Internet Gateways Will Lag Overall E-Commerce Growth, Report Says

After emerging in the 1990s as specialists in the business of connecting Internet merchants to acquirers and merchant processors, gateway processors are now wrestling with aggressive competition that will retard their growth relative to other e-commerce players, predicts a recent research report on online commerce. Gateways like CyberSource Corp., Authorize.Net Corp., VeriSign Inc., and Retail Decisions PLC now face competition from merchant processors that are developing or already introduced specialty gateway services of their own to allow online retailers to bypass the independent gateways and connect directly to them, according to the report from Celent Communications, New York. It cites as examples of this new competitive thrust by processors recent decisions by Wells Fargo and First Data Corp. to introduce competing service offerings, including First Data's Encompass platform, which includes the card associations' online authentication programs (Verified by Visa and MasterCard's SecureCode) as well as third-party billing from I4 Commerce Inc.'s Bill Me Later service (Digital Transactions News, March 3). Acquirers and processors are seeking to recoup revenues lost to the gateways in the past decade, according to the report, “Online Payments in the U.S.” Because of this stepped-up competition, gateways will find it increasingly difficult to differentiate their product offerings, the report says, leading to slower revenue growth for gateways relative to all providers to the e-commerce industry. Celent estimates gateway companies' revenues were $77 million last year, and forecasts sales will grow to $89 million in 2004 and $108 million in 2005. That's a compound annual growth rate of 18%, below the growth rate of 25% Celent figures all providers?including card issuers, merchant acquirers, e-check authorization companies, and the card networks?will derive from e-commerce. But that's far from saying the gateway business model is in jeopardy, says Gwenn Bezard, author of the study. The gateways' specialized services, which include currency conversion for foreign sales, tax calculations, and fraud management, are likely to keep at least the larger companies competitive with the merchant processors, even if they suffer some loss of market share. The dominant gateways, according to the report, are VeriSign and Authorize.Net, which collectively control about two-thirds of all gateway revenues. “The biggest [gateways] are often able to provide added-value services to small-to-mid-size merchants,” says Bezard in an e-mail responding to questions from Digital Transactions News. Indeed, online fraud screening, a specialty of such providers as CyberSource, Retail Decisions, and ClearCommerce Corp., may get a lift from the slow uptake of the card networks' online authentication programs, as well as from Visa's rule that online merchants' must keep monthly chargeback rates under 1% to avoid losing their ability to accept cards. The latter cap is “a boon for fraud-management vendors in the short term,” the report notes. “Although large merchants are already experiencing chargebacks below this cap, a number of mid-size retailers and those operating in high-risk businesses will have to turn to fraud-management vendors if they haven't done so yet.” The biggest beneficiary of this trend may well be ClearCommerce. The dominant gateways in fraud screening, the report says, are CyberSource, with a 62% share of this market, followed by Retail Decisions at 25%, and ClearCommerce at 14%. By 2005, the report predicts, ClearCommerce will pick up 9 points of share at the expense of other vendors. Even though 18% growth for the gateways is slower than that for all e-commerce participants analyzed in the report, it is still appreciable growth. Bezard, however, says the challenge will be showing a profit. “E-commerce is growing so fast that it's not a big issue to grow top-line revenues,” he says in his e-mail. “Being profitable is another matter.”