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Good morning and thank you for joining us today for the FIS Third Quarter 2020 Earnings Conference Call. The call is being webcasted. Today's news release, corresponding presentation and webcast are all available on our website at fisglobal.com. Gary Norcross, our Chairman, President and CEO, will discuss our quarterly operating performance and share our strategy for continued accelerating revenue growth. Woody Woodall, our Chief Financial Officer, will then review our financial results including our balance sheet, cash flow and segment level trends.
Turning to Slide 3. Today's remarks will contain forward-looking statements. These statements are subject to risks and uncertainties as described in the press release and other filings with the SEC. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Please refer to the safe harbor language.
Also, throughout this conference call, we will be presenting non-GAAP information, including adjusted EBITDA, adjusted net earnings and adjusted net earnings per share. These are very important financial performance measures for the company, but are not financial measures as defined by GAAP. Reconciliation of our non-GAAP information to the GAAP financial information are presented in our earnings release.
With that, I'll turn the call over to Gary, who will begin his remarks on Slide 5.
Thank you, Nate. Good morning and thank you for joining us. I'm extremely proud of our third quarter results, which were turned to positive organic growth for the quarter, an impressive result for our team given the backdrop of a global pandemic. We continue to sell new business, grow the top-line, expand margins and generate exceptional free cash flow. Our strong performance demonstrates the durability of our unique business model and underscores our commitment to lifting our clients and communities. While others have been forced to retrench and preserve capital, we continue to invest for growth, bringing new solutions and services to our clients now.
This quarter alone, we launched several new solutions, including access Worldpay, which is now the world's most advanced payments gateway. ClearEdge, a new subscription-based offering that enables community banks to run a highly efficient modern bank while also benefiting from simplified pricing and contracting. Ethos is our innovative new data ecosystem that provides clients with a unified view across our enterprise, powering data-driven insights and automating reporting.
In addition, we partnered with The Clearing House to launch our new real-time payments managed service, which provides a complete turnkey service for financial institutions to quickly and cost effectively connect to the United States real-time payments network. Even with all these new solutions, we continue to look beyond our own current capabilities to see what's next on the horizon for our clients. I'm pleased to announce that we recently completed our fifth annual FinTech Accelerator program, which was just named best FinTech Accelerator by Finovate.
And we launched our new FIS impact labs, both of which are focused on accelerating transformative innovation into the market. Now more than ever our clients are embracing innovative technologies like these and our scalable end-to-end solutions are increasingly in demand. We saw evidence of this demand from a recent and focused client event, which was heavily attended and expanded its reach virtually this year to nearly 40 countries and which drove at 25% plus increase in demand for FIS solutions. Our strong lead sales performance has increased our backlog by 6% organically during the third quarter and our pipeline is exceptionally strong, up more than 30% year-over-year as we continue to grow and win new business.
We are also adding our new sales opportunities for revenue synergies. As of the end of the third quarter, we are generating $150 million in annual run rate revenue synergies, and we have $60 million more currently being implemented with our clients. This puts us in great shape to exceed our $200 million revenue synergy target before the end of the year. We clearly had the momentum that continued accelerating revenue growth through 2021 and to sustain high single digit top-line growth into the future. Our ability to leverage our world-class scale is driving ongoing margin expansion. Adjusted EBITDA margins expanded 340 basis points sequentially and 30 basis points year-over-year during the third quarter as we continue to harness the operating leverage inherent in our business.
We remain focused on further enhancing our superior cost structure by driving automation, streamlining our organizational structure and generating expense synergies through proven integration capabilities. Our unique combination of durable revenue growth and persistent operating leverage enables us to generate exceptionally high levels of free cash flow. We will use our free cash flow to invest back into our business, both organically to delivering innovative solutions like the ones that I mentioned a few moments ago, as well as inorganically to expand into new high growth segments of the market. This in turn will reinforce the momentum that we're building to drive continued growth acceleration.
Turning to Slide 6, people often asked me what's next for FIS and how there our investments allow us to compete with disruptors. In order to answer that question, it's important to understand not only where we've been, but where we are going, what's new and what's next for FIS and most importantly for our clients. It begins with the pathway to transformation that we started five years ago. We consolidated data centers and moved solutions to the cloud. We rearchitected our application stack to be modular and componentized, while upgrading and integrating our enterprise tool sets and we launched a dramatically more client-friendly approach to delivery and service.
Now, we are leveraging our technology and expertise to leapfrog over inflexible point solutions using cloud-native, open architecture and get delivered digital omnichannel solutions that are simple to integrate and easy to navigate. In this way, we are helping our clients to quickly adapt to rapidly changing consumer expectations with innovative solutions that are fast, flexible and frictionless. What you can expect to see next from us centers around our unique ability to tailor end to end experiences by connecting the global financial ecosystem in ways that only FIS can be, which served each of our clients as a trusted partner by building new and unique capabilities to better solve their challenges.
