US Payment Firm Accuses FIS/Worldpay Of Corporate Catch And Kill

September 5, 2023
A US cannabis payment processor has accused Fidelity National Information Services (FIS) of exploiting their partnership to destroy its business and make room for FIS’ own payment processing arm.

A US cannabis payment processor has accused Fidelity National Information Services (FIS) of exploiting their partnership to destroy its business and make room for FIS’ own payment processing arm.

On August 24, Spence Labs, a payment processor for cannabis dispensaries, filed a lawsuit against FIS and its payment subsidiary Worldpay.

The lawsuit alleges that the global fintech giant lured Spence into a partnership to offer much-needed digital payment services to the cannabis industry but abruptly dropped the deal, driving Spence out of business.

The complaint, seen by Vixio, describes this move as a “corporate catch and kill”, which now allows Worldpay, FIS’s soon-to-be spun-off payment processing subsidiary, to capitalise on a market opportunity worth billions of dollars.

Specifically, the complaint argues that medical and recreational cannabis sales in the US are expected to top $30bn by the end of 2023 and surpass $50bn by 2027.

Cannabis firms are often de-risked by banks and have to operate on a cash-only basis. 

Only a month ago, Mastercard made headlines by telling financial institutions to stop allowing cannabis transactions on its debit cards. 

This is mostly due to the fact that the product is illegal at the federal level, although nearly half of all US states, including California and Washington, DC, have legalised its use to varying degrees.

'Corporate catch and kill'

FIS and Spence began negotiations in the fall of 2021 after several large states passed medical and recreational cannabis legislation.

The negotiations began with FIS considering the full acquisition of Spence and building a brand that would be its gateway into processing payments for the cannabis industry.

At that point, FIS valued Spence at $25m, but Spence claims its value dropped to “effectively zero” after FIS walked back on the partnership.

Eventually, following extensive negotiations and due diligence, FIS decided to make a commercial deal with Spence acting as “an arm’s length intermediary”. 

Under that deal, Spence would have served as the “exclusive preferred provider for Worldpay globally on cannabis deals” and had a 50/50 split on all net revenue.

Spence had already provided proprietary technology and a mobile payments platform to cannabis dispensaries before the deal, but it lacked a payment network and its business relied on sponsor banks and other payment processors.

The partnership with FIS gave Spence access to FIS’ payment processing connections with credit and debit card networks and sponsor banks.

The two firms also agreed to build new products such as buy now, pay later (BNPL) and instant pay-with-wallet.

In return, Spence claims it introduced FIS to many key industry players and turned over its blueprints to the cannabis financial processing industry, in which FIS had “little to no experience”.

As part of the deal, FIS required Spence to undertake several large remediation measures, including changes to its corporate structure, policies and procedures. Spence also agreed to work exclusively with FIS.

Spence said it paused all of its other projects and dedicated the entirety of its resources to developing its partnership with FIS.

Meanwhile, FIS invested $4.5m in Spence to develop and build up Spence’s infrastructure to support the partnership’s products.

In late 2022, the two firms started to promote the partnership, announcing the new payment products that are tailored to cannabis providers and are compliant with all the regulatory requirements.

Spence now argues that all of “FIS’s promises and investment were bait to ‘catch’ Spence, and later, if or when it wanted out, FIS could ‘kill’ the startup by refusing to move forward with the partnership, even after the parties agreed on the material terms.”

As per the complaint, FIS opted to walk back on the deal in March 2023 when it denied Spence’s merchant account application due to an “unsupported business model that violated the current FIS cannabis policy”.

Shift in FIS’ strategy

Around the same time as the two firms started to promote the upcoming products, Spence argues substantial changes were taking place within FIS.

In November 2022, FIS reported that its merchant solutions segment, meaning Worldpay, suffered a margin contraction of 430 basis points. Following the announcement, FIS’ stock plummeted nearly 30 percent, erasing billions in its market cap.

In December, FIS announced a comprehensive assessment of the company’s strategy, business and operations, adding that it would focus on optimising incremental revenue generation and cost reduction.

FIS also announced that its CEO would leave earlier than anticipated.

In February, the company laid off 2,500 employees and thousands of contractors, and announced that it would spin off Worldpay. At that point, FIS’snew CEO said the spinoff would allow Worldpay to invest “more aggressively for growth”.

Although FIS did not inform Spence of this strategic shift, the company claims these statements meant a shift towards “a conservative model” on FIS’ side.

In other words, FIS would cut ties with what it saw as riskier industries, and the potential for Worldpay to go after “more aggressive” opportunities and “capitalise on the cannabis payments processing opportunity itself”.

On the same day that FIS ended the partnership, Spence claims a Worldpay senior director told the firm that cannabis is still a high priority for them and that their “leadership is ‘still on board to win in this vertical’ — just not with Spence”.

The complaint also quoted the global head of strategy and growth at Worldpay saying that Worldpay is a multi-billion-dollar financial powerhouse subsidiary that does not “need” Spence.

“After leveraging Spence to secure a foothold in the market and acquire crucial information and contacts, FIS kicked Spence to the curb, while the newly spun-off Worldpay could pursue the same cannabis opportunities that the parties had agreed to partner on, just by itself, or with another partner under more favourable terms or circumstances,” the complaint notes.

The end of the partnership made Spence employees leave the company “in droves”, and its business relationships, such as its sponsor bank Burling Bank, to end their contracts.

Spence was ultimately forced to close its business. The company argues that after it found a “viable acquirer” for its assets, FIS used its shareholder right to vote against the sale, “ensuring that the assets would not help give rise to another competitor”.

Spence is now asking for a jury trial and compensation for the damages caused by FIS’ conduct.

Vixio reached out to both parties for comment but did not receive a reply by the time of publication.

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