In many respects, acquirers have long been a disruptive force in the cards business, competing effectively against traditional players and innovating around card associations and issuers. However, on several fronts, acquirers risk disintermediation or marginalization by traditional and emerging competitors, a factor that begs for a different kind of strategic planning than what acquirers generally pursue.
The current stable of acquirers is a group that has survived a twenty year Darwinian process in which a great many traditional competitors exited the business. Since the early 1990’s, more than 50 banks have exited acquiring and fewer than five have re-entered. Acquirers effected this consolidation primarily as a result of economics and competitive strategy, but product and technical innovation was also an important factor. Those traditional acquirers that proved less flexible in adapting to the evolving market requirements were the ones that exited the business, as a general statement.
Also, in episode after episode, successful acquirers have innovated around card association rule—Rent-a-BIN deals and the rise of non-bank acquirers in the US; international expansion of acquirers and, related, the emergence of multi-national acquiring; multi-currency processing generally and dynamic currency conversion specifically. Every one of these innovations, all of which are staples of the industry in its current form, had cut across the policy and strategy of the card associations at the time the innovation emerged. Therefore, there is some irony that creative competitive forces from outside the industry are now putting pressure on the acquiring business.
This disintermediation and marginalization comes from different directions. For example, in specific product markets, the key principals are dynamic players generally from outside of the acquiring business. The merchant cash advance business is dominated by non-acquirers – specialty finance companies. The mobile phone and gift card top-up business in the US and abroad has been pioneered by players who are not acquirers. Many acquirers are direct issuers/processors of proprietary gift cards, but many more are resellers for other companies. It is not the acquirers that are driving check image exchange. These are all transaction processing businesses that are close adjuncts to acquirers’ core service offerings.
Top-up is an interesting case study. POS activation and top up currently occur through a mish-mash of mechanisms and providers, but out of this mix, certain POS-based top up businesses have emerged. These US and European companies include Alphyra, Global Payments Europe, Green Dot, and Blackhawk. The top-up market potential in Europe, for example, is on the order of a $500 - $600 million in revenue and in the US, the market potential is also several hundred million. Simply another transaction type at the point of sale, that top up transactions are not part of a greater acquirer offering is remarkable.
From a different direction, there is mounting evidence of acquirer marginalization resulting from the acceptance strategies of the card networks. Visa and the other brands have long had a direct connect strategy, and Visa’s MDEX’s are installed at 60 or 70 very large merchants, effectively disintermediating acquirers’ front end offerings. The card brands are increasingly investing in their relationships and direct offerings with merchants themselves. To be clear, there’s little evidence that the card brands are intending to compete with acquirers, per se. The brands are making these moves because of other competitive pressures unrelated to acquiring but to which the brands must respond. The side effect on acquirers is the same, no matter.
Finally, in the past several years, the industry has seen entry by players who have economic motivations that go beyond the economics of transaction processing, per se. For example, Intuit and Sage both vertically integrated into acquiring, and both players are primarily interested in the economics of their software sales. Paypal, likewise, has through acquisition and other steps proven effective in making certain in-roads into aspects of the acquirer value chain. It is noteworthy, however, that Paypal, Intuit, and Sage have all proven profit-motivated in the acquiring business itself. Contrast this to Google Checkout. The amount of apparent investment in Google Checkout only makes sense in the broader context of the benefits that Google expects to accrue in its AdWords business. Google is targeting aspects of the acquiring value chain but does not yet appear to be acquiring profit motivated, and this phenomenon is a clear threat to traditional players.
From our vantage point, these competitive pressures trigger a different set of strategic considerations. What product markets will be core to acquirer p&l’s in six to eight years and what steps do acquirers need to make today to have the right competitive capabilities? What active and contingent plans should acquirers have in place to address the current or prospective tactics emerging at the card associations or other competitors? What is the role for mergers and acquisitions in reshaping the boundaries of acquiring? Given the implied geometric increase in complexity, what is the right course for the small and mid-sized acquirer with particularly finite resources? These questions are not entirely unprecedented, but the emerging industry context gives them a sense of urgency that has not existed in other, historical eras.
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