We then scale these new capabilities across our cloud-based environment for the benefit of all of our clients in a highly efficient and cost-effective manner. This is the advantage of our unique business model and we're just getting started. By investing approximately $1 billion annually in new product development and R&D, we are bringing tomorrow's innovation forward now. And by using our One-to-many model we continue to grow faster than the market, support our clients' needs and sustain our technology leadership.
I'll give you a few examples of how we are bringing together capabilities from across the business to create new and exciting growth opportunities on Slide 7. Case New Holland is a global leader in agriculture and industrial equipment. They've been a value client with our capital markets business for the past three years, leveraging our auto and equipment finance solutions deliver a robust and automated digital experience for its customers. They recently asked us to help them to drive data and insights as well as improved acceptance across their network and more than 900 dealerships.
Now, we're bringing capital markets together with merchant by partnering to drive frictionless payments. Another great example is our Premium Payback solution, which enables consumers to pay for purchases with reward points. Demand is very strong from both our banking and merchant clients as there is a compelling value proposition for each of them, as well as for the consumer. Thousands of financial institutions representing more than 7,000 card loyalty programs are enrolled in the FIS Premium Payback ecosystem. In this quarter, we added one of the largest issuers in the world to our points bank, further driving adoption. In addition, we announced this quarter that Walgreens is now one of a growing number of merchants to offer its customers our premium payback services, joining companies like PayPal Shell, and BT.
The ability to use loyalty points is becoming an increasingly important factor in consumer decisions on where to shopm highlighting the type of next generation value that we are offering to our clients now. Another area where we are driving phenomenal value is with our merchant bank referral network. When we signed the Worldpay deals, we thought that we would be able to sign three to four new bank referral agreements per year. As it turns out, we've signed more than 15 significant new bank relationships, adding well over a thousand branches through our partner distribution network in the first year.
Lastly, it's gratifying to see one of the key benefits of the deal come to fruition as we expand our global reach. We're leveraging our combined scale to enable our merchant business to enter new countries and markets. Our e-com business remains globally during continues to be a partner of choice for multinational companies in leading global brands. We're expanding into 16 countries this year, including Argentina, which we announced most recently. With our new domestic acquiring licenses, Worldpay from FIS can deliver advanced payment technology to both merchants and global companies operating in these countries around the world. I'm also happy to announce that we have successfully expanded our integrated payments business into Europe. We've signed more than 30 partners there already and are finalizing agreements with several more. Winning these new partners gives us access to distribution that will drive accelerating growth through 2021 and beyond. With recent investments in the U.S. as well new wins are up significantly within our integrated payments despite the pandemic.
Before I turn the call over to Woody to discuss the financials, I do want to highlight a couple of marquee wins that we have this quarter on Slide 8. In banking, we added another Top 30 financial services firm to our growing roster of large client wins. They will use our modern banking platform to power their online bank and chose FIS because of our cutting edge technology and omni-channel capabilities. We are also seeing strong success with our digital and mobile banking solutions. This quarter we signed an agreement with the Top 50 bank who chose us because of digital war and mobile banking solutions will enable them to rapidly innovate, further differentiate their consumer user experience and increase their speed-to-market for new products.
In merchant, we signed the Top 100 luxury retailer who chose to partner with us because of our end-to-end capabilities, including our debit routing, e-commerce and differentiated omni-channel technology. Sticking with the omni-channel theme for a moment, I'm very pleased to announced at Walmart, the world's largest retailer recently began processing e-commerce transactions with us further expanding our existing relationship. It's a testament to our superior client value proposition and omni-channel capabilities that we continue to win share wallet with our largest global clients. In integrated payments, we signed two of the world's leading dealer management system software providers; one in the U.S. and one in the UK. Between the two it will provide us with distribution to thousands of dealerships through these leading ISVs.
Turning the capital markets; demand for our end-to-end SaaS based solution remains robust. I'm excited to announce that we signed a deal with the leading global technology company to power their complex multinational treasury function, as well as to modernize their B2B payment operations. The company selected FIS because of our cloud-based technology, flexible deployment and simple integration. We also signed a significant new deal with the large Japanese bank to provide a middle and back office post-trade derivative clearing solutions. The bank chose us in order to leverage our new API driven technology stack to drive efficiencies and reduce operational risk.
I conclude my prepared remarks back where I started. We clearly have the momentum to continue accelerating revenue growth through 2021, and to sustain high-single digit top line growth into the future. Based on our new solutions our unique ability to combine our knowledge and expertise from across our business and new ways to solve our client's challenges and do their continued sales success with marquee clients.
I'll now turn the call over to Woody to discuss the financials. Woody?
