Merchant Acquiring Industry: New Potential in Current Era of Transformation

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 the 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 as these devices can be attached to the phones and iPads and used for payment acceptance. In addition, NFC and other mobile payments are expected to increase by over 100% over the years to come. 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.

As a result, some of the key players in the merchant acquiring ecosystem have already embraced 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, tablet based POS solutions, and has also strengthened its fraud and security portfolio – all in less than 4 years.

The market for value added services is expected to be greater than the market for processing by 2019, according to a report by GrowthPraxis. The processing revenue is expected to be $17.4 billion in 2019. Furthermore, it is seen that the leaders in transformation are already making 6 percentage points more margin than those who are laggards in the payments processing market. Some players are quite aggressive in their transformation from an acquirer/ISO to a technology player.

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.

Table of Contents 1. Executive Summary 2. Introduction to the Merchant Acquiring Industry 3. Key Challenges Faced by the Industry: Market Size and Strategic Shift 3.1 Merchants ‘Spoilt’ by Choice: Emerging Payments 3.2 Rise in Fraud-Prone CNP Transactions (Market Size) 3.3 Competition from Non-Traditional Players: Square, Paypal, Swipe 3.4 Dublin Agreement and Others 4. Merchant Acquirers and Processors: Need for Transformation and Market Opportunity 4.1 Opportunity in Proximity Marketing – Market Size and Examples 4.2 Opportunity in Loyalty and Prepaid – Market Size and Examples 4.3 Opportunity in Analytics – Market Size and Examples 4.4 Opportunity in Emerging Technology Integration – Market Size and Examples 5. Leaders in Transformation: Case Study 5.1 Vantiv 5.2 First Data 5.3 World Pay 6. Top Company profiles

One of the possible scenarios is given below. The actual roadmap is build by an assessment of internal strengths and capability, external market condition, what market needs, build vs. buy, window of opportunity, and other factors.