There’s been no shortage of backroom snickering in payments circles.
Ha, these fucking POS resellers are getting into payments processing to survive. The internet is killing these guys. We’re so smart that we started with payments first.
Pretty much every payments reseller
Let’s not conflate the issue. First, most of you got into payments processing because you lacked the acumen necessary to provide any real utility. The idea of selling on value, offering support, having tactical knowledge to help the merchant? You are few and far between.
Second, the same trend that’s upending POS resellers is also upending payments processing. If you don’t realize that then maybe you’re even too dumb to hock payments.
Perhaps you’ve noticed all the payments consolidation as of late. Here’s a decent list for you.
- May 2014: Vantiv acquires Mercury Payments
- December 2015: Global Payments acquires Heartland Payments
- December 2016: Vantiv acquires Moneris
- September 2017: Vantiv merges with Worldpay
- January 2019: Fiserv to acquire First Data
- March 2019: FIS to acquire Worldpay
- May 2019: Global acquires TSYS
Why is this happening?
Well, in the early days of credit cards the banks needed ways to convince merchants to accept a new kind of payment. While they could issue cards to their customers, customers wouldn’t use the cards if there were no merchants who accepted the cards. It’s the classic catch-22, chicken-and-egg, two-sided market conundrum.
Enter the merchant acquirer. Over decades of work, this group of salesmen hit the streets and single-handedly convinced millions of merchants to accept a new form of payment: the credit card.
Now, however, that flywheel is spinning very well. An army of door knockers is no longer needed to keep the flywheel moving. Merchants are aware of the necessary evils of credit cards and now hold their noses (and lube their anal cavities) in choosing a payments provider. Processing entities that are further from the processing rails – like ISOs and agents – do little but add cost to the merchant. Think about it: it’s the exact same service marked up to cover the cost of distribution yet there’s no more value added – ISOs and agents are just brining the payments product to your door. Doesn’t this sound like the reason the internet exists: disintermediate the distribution of non-perishable, commoditized goods to lower the cost for the customer?
The current payments modus operandi has an expiration date, and we can turn to a Cowen report to learn why.:
While still prevalent, traditional customer acquisition channels (such as the bank channel) are under increasing pressure from a savvy customer base growing more comfortable with self-sourcing solutions or using specialized Dealer/distributor networks – in turn opening the door for new POS entrants to make headway vs. incumbents. The importance of traditional sales channels – namely the bank channel and direct feet on the street – appears to be waning with over 65% of respondents having either self-sourced their payments processing or received a referral from a partner (40% of restaurants surveyed self-sourced while 25% were referred by a POS partner).
Cowen Restaurant Report
Basically the revenues and margins in payments acquiring are trending downward. If there was great organic growth you wouldn’t see the rate ratcheting we do. One way to increase margins is to eliminate costs, which can come in a merger. For instance, Company A has 1 accountant to handle their business. Company B has 1 accountant to handle theirs. When A and B combine one of those accountants can be let go, even though the joint entity benefits from the combined revenue of A and B. So the same revenues with lower costs = higher margin.
Math.
It seems that the internet and verticalized software are helping merchants select payments without the need (and added cost) of an acquirer. And since payments processing is the poster child for a commodity, we expect this trend to accelerate even more rapidly than it has in POS. Look no further than what software companies serving merchants are doing: they’re becoming payfacs and doing their own processing.
- Fivestars
- Lightspeed
- Mindbody
- Countless others
Payments processing is so easy it makes sense for anyone touching a merchant to just do it themselves. Hell, one of the fastest growing startups of all time is just a card issuing bank with a branded credit card. You read that right: a credit card. Brex became their own issuing bank and raised a boatload of capital to earn 1.5% of free money on every transaction their customers make.
Why innovate when you can just make guaranteed money on payments, right? Except this will be a death knell eventually…
An additional worry for conventional acquirers should be that internet business have very different cultures. Stripe and Square process payments, but they’re software companies. They use data and reinvest into R&D to build more valuable and stickier products. In other words they’re happy to lose money and avoid ratcheting rates in the quest for growing market share.
A silver lining for incumbent acquirers is that the cost of running a payments company has decreased. Automation, software, and machine learning will drop their costs just as it has for other industries. But the payments industry has proven it can’t even choose good encryption technology, so we think many of these opportunities will be lost on conventional acquirers. Remember, the acquirers didn’t get here on innovation: they got here on legislated monopoly.
Stripe has become a ~$25B payments processor in a short nine years because online merchants are already using the internet to solve their online problems. You’d be a fool to think offline merchants won’t discover the internet too.
Add comment