INSIGHT
Edgar, Dunn
In this month’s Insight
issue, Kathleen, Erik, and
MItch offer an EDC global
perspective on the payment
industry’s expansion to a
borderless economy and
marketplace.
Kathleen McDowell, Manager
Kathleen, a manager based in
EDC’s Sydney office, has nearly
two decades as a financial
services and payments
professional throughout the
US, UK, Australia and Asia
Pacific regions. Her global and
regional expertise in payments
provides innovative marketing
and strategic development for
clients’ card product portfolios.
Kathleen has developed
strategies and programs with
measurable results for banks,
non-financial institutions,
and associations in areas
such as market entry, new
product development, product
propositions and positioning.
She has led benchmarking
and business opportunity
assessments, working with
clients both strategically
and tactically to maximize
market share, profitability and
customer loyalty.
Erik van Winkel, Manager
Erik is a manager in EDC’s
London office and is based
in Brussels, Belgium, from
where he provides EDC’s
bank, processor, scheme
and merchant clients across
international, local and
regional markets an in-
depth knowledge of the
Single Euro Payments Area
(SEPA), the Payment Services
Directive (PSD) and other
important European payment
developments. With his
experience of close to a decade
in the payments industry, Erik
& Company
Strategic Viewpoints for SUCCESS
Volume 28 August 2008 www.edgardunn.com
Payment Companies Reach Beyond Their Borders
Expanding Services and Achieving Scale Through International Growth
By: Kathleen McDowell, Erik van Winkel, and Mitch Muroff
Edgar, Dunn & Company
T
o many, the global economy means materials, products, and services
moving across oceans and continents to meet the needs of mature and
emerging markets. In the payments industry, a global economy means money
on the move – not just in yen, euros, and dollars, but in rupees, riel and baht
as well. It means making purchases with Chinese credit cards in London, us-
ing PayPal to send money to a relative abroad, and processing online transac-
tions denominated in all of the world’s major currencies.
As the economy goes global, so goes the payment industry. Companies
across the payments value chain are boldly expanding beyond their home
countries to facilitate and participate in the world economy.
BORDERLESS MARKETS, BOUNDLESS OPPORTUNITY
This Insight issue explores global expansion within the payments industry
– how and why it is happening, and what it means for suppliers and con-
sumers of payment services. Edgar, Dunn & Company (EDC) studied recent
cross-border expansion activities of eight organizations in the major world
payments markets – North America, Europe, and Asia/Pacific – ranging from
traditional banks to payment processors and transaction-enabling technology
firms. The research revealed a wide range of goals and strategies related to
international growth.
What drives payment companies to expand globally? Specific motivations
vary, but typically include one or more of the following:
• Attaining advantage through scale – Scale is a natural advantage in the
payments industry, both to deter competitors and to reduce unit costs.
However, once a firm has achieved a dominant share in its domestic mar-
ket, growth becomes increasingly difficult and expensive. For such firms,
expanding into foreign markets can significantly increase transaction
volume, enhance revenues and reduce costs.
• Serving the needs of home-market customers abroad – Payment compa-
nies must accommodate the changing needs of the consumers they serve.
For instance, the World Tourism Organization projects 100 million Chinese
residents will travel outside the country by 2020, creating a huge need
for payment vehicles that travelers from China can use around the world.
China UnionPay is pursuing an aggressive international expansion initia-
tive, and now allows their cardholders to make purchases through local
and regional alliances in 26 countries, including Australia, Russia, USA,
Japan and Germany.
has played leading roles in
Company Home Market Region of Expansion Organization Type
projects around strategic
growth opportunities for Barclays UK Scandinavia Bank
international banks, SEPA
card scheme migration Chase Paymentech USA Europe Acquirer
strategies, issuing/acquiring
value chains, payment China UnionPay China Worldwide Association
business models, M&A
projects and new product First Data USA Europe, Asia Processor
development. His expertise in
retail bank payment systems Asia Pacific, Eastern Europe,
Global Payments USA Processor
span all key European Latin America
markets, US, Canada, Brazil, Europe, Americas, Asia
South Africa, the Middle East ING Netherlands Bank
Pacific
and Australia
Processor, Acquirer,
PayPal USA Europe, Asia
Issuer, Bank
Mitch Muroff, Manager TSYS USA Asia, Europe Processor
A manager in the San
Francisco office, Mitch Muroff Table 1: Edgar, Dunn & Company studied a cross-section of payment companies engaged in international expansion.
is a global thought leader
in e-commerce payments
and risk management
serving many of the world’s By the same token, payment companies must evolve to retain merchants that
preeminent multi-national
e-commerce and technology
are themselves expanding internationally or need to support cross-border
companies throughout transactions.
his more than 20 years in
the industry. In leading • Extending brands by expanding services to new markets – For many pay-
strategic and operational
advisory capacities, Mitch
ments companies, a logical international evolution occurs – first expand-
provides clients a global ing acceptance capabilities to new markets as described above, then offer-
perspective on large-scale ing full services in those markets. The major card companies followed this
e-commerce payment and strategy years ago. PayPal is doing so today. Likewise, China UnionPay
risk management issues that
result in efficient, reliable and
has continued its expansion beyond internal acceptance to issuance of
scalable approaches to the new CUP cards through over 30 international issuers such as Sumitomo
management of e-commerce Mitsui Cards Company in Japan and Bank of China (Hong Kong) Limited,
payment operations and HSBC, Bank of East Asia, Hang Seng Bank in Hong Kong and BC Card in
fraud risks. His global
expertise and experience
Korea.
providing innovative payment
solutions span 15 countries • Capitalizing on structural and regulatory changes – Changes in regula-
throughout North America, tions are creating new opportunities for firms to operate in ways that
Asia Pacific, United Kingdom
and Europe, and Latin
might not have been previously possible. Among these, the introduction
America. of the Single European Payments Area (SEPA) and Payments Services
Directive (PSD) loom large on the global stage. SEPA and PSD will at-
tempt to standardize payment services across the EU and ease barriers to
market entry, making it possible for payment companies to offer a consis-
tent product or service to the entire European Union, whereas previously
The World Tourism an independent investment might have been required in each country.
Organization projects 100
million Chinese residents
will travel outside the These changes are motivating a variety of responses, including attraction of
country by 2020, creating foreign firms to Europe, consolidation among European organizations serving
a huge need for payment individual countries, and an urgency among small local European players, no
vehicles that travelers from longer protected by the barriers to entry, to grow quickly, combine with other
China can use around the players, or consider selling to a firm better positioned for long-term success
world. in the post-SEPA environment.

