Situation. If you could just kind of tell us where you are, what changed between 2Q and 3Q? Was it just a better negotiation on your part? Was it perception of value that changed? If you could go through your thoughts.
Why don't I talk a little bit about the business relationship and then Mike can talk about the financial side, but obviously we've had a longstanding relationship with M&I Bank. We've had a longstanding relationship with Harris Bank. But they were on different products and Harris Bank M&I Bank. We've bought to the market’s attention in second quarter because we knew that the conversion was coming up like Q3, early Q4 and we knew that we had not worked through the contractual arrangements. So we brought up the fact that pulling these two together we had always said that one plus one was not going to equal two.
What transpired as we were working the implementation, what's transpired is what we think is a great long-term relationship. So what we ended up doing was, we moved a lot, we converted M&I Bank off of one of our core platforms that we were providing on an outsourced basis. We converted it onto another one of our core platforms that BMO Harris actually runs in-house. Now what's interesting is, we have an application management agreement with them. so what that means is, while its our software running in their data center, it’s our people doing the work. So one of the things that transpired through the arrangement is we extended that agreement for another five years and we also increased the size of that arrangement. We also at that point in time though then combined our bill payment under our bill payment platforms, we combined our debit. There were a number of ancillary product wrapped around the core that we also converted and all of those products were on an outsourced basis including stuff like mobile banking. So all of that got extended to full five years which is very positive from our standpoint.
When we went through conversion which we've already gone through the conversion now which was prior to the call, honestly this was one of the biggest core banking conversions that have occurred in North America. What came out of that was all of the things that FIS worked on, frankly went very, very well. I mean in a conversion this size you’re always going to have some issues. What I think executive management realized that at Canada, those issues just did not occur and frankly did not occur on the FIS products and services. So really was a great come.
We've sensed that conversations with executive management of Bank of Montreal. Obviously in Canada, they saw the value of that and we think there is tremendous opportunity now to do more business with the Canada Bank as well. So we’re excited about that arrangement where it can go.
Just so with color on the numbers, and again, I think it’s a little bit of challenge for us. We don't want to be in a situation where we brought to the market, we just moved de-converted M&I from the MI platforms, and moved it over to another and here is the financial impact after the fact. So second quarter we tried to give some certain expectations what was going to happen on the timing of that but did not have our agreements, I hammered out with BMO Harris.
So we (inaudible) second quarter M&I is a very unique client, a portion that FIS came out M&I as the technology stop. So it’s the subsidiary of M&I and we did virtually everything for M&I. so it’s very unique. People always say do you have other clients that could consolidate that, have that impact, the answer is no. we don’t have other relationships like we have with M&I and because some of the people sought answer, a lot of the people that follow us over the years knew a fair amount about that M&I relationship and the size we felt it was important to share that with everybody.
So that's what we did in the second quarter. Net on a run rate basis, it’s about $60 million EBITDA hit to FIS, unmitigated, that's the hit of M&I moving over the Harris BMO platform. As we work through the deals during the quarter, and then we said in 2013, we expect the termination of settlement fee that would mitigate half of that 60 million in 2013 that was the message we gave on the second quarter call. as we worked out the arrange as you can see, it worked out better. I don't think it was a negotiation. I think we have a better relationship today than we did three months ago.
The terminations of settlement, there is a relationships we settled out, we ended up with $40 million term selling fee in 2013 and then two other (inaudible) one is the special services is part of the five year extent, the level of the professional services, the level of support. So its supporting the applications that BMO Harris has, that we do for them is higher than we had originally anticipated. And so that's going to mitigate a chunk and we have another business arrangement, I'll call it, that we’re settling up with BMO Harris. We can speak the specifics but it will be a deal that we complete with them hopefully soon and that we anticipate to about $10 million EBITDA on going impact positive EBITDA.
So the 6 million next year between the deal we’re going to announce and the additional professional fees and the 40 of term in settlement will be virtually eliminated in 2013. So we don't expect to be whole in 2013.
