Re-imagining acquiring: How should bank acquirers respond to the rapidly evolving acquiring market?
Driven by a surge in innovation, an enthusiastic community of new entrants, and a proliferation of new payment experiences, today’s acquiring landscape is more dynamic than ever before.
The past 18 months has increased the need for acquirers to enable merchants with new digital solutions. Here are five key acquiring trends and suggested responses for traditional acquirers to remain competitive.
Trend #1: Technology players have revolutionized acquiring
Over recent years, tech-savvy players have entered the market – transforming the acquiring value chain, redefining the merchant journey, and simplifying pricing structures and merchant experience across the lifecycle. Fintechs like Adyen, Stripe and Square, in addition to processors, software vendors, gateways, payment facilitators, value-added resellers, service organizations and point of sale vendors are all vying with acquirers, and each other, to create new value for merchants and their customers.
As a result, there is now a proliferation of new go-to-market business models, payment experiences, and acceptance points.
Trend #2: The rise of independent software vendors (ISVs) has required acquirers to re-imagine partner and vertical strategies
One of the most important developments has been the emergence of ISVs providing end-to-end software platforms to specific and tightly-defined merchant segments – such as Shopify for e-commerce merchants, or Lightspeed for restaurants, to outfits like Mindbody for yoga studios, Housecall Pro for field services, or Gingr for pet services.
By integrating payments into their business management platforms, ISVs have tremendous influence over the payment provider selection process. For example, 87 percent of U.S. merchants choose a payment provider at the same time or after selecting their business software, and 90 percent rate the ability to integrate payments into their software as important or very important.1
The power of ISVs makes it critical for acquirers to not only develop their own segment-specific merchant strategies, but to also develop partnership strategies and robust value propositions to serve relevant ISVs and optimize engagements and integrations.
Trend #3: Merchants, large and small, are demanding more from payment providers
Years ago, acquiring sales were face-to-face, and merchants had to choose from a handful of pricing structures. Today, everything has been democratized. Merchants can select the solution that suits them, under the terms that are most relevant, using the mix of devices and technologies that are most appealing. Applications are submitted online, devices are plug-and-play, and merchants can accept payments within minutes.
Even small businesses are demanding capabilities like cross-border, omni-commerce, data and analytics, and differentiated user experiences. With increased investment in technologies such as digital applications, onboarding and servicing, the ecosystem can now serve them in scalable, cost-effective ways.
And while price remains a top priority, merchants of all sizes are placing greater value on simplicity and frictionless experiences - from simple pricing, onboarding, and set-up, to robust, intuitive self-service portals for account management and detailed reporting options.
Trend #4: Increased competition has driven consolidation
In the past five years, the industry has seen a wave of mergers, acquisitions, and investments. In 2019 alone, there were more than 30 mergers and acquisitions within the U.S. acquiring space.2 Some of the more notable mega-mergers included Fiserv and First Data, FIS and Worldpay, and Global Payments and TSYS. In the five years preceding these mega-mergers, First Data Corp, Global Payments, TSYS and Worldpay spent a reported US $10 billion on acquisitions to boost their integrated payment efforts.3 These mergers and acquisitions aren’t just about scale. They are also about extending capabilities with merchants.
Similarly, these and other acquirers are making acquisitions to capitalize on the increasing value of integrated payments. In recent years, several leading ISVs, including Instamed, Axia Technologies, and Zego, have been acquired by top U.S. acquirers.
Many acquirers have also invested in acquisitions to strengthen their e-commerce and omni-commerce capabilities. While the shift to online payments has been ongoing, these investments became even more important as this shift accelerated in 2020 when payments volume continued to increase despite widespread business shutdowns.4
Trend #5: The shift to digital payments has accelerated
Globally, e-commerce purchase volumes rose significantly. This has led to a rise in unified commerce, and a blurring of the lines between online and in-store payments. At the same time, we have seen the continued rise in contactless payments, including especially in the U.S. market. In the U.S. in Q3, we surpassed 370 million tap-to-pay enabled cards, and we now have three cities above 25% face-to-face tap to pay penetration, New York, San Francisco, and San Jose.5 All the indications suggest that the changes will continue – driven by consumer demand and enabled by acquirer-side investment and innovation.