DIVERSE APPROACHES FOR INTERNATIONAL GROWTH

Just as firms’ motivations for international expansion vary, so do the means
to accomplish it. No single route to cross-border growth is inherently best for
every payments company. Organizations balance a variety of priorities and
constraints to choose the right means for their specific goals, timetables and
budgets. In the case of the firms we studied, all employed one or more of four
distinct approaches to international expansion: organic growth; alliances or
partnerships; joint ventures; and mergers or acquisitions.
 Organic Growth
Creating a new market offering by building technologies and capabilities in-
house allows firms to generate customized solutions that are well integrated
with current operations. However, organic growth can be more time consum-
ing than other routes to cross-border growth.

Organic growth can be This strategy is favored by firms with sufficient resources and time to tackle
more time consuming than the considerable challenges of bringing a business model to a new geography
other routes to cross- and culture. Further, this strategy is better suited to firms offering a difficult-
border growth. to-replicate product or service than those with a commodity offering. PayPal
is a prime example of such a product offering. The innovative online pay-
ments company, which operates in 190 markets and 17 currencies, established
PayPal Europe in Luxembourg in 2007. This organic growth move, supported
by a new banking license for the European Union, allows PayPal to offer its
services to more online merchants in Europe.

The European banking and insurance group, ING, built a lean direct banking
organization called ING Direct to expand its consumer banking business and
leverage its strong direct marketing skills. This approach allowed ING to enter
dozens of mature markets around the world while avoiding the complex IT
and organizational integration processes that might be required of an acquisi-
tion-focused strategy. In less developed or smaller countries, ING has used a
combination of partnerships and bank acquisitions.

Alliances or Partnerships
Alliances and partnerships are among the most expedient approaches a firm
might take to enter a new market. These approaches are best suited to firms
needing to move quickly, and those lacking the resources to independently
accomplish their objectives within an acceptable timeframe. Some firms also
use alliances to experiment in new markets, as these agreements can be fairly
easily dissolved.

Typically one firm with an entrenched position in a given market offers its
new partner(s) preferential access to a ready group of customers. The first
firm thereby broadens its service offerings while its partners enjoy quick, rela-
tively easy access to new markets. For example, China UnionPay is gaining
global reach through alliances with Discover Network and National Australia
Bank, as well as a joint venture with TSYS.

China UnionPay is gaining Not all alliances work. Successful alliances require a clear vision, measurable
global reach through goals, a high degree of trust and a business model that is beneficial to both
alliances with Discover parties, as well as to consumers. If any of these key elements are missing,
Network and NAB
the long-term success of the alliance may be at risk.
(Australia).
Joint Ventures
Joint ventures offer similar benefits as alliances and partnerships for compa-
nies seeking to expand internationally, with one important difference. As joint
ventures create a mutually owned third entity, the relationship is more formal
and lasting.

First Data, headquartered in Denver and acquired by private equity firm KKR
in 2007, has aggressively pursued international expansion, including joint
ventures with Standard Chartered Bank in Asia and Allied Irish Bank. The
company also acquired Polish processor Polcard SA, and Check Forte Proces-
samento de Dados Ltda., of Sao Paulo, Brazil.

