Guest blogger Marc Abbey discusses why addressing competitive implications of integrated payments is a priority.
The explosion of software at the point of sale (POS) is a major force of change in acquiring today. This trend is not new, but its speed and scope are. Addressing the competitive implications of integrated payments is now a priority concern for acquirers. Understandably so.
The issue: Disruption from developers
Software is migrating down market into smaller merchants. It performs various business functions for merchants and is replacing traditional terminals and PC-based solutions. Increasingly, these solutions are integrating payments and capturing the economics of payment acceptance.
The merchant market is characterized by industry verticals with niche business needs and specialized accounting processes. For example, health and fitness companies can handle scheduling, e-commerce, membership collections, and on-premise payments through the business solutions available to the vertical. And not-for-profits can integrate donor management, events, fundraising campaigns, and e-commerce. Also, faith-based organizations can take recurring payments and payments through e-commerce websites and kiosks. All of this is possible because of these business solutions.
By streamlining business operations through a single application and creating new user experiences for merchants and their customers, software developers are filling gaps that traditional acquirers are not. With payments now central to developers’ businesses, delivering payments functionality is not just a nice-to-have for them.
In fact, software developers are realizing that payments is where the real economic value lies. In many cases, they can double their revenue as a result, according to Accenture estimates. Developers can achieve this revenue growth through different approaches. These include referring merchants to traditional acquirers or becoming ISOs or payment facilitators that are more centrally involved in payments processing. Private equity firms are often agents of change here. They are targeting developers before monetization of payments, leading them through the process, and exiting on the strength of the improved economics.
A look at the software mergers and acquisitions (M&A) market reveals how common this approach is among private equity firms. The market has about 500 to 600 deals per quarter, many are payments focused.1 Some 30 to 40 percent of these transactions have been completed by private equity firms or their portfolio companies in recent quarters.2 In addition, more than half of companies being purchased are in dynamic acceptance verticals like healthcare, education, hospitality and real estate.3
The impact: A catch-22 for acquirers
These changes are creating new competitive dynamics for traditional acquirers. Software developers are emerging both as a new distribution channel for acquirers and as a new and formidable category of competitors.
Most acquirers recognize the complexity of this friend-and-foe relationship. In response, many are investing to create integration environments hospitable to software developers to attract these new referral sources. Sometimes, this investment involves pursuing acquisitions to add capabilities. Accenture estimates that in the past three years, there has been more than $6 billion in acquisitions with an integrated payments business thesis.4
The new normal: Unchartered territory for all
To keep pace, traditional acquirers must take stock of what all this means to the future of integrated payments. Here is what the landscape will likely look like:
Old rules getting broken
As software developers set the new rules of acquiring, there will be more share shifts between traditional and technology-enabled channels. Already, growth in the independent software vendor channel (35 percent) is outpacing growth in the overall acquiring industry (8 percent), according to Accenture estimates.5
Rise of the gatekeepers
The road to acceptance product enablement will increasingly run through software at the POS. This results in a powerful gatekeeper role for software developers. Just like they did for near field communication and Apple Pay, acquirers must prepare to modify their solutions for the next generation of acceptance products.
Next-gen sales and marketing
Sales and marketing will never be the same with developers in the value chain. While acquirers have long relied on third-party sales partners, the dynamics will be different with developers in the mix. Acquirers should start to prepare for non-traditional sales partnerships with developers.
Beating them by joining them
Acquirers will become developers in key verticals, either through building internal software innovation capabilities or through M&A activity. Vantiv Inc.’s acquisition of Paymetric and Global Payment’s acquisition of Active Networks are among several examples of this trend.
A critical decision
Software developers have the ambition and ability to capture a good share of the payments acceptance business. Traditional acquirers must act to avoid disintermediation, and software developers that have yet to get involved are missing significant revenue potential.
This is a fight-or-flight moment that calls to mind e-commerce in 1995. At the time, an emerging business model was taking off. There were a few dominant players and a handful of specialized players. But many acquirers stood still. There is every indication that integrated payments will evolve on a similar trajectory. Now is the time for acquirers to lean into the growth.
1 Software Equity Group, “SEG Snapshot: 3Q17 SaaS M&A Update,” October 20, 2017, retrieved on April 3, 2018
4 Accenture Payments research conducted March 2018
Marc Abbey, Managing Director, Payments