Thanks Gary. And thank you for joining us this morning.
As Gary highlighted, we're excited about the momentum that we are building in the business. Our pipelines are full, but more than 30% in banking and capital markets and remain the largest that I've ever seen. Our cloud-based end-to-end solutions are clearly resonating in the market right now. Transaction in volume growth continued to improve in our merchant segment, and we're seeing positive transit in our revenue yields as well.
And with our backlog consistently growing in the mid-to-upper single digits for multiple quarters in a row, I feel really good about our ability to accelerate revenue growth next year, consistent with the 7% to 9% range we have been messaging. But let's start with our third quarter results beginning of Slide 10. We delivered a strong set of financial results with significantly improving trends. On a consolidated basis, revenue increased 13% to $3.2 billion, up 1% organically, which represents a marked improvement from the 7% decline that we experienced last quarter. Improving revenue growth was primarily driven by two things, stronger recurring revenue in both banking and capital markets, as well as improving trends throughout the quarter within our merchant business.
Adjusted EBITDA increased $1.4 billion with margins expanding 340 basis points, sequentially and 30 basis points year-over-year to 42%. We continue to expect margins to expand sequentially again in the fourth quarter, as consumer spending trends continue to improve, driving margin expansion for the full year as compared to 2019, as a result of our improving revenue growth and profitability, we achieved adjusted EPS of $1.42 for the third quarter. Touching on our Worldpay integration; we are more than two years ahead of schedule. We have achieved $150 million in revenue synergies as we continue to see really strong traction with our premium payback solution.
And we are significantly outperforming our initial expectations for merchant bank referrals. We have also achieved costs energies of over $700 million, including $385 million in operating expense savings contributing to our adjusted EBITDA margin expansion. I'll expand more on our segments with slide 11 banking solutions; revenue increased 3% organically to $1.5 billion. This includes a three percentage point headwind related to COVID as well as an exceptionally large license comparison in the prior year period, excluding these organic revenue growth was closer to 6% for banking, which is more consistent with our strong growth in recurring revenue.
Adjusted EBITDA was $653 million for banking representing 220 basis points of sequential margin expansion to 43%. This is a very good result as the team drove effective cost management to overcome the large margin headwind associated with last year's license comparison. Our merchant segment also saw significant rebound in the quarter. Revenue was flat on an organic basis at $1 billion. This represents 14 points of improvement over 2Q when normalizing for the U.S. tax deadlines shift, as we continue to win market share, particularly in our e-commerce, integrated payments and merchant bank referral channels. Adjusted EBITDA on this segment was $487 million, representing over 700 basis points of sequential margin improvement. As we saw material rebound in our higher margin transaction processing revenue.
Capital markets revenue has increased 3% year-to-date on an organic basis; demonstrating more than a point of acceleration compared to the prior year period. We continue to see good progress in transitioning this business to a SaaS based recurring revenue model and away from license sales. Capital markets declined 1% in organic revenue growth for the third quarter and was primarily due to quarterly differences in the timing of license renewals. And we expect quarterly variability of this segment to continue to improve. As we complete the transition to SaaS. Recurring revenue continues to grow strongly and new sales for our SaaS based recurring revenue solutions increased by nearly 50% during the third quarter reinforcing our confidence for continued acceleration in revenue growth during 2021 and beyond. Adjusted EBITDA was $286 million representing a consistent 46% margin with last quarter. As capital markets teams continued to manage costs and executed a very high level.
Turning to Slide 12 for an overview of our recent merchant volume and transaction trends, we continue to see improvement throughout the third quarter with volume and transaction growth exiting the quarter at 6% and 3% respectively. Trends have consistently improved since April, and this is a specialty notable for our revenue yields. Historically merchant revenue growth has been highly correlated with transaction and volumes, with the severe impact of the COVID pandemic on cross border and SMB caused revenue growth to fall by more than volume growth last quarter. This quarter as expected, we saw that spread narrowing as yields continue to improve primarily with improving SMB trends. E-commerce transactions increased 30% in the quarter excluding travel and airlines. While the global pandemic continues to affect us all, we believe this is a critical time to continue to invest in our solution suite, to empower our merchants into an accelerating digital economy. As Gary mentioned, we have rolled out significant enhancements within our merchant segment, all of which continue to position FIS as the premier provider of global e-commerce and integrated payments.
Turning this Slide 13; I wanted to provide some color on the strength of our balance sheet, cash flows and liquidity position. We ended the quarter with total debt balance of about $20 billion and weighted average interest rate of 1.6%. Our debt balance is up slightly quarter-over-quarter primarily due to FX translation as we carry a significant euro and pound denominated balances. We continue to generate high levels of free cash flow. This quarter we generated $866 million representing a 27% conversion of revenue. Capital expenditures were $263 million or 8% of revenue. As a result, liquidity increased again to $4.2 billion, up by more than $700 million quarter-over-quarter. Our business model remains durable and our strategy is clearly working to help us win market share. Before I conclude, I'd like to acknowledge the dedication and expertise of our colleagues who have done a tremendous job to continue to empower clients, giving back to our communities and supporting one another through this pandemic. Thank you for all that you've done.
