This article is part of Wellesley Hills Financial’s Market Movements series, found in our weekly newsletter.
Deutsche Bank announced a joint venture (JV) with Fiserv Monday, June 21, signaling a revival of Deutsche’s merchant services business. The bank had exited the merchant services space in 2012, following the divestment of Deutsche Card Services to EVO Payments. At the time of the divestment, Deutsche was still reeling from the global financial crisis and was desperate to bolster shareholder value. Fast forward to 2021, the merchant services industry can no longer be ignored by any large bank. COVID-19 accelerated the global transition away from cash, and an unprecedented rate of brick-and-mortar closures forced late adopters to eCommerce.
Deutsche Bank’s decision to re-enter the payment space via a JV is of little surprise. After the financial crisis, European banks never recovered their prior form leaving most of the continent’s banks without the resources necessary to develop the technology internally (Deutsche Bank, which has paid over $18 billion in fines since 2008, is certainly not the exception). Barring organic development, Deutsche had two options left: acquisition or joint venture. Deutsche had attempted to acquire Wirecard assets out of bankruptcy last year; however, after a run-up on the asset’s sale price, valuations proved to be too rich to enter the space via acquisition, leaving a JV as Deutsche’s best option.
Pending regulatory approval, the JV will enable Deutsche to provide merchant services to its German customers, in addition to the host of pre-existing banking solutions that the European Financial Institution already has. Integration of the two firms’ technologies is expected to simplify the payments and banking ecosystem for SMB merchants, enabling them to avoid multiple contracts with a variety of payment providers. The combined entity will be uniquely positioned to offer end-to-end financial services to Deutsche’s 800,000 SME customers, along with future non-banking clients.
Fiserv’s rationale for entering into this JV is likely driven by its desire to diversify revenue streams internationally. For FY 2020, only 13% of Fiserv’s revenue was generated outside of the U.S. Further, the German market (and Europe at large) is lagging behind the United States in card payment usage. Being historically austere-minded, German citizens used cash for approximately 41% of all purchases in 2020, signifying considerable growth potential for the payment space in the near term as card usage picks up.
Given Deutsche’s existing penetration within the market, along with the capabilities of Fiserv’s Clover Platform, this new joint venture is likely a force to be reckoned with. However, given Deutsche’s back-and-forth on the payments space in the past decade, this JV is as much a step forward as a reminder of past mistakes.