20 million of that is, will carry forward as a positive. So we have somewhere to do to address the rest of that EBITDA hit. Gary talked about the call earning a (inaudible) is about $9 million bank that’s going to go on to platform that M&I is vacating. So that will go on there and drive good margin because it’s going to excess into excess capacity there. And the team has to go and do more of that. So we have to sell more on the platform. We think the relationship with BMO Harris, we do very little north of the border and as you look at the relationship today as opposed to even three months ago, we think there is some opportunities to even expand beyond what we see today as it will help fill that additional 40 and then we have to go and do deal and then see what a business model is, we announced signing a large 18 deal in India, so we can go where there is lots of opportunities to grow our business and chase business that's going to have a big impact on us in the future and will help mitigate that impact as well.
I think we looked at it every year we have to deal with consolidation. This is a big one and again very unique client. But we've overcome that ever year. it’s not just 2013, every year we go through the planning cycle. So we feel pretty good about 2013. Obviously we've mitigated it and we feel good about the timeframe we have to address 2014 and beyond.
Just one more question on BMO. Based on our check certainly, it seems as though they’ve been barely aggressive with regards to rebranding and making changes to make sure it’s one company both from an external planning perspective and from an internal systems perspective. Does that feed translate to decision making on such things as like I said, processing north of the border?
Well we certainly think it’s going to provide us the opportunity. when you look at what they do with M&I Bank, they certainly went through a major transformation in their US based operations along technology. I think they feel very, very comfortable with that technology stack and how that thinks them up for growth in the US.
Now as you would expect, those technology environments are different between Canada and between the US and so, it would be natural. As I look at that, is what are the opportunities to further leverage that and that's certainly some of the opportunities we’re talking about. When you deal with a bank the size of BMO, you’re not going to see them go through their Canadian operations and a massive light switch transformation, but you will start seeing them to do is as they make decisions, we believe that there will be opportunities for them to make decisions around some of the decisions they've made in the US and over time get more leverage and transition through the changes they made with the combination with M&I Bank.
So question on demand is, if you signed a really good deed outside the US and I wanted to ask you guys how much of that is driven sort of indirectly by Capco. Maybe Capco is more Europe and so India and Vietnam may not be Capco but I guess in terms of just keeping on going your international business at significantly above market rates. What kind of investments do you need to make, what do you see in that market? are there even potentially you know small acquisition opportunities taking on processing infrastructure from European Banks that need to share. This is from a capital perspective.
I think when you look at our international markets that start at the most highest level, I mean we are very excited about the opportunities in the international market. this quarter we had very strong growth. We think that's going to continue. We think we’ll end up the year with double digit growth outside of the US or outside of North America. And so when we see that trend continuing, we are signing some really big deals. Specifically around India and Vietnam, those deals did not have Capco’s involvement because right Capco’s predominantly in Europe and in North America. Although I would tell you that we are extremely pleased with the results of Capco. Capco has brought tremendous growth to their business, their consulting practice and their transformation type activities around IT services are growing very rapidly. We've seen the margins come in to alignment. There at first we talked about. When we acquired Capco, obviously they had an issue with one of their single largest customers in North America. We chose to sell through that and the results of that have turned out to be the right decision.
What we are seeing in both Europe and in north America though is the elevation of broader conversations with financial institutions around taking major components of their business to help, take out costs, streamline their operations, improve their product and technology footprint and deployment and those conversations are ongoing but we are very excited. We've highlighted a few of those. We had the significant win with RBC here in North America which was Capco led. That one was very interested. We were in at the start, then we placed Capco in there. Capco took it to an all different level. broadened the overall arrangement and drove a much superior outcome to what we would have gotten had we just been in there by ourselves. So that's a good example of a highlighted success.