Operator, now we'd like to open the line for questions.
Thank you. [Operator Instructions] Our first question comes from the line of Tien-Tsin Huang with JPMorgan. Your line is now open.
Thank you so much. Yes, good results and wins. You've got a nice backlog of large deals that you've built up here for the last few quarters. I was just curious if you can just give us an update on timing of when some of these deals will convert and how impactful they might be for 2021 revenue, as well as margin assuming there might be some startup costs with the deals? Thanks.
Yes. Now we appreciate that compliment. I think the team did execute well. We continue to build the backlog out, as you were saying the implementation have been going very well on the modern banking platform; installs as well as across a number of our other new products that we've launched. You'll start seeing some of our modern banking wins start to come online towards the very end of this year through some friends and family rollout, but primarily we'll ramp up throughout next year, as we talked about on prior calls, Tien-Tsin, I mean, these are really big contracts measured in tens and several instances, well over $100 million. And so as I start launching up, you'll see that growth accelerate through 2021 and contribute to that.
From a margin perspective, you're right. There are some startup costs, but you'll also see well ahead of where we thought we were being on call. So very comfortable as we look towards margins into next year and continuing to expand those. And that's really just given the durability of our business model; we're able to offset some of those startup costs through other margin acceleration and other areas. So we're, we're very comfortable where we are there.
All right, this is great. Gary, if you don't mind just one follow-up, I liked your comments around end-to-end solutions and how it compares to some of the point solutions out there. And I'm always debating this depth versus breadth sort of debate and strength there. It seems like breadth is, is where you're going. Do you see sort of demand changing for that that whole depth versus breadth, I mean, is it – are people looking for more diversified solutions from one vendor? I'm just kind of understand how that pendulum is swinging?
Yes. I would actually put a little spin on what you just said. I would say depth and breadth are required in this industry is what we're seeing. We're starting to; you need the depth in order to drive the scale to be able to – to be at a total cost of ownership, to drive value to the end customer. You need the breadth; because frankly especially what we're seeing in some of these large signings that we've had over the last nine months is people are looking to leverage more of their buying power with a single solution provider. Frankly, eliminate the need for custom code and carrying cost and uniqueness and even with the openness of like code connect and our open API framework, our ability to leverage that and drive value into the customer is differentiated compared to the customer then having to manage now on a new third-party et cetera. So I think breadth and depth are important and we're continuing to see that expand in the sale cycle.
Thanks for that.
Thank you. Our next question comes from the line of Brett Huff with Stephens, Inc. Your line is now open.
Good morning guys. Congrats on a nice quarter.
Thanks Brett.
Thanks Brett.
One to follow-up on the new gateway. Gary, I think you've led with that, I think we all know, and I know you guys see it's a competitive market out there and the multi-national kind of gateway, big merchant space. What is the new gateway get us specifically in terms of enhancing competitive position and what's the initial feedback specifically and any kind of wins that has driven so far? Thank you.
Yes. Now look, I think that's very important for us. We talked a lot about it. We're really excited about getting that end market. We've actually been testing it with a series of our new customers. What it gets us is really speed of implementation. Our ability now to bring people into and gain access to all of our various payment types and all of our various currencies that we transact business on a global nature is really second to none.
And so if you look, it's a ground-up build that really is an next generation innovation that gives our new customers these large global merchants, an opportunity to bring in their developers into a dev ops environment to quickly and expeditiously tasks in real time and onboard. So you see speed of onboarding, you see flexibility and gain of access to all of our backend systems, all through a very simple, easily utilized deployment mechanism. So we're excited about this. This will clearly be the single gateway for us, for the future going forward. And obviously over time, we'll move our other remaining gateways to this over the next 12 to 18 months; so really excited about this development coming online.
Great. Thank you.
Thank you. Our next question comes from the line of Dave Koning with Baird. Your line is now open.
Yes. Hey guys. Thank you. And I guess, first of all, in banking, I mean, it's pretty remarkable that you talked about normalized growth. I think excluding some license headwinds and maybe some one-off COVID impacts of about 6%, which is better really than probably any point in the last several years. And it sounds like the pipeline with the wind. Maybe you can talk about a) what's different right now that's happening either in the market or what you're doing that's different than the last few years, and if next year grows even faster as all those big wins pile on?
