MasterCard agrees £700m VocaLink acquisition

MasterCard agrees £700m VocaLink acquisition

MasterCard has agreed to pay about £700 million to buy 92.4% of VocaLink, the bank-owned operator of the UK's Faster Payments system and Zapp mobile service.

Under the definitive agreement, VocaLink's existing 13 bank shareholders are also in line for a potential earnout of up to £169 million if performance targets are met.

Philip Hammond, the UK's new Chancellor of the Exchequer, welcomed the move, saying: "MasterCard's decision to buy VocaLink shows that Britain remains an attractive destination for international investors. Britain is and continues to be an open and globally facing country in which to do business."

The deal comes just months after the UK's Payment Systems Regulator (PSR) said banks should sell their stakes in VocaLink to help increase innovation and competition in the nation's critical payments infrastructure.

The London-based group operates BACS, the ACH enabling direct credit and direct debit payments between bank accounts, as well as the Faster Payments scheme and the Link ATM network. This means that it processes over 90% of salaries, more than 70% of household bills and almost all state benefits. Nearly every business and person in the UK uses its technology and last year the company processed over 11 billion transactions with a value of £6 trillion, generating revenues of £182 million.

The PSR believes that the common ownership of VocaLink by a small number of banks is having a "negative impact on innovation and competition in the industry".

MasterCard says that the acquisition "accelerates MasterCard’s efforts to be an active participant in all types of electronic payments and payment flows".

In particular it means getting hold of VocaLink’s Immediate Payments System, which is live in Singapore and has won deals in the US and Thailand, and the Zapp system, which would give the card scheme a new route into UK debit payments, currently a Visa stronghold.

Ajay Banga, president and CEO, MasterCard, says: "VocaLink is a unique company with outstanding technology, assets and people. We look forward to investing in and maximizing the technology, and embedding it in our products and solutions, both in the UK and around the world."

David Yates, CEO, VocaLink, who will join the MasterCard management committee, adds: "Today’s announcement is positive news for our partners, customers and employees. We will continue to focus on ensuring that the UK systems perform seamlessly, maintaining the highest levels of quality. At the same time, we’ll invest in further innovation to power competitive payments solutions for consumers and businesses around the globe."

The deal, which sees the current shareholders retain 7.6% ownership for at least three years, is expected to close in early 2017 and to be dilutive for up to 24 months after this.

Comments: (15)

Steven Hatton
Steven Hatton - Trusek Ltd - Amersham 21 July, 2016, 14:446 likes 6 likes

How can MasterCard's acquisition of a payment service that could, under PSD2, provide direct competiton to the card schemes be possibly thought of as increasing competition?

Or am I missing something?

Craig Lawrance
Craig Lawrance - Starkspur Ltd - Chalfonts 21 July, 2016, 15:334 likes 4 likes

@stevenHatton, I'm thinking the same way, it flies in the face of where the regulators are urging the payments industry to go.  Something as key as our national payments processor, responsible for the majority of monthly salary payments, now owned by a Card Scheme.

Ganesh Vaidyanathan
Ganesh Vaidyanathan - Self employed - Croydon 21 July, 2016, 15:431 like 1 like

This is a tremendous coup for MasterCard. Such a strong play in the direct payments space will be a huge asset at a time when the traditional interchange model for cards comes under increasing pressure from retailers and regulators around the world. It also helps them in the Debit segment where they are non-existent in the UK.

In the last few years, MasterCard has transformed itself from being a card scheme to a technology organisation. Their deep pockets and willingness to invest bode well for Vocalink and the UK payments infrastructure.

A Finextra member
A Finextra member 21 July, 2016, 17:00Be the first to give this comment the thumbs up 0 likes

I can't believe a piece of essential national infrastructure is sold so care-free.  Will MasterCard Access Prepaid Worldwide merge with VocaLink to rationalise processing and business units, perhaps?

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 21 July, 2016, 17:21Be the first to give this comment the thumbs up 0 likes

MasterCard will need some major getting used to with the drastic difference between its own and VL's revenue models: As against ~1% that MC must be making on cards, VL's figure is only 0.003% (£182 million revenues on £6 trillion transaction values).

