In Acquiring, a Slow Pace of Change Masks Rapid Run-up in Growth for Newer Models

The acquiring business is accustomed to a slow rate of change, but that deliberate pace is masking radical underlying shifts in how merchants handle payments and whom they deal with for processing services, according to research at First Annapolis Consulting, Annapolis, Md.

Change comes so slowly in this business that 30% of the installed base of U.S. point-of-sale terminals are still dial-up devices, despite the shift to EMV, estimate Marc Abbey and Brooke Ybarra, analysts who follow acquiring at First Annapolis. Similarly, Abbey and Ybarra estimate three relatively new forms of serving merchants’ payments needs—independent software vendors (ISVs), payment facilitators and aggregators, and marketplaces like Amazon and Uber—command only about 10% of the $3.5 trillion U.S. acquiring market.

But that’s only part of the story. These three new models accounted for fully 52% of the estimated $250 billion in growth the acquiring market saw between 2014 and 2015, First Annapolis estimates. “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,” Abbey and Ybarra point out in an article they published Friday in “Navigator,” a monthly newsletter highlighting First Annapolis’s research. Abbey is a managing partner at the firm; Ybarra is a senior manager.

For traditional acquirers like independent sales organizations, processors, and banks, “the implication is, you’re facing a lower-growth, more mature environment than you would have a decade ago,” Abbey tells Digital Transactions News. “For a long time, acquirers have benefited from a rising tide. That’s declining.”

This most recent research echoes data First Annapolis published in May indicating ISVs are growing fast and poised to grow faster. Distribution via ISVs relies on close links with software developers to develop leads and referrals for new business. Payment aggregators can include newer entities like Square Inc. as well as older ones like major oil companies; what they have in common is that they stand in as the merchant of record for so-called downstream merchants. Marketplaces serve to rev up demand and bring buyers and sellers together on a common platform.

Two responses are possible for traditional processors looking to boost growth, Abbey says. One response is to use competitive strategies to build market share. These strategies can include buying up competing companies. The other is to acquire ISVs, payment facilitators, and marketplaces. That’s the option longstanding players like Global Payments Inc. and Vantiv Inc. have pursued in recent years, for example. “That’s a sensible reaction for many acquirers,” Abbey says.

Vantiv Inc.’s acquisitions of ISVs Mercury Payment Systems LLC and Element Payment Services, led to the formation of Vantiv Integrated Payments. Similarly, Global Payments Inc. created its Open Edge unit after acquiring ISVs Accelerated Payment Technologies and PayPros.

One thing is sure about the trend toward ISVs, payment facilitators, and marketplaces, according to Abbey: there is much yet to unfold. “We’re in the first inning of this, not the ninth inning,” he says.