing not only in all their post offices but also USPS.com and the kiosks."
The other two acquisitions relate to the integrated payment space. Whenever a merchant, such as a restaurant, buys the software to manage its orders, inventory, kitchen, employee time and accounting, Vantiv can integrate the payment processing technology and offers 24/7 help lines for all platforms if any issues arise.
Vantiv's purchase of Element in 2013 brought innovative technology into this integrated payment space, while the larger Mercury buyout in mid-2014 brought with it one of the largest distribution channels in the U.S.
More Sales, Cybercrime
The company is certainly benefiting from a positive secular trend. "The macro backdrop has been a positive (for Vantiv), and the declining gas prices have helped fan its sales growth," said Jason Deleeuw, senior research analyst at Piper Jaffray. "We think payment security at the small and midsize merchant level is a key driver of growth for the larger, more sophisticated merchant processors like Vantiv."
Vantiv also plans to use its large cash position to consider offshore acquisitions, grow its core business and return capital to shareholders.
As with any business, there are risks. Analyst Johnson mentions integration risk of its acquisitions, pricing pressure from financial institutions, PIN-network transaction-fee declines and economic risk.
But the company has ambitious plans to grow its market share. From its spinoff in 2009 to today, Vantiv has grown its U.S. payment transactions share from 13% to 18%. "We intend to grow faster than the payments industry," said Rozof.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.