But we've got a lot of conversations going on in Europe and the US and we really believe not only has Capco provided us the consulting aspects that we need in the large financial institution place which we can’t trivialize that getting ahead of the curve of before these financial institutions make decisions but we are seeing now that transition into meaningful sales opportunities that will drive much larger deals and we feel very confident that we’ll be talking about some of those in the future.
Just to round out the conversation on international, want to bring up Brazil and given the deceleration of the Brazilian economy. I want to ask you, how important is that to your outcomes?
Well you know we had a very strong quarter in Brazil this quarter. If you look at the Brazilian market, the economy is definitely slowing, although what we are seeing is the continued adoption of the transactions. Keep in mind in Brazil two things. One, we’re the largest third party processor of credit card transactions in the country today. We’re also the single largest BPO provider around that in credit card transaction in the market today. We also are the largest outsourcer of the prepaid meal voucher program in the country today. All of those, while the economy is slowing, there is still growth in the economy and we’re still seeing, while the number of cards that are being issued had slowed, it’s still growing very nicely, organically and that translates into transaction growth and ongoing servicing cost. So we feel that Brazil is going to continue to grow for us very effectively. It had a strong quarter in Q3 and right now, unless the economy’s target going into our recession, we’re comfortable that we’re going to see strong growth.
Give the partners that we’re partnering with, there is also a number of things going on in Brazil that we’re unclear of where that's going to end up. When you think about the (inaudible) launch of that brand which is really going after the under banked, underserved market, we've not seen that take off exactly where we had hoped or where had thought at this time but we also know in Brazil, in that marketplace, things tend to move slower than you might like and then once they take off, they take off with huge volume. So we still think that's got some unique opportunities to grow the business as well.
Staying on demand, bringing itself to the US, want to talk about the bank spending environment and what you guys are looking for as we head into 2013. Certainly on the IT side it seems as though very bifurcated environment between regional banks, smaller banks being willing to spend large money, central banks obviously more constrained. Is that what you also see, that what you’re continuing to see into 2013?
Yes, when I think we look at 2013 is kind of a continuation of obviously the last couple of years, so not anything dramatic in terms of changes, either up or down but could steady focus on the future spending. I think what we saw literally about 18-24 months ago as banks who said, I am going to survive, to get my balance sheet in order, I am starting to build my capital and now I've got to think about what I am going to do in the future and I am going to think about that in terms of the reality of banking going forward which is I have got different fee income coming in based on some of the regulatory change. I have got different regulatory burden. Right now I have got a shorter spread and I had to raise my capital so it’s how we get return on my capital.
So I think they look at that and say, how does my business operate going forward and when its manifesting itself in is, they have to compete differently, to look at different operating models, the segment of customers to go after the products they deliver, how they get their fees. But they also think they have to continue to focus on costs. and I think that cost actually carries over the larger banks too and so they now look at the way or business model works is we bring leverage meaning, we’ll do the same things for more than one entity.
So institutions in the past who were not considered, not by us, I think look now and say, well we think we’re doing something unique, it’s not all that different and we know that if we do something if FIS, you are going to do it for multiple entities, so you can dramatically change our cost structure if we’re just doing a one-up we can. We’re seeing the same phenomenon quite frankly in the European entities because they have in the past not have that pressure and so we’re seeing a lot, you see a few announcements coming out banks, who either are exiting businesses or continuing to deliver the products but deciding not the manufacture it in-house in its entirety anymore. And that's something in those larger banks you did not see two, three years ago.
So we look at demand environment going forward, some opportunities on larger entities and larger deals and then people are starting to focus more on the future and doing the spending but not a rush. I don't think we’re going to see a big movement as we look at growth going forward.
Okay, one other question and then I'm going to turn it over to the audience. The payment business and you have clearly pieces that are doing much better now which is nice. Why does it seemingly go much slower than the competition? I know some of it is what you put in the business. [Multiple Speakers]
Well you see bifurcate it and look at the various components. We have very unique components. Appears that payments is the number of lines of business. Anything an institution does from writing a check to anything with a card, a debit card, a prepaid card, a credit card, ACH, anything, they’ll pay that an entity is going to do; we’re going to do the full suite of services. So in my mind businesses are on a segment that has a lot of growth. They are going to have different growth characteristics.
