Consolidation and fintechs have pushed acquirers to the edge of relevance
The choice is clear for merchant acquirers: Learn new technology and embrace it, or stay on the sidelines and watch fintech disruptors peel off clients.
Traditional acquirers are under severe pressure from the digital payments revolution, challenged to hold onto clients by stitching together legacy systems, existing hardware, mobile, cloud and apps. Those that can harness innovation and find the right startup partners can not only stave off elimination, but drive the next generation of multi-channel shopping and transaction revenue.
"Acquirers have a much more important role in this business then they did 10 years ago," said Brian Riley, director of card services for Mercator Advisory Group. "In Europe they are forced down to be more efficient and in the U.S. they are forced to be more competitive, and that is reflected in the recent mergers we have seen."
The response from incumbent payment processors is to respond to the rise of software challengers like Stripe and Square by adding scale. Consolidation between bank technology sellers and merchant acquirers is the name of the game as FIS acquired Worldpay, Fisesrv bought First Data and Global Payments obtained TSYS.
"That type of activity is going to set the pace in acquiring for some time," Riley said.
The combined companies still have to differentiate themselves--it's not enough to just be larger since the fintech challengers often use the size of the legacy acquiring industry as a selling point, positioning themselves as smaller and more nimble. Expect the combined companies to seek third-party collaborations, especially to serve smaller businesses, to counter PayPal, iZettle, which PayPal acquired in 2018, and Square.
This is particularly true in Europe, where payments represent a more diverse mix, depending on the various payments schemes and local regulations in each country.
"Europe is a mix of highly innovative countries, such as Sweden, which is pushing for a cashless society, and rather traditional ones like Germany and France, who are proud of their local payment schemes both in offline and online commerce," said Martin Herlinghaus, market analyst for payments technology integrator AEVI, which completed recent research on acquiring challenges and trends in Europe.
Providing full service
The challenge for merchant acquirers is serving customers who want flexibility with their payment networks, numerous payment options and add-on business services.
For example, travelers and small businesses want to support "own currency" payments in which consumers want to make payments abroad in their own currency and with their own device. This has been apparent in acquirers seeking ways to serve those merchants who want to accept a payment from customers using their national payment schemes or through mobile payments like Alipay.
The acquirer and its independent sales organizations have to become consultants and educate the merchant about the consolidation of legacy systems with app-based payments.
"European acquiring is already more complex than in the U.S., nevertheless we see signs of a more unified European commerce infrastructure, being driven by consumers embracing new technologies, such as Apple Pay," Herlinghaus said.
To serve merchants who are pushing for a multi-channel infrastructure, acquirers are expanding capabilities both regionally and channel-wise and working with companies like AEVI to establish an open commerce in which all payment stakeholders can participate, Herlinghaus added.
"Some of the traditional acquirers have bigger hurdles to overcome than the newer breed of fintech companies, as many are carrying the weight of their legacy systems that were optimized for processing speed and scalability," Herlinghaus said. "But that is no reason to be afraid or passive."
Now, those acquirers and their merchant clients have seen what can happen to boost business when new payments technology piggybacks onto rewards programs, customer interaction and increased transaction flows.
At first, it might have been hard for traditional acquirers to envision a future far beyond simply opening a box, plugging in a terminal and setting up codes for merchant accounts.
"Technology creates a unique chance for acquirers to embrace their size, their standing with the merchant and the abundance of transactions — and turn them into meaningful customer experiences," Herlinghaus said.
But an unpleasant truth in acquiring still holds strong today — that merchants are quick to change providers if better pricing or better technology integration is offered. It puts a lot of pressure on acquirers seeking small-business clients. AEVI's research indicates that nearly half of small business merchants said they would switch providers offering better pricing deals or expanded service.
"The industry is getting more complex, particularly if you are a small business," Glenn Fodor, senior vice president and head of data analytics at Fiserv, said during his company's year-end report webinar. "When you dig into the mental state of a small business, it's all a blur now because payments technology is moving at light speed."
For Fiserv, it's a matter of positioning its Clover point-of-sale terminal as a way to add multiple payment types and value-added services that will help a business.
"There is much more now that a merchant has to think about and worry about," Fodor said. "They look at the merchant next door and see it has great technology and getting more customers, and they want to know how they can compete."
Thus, the opportunity for acquirers to leverage expertise and "boil down big technology like machine learning and analytics to a bite-size chunk that an SMB can digest" is a critical factor moving forward, Fodor added. "We want to take on that complexity for an SMB or an ISO; that is what we are here for."
In Europe, interchange regulation has changed the dynamics of payments and it is certain the PSD2 directive, which demands more collaboration and the existence of open banking, will change the market even more.
"The U.S. is much more market-driven and less regulated," said Ron Van Wezel, a senior analyst at Aite Group who contributed to the AEVI research. "This also means that new developments that require a regulatory framework and standards will develop at a slower pace in the U.S."
Van Wezel suggests Europe's advancements in real-time payments, which is more significant than in the U.S., will lead to the development of new account-based payment methods in the future, thus taking a share of card payments in e-commerce.
Part of the push in payments technology rests with contactless, a payment method reaching 100% availability in some European markets, but still lagging in the U.S.
"Contactless opens the gates for mobile payments, mobile POS acceptance of card payments by small retailers and it drives card acceptance while reducing reliance on cash," Van Wezel said.
Because the payments landscape in Europe and the U.S. has become complex, it is vital for acquirers to improve their onboarding processes in order to gain a competitive advantage, the AEVI report noted.
An advancement in onboarding processes can equate to setting the table for what the acquiring industry essentially is becoming — a full-service consultant and provider with payments being interoperable within many other services.
"Acquirers and banks have a vast distribution network, but lack on the commercial technology side," AEVI's Herlinghaus said. "We have small business merchants in need of a solution set consisting of payments and flexible commerce infrastructure on one side and trusted partners and a flexible solution partner on the other side."
In the U.S., linked2pay has been providing digital onboarding for merchants for more than 10 years, a process that has helped streamline communications and services between banks, the acquirer/ISO and the merchant applicant. The company added real-time underwriting in the past four years.
"It delivers ongoing advantages like the ease of updating the information associated with merchants in the digital portfolio on a risk manager schedule and in accordance with their unique preferences," said Richard McShirley, marketing director at linked2pay.
McShirley points to client Avidia Bank with its "scalable first-mover efforts in the realm of real-time payments and instant merchant settlement" as an example of how a small bank can expand its acquiring services.
All of those capabilities can be linked to digital onboarding as the point of origin and the anchor making the process robust and compliant, McShirley added.