August 19, 2016
Guest Perspective: Surviving the Shifting Sands of Acquiring
By Ralph Bianco
During my 30-year career I’ve experienced payments from nearly every perspective—I’ve worked with card brands, issuers, acquirers and third-party processors for consumer, corporate and private label payment products. If this broad experience has taught me anything, it is to embrace and encourage change as a catalyst for innovation. Even I, however, am amazed at the accelerating pace of change in the past decade and what it can enable.
Several primary drivers are forcing payment companies—particularly acquirers—to think differently about their industry and their competition: the evolution of the Internet and consumer adoption of mobile devices.
The Internet has evolved from a collection of static Web pages and minimal interaction to today’s Web 2.0 characterized by dynamic page content, a high level of consumer interaction, the rise of social media and early stage mobile adoption. The evolution will continue with more sophisticated integration with mobile, new ways to interact, new business models and new disruptors. For payments, Web 3.0 means smarter artificial intelligence systems, location-based systems and data mining for better real-time purchase suggestions and more effective fraud tools.
Rapidly increasing mobile adoption will persuade more and more retailers to leverage transactional and social data, digital wallets and location-based services that support sophisticated incentive programs.
What Makes this so Relevant?
So, in light of this rapidly changing environment, what happens to acquirers? Acquiring is already the most complex part of the payment transaction. And, given the regulatory and compliance environment, processing complexity, and risk relative to where pricing is today it’s significantly underappreciated.
But, as complex—and often marginalized—as the payments business is, new entrants appear on a regular basis. Where barriers to entry have historically been very high, new technology, new acquisition channels (TV, internet and mobile), new business models and new regulation have had a combined effect to significantly lower them. Competitors to traditional acquirers are numerous, aggressive, and not necessarily even in payments yet. Disruption often comes from competition you don’t see. This is especially true for established players that are heavily grounded in yesterday’s model and are unable to connect the dots. New technology and companies that today are not direct competitors, but ideally are positioned to be , can drastically change the game.
Changing the Game
Several companies that have emerged in the last decade are being or will be completely disruptive to stagnant acquirers. These new competitors and potential competitors are playing a significant role in payments by utilizing new business models and current technology. In my opinion, there are a half dozen—either in payments or coming from the outside—that are the most threatening to acquirers hampered by an overreliance on traditional models and legacy systems.
While PayPal has been around since 2000, it is really their more recent history that is noteworthy beginning with the execution of their payments strategy outside of eBay. Consumers trust the PayPal brand and PayPal, having been empowered by consumers is rapidly changing the game. Very quickly, they have taken their brand to the physical point of sale. They are making strategic acquisitions (such as Braintree) to shore up their services, are present in all acquisition channels and are positioned to be their own payments brand. The launch of PayPal Here is noteworthy because a smart phone is not used as a form factor. Instead, once the consumer downloads the application and establishes an account and PIN, a payment from the consumer’s PayPal wallet can occur by simply entering the mobile phone number and PIN.
Also, PayPal, along with Amazon , were the first to “export” their wallets, enabling consumers on e-commerce sites with no connection to PayPal or Amazon to conveniently checkout using those wallets. It is bad enough these players have a huge consumer following, but when they can exponentially increase their visibility and utilization by allowing their checkout experience to be used on other merchant sites it has got to be very unsettling.
As the largest search engine and the largest operating system supporting mobile devices, Google directly or indirectly influences hundreds of millions of consumers. Google’s 2012 purchase of payments processor TxVia and other acquisitions provide the company with a digital wallet, link consumers and merchants through online and mobile channels, and can influence the use of the device and how search results are presented to consumers. What is to stop them from establishing programs with merchants that could result in incremental business for merchants? The transaction could be processed through Google systems thus making the cost of the transaction meaningless when compared to the value of an incremental sale. Most merchants would not hesitate to pay a premium for this transaction and not necessarily in the form a processing fee but something more related to marketing and promotion all the while traditional processors struggle to get a penny or two for a transaction? This is just one example of what Google can do to leverage its enormous infrastructure.
