The merchant acquiring industry faces continuing pressure from shrinking margins and disruptive competitors, but it has used the past five challenging years to seek out a position of strength.
Facing thinner transaction revenue and the torrid advancement of technology, many acquirers have stuck to the basics while also embracing digital products and security services to maintain their status in the payments food chain.
A recent First Annapolis Consulting report revealed acquirers' "net spread" margins when signing up a new merchant have fallen significantly in the past two years. In taking interchange and network fees out of gross revenue and dividing it by sales volume, acquirers have seen margins fall to 52% for merchants with annual volume between $1 million and $5 million. Two years ago, that margin was between 60% and 70%, First Annapolis said.
Merchants are becoming less receptive to re-pricing tactics, so acquirers can't rely on interchange-plus pricing, bundled rates or flat-rate pricing to turn that tide, First Annapolis said.
Yet, chief financial officers of acquiring companies say they are optimistic about the future for their industry and that margin compression is not a life-threatening issue, according to a separate report from payments research firm Double Diamond Group.
"Margin is really revenue and cost combined revenue continues to go up, though a little less with each incremental transaction, but costs stay largely the same," said the report's co-author, Richard Oglesby, senior analyst at Double Diamond Payments Research.
Revenue per transaction has thinned, but revenue per merchant has gone up, said Bob Carr, CEO of Heartland Payment Systems.
"I've been in this business since 1987 and I don't think there has been one year that has gone by that I haven't been hearing people complain about pricing compression," Carr said.
Heartland's revenue per merchant account has increased "because we are moving upstream to bigger accounts," Carr said.
Many of the startups seeking to disrupt the payments industry essentially went into the battle with unsustainable pricing, Carr said. "That's what we are really seeing in the market, and some people go to the snap judgment that it means there is pricing compression."
For the most part, Carr categorizes those scenarios as false positives.
The acquiring industry has dealt with a wave of new entrants and new technology the past few years. The landscape was again reshaped in recent months with the launch of Apple Pay and the consolidation of Google Wallet and Softcard.
In addition, Samsung acquired LoopPay before unveiling Samsung Pay on its newest Android phones, while PayPal is stepping up its acquisitions by purchasing Paydiant and CyActive ahead of the company's separation from eBay.
All of these moves caused many to declare the impending demise of traditional acquiring.
"The threat was overblown a bit," Oglesby said. "The acquirers have to distribute these services and there's nobody out there that can distribute the way acquirers can."
But even if these new threats were not instantly lethal, it would be foolish to ignore them for too long, Oglesby said.
"Acquirers don't have to adapt to the speed of technology; they have to adapt to the speed of their competitors," Oglesby added. "The reality is, acquirers and payments in general don't change that quickly."
Apple's entrance into payments dealt a blow to other disruptors because the company chose to work with mainstream banks and card networks, something that others were unable or unwilling to do initially. Apple Pay made it easier for large processors to bring their models to the table as viable players in the mobile space.
"The big players, First Data and Heartland and others, they are using their scale in a more-power, more-play fashion," said acquirer consultant and industry researcher Paul Martaus, of Mountain Home, Ark.-based Martaus & Associates. "The small players, the guys who don't quite see all of this coming, they will get hurt the worst. Earnings compression comes into play far more when you are smaller."
Rather than facing serious pricing or margin compression, the acquiring industry is undergoing a re-distribution in terms of where companies are seeking new business or developing new services.