It’s no secret that merchant acquiring is a stagnating business. There isn’t a 10% net new CAGR for processing each year, and processing revenues should follow the general growth in commerce, which is a much less spectacular 2% per annum… and when counting for inflation, even less than that in real terms.
Yet many merchant acquirers are public and they are “somehow” (wink, wink) able to defy math with consistent 10%+ annual growth.
How?
Well, fraud. Duh.
Maybe they’ve found some creative ways around legal prosecution for fraud (like chartering banks in Utah to avoid usury laws) but ethically, it’s fraud.
Eventually the music stops, and we either get legislative limits on payment fees or new methods of transferring money that aren’t as punitive.
In the ramp up to this eventuality we expect a lot more consolidation, and thusly see the payments acquiring ecosystem looking a bit like the below map by 2025. We’re ignoring the banks and their acquiring arms (think Elavon, Bank of America Merchant Services, Wells Fargo, Chase Paymentech, et al.) because those entities can continue to operate as stand-alone business units as they have a less expensive customer acquisition cost than the model of the feet-on-the-street, pure-play acquiring model.
The take away here is that pretty much every single legacy acquirer that you know today is going to merge into a single, dysfunctional army to take on Stripe and Adyen. Whether the arrow points to Fiserv or FIS is irrelevant, since these are the only two majors left. Fiserv has Clover (but is undoubtedly ceding ground to Square and a handful of other POS companies in SMB) and FIS doesn’t have any sticky merchant software, instead playing to a theme of neutrality.
For the naysayers, the limitations Stripe and Adyen have today – not having a great card present solution and only focusing on enterprise, respectively – go away as the two payments giants search for more growth vectors. Their cultures are just so anti-payments-bro and technology stacks so much newer that it’s a going concern for smart money.
Of other note, our chart only considers larger or public merchant acquirers. There are many more logos to lump in here but we didn’t want to overcomplicate the graphic.
The distinction really is this clear:
Are you a payments company hoping to acquire/lure software companies into your fold, or are you a software company that happened to build payments with amazing APIs that allow best-of-breed software to integrate in about 30 minutes of development time?
Software is hard, payments is easier than easy, and the former offers demonstrable ROI while the latter is literally about the lowest possible cost (or pushing the cost onto someone else since everyone finds it so foul).
The only thing keeping the legacy (and what we term decaying) part of the acquiring market relevant are their backends. But we think Adyen and Stripe build their own backends if they haven’t already (which is about 18 months of work for a few engineers) and at that point payfac providers, like Infinicept, Tilled, or Payrix, decidedly migrate their integrations to tech companies with much less legacy debt and better APIs.
This will come to pass particularly when the decaying backends start increasing payfac costs to make up for the massive hemorrhaging of direct customers.
The flywheel spins even faster as Adyen and Stripe add banking services via API and make these available to software partners as well, now providing a suite of solutions that far outstrip the banal payments table stakes of the decaying providers who are wrestling with internal politics and towering technical debt from acquisition after acquisition.
And so, before you know it, software companies which have become payfacs (Square, Lightspeed, et al.) are just riding on the rails of Stripe or Adyen, with little consideration given to the decaying providers for the host of reasons mentioned above.
The decaying market doesn’t disappear overnight, clearly, but it’s a massive short for anyone who has seen tech play out in commoditized industries.