In today's markets, the merchant guys are having pretty good growth; we don't a lot on the merchant side. And so they have different growth characteristics on what we’re having. So if we look at each of our businesses compared to what's happening with our competitors, I think we feel pretty good about each one. In total we’ve got some negative businesses out there and the ones that are supposed to grow, bill pay, they nice tend to have a network, are continuing to grow very strong. I think on the issuing side for debt and credit, there is just not a lot of activity, debits are relatively flat. So those haven't grown a lot.
And we actually, when we run payments, we have PSE (ph) which is North American payments, we look at payments globally here exactly. Gary talked about having tremendous success with our credit card platform in Brazil. We’re having a lot of success starting ATMs in India. So we look at payments and say, in markets where there is a lot of structural growth, new devices, new individuals, new cards, new transactions, we’re going to go and participate there and in the States, where the growth is not going to be as strong, we’re going to focus on earnings. That's what we've done. I do think the payments, the new things, whether its P2P coming out or we talk about paying it on our call which is some technology that has largely to do (inaudible) time in DDA or whether its mobile, our new payments sometime will hit the curb and start to drive accelerated growth and we will participate when that happens.
This being the innovations conference, I do have to ask you about some of your innovations recently. Payment, could you talk about payment and how you want to position it, or you are already positioning it in the market, what kind of partnerships, relationships out in the future before that, what kind of growth, if you can talk about that.
Yes, payments are an exciting opportunity for us. It’s totally built internally. Frankly when you think about how inefficient the way payments move across the enterprise, we saw an opportunity, frankly by an internal need is how it got started, is how do you take a paper based check and how do you real time settle that in a matter of seconds, then through the more traditional channels and we did that because of one of our businesses we actually the check guarantee business. So that's how the conversation started.
What we realized as we talked about how to build that, and how to design that and how to make that work is that it had far more reaching applicability across all the payment framework as a lower cost way to settle transactions, whether P2P or others in a matter of seconds. So that what we set off for. We think it’s got great opportunities. We think it certainly benefits merchants, it certainly benefits issuers. As we shared on the call, we've got about 145 banks in pilot today that's growing and we’ll be rolling out more functionality. It started out with most basic of enquires and now it’s the one with actual settlement or transactions, unlike anything we’ll be building out the functionality in it. But a lot of our larger issuers are very excited about an opportunity to have alternative routing mechanism for various forms so payments and what we think is a way for people to lower their cost and we think it’s going to be a real revenue generator for us. We see it actually contributing meaningful revenue over the next several years as adoption comes up on it.
Okay, couple of others areas where you have made investments in the mobile wallet arena as well as some of your interesting partnerships with a few companies, I’d say mFoundry’s as well as monetize it in other and so on. Could you talk about some of those and how those factor in? How are you thinking of [Multiple Speakers].
Yes, it’s a good question. We've actually approached the number, over the years we've classically built products, we've classically acquired product or we've classically partnered around product. When we think around mobile and mobile payments, we've really done a combination of both build and partner but the partner is a little different than what we've done in the past. So within mobile, we've built out a lot of internal capabilities that then leverage our partner such as Monetize, such as mFoundry you just mentioned but in those two instances, we actually have a small ownership in first in those companies so that we actually can help, we think it brings with a partnership together more closely, we think it helps, it ties in to our environment better, it gets both parties with actually meaningful skin in the game and then we can go and deploy that to our customers, the FIS mobile solution.
So that's a real hybrid and that model’s worked very well for us. We've had a lot of success with it and we've seen mobile as something that continues to grow very rapidly. We have not talked a lot about it on the calls because as Mike and I like to say, we want to bring things to the calls that we think are going to move the needle in the short term and while mobile’s very exciting today, innovative, we’re taking share. We also realized for a $6 billion company, it’s got to grow to a meaningful size before it really starts moving the needle.
