Small cross-border deals play a big role for Visa, Mastercard

Visa’s recent green light from U.K. regulators to complete its Earthport acquisition was more than just the clearing of a regulatory hurdle — it was a revealing look at how important it has become for the card networks to diversify.

Earthport’s a relatively small company, but important enough for Visa and Mastercard to have entered a bidding war over, and vital enough for the U.K. to raise flags over how buying Earthport could suppress competition. With the government fight out of the way, Visa has taken control of Earthport, and Mastercard has found a similar company in the space to acquire, Transfast. That deal is expected to close in September.

Visa paid about $320 million for Earthport, and the financial terms of the Mastercard deal weren’t disclosed but are probably in the ballpark given the competitive bidding for Earthport.

The amounts of the deals aren’t impressive compared to the multi-billion dollar fintech mergers announced this year, but the strategies behind these deals were noteworthy.

Mastercard's earlier Vocalink acquisition was a move by the card network into diversifying beyond card payments, and the Transfast deal builds on that by adding services for cross-border payments, along with using Transfast to improve the user experience that surrounds the transaction.

Mastercard says Transfast can boost B2B, P2P and other payment flows, allowing it to compete against the fintechs that are more focused on FX than providing broader services and transparency around the payment, said Stephen Grainger, executive vice president of new payment platforms at Mastercard.

"Today if you send a payment, you don't have clarity on when that payment will arrive," Grainger said. "And that's not a good user experience."

Tranfast is also designed to build on Mastercard Send's push payments service to provide broader services to small to medium-sized businesses.

"It will provide reach to a significantly higher number of markets, while also materially enhancin our compliance and treasury capabilities," Grainger said.

Visa would not comment for this story, but in its announcement marking its regulatory victory in the U.K. Visa head of global push payments Bill Sheley said the acquisition of Earthport takes Visa “beyond the card.”

For the card networks, Earthport and Transfast are part of an evolution that includes tokenization and standardized “buy buttons” for e-commerce purchases, cross-border payments, innovation in supply chain transactions and P2P transfers.

Both card brands face pressure from regulators in Europe over transaction fees, and as such are accelerating their strategy to earn revenue from other services.

“Visa and Mastercard no longer see themselves as card companies, but as payment companies helping clients move money around the world,” said Zil Bareisis, a senior analyst at Celent.

Both networks are already strong in cross-border payments, but the acquisition of specialist players such as Earthport and Transfast will help both companies expand their portfolio of cross-border payment use cases, Bareisis said.

There are plenty of other companies that are chasing cross-border payments, not just because it’s a $30 trillion annual market (as measured by Accenture), but because it’s seen as a gateway to P2P payments as the role of online marketplaces expands within the broader cross-border market. And P2P rails can become a launchpad for broader merchant technology and financial services.

Much of the technology investment in this space is going outside of traditional payment rails to fintechs and distributed ledgers, which often move quickly and create alternatives to the traditional card brands.

Earthport’s partners include Ripple, which has used blockchain to remove correspondent banks from the cross-border transactions that feed international e-commerce sales.

Stripe is using its financial heft to build digital ID tools that can support a smooth user experience for businesses that are selling across borders, a strategy that includes an acquisition of Touchtech, which offers authentication in line with the global trend toward open banking to support use cases such as cross-border P2P for online commerce or B2B payments for e-commerce supply chain transactions.

“One potential use case could be B2B cross-border payments,” said Talie Baker, a senior analyst at Aite Group, adding a system such as Earthport's allows banks to make cross border payments without using the correspondent banking network.

Square just opened an online store in the U.K. to support social commerce opportunities such as shoppable Instagram galleries. The technology behind that comes from Weebly, another lower-dollar acquisition valued at about $365 million. PayPal in April announced a $500 million investment in Uber, a move that enables work on Uber’s digital wallet and possible P2P collaborations.

There have also been bank deals, such as JPMorgan Chase’s 2017 WePay purchase, another smaller deal that provided an incumbent bank access to an API to support international P2P or B2B payments for the small online businesses that are part of WePay’s network.

“[The card brand] acquisitions are about building depth and breadth in payments broadly, not just cards – think Mastercard and its acquisition of VocaLink,” said Gareth Lodge, a senior analyst at Celent. “While we don’t expect cards to disappear anytime soon, customer expectations and demands are evolving rapidly, and so they are both preparing to serve those customers of today and the future.”