 ( NYSE:GPN) lets small businesses process credit and debit cards. The company also insures checks these small businesses accept from customers against bouncing or default. The firm's focus on small business helps it build its margins, as small companies have less leverage when negotiating processing fees and GPN can take a larger cut of the transaction.
GPN is the second largest independent merchant processor in the U.S., behind First Data, a much larger firm which processes 15 times as many transactions as GPN. GPN also offers money transfer services in the U.S. and Europe, but this segment is dwarfed by card processing which accounts for 90% of GPN's operating income.
In the last decade, GPN has expanded into Central and Eastern Europe, as well as China, and these fast-growing regions have great potential for GPN as the credit card market is in its early stages in these locations (as opposed to the relatively mature market in the USA).
[edit] Business Overview
GPN divides its business into three main categories:
- Credit Card Transaction: During credit transactions involving its clients (merchants), GPN acts as the middleman between the merchant (such as a store) and a card issuer (usually a bank. A transaction begins when a card-holder attempts to pay with a credit or debit card at a merchant. GPN processes the transaction by accessing information from the card issuer to confirm the payment. This process involves intermediaries, each of whom is compensated a certain percentage of the transaction value. Thus the final amount that reaches the merchant is less than the amount paid by the card-holder. GPN temporarily makes up this difference, but bills its client, the merchant, at the end of each billing cycle to compensate for its loss, as well as to produce a net profit. [1]
- Check Services: Many of GPN's clients accept checks as well as cash and credit in payment, and are thus exposed to the risk of check bouncing. To alleviate this risk, GPN offers a check guarantee service. Each time a client merchant receives a check, GPN decides remotely, through its electronic check-readers, whether or not the check should be accepted. If accepted, GPN earns profits as a percentage of the check's value, but must reimburse its client the full value of the check if it bounces. To achieve this, GPN operates its own internal check verification and collection services. This service is attractive to merchants because it allows them to accept checks less stringently. [2]
- Money Transfer Segment: As of May 31, 2007, GPN operates 875 retail branch locations in the United States and 68 in Europe under its DolEx brand. These locations provide customers with the ability to transfer money across international borders. GPN earns profits by charging a fee for each transaction, and from the difference in the wholesale and retail exchange rates between currencies. As of the beginning of 2008, the vast majority of GPN's customers in this segment are immigrants in the U.S. sending back to Mexico and other Latin American countries.
In addition to its domestic operations, GPN also operates in Europe, Canada and the Asia-Pacific region. The company is involved in the dynamic sector of payment processing with frequent innovations. For example: the emergence of new, untraditional competition, particularly for online payments, may become a threat for traditional payment processors such as GPN (see Trends and Forces).
[edit] Business Financials
GPN has grown steadily by 15-20% annually during recent years, has very little debt, and holds roughly $360 million in cash. About one third of GPN's business is internationally based, and most of its profits are from credit transactions and check services.
 
Merchant Services include credit transactions and check services.
The above visuals are based on revenues as of 2007.[3] For the past 3 years, revenue from merchant services as a percentage of total revenue has been quite constant, but international revenue as a percentage of total revenue has increased from 28% in 2005 to 34% in 2007.
[edit] Key Trends and Forces
- The Emergence of Nontraditional Payment Processors, such as Paypal, Google Checkout and Amazon Payments bypasses intermediaries such as GPN. As online shopping grows in volume, these alternative payment methods pose a threat to GPN as they gain a greater share of total transactions. GPN relies on the physical use of a credit card at a merchant's location, and has difficulties processing and profiting from other types of payments.
- Consolidation in the Banking Industry may cause many financial institutions to take their credit and debit processing in-house, thus eliminating the need for a third-party processor such as GPN. In addition, larger banks possess greater bargaining power, and thus demand lower fees from GPN, to the detriment of its profits. [4]
- The Performance of Merchant Customers Impacts GPN's Revenues: GPN is indirectly influenced by the performances of its merchant customers, which may in turn be influenced by economic trends. Much of the company's profits are derived from fees as a percentage of credit transaction through these merchants. So trends in consumer spending greatly influence GPN’s revenues, and a decline in retail sales (as many analysts expect in 2008) could hurt the company’s balance sheet. Furthermore, in the event of a reversed payment (canceled payment by card holder), the merchant must reimburse the card-holder. However, GPN may be liable for this charge when is merchant is either unwilling or unable to pay this sum.[5]
[edit] Competition
[edit] Merchant Services
- First Data (FDC) : As the largest electronic transaction payment processor in the US, First Data's services overlap almost completely with those of GPN in merchant services. [6]
- Moneris Solutions : as GPN's primary competitor in Canada, Moneris currently has a larger market share of the Canadian transaction processing market, and also offers ATM and POS services.
GPN competes in a populated arena of payment processors, and is smaller than most of its significant competitors. Although it cannot compete in raw transaction value with companies such as First Data (FDC), GPN has successfully secured a niche in the market by focusing on small businesses for clients.
[edit] Money Transfer
GPN can only be considered as a small participant in the diverse money transfer segment, and possesses no significant market share compared to most competitors. As such, GPN has historically focused almost solely on immigrants sending back money to Latin America.
- Western Union Company (WU) : competes with GPN under its money transfer segment. It possesses greater transaction volume, more established locations, roughly 310,000 agent locations and a more established brand name with a 17% market share.
- Moneygram International (MGI) : also competes with GPN in the money transfer market. It is almost completely devoted to providing money transfer services, and has an agent base of about 110,000 as of 2007 with a 4% market share.
- ↑ MGI 10-k, Item 1, Pg 6
- ↑ MGI 10-k, Item 1, Pg 7
- ↑ MGI 10-q, Item 1, Pg 20
- ↑ MGI 10-k, Item 1A, Pg 19
- ↑ MGI 10-k, Item 1A, Pg 17
- ↑ FDC 10-k
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