When Barclays of the UK targeted Scandinavia and the Baltics as a promis-

ing credit card market, it chose a joint venture with SwedBank (which owned
EnterCard, a card company in Norway) as an expedient and effective means
to gain scale in a new market. This joint venture is notable for the excellent

Merging with or acquiring
another firm often allows
the suitor to gain a
foothold into a foreign
market more rapidly than
might be possible through
organic growth.
Increased scale may lead
to lower unit costs for the
providers, and we expect
providers to pass these
savings, at least in part,
to their highest volume
customers.
match of skills and assets from each party, combining Barclays’ international
credit card product/operations expertise with Swedbank’s retail banking cus-
tomer base and local market knowledge.
Mergers and Acquisitions
Merging with or acquiring another firm often allows the suitor to gain a foot-
hold into a foreign market more rapidly than might be possible through or-
ganic growth. An acquisition also provides the suitor with considerably more
control than is typical in an alliance, partnership, or joint venture.
Mergers or acquisitions may be preferable to other options when there is a
suitable target at an affordable price. If there is no suitable target in a given
market, or the price is too high, then joint ventures, alliances, and partner-
ships may be preferable strategies. Some organizations use a combination of
the above.
US-based Global Payments, a leader in electronic transaction processing,
entered Asia via Global Payments Asia-Pacific Limited, a joint venture with
HSBC. The company has also acquired companies in Eastern Europe and Latin
America. And through an alliance, Global Payments now offers Planet Pay-
ments’ “Pay in Your Currency” service to its Asia-Pacific merchants.
Approach Opportunity / Benefit Challenge / Cost
Organic Growth Control, continuity Speed, local market knowledge
Quick access to a new
Alliance/partnership Shared control, unclear intents
market, flexibility, cost
Joint Venture Stability Investment, shared control
Requires right firm at right
M&A Control, due diligence
price, integration efforts
Table 2: The companies studied used combinations of four primary methods for international expansion, each
with its own advantages and costs.
OUTLOOK FOR PAYMENT SERVICE PROVIDERS
Massive payment firms with capacity and relationships to operate on a global
basis are being formed in each of the major world economies. Key among
these are First Data in the US, China UnionPay and Standard Chartered in
Asia, and RBS, Barclays and ING in Europe. We expect the current wave of
cross-border expansion activity to continue for at least the next 5 years, with
important implications for all providers of payments.
As the large players integrate both horizontally and vertically through the
value chain and expand internationally, they will develop the capability to
serve an increasing range of needs for their customers. Since it is expensive
for consumers of payments services to maintain relationships with multiple
vendors, we expect participants to increasingly offer “one stop shopping” as
a value proposition to customers. There will clearly be new winners and los-
ers in the marketplace.
Increased scale may lead to lower unit costs for providers, and we expect pro-
viders to pass these savings, at least in part, to their highest volume custom-
ers. To the extent that providers can maintain current pricing while benefiting
from reduced unit costs, we expect their profitability to increase.
For smaller players, the impact could be severe. Many will likely find them-
selves squeezed from both ends – not being able to compete with the full
service or cross-country options of large players, and not being able to com-
pete on price due to the lack of necessary scale. We expect that it will become
increasingly difficult for small players to survive except where they serve a
 small niche of less interest to the global players, or where they are protected
by regulatory or structural barriers to entry that repel foreign competition. The
imperative, then, is for small players to look for combinations that will allow
them to gain scale – perhaps in niches the larger players are not pursuing – or
to position themselves for acquisition by larger players.

OUTLOOK FOR CUSTOMERS OF PAYMENT SERVICES

For service customers, most notably merchants, we expect to see new op-
portunities for cost reduction over the next 5-8 years. Merchants may be able
to negotiate lower pricing via higher value relationships with a comparatively
smaller number of service providers. As cross-border capabilities expand, ad-
ditional cost savings may be available to multinational corporations that are
presently incurring relatively large operational costs to maintain redundant
payment and treasury operations in multiple countries.

Merchants may be able to As the marketplace continues its rapid evolution, we recommend that mer-
negotiate lower pricing via chants re-evaluate their global payment processing postures relative to mar-
higher value relationships ketplace developments at least once every two years for the next eight years.
with a comparatively
smaller number of service EDC AND INTERNATIONAL EXPANSION
providers. Making the most of the global economy often requires new strategies, new
technologies and new business partners. EDC helps financial institutions, pay-
ment processors, and merchants identify and capitalize on opportunities in
markets around the world.

EDC is ideally positioned to lead clients to success in the global economy.

Experienced in the evaluation and implementation of cross-border strategies
from organic growth to M&A, our strengths include presenting a thorough,
practical understanding of specific international markets to pinpoint opportu-
nities and risks. EDC is currently active in various international expansion op-
portunity assessments to determine which markets to pursue, what products
to promote, and how to allocate investments across various global market
opportunities. Our perspective is helping clients at all stages of the payments
value chain drive successful expansion strategies in a variety of markets.

For more information about how EDC helps address international

expansion opportunities, please contact: Erik van Winkel at +32 473-829084
or erik.vanwinkel@edgardunn.com or Kathleen McDowell at +61 (2) 9279-2442
or kathleen.mcdowell@edgardunn.com.

Contact Information: About Edgar, Dunn & Company

Edgar, Dunn & Company (EDC) is an independent global financial services and payments consul-
contact@edgardunn.com
tancy. Founded in 1978, the firm is widely regarded as a trusted advisor to its clients, providing
a full range of strategy consulting services, expertise and market insight. Global capabilities
OFFICES include in-depth industry and consumer benchmarking, strategy, risk management, marketing,
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