Yes. No. I think it's a great timing, Dave. I mean, obviously you got to go back to almost five years ago when we really put the company through just a huge pivot towards next generation technology and transformation. We invested heavily in cloud-based computing. We then brought on our application stack and start investing heavily there to take advantage of the cloud. And so now, if you look what's different is we're really at a really differentiated level at this point in time. We've lowered our availability times now to, in some instances 10 minutes or less, where a lot of the industry is still at 24 hours, we've brought on new capabilities, the speed at which we're able to drive new capabilities in market have accelerated dramatically. And as I said, in my prepared remarks, were really just getting started and all of that is really translating into our sales engagement. So kinda to the comment Tien-Tsin made about breadth, what we're really starting to see is people are looking not for just what's the next generation status on I'll pick modern banking platform, but that's just one of many solutions we're bringing to market.
But what we're seeing in banking is people are looking for that. They're looking for an open API layer, and they're looking for a differentiated digital experience. They're looking for back office services to augment. Some of theirs are looking for advanced automation around data and decisioning, and all of that is now coming together in the solution. So we're pretty pleased with what we're seeing in the sales channel at this point, and really seeing the results accelerate through the growth curve in banking. And as you said, if it wasn't for the license, Grovers which you guys look at the license fees every quarter, that's consistently declined every quarter this year. And so it really just shows the power of the company through driving long-term scalable, reoccurring revenue to offset that as we transitioned through that. So, yes, banking had a great quarter.
Okay. Great. Thanks. And I guess just one follow-up. When we look at EBITDA, it grew modestly year-over-year and then revenue, I think was up just a touch year-over-year to give or take. And I know you have a lot of synergies, but why wasn't EBITDA up a little more? Is it a mix of business? And is it investments in all the new products and stuff? Is it those two factors really that aren't unlocking kind of that big synergy growth or that big EBITDA growth?
I'll take that one, Dave. I think it is a combination of two things. It's one, the revenue and volumes from merchant that have extremely high contribution margin there, plus to your point we have not pulled back on our investment in the current year. We think it's the right answer to continue to drive acceleration into 2021 and to continue to build a business for the long-term. But it's a combination of those two items is why – if there's an expectation of higher margin, while you're not necessarily seeing it again, those merchant volumes come on and go off at very high contribution margins.
Well, great job on the sales. Thanks.
Thanks, Dave.
Thanks.
Thank you. Our next question comes from the line of Darrin Peller with Wolfe Research. Your line is now open.
Hey, guys. It's good to see some of these wins keep going, but I guess before we get into the magnitude of the wins, just given the noise in the market, Woody, can you give us a quick update on – are there any other kind of Phase I time Grover's or items in the next one or two quarters, we should be aware of? And we think about modeling out each of the three main segments; tough comps, license fees, and then really just bigger picture now, when we think about the magnitude of some of these banking wins coming on; you mentioned some of them could be over $100 dollars in size, and so the work's being done now. So just remind us the magnitude of what that could mean for that segment's growth rate and the uplift, not only in revenue growth potential for that segment, but really, I mean, you're doing a lot of the work now. So could the cost that you're working on start to flow through with much better margins in 2021?
Yes. I'll take that one, Gary. I thought, well I'm not providing specific guidance this morning. I'll just give you some color on revenue, growth expectations by segment for the fourth quarter. We expect banking to reaccelerate in 4Q towards the mid single digits. We also expected to be the highest growth quarter of the year. To your point around costs, we have a fairly difficult comp and capital markets, but do expect modest acceleration in the fourth quarter over Q3. And then merchant trends continued to improve. Merchant's growth dynamics do have uncertainty around the pandemic potential fiscal stimulus and some of their impact on holiday spending. But certainly those are some thoughts and color around how we think about revenue growth in the fourth quarter.
On the larger wins in banking, we certainly do anticipate it continue to be a component of our confidence and accelerating growth in 7% to 9% for 2021; as these large modern banking platform wins come online, and flow through. The cost associated with them are hung on the balance sheet until we actually get the client converted. And then ultimately we'll amortize back through to create a more normalized margin profile on a go-forward basis. So that's some color around that, but they are sizeable wins. If you go all the way back to a little over a year ago, it was one of the areas that we felt like we could accelerate banking's growth beyond maybe what the market was expecting. And I think we're seeing that right now in sales and backlog and pipeline, and as we started fourth quarter, you'll see it in the actual revenue organic growth rate as well.
Okay. All right, that's helpful. Thanks, Woody. And guys my quick follow-up just on the e-com side of the business; I mean, access Worldpay with pretty big headlines and I'm just wondering what that could mean for you guys. We used to hear a lot of big e-com wins for the Worldpay opportunities. Is that something you're seeing as a big deal still? Thanks guys.
