Maintain NEUTRAL ratings on payments processors/private label card networks, including FDC, VNTV and ADS, given their national merchants exposure as Wedbush believes structural headwinds emanating from Amazon.com, Inc.'s (NASDAQ:AMZN) effect on retailers will continue to impact transaction volumes. While Amazon's acquisition will not have an immediate impact on any of the vendors on Wedbush's coverage list, the transaction's expected long term impact on the supermarket chain industry is just another sympathetic challenge for vendors with national merchants' exposure. Data from both VNTV and FDC (look for attached charts) suggests exposure to supermarkets. OUTPERFORM rated GPN remains the firm's top pick given its SMB exposure. Maintain OUTPERFORM ratings on the networks (V, MA) given their dominant role as transaction "facilitators".
From a big picture perspective, the payments industry has benefited from an ongoing, multi-year infrastructure upgrade spending cycle as retailers have been addressing security risks, complying with EMV standards/deadlines as well as requiring more integrated payments solutions. This trend provided merchant processors with share shift opportunities during the past 3-4 years. Having said that, the firm believes the cycle is nearing its peak at the national merchant level, while it is roughly 40% played out at the mid-merchant and SMB level, providing large opportunities for share shifts. In Wedbush's coverage universe, Wedbush stayed away from hybrid Fintech names (FDC, VNTV, ADS) with national merchant exposure, while focusing on GPN, given its exclusive SMB exposure. The firm believes "The Amazon effect" is another potential negative for FinTech vendors servicing national retailers, a phenomenon already reflected in VNTV's results (last quarter) as well as in ADS' SSS growth deceleration (500-700 BPTS moderation).
In one of its presentations, VNTV quantified supermarket exposure at 30%+ of revenues, while a FDC presentation pointed to supermarkets as one of its end markets. The networks continue to have a dominant position regardless of "The Amazon effect". At this point. V and MA remain the dominant networks, and transaction "facilitators", with no practical alternative solution. So far, any attempts to disintermediate V and MA, including MCX's venture ended with failure. Even ApplePay realized that for practical reasons, it is better off teaming with the networks (who manage ApplePay's relationships with the card issuers).