Over the past several years, the payments industry has exploded with innovation, as fintech players such as PayPal Holdings and Square have smartly leveraged technology to solve traditional pain points for merchants and financial institutions alike. But if traditional payment processing companies were supposed to roll over and surrender, it appears Global Payments Inc (NYSE:GPN) didn't get the memo.

In Global Payments' 2018 fourth quarter, which ended in late December, adjusted net revenue rose to $1.04 billion, a 12% increase year over year, and adjusted earnings per share (EPS) grew to $1.33, a 24% increase. The payment processing company managed to grow revenue and earnings by double digits, all while expanding its operating margin, which came in at 31.6% in the quarter.

Global Payments' Metrics Full-Year 2018 Full-Year 2017 Change
Adjusted revenue $3.97 billion $3.46 billion 15%
Adjusted EPS $5.19 $4.01 29%
Operating margin 31.7 30.4 1.3 percentage points

Data source: Global Payments Inc. 

The company has managed to keep pace with nimble, deep-pocketed fintech competitors by following a deliberate strategy to orient its business toward a software-as-a-service (SaaS) model, targeting specific software vertical niches where the market was fragmented and ripe for innovation and disruption. It has, slowly but surely, implemented this strategy via acquisitions, partnerships, and internal development. Let's take a closer look at what Global Payments is getting right.

The quiet SaaS transformation

It's not technically accurate to label Global Payments as an SaaS company. It captures the vast majority of its revenue by enabling merchants to accept card and digital payments at the point of sale for both online and face-to-face transactions. For each transaction, Global Payments collects small fees. Most of these fees end up going back to the card-issuing banks as interchange fees or to the card's payment network, such as Mastercard or Visa. However, a tiny sliver goes into Global Payments' coffers for its role in the transaction.

A man has a finger on his cell phone, with a credit card in his other hand.

Image source: Getty Images.

Payment processing services are largely commoditized, however, meaning they do not require much expertise and businesses can fulfill this need fairly cheaply. Smart businesses, such as Square, have developed entire ecosystems around their payment processing services, offering lucrative features that make their entire platform sticky and difficult for merchants to leave.

While Global Payments has not developed the same comprehensive tools that Square has, it has targeted software platforms that are used in specific industries using partnerships and acquisitions. It then integrates its payment processing capabilities into these platforms. The end effect is the same: Global Payments is developing a sticky platform that makes it awfully hard for its sellers to leave.

The successful examples

Management's goal is for this "technology-enabled distribution" to account for 60% of its revenue by the end of 2020, and management says it made "substantial progress" toward this goal in 2018. It has already built up a sizable collection of such software verticals, giving it significant market penetration in several different industries. 

For instance, in 2017 Global Payments acquired ACTIVE Network for about $1 billion. ACTIVE Network makes event planning software often used for events such as marathons, youth camps, and sports leagues. Among its customers it counts Ironman, YMCA, and several state park departments.  

Last year, it acquired AdvancedMD, a provider of cloud-based software solutions to doctors' offices, for $700 million. AdvancedMD helps doctors' offices automate their back office needs by fulfilling tasks such as record management, scheduling, and billing.  

It's not just acquisitions, however, that Global Payments is using to fuel its growth; it's also partnerships. Just this quarter, for instance, the company announced it would be partnering with PowerSchool, a K-12 educational platform that can be used for a variety of school operations.

The core-edge approach

While each one of these specific verticals is relatively small, they collectively add up to form a significant revenue stream. How has Global Payments managed to successfully progress with such a diverse collection of businesses? In the company's Q4 conference call, CEO Jeff Sloan answered that question:

Once we close an acquisition, we follow a core and edge approach to integrating and operating those businesses ... Our edge businesses continued to do what they do best, which is ensuring their software solutions maintain market leadership position ... At the core, we also leverage our capabilities to extend and monetize the payments opportunities transactionally that are inherent in these businesses on a local and global basis. In addition, we provide support through scale, technology infrastructure and architecture, compliance, and information security just to name a few.

In other words, Global Payments lets its growing list of companies do what they do best: Work within their markets and interact with their customer base. Meanwhile, Global Payments provides them with technology and payments infrastructure at scale.

Why you should keep your eye on Global Payments

Global Payments is a company that smartly read the tea leaves that its industry was beginning to undergo significant changes years ago. It began to take the necessary steps to ensure it wouldn't be left behind, offering just a commoditized service with shrinking margins. The result is impressive. Global Payments is a company that should continue to offer shareholders market-beating returns for years to come.