Global Market Commentary

Retail Tremors Shake the Payment Ecosystem


Consumers who use credit and debit cards are typically aware only of the card they’re using and the merchant they’re buying from; the payment pro-cess is a “black box” from a consumer’s perspective.


But as the first image below shows, the black box hides a complex ecosys-tem of firms with different specialized functions — including many publicly traded firms with exposure to specific trends in the technology, finance, and


retail sectors.


  • still-simple, but more comprehen-sive picture of the payment ecosystem looks something like the second im-age.


(There are some variations to this outline; when it comes to cards such as American Express [NYSE: AXP] or Discover Card [NYSE: DFS], for ex-ample, the card issuer and the card as-sociation are the same entity.)

Consumers are not generally aware of the various firms that stand between them and the merchant. When a customer presents a credit card to a mer-chant to purchase a good or a service, the mer-chant acquirer manages the payment processing and secures approval for the transaction. These merchant acquirers aggregate and separate pay-ments made to merchants. The card associations (such as Visa [NYSE: V] or MasterCard [NYSE: MC]) in turn stand between merchant acquirers and the card-issuing banks. Payments are debited to the card issuer, and ultimately the cardholder. The issuing bank sends a credit for all their daily payments back to the acquirer, who completes the cycle by funding the retailer’s bank account, of course taking a fee in the process.


(As an aside, we note that the many intermediar-ies in the credit-card payment process, and their fees, are another impetus behind the rise of bitcoin and other digital currencies — where technology promises to replace those intermediaries with algorithms and encryption.)


While consumers are used to interacting with the bank that issued their card, merchants are used to interacting with the acquirer. Some acquir-ers perform services such as payment processing and customer analytics themselves; other smaller acquirers outsource these services to third parties.


Since the black box usually functions smoothly, customers are rarely aware of its internal workings

  • until, for example, they want to dispute a charge, or they become aware of fraudulent activity on their account. As you can guess, though, the rise of online retail, mobile payments, and other techno-logical innovations has upended the inner workings of the black box, resulting in a lot of mergers and acquisitions during the past few years. A recent example is the bid by U.S. acquirer Vantiv [NYSE:


VNTV] to merge with British acquirer Worldpay [London: WPG]. VNTV is the largest U.S. acquirer,


spun out from Fifth Third Bancorp several years ago. It has little exposure to overseas markets, and more significantly, a relative overexposure to U.S. big box and mall retailers, with only 10% of reve-nues coming from e-commerce. 2017 has thus far been a tale of the decline of the brick-and-mortar retailers that are VNTV’s bread and butter.


WPG, on the other hand, was spun out of the Royal Bank of Scotland in 2015, and its e-commerce operations are global and growing quickly. It has a strong foothold in Europe; in the UK, it has a 42% market share, and in Europe, a 26% share of web-based transactions. WPG also has U.S. operations; between the U.S. and Europe, 41% of its revenue originates online. If the acquisition goes through, it will boost VNTV’s e-commerce business from 8–12% of its revenues to 20–25% of its revenues.


Thus, the same disruption that’s visible to mer-chants and consumers as they watch events like Amazon’s [NASDAQ: AMZN] purchase of Whole Foods [NASDAQ: WFM] is also visible within the payment-processing universe. This reinforces our view that for now, the company narratives that include secular growth will continue to rule the roost.




Investment implications: The shift to e-commerce will benefit merchant acquirers with a strong e-commerce pres-ence and global reach. One simple way to invest in the development of global e-com-merce is to buy the stocks of the credit card networks, such as Visa [NYSE: V] or MasterCard [NYSE: MC]. However, inves-tors may also identify merchant acquirers who derive a significant part of their rev-enue from e-commerce, and who are able to offer compelling services to merchants


in an environment where their fees are In early May, we wrote a piece on the outper-under pressure. 

E-Sports Leagues Hitting the Big Time



formance of video game companies, in which we noted how the unexpected demographic broad-ness of video game appeal is helping drive sales and engagement. We also mentioned e-sports — another aspect of video gaming that’s garnering investors’ attention.


E-sports is on the way to becoming a huge busi-ness, rivalling established sports leagues both glob-ally and in the U.S. “E-sports” refers to multiplayer online games, such as League of Legends, Call of Duty, Counter-Strike, Overwatch, or StarCraft, as competi-tive sports — complete with leagues, professional players, spectators, sponsors, and box office and advertising revenues. While the largest and oldest e-sports league organization is ESL (originally an acronym for “e-Sports League”), there are many events and organizers, still largely fragmented along game- and manufacturer-specific lines. While e-sports first took off in Korea, where they are already mainstream, they are expanding rapidly in the U.S., Europe, and China.