In terms of just your relationships with the issuers of banks, historically you’ve kind of been there as banks have had a need to innovate and so you in some sense always had this B2B 2C model in place. But you’ve never historically, never really pushed the 2C par, you've kind of left it to just to the issuer. Is that changing in the current environment? Do you see that changing maybe as banks potentially accelerate, things like pre-paid, things like mobile again. I know you say mobile is not a game changer of you yet but is it changing how you view the market?
Well I think it is, it’s certainly changing, its causing us to pause to look at where the market’s going and frankly, but we’re still approaching it with how do we empower the financial institution to differentiate them and the market. We’re very careful. We don't want to compete with our clients. So for us to go directly to a consumer, we don't feel makes sense. So we always want to enable the financial institution, but I do believe that we’re helping push the financial institution understand that these all current channels can lower your costs, can lower their end consumer experience, can become much more sticky form and help them grow their business. So it’s up to us to build the capabilities that we can deliver to their consumer through them and help them differentiate.
So when we think about mobile wallet for example, we think of it in a financial institution centric model. We want that wallet being able to be branded by the financial institution. We want to make sure they can put their card at the top of that wallet and so we’re consciously trying as we design solution to help them compete. But so are we thinking about the consumer yes, but are we considering going directly to the consumer, the answer is no. at the end of the day, if our financial institutions are successful, we know we will be.
With everything changing in the US environment with cards on the EMV, mobile, etcetera, what's your vision and strategy with NYSE to remain competitive, because the credits and signature debit cards, kings have already made many moves on that also outside the US. How do you think, what are you going to do with NYSE on that?
Well we actually saw very nice growth, in fact we talked about the growth in the third quarter because I think there was a perception that NYSE wasn’t growing for us during this year and the reality is, it has been. So we actually saw very, very nice growth when Durban originally came out. We saw that growth slow some, with some of the tactics by the large gains.
Frankly when we look at NYSE, there is a lot of opportunity and we've got a lot of levers to pull to continue to make that growth. It’s a very financial institution centric network as well, so there is good lever there. We've actually talked about paying that where leverage in a lot of the infrastructure of the NYSE to help create new transactions across those rails. So we actually think there is quite a bit of opportunities for us for NYSE in the future for it to continue to be a nice growth engine for us.
Margins, so as I think forward and in the most recent quarter obviously you guys did a very good job with international margins. But international margins do remain below the other segment and so to some extent there is a little bit of revenue mix issue going on with margin improvements. So in the face of that, how do you keep improving margins?
Again I’d say, this last quarter, international a nice set of margins, payments had a nice set of margins and payments can have a lot of revenue growth but a very nice set of managing their cost structure, delivering a good margin expansion. Now obviously took a pretty big margin hit and the bulk of that as we disclosed was related to reinvesting in information security and then the (inaudible) has a lot of the professional services work we’re doing and so, it’s a more licensed revenue last year which comes at a very high margin. You place that with special services which is lower margins. They have a mix challenge.
The overall margins in 2012 were ahead of year-to-date, they are ahead of where we said as a market, we’re very pleased that we can deliver the margin, we expect our margins this year to be where we expect it to be. And we’re able to take dollars and reinvest them in product innovations, reinvest in infrastructure, reinvest in security. And the way we run margins is, we look at the macro level margins we need to deliver. We can seem to find ways to fan the margin every year incrementally. We know those international growth that takes a little margin pressures, international expanding the margin helps us and we think as we get more scale in these country, we’ll get more margin expansion. So we have such a large diverse business that we have a lot of levers. We stay very focused on making sure as we grow, we can also make sure we expand that margin. And I think we've done a very good job at doing that.
Great, it seems with that, we’re out of time, so I want to you both for doing this and for your insight. Thank you.
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