Yes. Now look, I think access Worldpay, and honestly just our current position in global e-com puts us at a very competitive advantage to compete and continue to win share. We highlighted a new win and bringing on some Walmart volume in e-com. So as you look, we're really differentiated in that space, continue to be the leader in global e-commerce and we continue to feel very bullish on where we are going with our sales wins.
Okay. Thanks guys. Thank you. Our next question comes from the line of Jason Kupferberg with Bank of America. Your line is now open.
Good morning, guys. I wanted to just start on the merchant segment. I know you talked about it, narrowing of the spread there. Can you just quantify what, what that was? I think you were at a 12% spread last quarter, ex the tax filing timing. So if we exit out again in Q3, what would that spread look like?
Yes. If you think about Q2, there was about a 12 point spread there between volume and revenue growth. It was about 9 points this quarter. If you normalize for all the tax where volumes were up, roughly 4% for the quarter and, and actually the tax shift was – revenue was down about five. So it's about a nine point differential. We're singing in a combination of SMB improvements is the primary driver, as you're seeing yields on SMB clients higher than some of the other verticals that we've talked about before. And we've even seen some improvement in travel and airline, while it's still soft. It certainly improved over 2Q levels and the yields in that vertical tend to be a little higher for us as well. So yes, as expected, we did see the correlation between volumes and revenue narrowing, and we anticipate that to continue to narrow as we go further.
Okay. Understood. And then for Q4, just two things, I know you were walking through the segments. What did you say specifically on merchant? And then can you give us just a little bit more color on margin? I know you said that you'll be up year-over-year on a full year basis, but with just a couple of months off the New Year, I wanted to see if we can narrow it down a little bit, just in terms of when do you want to think about it quarter-over-quarter versus Q3 or just the magnitude of full year, year-over-year improvement. Thank you.
Sure, Jason. We did anticipate to see trends and merchant continuing to improve. Again, the growth dynamics in the fourth quarter for merchant are really around the pandemic status, potential fiscal stimulus, and ultimately their impact on holiday spending, which is the wild card for us right now, but we do continue to see improving trends, obviously exiting September at 6% in terms of volume growth helping us in terms of the merchant outlook for the fourth quarter. On the margin profile, we do expect sequential margin improvement for 4Q and full year margin expansion. To be very clear based on current expectations and trends that we see, we expect fourth quarter margins to be about 45% or roughly flat with last year, Jason.
Thank you.
Thank you. Our next question comes from the line of Ashwin Shirvaikar with Citi. Your line is now open.
Thank you. Hi, Gary. Hi, Woody. Good stuff here.
Hi, Ashwin.
Thank you.
I want to actually start with the segment that gets less focused capital markets. Could you quantify the impact of the SAAS transition on growth and are there other facts to consider? And then when you layer in that 50% growth in new sales for end-to-end SaaS, which seems quite impressive, do those SaaS sales can work to revenue faster and carry perhaps high margins as well? I mean, what's the good way to kind of frame forward rev growth and margin profile in this segment?
Yes. Thanks, Ashwin. For the quarter specifically, I would tell you license and renewals was about a three point headwind or set a different way. Cap markets would have grown about 2% versus minus 1%. If you think about it going forward, we've been talking about this transition to SaaS. I think, it will continue to take the recurring revenue rate up from roughly 70% where it is today, up into the 80% or more over time. We will see those dollars start converting as most of the sales, a majority of the sales, if you will, are coming on from SaaS based revenues. And we do anticipate margins to drive forward with that and removing some of the lumpiness around the quarterly impacts of license, but looking at yearly trends that could drive margins up in that business longer-term.
If you look at cap markets specifically, we've been beginning to message that cap markets would move from the low single digit growth towards low to mid single digit growth. That is our current expectation for 2021 as we see these SaaS revenues and contracts begin to convert into revenue. So, we certainly anticipate acceleration into 2021 based on the backlog and the sales that we've experienced in book to date. So that's how we're thinking about the revenue profile on cap markets going into 2021.
Got it. Thank you. And then the other question I had was with regards to the commentary in the banking segment with obviously the tough comp license and the COVID impact, if you can – I might have missed this breakdown the relative size of those. And when you say COVID impact, is that essentially fewer in branch transactions? Or are there other factors looking for sort of timing of when that goes away? Is that a technology solution to the COVID impact? I know you mentioned a snap back in 4Q, but I just want to get into that a little bit more.
Yes, the three points of delta between organic at three and sort of normalized at six roughly a point of that is around the difficult license compares specifically around $20 million kind of anomalous license if you remember license is a relatively low number for us in the banking organization. The two points that's generally COVID related is really around issuer payment volumes between network, debit, credit, et cetera on the issuer side. And the overall payment volume is being lower than they were last year. And that's the real delta there, Ashwin.
Thank you guys.
Thank you. Our next question comes from the line of David Togut with Evercore ISI. Your line is now open.