Because of their dominance as the premier developer of products that consumers really want, Apple has access to and some form of influence over hundreds of millions of consumers. Now, since the introduction of Passbook, Apple has a digital wallet that has become the fourth most popular mobile-commerce application in the U.S. Merchant and consumer adoption of Passbook as a loyalty platform is high and growing. With over 500 million payment cards on file with iTunes, a devoted customer base and Passbook, Apple will be a formidable competitor in the payments space. And, the potential for the TouchID scanner to take a huge bite out of fraud, with the potential to shift liability from the merchant to the issuer with biometric authentication, is significant.
In just a few short years, Square has disrupted the acquiring business by making card acceptance available to small merchants that were not profitable to existing players. And, it did not take Square long to move from smartphone based mobile POS devices aimed at micro-merchants to in-store sales with larger merchants by turning a tablet into a complete fully featured POS system. Even more recently, Square launched the PaywithSquare wallet that enables customer authentication using photographs at the POS and payment with credentials stored in the cloud. Finally, Square recently launched the SquareCash free P2P money transfer service that works by the sender composing an email to the recipient.
Social-media powerhouses Twitter and Facebook are platforms to watch because, like the others listed above, they have hundreds of millions of followers and are in a position to add services like wallets and payments that can be tightly integrated within their environment causing more potential disintermediation for acquirers. Both companies are already beginning to move down this path and the potential they have can easily move beyond merchant payments and into P2P payments and more.
What Does this Mean for Acquirers?
Again, competition is not always about the competitors that you currently know. Some new “players” aren’t necessarily in payments today, but they are ideally positioned to be. The platforms above either already are or can be disruptors and either already are or can disintermediate acquirers.
Each has a huge consumer following (albeit with some overlap) that puts them in a position to act on a transaction by either influencing or changing the consumer’s purchase decision. And, because these providers work directly with consumers and either now offer or can enable payments, they enter the purchasing process well before a payment method is selected. How can a traditional acquirer offering a commodity service compete—especially when they sit behind the scenes, unknown to consumers?
I can paint other scenarios, but the point is, these scenarios can happen, and in some cases, already are.
The Beginning of the End for Traditional Acquiring?
So, is it lights out for the traditional acquirers that dominate today? Most likely not, but the game and the players will change. Some of what I detailed above is happening now or has been announced. Some is conjecture based on what I hope is my logical assessment of the near- and medium-term future. But, the game is far from over and there are many barriers for these potential disruptors to overcome:
- Lack of technology standards particularly surrounding wallets and mobile payments
- Greed and unrealistic expectations among the many players that have or want to have a stake
- Merchant caution about investing in necessary but costly upgrades to their point of sale systems given the lack of standards
- Regulation or the threat of regulation could stifle innovation
Another consideration for the disruptors: other disruptors. The carriers and the merchants will have their say before this is over. Mobile carriers will extend the fight for supremacy, making choices more confusing to consumers and lengthening the adoption period for mobile payments. And, what shape the Merchant Customer Exchange takes will bear on the outcome for both traditional acquirers and disruptors. It is too early to tell if the MCX will evolve from being general advocates for its merchant members to being an organization that can leverage its collective “purchasing power” with the card brands or if it will evolve to become its own payments brand. What’s more, while merchants can agree on a shared desire to lower the cost of acceptance, there is little else that really unites them.
On the other hand, large acquirers have a scale advantage. Startups are extremely unlikely to survive as standalone enterprises, making some of the best new ideas candidates for acquisition by the major players that dominate today. That said, this is not a response to the potential threat that is represented by Apple, Google and the others.
The business will change and change significantly in the next 3 to 5 years and beyond. Some players that we know today will prosper, others may be gone or may be acquired, while still others could become further marginalized as a behind the scenes commodity. There will always be an acquirer and acquiring will always be an important part of a transaction. What will be interesting to watch is how the role of the social media players, device makers and search engines evolve and how traditional acquirers evolve to meet the challenge posed by competitors—those they can see and those that may not be as visible but are lurking, building their infrastructure, scale and ties to the consumer while waiting for their opportunity to change the game.
Ralph Bianco began his career as an engineer, but moved into payments nearly 30 years ago. As the COO of Adaptive Payments he helped lead a movement to leverage PIN debit networks to create innovative authentication solutions for the e-commerce and mobile channels. He has worked for and advised companies representing virtually every link in the payments value chain including issuers (US Bank), networks (MasterCard) and processors (Gensar/TransNet, which became Paymentech).