A Case for Change in the U.S. Acquiring Industry
The merchant acquiring business is changing at a faster rate than ever before and though it’s important to maintain perspective, it is also important not to ignore the impact of such change over a strategic time horizon.
The merchant market is famously slow moving, and small business owners are reliably techno-phobic. Dial terminals continue to represent upwards of 30% of the installed terminal base in the U.S., here so many years after IP provided a better, cheaper, faster alternative. We are five years or so after the Clover re-launch and three or four years after Square POS, and still the universe of tablet-based POS solutions is measured in the hundreds of thousands while millions of terminals have been deployed over the same time frame. Banks continue to source 40% of new merchants, the largest single lead source in acquiring. It’s important to keep perspective. Our industry moves slowly.
It would be a mistake, however, to allow this sort of phenomenon to cloud the level of change occurring and its likely impact, not next year and maybe not the year after, but over a strategic planning horizon. The way acquirers sell, the way merchants buy, the technology at the POS, the needs merchants have and the offerings acquirers put forward – it is unmistakable there is fundamental change underway.
As an illustration, the ISV distribution model, the aggregator model, and the marketplace model represent a small portion of today’s market, but they represent an outsized share of the growth in the industry.
- The ISV distribution model is the business of selling to merchants based on referrals from software developers and their dealers (often identified as the Mercury or OpenEdge model).
- The aggregator model involves a merchant of record combining the volume of many downstream merchants and includes payment facilitators as well as legacy business models like major oil companies (which aggregate downstream independent petroleum marketers).
- The marketplace model includes companies that engage in demand generation, bringing together buyers and sellers in a specialized type of aggregation approach, including such companies as Amazon Marketplace and Uber.
Figure 1: U.S. Acquiring Industry Share of Volume vs. Share of Growth
First Annapolis’s best estimate is that the approaches outlined above represent approximately 10% of current volume in the system but constitute more than half of the growth in the U.S. market. This is not an argument for every acquirer to launch a payment facilitator offering, but it is a clarion call that the strategic landscape is changing at the foundation. Acquirers’ strategies and investments in product, technology, and distribution need not to be blind to the change that is underway and that will remake our industry.
For more information, please contact Marc Abbey, Managing Partner, firstname.lastname@example.org; or Brooke Ybarra, Senior Manager, email@example.com. Both specialize in Merchant Acquiring.
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