Thank you. Good morning, Gary. Good morning, Woody.
Good morning, Dave.
Good morning. Looking at the banking solutions business and we talked to your customers about spending intentions. They do consistently highlight payments now with the top three IT spending priority. I'm just curious and looking at those 5 MBP wins with top 30 banks over the last four quarters. On what percentage of those big transactions was payment a significant component of the contract?
Well, look, I mean, as I described earlier, I mean, every contracts are a little different, but what we are seeing is a broad breadth of additional services being wrapped around these modern banking wins. So in some instances those customers were already doing issuer payments on the debit side, for example, with those customers, in some instances, we've expanded payments into those spaces, and other instances we've had to leverage Code Connect in order to for them to gain access into their existing payments provider. So it's really been a combination of all of the above, David, as we've worked through that. It's a real interesting dynamic as we see these customers.
We talked about several quarters ago, would we see a top 30 institution really go through a core transformation? Well, now we've answered that question resoundly, which is yes. We've had several, but what's really interesting is more and more now are expanding more of what they're taking from us, which starts to making them look much more like a regional or even a community bank and how they're thinking about their next generation total cost of ownership and deploy retail banking. So it's a long-winded answer to tell a little bit of all of the above.
Got it. Just as a quick follow-up on capital allocation priorities, I see the goal of hitting 2.7 times net debt to EBITDA next year, but your weighted average cost of debt is 1.6%, which is exceptionally low. So I'm just curious how you weigh de-leveraging given such a low interest rate versus committing capital, let's say the M&A dividend growth and so forth.
Yes, I'll start and maybe Gary, you can add on if you'd like.
Yes.
We've been very committed to both the equity capital markets and the debt capital markets in terms of commitments that we've made and delivering on those commitments. We're very focused on continuing to delever the balance sheet and we'll be focused on de-levering the balance sheet into 2021. At that point in time, Dave, we've got more flexibility to utilize capital in a different way to continue to drive incremental shareholder returns, whether that would be M&A, which is our preference to be candid or through potentially share buybacks longer-term, but we're still focused on de-levering back to roughly 2.7 times and living up to those commitments on the debt capital markets. I think living up to those commitments, long-term has given us a lot of credibility with the agencies and has allowed us to ultimately utilize debt capital and very cheap debt capital by living up to those commitments long-term.
Understood. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Dan Dolev with Mizuho. Your line is now open.
Thank you. Thanks for taking my question. So I'm sorry to harp on this, but can we go back into the merchant acquiring segment. Last quarter, your volumes were roughly in line with Visa, your 4% growth now, which is nice, but visa was a little higher. Can you maybe help us – give some more, shed some more light on what is happening with the SMBs? How much – I would imagine that's the drag on volumes because those are more profitable too, but anything that you can shed more light on sort of how the SMBs are trending because we know e-com and when we sort of know travel that would be really helpful. Thank you.
Sure, sure. We did see volumes increase in September at about 6% as we described on the chart or 4% for the quarter. We contended to generally trend in line with the networks. I would tell you, in the third quarter, we were a little closer to Visa with U.S. volume growth at about 7% and double-digit growth in debit. I believe a good bit of that was continued improvement in SMB. I think that's why you continue to see the yields from our revenue and the gap narrowing around the correlation between volume and revenues.
So we do continue to see SMB recovery particularly in the U.S. right now. As you mentioned, travel and airlines continue to be soft, but it actually improved as well, particularly over Q2 levels. And then e-comm ex-travel and air continues to be really strong at 30% growth for the quarter. So different moving parts within the verticals, but with the SMB specifically, we certainly continue to see incremental levels of improvement there driving improvement in our revenue yield.
So, that's really good news just to make sure I got it. So in the U.S., your volumes are tracking Visa. Is that a correct statement?
That's close, very true for the third quarter, closer to 7%, and I think Visas was 7.5%.
All right. Well, fantastic news. Thank you so much.
Thank you. Our next question comes from the line of John Davis with Raymond James. Your line is now open.
Hey, good morning guys. Woody, I just wanted to start with your comments on 2021 revenue growth. I think you said you feel comfortable with 7% to 9%. Just curious are things should be thinking about why it wouldn't be above that, given you're going to comp plus or minus flat this year going into next year. And maybe if you can give any color by segments that would be super helpful. Thanks.
Yes, I think, it's really around three key fundamentals for not only growth in 2021, but sustaining that growth. New sales are building our backlog. Backlog was up 6% this quarter and is consistently up mid to upper single digits over the past several quarters. Second, we've got revenue synergies that continue to outpace our original expectations, both in timing and quantum. So that's driving our confidence level. And then the third would be, as Gary talked about last quarter, our Chief Growth Officer office continues to drive incremental product. We tried to highlight that as part of some of the incremental innovations that we're getting in the marketplace, pushing new product into the market faster is not only going to help us into 2021, but will help us sustain that growth once we get through the revenue synergy timelines.
