Market Dynamics are Changing in the Acquiring Space

The payment industry is going through a series of transformations. The payment methods preferred by customers are shifting from card-present to card-not-present (CNP). The impact of this change can be seen across all stakeholders in the industry. Merchant acquirers and processors who play a pivotal role in the payments industry are the most vulnerable to disruption because of this shift.

First, new payment methods, such as wallets and card readers, are replacing the demand for POS terminals. These devices can be conveniently attached to phones and iPads and used for payment acceptance. In addition, NFC and other mobile payments are expected to increase by over 100% during the coming years. Clearly, this emerging sector cannot be neglected. The obvious threat with CNP is an increase in fraud-prone transactions, and the circumstances demand that the merchant acquirers quickly adapt to CNP. Finally, the migration from traditional card readers to those compliant with EMV involves significant incremental investment. This creates an economic roadblock for merchants to move to this technology. In 2013, only 11.1% of organizations were fully compliant with the standard at the time of their annual baseline assessment. To add to this complexity, the market of merchant acquirers is reaching a saturation point due to intense competition and exponential growth in the number of merchant acquirer players.

Here’s what the scenario looks like for top Acquirers in US:

Source: Nilson Report

Here’s what the scenario was like last year:

Source: Nilson Report

Clearly, First Data has made quite a jump, being the fourth largest acquirer in 2013 and moving ahead to top position in 2014. Meanwhile, Citi, which was among the top 5 acquirers in 2013, is falling out of the picture, dropping into the top 9 acquirers in 2014. Clearly, this change in positions highlights who is better able to handle the ongoing transformation.

Some of the key players in the merchant acquiring ecosystem have already embraced the transformation from being pure play acquirer processors to technology/solutions and program management providers. Vantiv, for example, strengthened its stored value card platform by expanding into health savings accounts, disposable gift cards, and reloadable card programs. The company also acquired Litle & Co, specializing in eCommerce and card-not-present transactions. Apart from these, the firm has struck numerous partnerships to include mobile POS and tablet based POS solutions. It has also strengthened its fraud and security portfolio – all in less than 4 years.

Value added services such as Analytics, Loyalty Programs, Proximity Marketing and Prepaid Cards are in huge demand by merchants. Processors and acquirers, being in direct contact with merchants, have a great opportunity to up-sell/cross-sell these solutions and provide platform/program management support to merchants. Of all the value added services, the prepaid and loyalty program development market is expected to be the biggest revenue generator for the industry.