“How much are the ISVs going to take away from the acquirers’ revenues?” seems to be consistent question that the investment community wants to know about merchant acquiring lately. Different week, different firm, same question…

Well the answer is simple: the way I see the market, ISVs are going to be demanding more in revenue shares and that’s going to affect the acquirers’ bottom line. In fact, they will demand so much that they will keep the lion’s share. All we have to do is look at the ISO/agent revenue share split progression to have an idea of where the ISVs revenue-share splits will go.

The industry has a fundamental issue in creating value, or at least the perception of it. Pricing is  the first resort of the unimaginative in creating value or differentiation in the market.

“What will acquiring look like in the next 15 years?” asked the investor.

I believe we will see 4 different types of companies in the future:

  1. Pure processors: these will be the mammoths doing basic processing. Huge volume, thin margin, pricing wars. We will probably only have two large ones left, a few of smaller ones vying for some niche markets such as CNP, and another handful of small ones trying to crack the code using whatever newer technology is available to them then. Prepaid processing is good example of where the acquiring industry is going.
  2. Banks will be banks. Too rigid to change because their identity is calcified unless they go the path of U.S. Bank or Chase. That model opens up the door for great positioning for their processing entities.
  3. The Business Enablers: companies like Heartland, Nelnet, Vanco who will be so specialized in verticals that their horizontal penetration will make them enable the vertical they are in. These will be the true winners because they can command price elasticity, add new revenue streams by adding real value. The real threat to the market is when they figure out how to systemize the vertical specialization and launch a couple of new verticals every 2 or 3 years.
  4. ISOs: will be ISOs but not necessarily selling merchant processing. There is more money selling solutions that merchants are looking for. Pure ISOs are the most fluid of all companies in the eco-system and they will put their strengths and assets to work selling solutions with the highest return.
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Of course, there will be a share of defunct companies, mergers, acquisitions. But that’s business as usual.

 

EX2

 

The real question is: is the merchant acquiring industry resigned to endure what is happening and continue on their path because of their attachment to their identity (we are payment processors), or are they going to compete on their assets and strengths while keeping their identity fluid?

Some have already started answering this question by implementing growth strategies to reverse market trends. Others will continue to suffer from slow growth.

In order to learn about the strategies to compete in merchant acquiring while achieving growth, click here to reserve your: Strategic Differentiation Executive Presentation.