If you look at banking specifically, we've got large signings coming online as well as very good sales that we've been talking about that will help us continue to accelerate growth in that mid to upper single digit area that we've been talking about. Merchant to your point, we currently believe the impact of COVID will obviously at least anniversary at some level and should drive incremental growth. The question is ultimately how much, and we continue to take share in those key verticals.
And then cap markets, as I mentioned a little bit earlier before, continues to benefit from the transition to SaaS including some higher normal renewals in 2021 and we'll believe that will move us towards mid single digit growth. The combination of all those items is what's giving us confidence in the 7% to 9% organic growth not only for 2021, but we've been messaging that for several years to come. So that's some color around the revenue outlook, and really the fundamentals in how we believe it builds up from 2021 forward.
Okay, that's helpful. And then just as a quick follow-up on the margin, I think it was up 30 basis points year-over-year then down modestly on a pro forma basis. And you called out incremental investments and obviously the negative revenue mix shift from merchant. Just as we kind of think about next year, how much of that – can you parse out how much of that's an incremental investment versus revenue mix shift because assuming transactions come back that revenue mix shift should also come back next year?
I think that's right. And we're not going to provide specific 2021 margin today. It is November. We are in the planning process and we're in a pretty uncertain backdrop as everybody knows. That said I can give you some color around the building blocks for 2021. We'll continue to see operating leverage in the base business. You've seen that year in and year out since Gary and I have been at the helm. We have also outperformed on our cost synergies and we'll see that benefit flowing through 2021.
The majority of our short-term cost actions, we'll reverse primarily bonus compensation. We'll hold the line on the rest of it, or try to hold the line on the rest of it understanding some of is travel related and we believe some of that will return later next year. And then ultimately based on the demand and the pipeline, we could be looking at some potential incremental investment to further accelerate growth. Again, not giving a specific guide today, but when we do provide guidance in February, I'll give you guys a bridge with all these building blocks and on how margin rate builds up from 2020 into 2021.
Okay. That's helpful. Thanks guys.
Thank you. Our next question comes from the line of George Mihalos with Cowen. Your line is now open.
Hi, good morning guys and congrats on the sales momentum. I guess, my first question is it certainly doesn't seem to be impacting sales at all, particularly on the banking side, but Gary just curious as we're seeing more bank consolidation in Europe internationally, specifically and the potential for that to kind of pick up going forward. How do you see that impacting or for that matter not impacting the business, both around kind of pricing and the ability to sign new deals?
Yes, I think, it's a great question, George. I mean, what we've consistently seen? Obviously, we've actually seen a slow down during the pandemic with M&A activity across our various clients, but I'll just go back to historically and remind you, especially in the banking business, we tend to be in the larger side of the market, right, so the largest regionals, super regionals, national and global institutions.
And because of that, our customers pretend to be their acquirers. And over the last several years, what we've really seen, even where they're not at most of the time when our customers being acquired, given our scale in the large side of the market. We've been very fortunate and not only being able to retain the business, but actually grow the business through moving the acquirer onto our platforms. And so, we think that trend is going to continue. We do see continued – the strength in the sales channel frankly is based on some comments I made in prior calls.
I think a number of the larger global institutions and a number of the larger institutions, frankly, have just held on too long to make technology investments, especially around core banking, especially around modernization, digital enablement, openness, et cetera. And I think you're seeing that now translate just into a really strong, not only pipeline sales success and obviously increasing backlog.
I want to thank you for your questions, for your participation in today's call. We'll conclude with Slide 15. While we are excited about the momentum that's building within our business and the growth prospects for FIS, I do want to reinforce our continued commitment to helping our colleagues, clients and communities thrived by advancing the way the world pays, banks and invest. We continue to invest in innovation to drive top and bottom line benefits for FIS and our clients, but we haven't achieved success for investments alone. Our colleagues remained key stakeholders in our business, and we were becoming the FinTech employer of choice by maintaining an inclusive and diverse environment while fostering a culture of innovation and growth.
I sincerely want to thank each of you for your continued efforts. We would not be where we are without you. For our clients, we will continue to deliver tailored end to end experiences by leveraging differentiated technology and unique expertise. Together, we will exceed consumers' rising expectations with solutions that are fast, flexible and frictionless. And lastly, for our communities, we will continue to get back not only during these challenging times, but always in order to have a positive impact on the places where we live and work. Together, we will continue to win as one team and deliver on our commitments. In closing, I'd like to thank you for your investment in FIS. We appreciate your support. Thank you. Stay safe and goodbye.
Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect. Everyone have a great day.