Payment gateway companies have increasingly marketed “value-add” services such as shopping carts, fraud prevention, and terminal solutions (physical and virtual) to customers in addition to their core service of efficiently routing payment transactions. And while payment gateways have recently seen the most traction in the e-commerce world, we believe these service offerings should capture more attention from brick-and-mortar merchants, particularly smaller ones that can achieve substantial cost-savings from bundling services beyond the routing of payment types. However, we would also expect these gateway companies to stress or actively market different services based on whether they focus on only e-commerce merchants, only brick-and-mortar merchants, or both.
In late 2008, First Annapolis reviewed websites and publicly available information of 76 different payment gateway companies in the U.S. in order to identify each provider’s target merchant segment (e-commerce only, brick-and-mortar only, or both) and what value-add services it actively marketed to merchants. For our analysis, we defined and identified the following key “value-add” services provided by gateways:
1) Proprietary Shopping Cart: Offer a proprietary website shopping cart product for use by the merchant (does not include re-selling a shopping cart offering from a 3rd party provider).
2) POS Solution: Offer services to directly input/manage payment information at the point-of-sale, whether physical or virtual terminal (does not include payment transaction routing).
3) Multicurrency Solution: Offer multicurrency or dynamic currency conversion services (proprietary or through a 3rd party provider).
4) Fraud Solution: Offer a fraud detection or data security product/service (proprietary or through a 3rd party provider).
5) Alternative Payments: Offer payment acceptance of PayPal, Google Checkout, BillMeLater, or eChecks.
6) Recurring Billing: Offer recurring billing services (proprietary or through a 3rd party provider).
Based on our research, we recorded the following observations:
E-commerce merchant offerings are dominant. An overwhelming majority of the researched gateways (46 out of 76, or 60%) targeted only e-commerce merchants. While we admit that our results may be biased towards e-commerce due to our focus on researching gateways with websites, it is also important to note that nearly all of the remaining gateways (25 out of 76, or 33%) targeted both e-commerce and brick-and-mortar merchant types, which further stresses the importance of a strong e-commerce offering for payment gateways even if they are focused on physical retailers.
Value-add service offering by gateways are broad, not narrow. In addition to providing traditional core services (transaction routing), most of the payment gateway companies reviewed offered at least 3 services that we deemed as “value-add” services. Fraud solution offerings were the overall most prominent value-add services provided (found at over 72% of all gateways researched). While providing a broad service offering in terms of scope, gateways offer a relatively static number of value-add services, with those focused on both e-commerce and brick & mortar merchant types offering 3.4 value-adds on average. Though it may seem counterintuitive, we believe that there may be opportunity for a gateway to narrow its value-add focus and specialize in a particular value-add service (e.g., PCI compliance solutions) in order to differentiate themselves to potential merchant clients.
E-commerce focused gateways stress different offerings than those focused on brick-and-mortar merchants. For example, we noticed a significant marketing of multi-currency capabilities for gateways focused on e-commerce (39% vs. 20% for gateways targeting physical merchants). However, value-add services such as fraud solutions and acceptance of alternative payment types were stressed equally regardless of the target merchant type.
As gateways must now provide more value-add services to compete for merchants, we anticipate that acquirers will become more directly involved in the gateway market. During our analysis, we also found that over 43% of the gateways researched (33 out of 76) are wholly owned by ISOs or acquirers. Though it appears that the majority of gateways still remain as independent third parties, we would expect there to be less independent gateways going forward as smaller gateway entities require the resources of acquirers or larger gateways to provide a full-service offering to merchants.
