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In the aftermath of the announcement of the dissolution of Chase Paymentech Solutions LLC by First Data Corp. and JPMorgan Chase & Co., the acquiring industry is even further divided between bank acquirers on the one hand and nonbank acquirers and independent sales organizations on the other.
ISOs, by nature, go after small merchants. Their aggressive sales tactics require that they slash prices to get deals.
Banks, which are more traditional in nature, encourage their sales representatives to go after medium-sized accounts, which have higher margins. Those sales representatives usually work with pricing grids that largely are dependent on the total volume of transactions merchants process. The grids do not allow for a large variance in pricing.
In Aite Group studies of the acquiring industry the past five years, we see a big disparity between what banks and nonbanks have achieved.
In 2007 alone, nonbank acquirers, such as First Data Corp. and Global Payments Inc., and ISOs captured 61% of the merchants and 51% of the total bankcard volume processed.
However, despite an overall drop in average revenue per merchant last year, banks still outperformed ISOs and nonbank acquirers in revenue. The acquiring industry's average annual revenue per merchant in 2007 was $883, down 35% from $1,365 in 2003.
Banks' revenue per merchant in 2007 was $1,101, down 15% from $1,297 in 2003.
ISOs' and nonbanks' annual revenue per merchant was $742 last year, down 48% from U.S. $1,421 in 2003.
These numbers show the aggressiveness of ISOs in slicing prices to win merchant accounts. But the numbers also reflect directly the sizes of merchants that ISOs typically go after and are able to convert.
The numbers also suggest the increasing margin squeeze that is gripping the acquiring industry. Banks, ISOs and nonbank acquirers are looking for more volume to compensate for the loss of revenues. The need to compensate is driving the acquisition of new merchants, the emergence of new markets, cross-selling of ancillary products and the development of international processing.
However, ISOs are not in a good spot to expand internationally, so their only alternative is to keep going after more merchants and to specialize in niche markets by developing services that will give them an edge in the market.
Larger ISOs are showing some good initiative by targeting specific industries and integrating their products with software vendors that service those specific industries. (An example is TransFirst's integration with MedicsElite software doctors and hospitals use.)
Banks and processors, however, are well-placed to benefit from international expansion. First Data already is processing internationally.
When Chase and First Data dissolve their joint venture by the end of 2008, Chase will keep 51% of the former venture's assets. That includes the Chase Paymentech name, its Dallas headquarters, most of its employees, and its Canadian and European operations.
Despite those international processing and merchant-acquiring businesses, Chase will have to do a lot of catching up to rival First Data on those fronts.
First Data, by keeping the ISO business after the dissolution of Chase Paymentech, is tapping into one of its strengths: processing for other bank and nonbank acquirers.
Processing for ISOs and banks is lucrative because they spend up to 19% of their revenues on processing, and First Data is well-poised to get part of that money by offering its services.
The merchant-acquiring industry still is divided between ISOs and nonbank acquirers on the one hand and banks on the other. While the goals of acquirers seem the same, their business models and strategies for growth impose different approaches to survival in an industry that is growing increasingly commoditized. CP
Adil Moussa is an analyst at Aite Group LLC. He can be reached at amoussa@aitegroup.com.
