The payments space has seen increased commodification over the past decade, as more and more acquirers and payment service providers fight for merchant clients. Industry watchers have been calling for the increased need for differentiation among acquirers at least since the years immediately following the 2008 financial crisis. Several trends in recent years have accentuated the problem:
- The growth of fintech startups like Adyen, Block and Stripe that have successfully challenged traditional acquirers for market share.
- Merchants have access to more options as acquiring applications have moved online and solutions have become plug-and-play.
- The rise of independent software vendors (ISVs) providing integrated end-to-end business management platforms including built-in payment provider options.
- An accelerating shift to digital payments that favors fintech upstarts that can scale without encumbrance from legacy systems as eCommerce has boomed and mobile in-store payments have grown.
To compete, acquirers have been differentiating themselves by either building scale or offering value-added services.
Top U.S. acquirers consolidate
Consolidation has already occurred with the mega-mergers in 2019 of Fiserv and First Data, FIS and Worldpay, and Global Payments and TSYS. These larger companies sought to buy their way to growth as they faced more difficult paths to continued expansion in the U.S. and globally.
Since then, large-scale acquisitions have cooled, as the top five merchant acquirers already own more than 80 percent market share in the U.S. This has left the industry to focus more on offering value-added services to arrest margin compression and facilitate top-line growth.
Opportunities presented by eCommerce
The growth of eCommerce and card-not-present (CNP) payments has provided a great boost to acquirers' volumes and margins for those who have built appropriate offerings.
On the volume front, year-over-year (YOY) growth of CNP payments outpaced card-present (CP) growth by 30 percentage points in the U.S. in 2020, according to VisaNet Data. Similarly, YOY processing growth at acquirers with greater than 50 percent CNP volume was five times higher than other acquirers.
In terms of margins, the shift to digital is driving up merchants' payments-acceptance costs, which McKinsey expects to rise by an incremental $8 billion to $15 billion (about 6 to 10 percent) as commerce migrates to higher-cost digital channels.
The key role of SMEs
The increased importance of eCommerce is not just due to its growing size but also to the composition of merchants fueling this growth. A 2020 McKinsey report found that marketplace platforms like Amazon, Shopify, Flipkart and Walmart Marketplace are expected to account for 60% of global digital commerce volume by 2023. Just as important, this growth in volume is being driven by the digitization of small and medium enterprises (SMEs) – merchants that pay a higher discount rate to acquirers than large enterprises.
According to McKinsey's analysis, SMEs with less than $100 million in revenue or sales were responsible for 76 percent of the growth in merchant services revenue in the U.S. from 2017 to 2019. This period predates the arrival of the Covid-19 pandemic. Since then, the figures must have increased. Similarly, according to Boston Consulting Group estimates, SMEs will contribute to 70–80% of global net acquiring revenues by 2023.
Importantly, this shift to digital presents merchants with higher decline and fraud rates. Overall acceptance rates for e-commerce transactions average about 80%, compared to 98% for in-store, card-present transactions, so merchant acquirers that can help online retailers close this gap offer tremendous value.
Adding value with chargeback analytics
Interestingly, according to the McKinsey analysis of 2019 data, SMEs are using a growing share of acquirers' value-added services; however, they utilize only a small fraction of acquirer-provided fraud prevention and data analytics services.
One gap in the market that Justt fills is the provision of chargeback analytics and a chargeback fraud (AKA friendly fraud) management service for acquirers' merchant portfolios. An acquirer can easily add these services to their offering through a white label arrangement that maintains their control over their customer's experience.
The way forward
There are a variety of paths forward that acquirers can take. However, based on the previously mentioned figures, the most profitable one is likely to focus on direct-to-SME models that offer value-added services beyond pure payments processing. This will mean expanding the sale of services already highly utilized by SMEs, such as financing and marketing, to more customers. There is also a significant opportunity for acquirers to profitably sell services less used today, such as data analytics and fraud prevention, to existing value-added service customers. Expect to hear more on this subject as current trends unfold