Nick Collin
Nick Collin - Collin Consulting Ltd - London 22 July, 2016, 10:451 like 1 like

I agree with Ganesh.  This is a really smart move by MasterCard.  £700 million looks like a bargain.  I've always thought that much more could be done on the back of Faster Payments and MasterCard is probably just the right sort of company to do it - my guess is that new added value products will turn out to be the main revenue drivers in the longer term Ketharaman.  Branding will be interesting!

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 22 July, 2016, 11:201 like 1 like

@NickCollin: It was early 2007. At a Top 5 UK Bank that had just started implementing FPS, we were discussing various ways - including value added products - to monetize FPS. As a marketing professional, I feel disappointed that, 9 years later, not one of them has fructified into an incremental source of revenue. Although I no longer have any vested interest, at least for old time sake, I'd be very happy if your prediction "MasterCard is probably just the right sort of company to do it" comes true!

Tom Hay
Tom Hay - Icon Solutions Ltd - London 22 July, 2016, 14:212 likes 2 likes

While the high street banks were in control of Vocalink there was little incentive for them to make access to the clearings easier, because they derive a revenue stream from smaller banks that connect indirectly (via the member banks). The limited technical performance of those indirect connections meant that smaller banks could not offer the same quality of service that member banks can.

Mastercard do not have any such conflict of interest. Their revenues will depend on the number of banks connected and the volume of payments made, so they will have an incentive to get more banks on board with high speed connections and innovative services to encourage customers to make more electronic transactions.

The Mastercard acquisition could provide a shot in the arm for access to clearings, innovation and hence competition.

 

 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 22 July, 2016, 18:28Be the first to give this comment the thumbs up 0 likes

@TomHay's predications may well come true but here's an alternative scenario: MasterCard leverages VL's existing relationships with consumers to move bill payments to credit cards and with corporates to move vendor payments to p-cards. This will help MC - and the card issuing banks - make more revenues.

Ganesh Vaidyanathan
Ganesh Vaidyanathan - Self employed - Croydon 22 July, 2016, 18:35Be the first to give this comment the thumbs up 0 likes

Time will tell Ketharaman but I feel that is unlikely. I expect MasterCard to leverage Vocalink to develop a complementary business model and a parallel revenue stream.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 22 July, 2016, 18:45Be the first to give this comment the thumbs up 0 likes

@GaneshVaidyanathan: I'd feel more confident about that prediction if the difference in yield between MC's and VL's business models is not as drastically different as 1% versus 0.003%. But time - and MC's shareholders - will tell...

Ganesh Vaidyanathan
Ganesh Vaidyanathan - Self employed - Croydon 22 July, 2016, 18:52Be the first to give this comment the thumbs up 0 likes

@Ketharam Swamimathan: that is where the complementary business model is key. MasterCard could for instance package and licence the technology and make a killing on licence fees. After all, the technology has already been deployed in Singapore. Remittance is another area where MasterCard could have a significant play with this technology. As you say, time and shareholders will tell.

Tom Hay
Tom Hay - Icon Solutions Ltd - London 22 July, 2016, 22:461 like 1 like

There's an interview here with Michael Miebach, Mastercard’s Chief Product Officer, that aligns with my predictions. For example he highlights: 

…capability to leverage Fast ACH technology for digital debit payments through its Zapp mobile payments app…

and says:  

 VocaLink will provide Mastercard with a complementary set of technology will enable it to participate in a much broader range of payment flows. “And it will allow us to continue to grow our services business across their customer base and their payment flows and vice versa for their services business”

 

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 23 July, 2016, 12:01Be the first to give this comment the thumbs up 0 likes

True that but the line “And it will allow us to continue to grow our services business across their customer base" from the same interview also aligns with my prediction "MasterCard leverages VL's existing relationships with consumers to move bill payments to credit cards and with corporates to move vendor payments to p-cards."!

Anish Kapoor
Anish Kapoor - AccessPay - Manchester 16 August, 2016, 09:23Be the first to give this comment the thumbs up 0 likes

The proposed sale of Vocalink to MasterCard, threatens to kill innovation in UK Payments – This is my damning verdict. I've put some thought into this whole acquisition and my reasoning for the above statement into a Finextra blog post. Read it here: Selling VocaLink to MasterCard will Kill Innovation in UK Payments.

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