Companies that provide services for brick and mortar merchants face the challenge of adding lots of technology in a short amount of time.

This is a tough task from an execution space but a big opportunity to gain returns for investors.

The merchant acquiring market is changing, and new mobile and digital technologies are disrupting old models, according to Trevor Rich, a principal with Lovell Minnick Partners, a Radnor, Pa.-based private equity firm that specializes in financial services and related business practices.

"In the 80s and 90s the whole game was payment acceptance, using debit/credit cards and going paperless at the point of sale," Rich said, adding a lot of private equity firms during that time did "rollup" strategies in an attempt to build scale. "Fintech is an interesting space to be investing in at this time," Rich said in a phone interview.

Card penetration in the U.S. has grown from about 30% during that time to about 80% today. Thus, the strategies that earned profits in past decades no longer apply.

"Today that's not where the growth is. Now, it's about having more sophisticated point of sale terminals," Rich said. "It's about having a higher value-add than just a simple credit or debit acceptance."

Some of the areas where Lovell Minnick is focusing are in traditional merchant acquiring, integrated point of sale technology and marketing strategies. Its portfolio includes LSQ Funding, a company that provides invoicing services and technology for businesses.

There are several forces disrupting payment practices in the retail industry. Simply put: Data, tablet computing and lingering impacts from the 2008 banking crisis have created an entire industry devoted to startup and nimble companies that focus on bringing small to medium sized merchants in line with their larger peers.

"Since 2010, you don't have the clunky software/hardware packages or high priced terminals that only serve large enterprises," Rich said. "Small merchants can have a lot of these sophisticated systems powered by tablets."

Venture capital funding is flowing to payments technology startups at a record pace, according to CB Insights, which notes that yearly deals have increased to more than 250 in 2015 from just from 63 in 2010.

"There's been an explosion of investments," said Ian Benton, an analyst in Javelin Strategy & Research's small business banking practice. "Silicon Valley has allowed this to explode … to allow small businesses to compete with large merchants like Target, Starbucks and Walmart."

As larger businesses adopt more sophisticated technology, there's an even greater need for small stores to close the gap, Benton said. "It can be tech on the backend, inventory management, or the front end like CRM or marketing," Benton said.

Many of these investments have targeted companies that enable merchants to quickly deploy mobile or digital technology. CB Insights says the big winners are vendors like, Square, Stripe and Klarna.

"A lot of the focus on small business is spillover from the financial crisis," Rich said. "From a credit perspective, these businesses may have been served by large regional or national banks but are no longer being served today for reasons such as regulation or poorly suited products."

Additionally, tablets have made almost all businesses digital, enabling them to use data to broaden customer engagement, build e-commerce capabilities and embed payment transactions with marketing and other customer services.

To fill that demand, there's room for financial technology startups in particular because small businesses are not being served by traditional banks as in the past, Rich said. “Fintech firms have brought large enterprise solutions to the smaller firms.”

The explosion in data production is also attracting investment, as smaller merchants look to reduce expense and overhead for storage by using cloud and other data management tools.

"It's about knowing who your customer is and having better data on your customer," Rich said. "This has not happened in the industry in a meaningful way."

Data will be the key battleground in the merchant tech industry, according to Gareth Lodge, a senior analyst at Celent.

"In B-to-B payments there has long been a mantra of 'the information about a payment is often as important as the payment itself,'" Lodge said. "In C-to-B, that is increasingly true. With e- and m-commerce, price comparison websites, changing consumption models, anything that identifies and drives customer purchases to specific retailers is going to be significant."

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