How big is e-sports now, and is competition with established sports (such as soccer, American foot-ball, and basketball) becoming visible? Numbers are hard to come by for many events, but the 2016 League of Legends World Cham-pionship, organized by Riot Games, had 43 million unique viewers for its final game — compared to 40 million for game seven of the 2016 baseball World Series. League of Legends may have global reach compared to the relative parochialism of American baseball — but advertisers and sponsors will love the eyeballs, no matter where they’re found.


Direct e-sports market revenues — including spon-sor and advertising revenues, as well as ticket rev-enues — were $900 million in 2016. That figure


is relatively small, but it fails to capture some of the significant promotional benefits of e-sports for game companies such as Activision Blizzard [NAS-DAQ: ATVI] and TakeTwo Interactive [NASDAQ: TTWO] in terms of the impact on game sales.


Recognition of e-sports is also rising. In 2013, the U.S. Citizenship and Immigration Services (USCIS) began issuing athlete visas to event participants in the League of Legends events. The Asian Games will include e-sports as medal events beginning in 2022. Major European soccer clubs, including Paris Saint-Germain, have created e-sports teams and partic-ipated in e-sports events. The National Basketball League has announced that it will partner with TTWO to launch the company’s NBA 2K game as an e-sports league in 2018.


The main online outlet for e-sports viewing is, bought by Amazon [NASDAQ: AMZN] in 2014, accounting for about 20% of all e-sports online viewing time in 2015. Alphabet’s [NASDAQ: GOOG] YouTube won ESL broadcast rights early this year. Facebook [NASDAQ: FB] struck a deal to live stream Valve’s Counter-Strike. But it isn’t just the internet giants getting involved; cable channels ESPN and TBS have also established e-sports pro-gramming.


The growing clout of e-sports, as we noted above, will be a boon for game companies. Titles that gain popularity as e-sports venues will see extended game and franchise lifespan and higher sales; e-sports will become one of their main promo-tional tools. The impact on game producers can be profound; independent game studio Pyronix saw unit volumes of its Rocket League game exceed 10 million largely thanks to e-tournament exposure.


For the companies that broadcast and promote merchandising. If the 2016 numbers for League of events, e-sports will create new sources of mone- Legends are an indication, e-sports are nearing a tization through sponsor and advertising revenue, critical inflection point. as well as through direct sales of event tickets and

Investment implications: In our opinion, investors who want to benefit from the rapid rise of e-sports should concentrate in two areas: first on the game studios them-selves, and second on the platforms that will bring e-tournaments to the new masses of fans. As we noted in May, the largest pure-play gaming companies are Electronic Arts [NASDAQ: EA], Take Two Interactive [NASDAQ: TTWO] and Activision Bliz-zard [NASDAQ: ATVI]. Hong Kong-based Tencent [Hong Kong: 700HK] is the major gaming company in China, getting about half its revenue from gaming, supported by its other robust social and communications platforms. Amazon [NASDAQ: AMZN], Alphabet [NASDAQ: GOOG], and Face-book [NASDAQ: FB] are positioned to be

major platforms for e-sports viewing, and we would currently favor them above estab-lished cable broadcasters.


Please note that principals of Guild Invest-ment Management, Inc. (“Guild”) and/or Guild’s clients may at any time own any of the stocks mentioned in this article, and may sell them at any time. Currently, Guild’s principals and clients own EA, GOOG, and FB. In addition, for investment advisory cli-ents of Guild, please check with Guild prior to taking positions in any of the companies mentioned in this article, since Guild may not believe that particular stock is right for the client, either because Guild has already taken a position in that stock for the client or for other reasons.

Market Summary


After some end-of-the-quarter volatility, markets have settled down and continued to move ahead, offering investors a typical seasonal July rally.



The U.S.


We like the U.S., and in the U.S. we continue to prefer large-capitalization technology compa-nies with disruptive stories and visible, long-term growth prospects.



Europe and Emerging Markets






rather than by fundamentals.)


We find Brazil interesting in the light of former president Lula da Silva’s recent conviction on corruption charges — although the long-running corruption scandal is still ongoing, with President Temer remaining under a cloud even after avoid-ing impeachment thus far. Both the Brazilian stock market and the Brazilian currency could rally if and when market participants believe that the corrup-tion scandal has reached its nadir.





We are neutral to slightly positive on European stocks. We are most enthusiastic about Asian stocks in manufacturing economies — particularly China, Hong Kong, Taiwan, Thailand, Singapore, and India. Here as well, we like technology, and view some Chinese internet stocks favorably. (As usual, we caution investors that most of the Chinese stock market is driven by retail investor sentiment


Gold remains in a trading range. It has moved above $1240, but according to technical analysts, a close for gold above $1275 would signal the potential for a more significant rally.


Thanks for listening; we welcome your calls and questions.