Taking stock – and selecting the right response
This post-pandemic context has made a complex and competitive sector even more challenging. Despite the challenges, significant opportunity remains for acquirers to carve out a differentiating, value-creating role by capitalizing on their natural advantage to offer a full suite of solutions, including merchant services.
Step #1: Understand and quantify the strategic value acquiring can create
This will depend on the nature of your existing acquiring business, and the way it relates to your wider business banking offer – including the way it is positioned, the characteristics of your customer merchant portfolio, and the type of customer segments and verticals you currently serve. For example, acquiring can play an important role in your overall merchant value proposition and retention strategy. It can also connect with your broader business product suite, sales processes, and relationship management approach.
With this analysis, you will be better able to quantify the role and value of your existing acquiring business, and to define and size your future opportunity.
Step #2: Formulate a clear strategy
This is about understanding, at a granular level, where you are today and where you want to be tomorrow. A fundamental requirement is to decide on the strategic function that acquiring will fulfill. For example:
- Will acquiring be a stand-alone offer widely available regardless of banking relationship?
- Will acquiring exist solely to serve the bank or organization's broader strategy with existing or potential clients?
- Will your acquiring offer be built around foundational capabilities for broad merchant segments and verticals?
- Will you pursue a differentiated strategy?
In addition, to understand and benchmark your existing performance and track your future performance, good quality market data is critical. Armed with market-wide analytics spend data, for example, you will understand how your performance compares with your peer group.
Step #3: Know where you can compete and win
Be clear about your competitive strengths and weaknesses, including your existing strengths by vertical, geography, and segment. Find the hidden wealth within your own business. The better you understand your existing customers, and the more precise you can be in understanding what it is about your existing offer that appeals to them, the better able you will be to defend and extend for your business – and to carve out a sustainable role for yourself going forward.
Step #4: Know how to compete and win
Determine how you will build on your existing strengths and address your vulnerabilities. The end game, based on an in depth understanding of your target customers, is to construct a compelling value proposition, establish the critical capabilities that will support it, and deliver on relevant distribution and customer servicing strategies.
The question of verticals has never been more important. For example, whether your payment services are integrated to a merchant's preferred business software may supersede any other consideration. Similarly, some merchants need global support, and to compete, you will need to be able to serve them everywhere.
Step #5: Determine the necessary resources, capabilities, and infrastructure
Put careful thought into your operating model and how it will be constructed – including the organizational structure, the technical infrastructure, the sales, servicing and relationship management approach, the intra-bank connective tissue and partnerships. Meanwhile, be disciplined about how to prioritize your capability requirements, with a clear roadmap for strategic initiatives and capability development.
In selecting and optimizing your partnerships, be careful to maintain direct ownership and control of the differentiating aspects of your proposition. Also, think about partnerships from multiple angles:
- How can they help you to increase your efficiencies?
- How can they enhance your capabilities?
- How can they extend your distribution?
- How can they mitigate your executional risks?
In the acquiring ecosystem, with so much happening so quickly, there is an imperative to set the right course – but also an opportunity to create winning strategies that drive growth while adding value to merchants and the broader organization.
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1 Merchant survey conducted by independent third party on behalf of Visa Consulting & Analytics, October 2019
2 The Nilson Report, 1192, March 2019
3 FinTech 2.0: Software as the future of payment distribution, Journal of Payments Strategy & Systems, 2019, https://medium.com/ideas-from-bain-capital-ventures/fintech-2-0-software-as-the-future-of-payments-distribution-57e8b5b8e643
4 The Nilson Report, 1192, March 2021
5 Visa Q3 Earnings FY21
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