A storm of innovation in technologies and business models is shaking up how consumers make—and businesses receive—payments.
Well-prepared and adaptable merchant acquirers can turn the disturbance to their advantage—that is, if they can meet the following major challenges.
Avoid disintermediation by controlling the payment interface and the merchant relationship. Acquirers have historically operated in both transaction capture/payment gateway and pure acquiring markets, renting point-of-sale (POS) terminals to smaller merchants and providing e-commerce gateway services. This has allowed them to control the full merchant relationship and, therefore, capture the end-to-end profit margin.
The dynamic is changing, however, as new entrants target the interfaces, potentially wresting control and relegating acquirers to the status of commodity providers.
Businesses increasingly look to technology providers for a payments solution integrated with other components of hardware and software. This hands an important distribution role to the software vendor or technology reseller—or, in the online world, to the Web developer. Commercial success with technology distributors requires a different set of capabilities for today’s acquirers, including ease of integration and the ability to serve up a portfolio of products, such as payroll functionality, that can easily integrate into a broader software stack through cleanly written application programming interfaces (APIs).
Deploy a practical customer segmentation scheme and tailored propositions, because one size does not fit all. For merchant acquirers, serving distinct customer types—large domestic merchants, domestic small and medium-sized enterprises (SMEs) and global online merchants—entails quite varied starting points, meeting different priorities and dealing with separate competitive pressures.With large domestic corporations, for instance, successful acquirers deliver value through reporting and custom analytics to help run the business, expanding payment methods and, more recently, supporting large retailers’ attempts to offer consumers a seamless experience across their websites, mobile apps and physical stores.
For domestic SMEs, by contrast, acquirers that can cut through the complexity of their legacy IT systems to provide a single payments hub that integrates data, pricing and functionality across all channels will help their merchants to reduce costs and increase sales. New entrants are offering more sophisticated, tailored solutions. A pizza parlor that depends primarily on takeout orders will need a different workflow and functionality than a high-end restaurant.
Protect diverse distribution channels and access to new channels. Within the SME segment, many acquirers could stand to strengthen their basic go-to-market muscles. Busy merchants want a fast and easy sales process, so getting the basics of the sales approach right across face-to-face, phone, partnership and digital sales channels is critical.
In the e-commerce world, developers or integrators have long been an important go-to-market channel for acquirers; the US market has demonstrated that with the shift toward integrated POS systems, developers or integrators are also becoming critical for POS and multichannel merchants. Witness Heartland Payment’s acquisitions in the higher education industry and Vantiv’s acquisition of Mercury. These firms are betting on increasing distribution to large portfolios of merchants with which they already have a relationship.
Embrace new payment types, remaining agnostic where possible, to meet consumer and merchant needs. How consumers pay is changing at the fastest rate since the proliferation of cards in the 1980s, as new card form factors and non-card alternatives gain steam. Consumers increasingly expect to switch channels to suit the context of the moment (start a purchase online, complete in store).
It is too early to call which of these initiatives will ultimately succeed. At the physical point of sale, cards likely will remain dominant over the next five years, but the form factors will change and the dynamics of each country’s market can vary significantly. The uncertainties mean that acquirers should remain agnostic on payment methods, facilitating rather than fighting non-card methods. In fact, the complexity that merchants face offers an opportunity for acquirers, which can step up to the role of an intermediary that makes sense of the confusion of multiple settlements and simplifies life for their merchants.
Defend valuable data, and plan to monetize that data. Many participants in the payments ecosystem regard payments data as a huge seam of gold waiting to be mined. Knowing in real time where and when consumers spend money has enormous intrinsic value, and data represents perhaps the greatest latent opportunity for acquirers to capture more value through innovative services.
Other companies in the value chain, such as Visa and Capital One, have used data to their advantage. Yet despite having the deepest relationships with the merchants that stand to gain the most from data propositions, acquirers have not yet been able to unlock the value of their data. To do so, they will need to address several issues.
The first is protecting their access to the data itself. Tokenization threatens to nullify some aspects of the information they see. The second issue is figuring out which propositions to offer, to whom and at what price points. How can acquirers turn data into a product for which retailers or other businesses would actually pay?
Despite the challenges, there are reasons for optimism. Payments represent a rich and growing profit pool with relatively low capital requirements—a rarity in financial services. But the financial utility model no longer generates value. Instead, winning acquirers will evolve to become true business partners with their customers by helping merchants sell more, reduce cost and create better experiences for consumers.
Glen Williams is a partner at Bain & Company.
