The Tightrope Walk

Processors and acquirers are chasing integrated payments while also serving traditional, terminal-based merchants. Can they keep their balance?

The biggest buzzword in payments today is “integrated.” While such payments—exemplified by point-of-sale software with an add-on payments capability that is supposed to be seamless to the user and the consumer—are not new, they are capturing the attention of more and more payments companies.

That’s because the incessant quest for better profit margins, lower attrition, and more transaction volume is driving these companies, and investors, to what has turned into a lucrative market for integrated payments.

As more companies shell out increasing sums for integrated payments—witness Global Payments Inc.’s $700 million purchase of AdvancedMD, a medical-practice software provider in August—their attention expands to what may be new or much larger elements of their businesses.

For example, do they have enough resources to cater to this burgeoning market while ensuring their other sales channels get the attention and resources they need? What factors determine how to divvy the resources, especially when integrated payments is capturing so much of the payments spotlight now? The answer is that the best chance of benefiting from integrated payments comes from a plan for targeting integrated payments.

‘On a Collision Course’

Integrated payments were around for years before they became hot. Some payments providers, like Mercury Payment Systems LLC, which Vantiv Inc. (now Worldpay Inc.) purchased in 2014, specialized in serving software developers long before they caught the attention of many others.

Many payments companies choose to buy their way into integrated payments. An early example was First Data Corp., which bought POS system developer Clover in 2013. In September, First Data shipped the 1-millionth Clover device, having shipped the 500,000th less than two years ago. First Data launched an Integrated Solutions Group in 2017 to cater to the overall segment.

For an acquirer, the payoffs for building up integrated-payments merchants in a portfolio are numerous. For one thing, they are less likely to defect to other processors because of their need to use specific software just to operate their businesses. Beyond that, they may be more likely to use other value-added services, their cost of acquisition may be lower, and they provide steady, recurring revenue.

This is not to say that the payments industry ignored the segment. It’s just that it was more difficult to serve these merchants prior to the emergence of a litany of recent technologies. This was before the breadth of the Internet and its cloud-based connectivity enveloped industries, and before EMV forced software developers to look at other ways of integrating point-of-sale acceptance into their software.

This was before the cost of POS systems started to decrease because of devices like Apple Inc.’s iPad and Android tablets. And it was before the whole notion of having as a goal making the payment not invisible, but indistinguishable from the rest of the checkout experience.

It’s the ability to incorporate integrated payments into services that solve problems for merchants that makes this capability such a coveted option.

“Put simply, integrated-payments solutions simplify the lives of our merchant customers,” says Brendan Tansill, president of EVO Payments Inc., North America, an Atlanta-based payments company. “The software solutions address real business needs and make business management easier and more effective.”

That explains, too, why gaining market share among POS-system developers is such a coveted objective. Merchants are more likely to want to use software that helps run their businesses—not just accept payments—and are less likely, because of that necessity, to walk away from that software.

“Software and payments are just two industries that are on a collision course,” Greg Cohen, president of Paya, a Reston, Va.-based payments provider. Paya is the former Sage Payment Solutions, which was part of accounting-software giant Sage Group plc until the unit was bought by private-equity firm GTCR LLC in 2017.

‘One Leg of the Stool’

It’s this compulsion to use business software that elevates the POS system provider to the role of trusted advisor, Cohen tells Digital Transactions. “If this is the most trusted advisor of the merchant because everything the merchant does is around this thing, this flips the equation and payments becomes the value-add service inside a business-management solution,” he says.

In this convergence, software and its cloud-based connectivity shine. “With or without integrated payments, the process is moving to the cloud and becoming embedded in other functions,” says Thad Peterson, senior analyst at Aite Group, a Boston-based research firm. “While standalone solutions will be around for some time to come, the future is payments-as-a-service, and developers are a core constituency for a software-based payments ecosystem.”

That’s how Henry Helgeson, president and executive vice president of integrated solutions at Total System Services Inc. (TSYS), sees it. “In today’s world, it’s not only mobile apps and all sorts of consumer-convenience applications, but everybody is figuring out payments should be integrated to a seamless customer experience,” Helgeson says.

TSYS bought Helgeson’s former company Cayan LLC in 2017 for $1.05 billion. Among Cayan’s specialties was the development and subsequent offering of its Genius platform that easily integrates into POS systems.

“Everybody has figured out they shouldn’t have to go to a different system to handle payments,” Helgeson says. “The market has grown and become a more attractive place for payments, it makes it easy to scale distribution when the customers are very sticky. They generally don’t attrite over a basis point or two.”

When so much attention, and money, is allocated to integrated payments, one might wonder if the segment is getting too much attention at the expense of other ways to acquire merchants. “It’s one leg of the stool,” Helgeson says. “You can’t neglect all these legacy distribution partners, some of which are evolving. Agents are figuring out how to get into integrated payments.”

Others echo him. “We clearly see integrated payments as the future of card-present payments, but we also recognize that terminal-based merchants are a majority of the 7 million merchants in the [United States].” Tansill says.

“We strike a balance by recognizing the differences between the two channels and not asking our colleagues to operate in both arenas,” he continues. “We emphasize expertise and focus by delineating two distinct strategies, thereby enhancing the experience of our merchants and sales partners.” EVO operates separate sales and supports staff for each of the two channels.

At Paysafe Holdings UK Ltd., which is based in Montreal for the North American market, balance is the operative word.

“From a distribution perspective I favor a world that focuses on integrated solutions as part of the sales process, but never losing sight that we have a large population of merchants that don’t recognize or don’t think there’s an immediate need” for POS systems, says Todd Linden, chief executive for Paysafe’s payment processing in North America. United Kingdom-based Paysafe in 2017 bought Linden’s former employer, Merchants’ Choice Payment Solutions.

‘High-Caliber People’

Many merchants still using standalone countertop POS terminals will eventually migrate to a POS system, such as a cloud-based one that uses common consumer devices. Some merchants may not recognize a need for such systems immediately, Linden says, but over time they realize the value such systems offer.

For payments companies, embracing integrated payments also necessitates a unique sales approach.

EVO intentionally keeps its integrated-payments focus only on these merchants, says Tansill. “We believe the expertise and focus of a dedicated integrated-payments division makes EVO a more attractive partner and payments provider,” he says. “Lastly, we have retrained our direct-sales professionals to focus on integrated software to increase our capacity and accelerate growth.”

EVO’s path to embracing integrated payments began in earnest six years ago with some acquisitions. Each brought unique qualities that the company combined into its current product offerings, Tansill says. These included payments companies Snap, Sterling Payment Technologies, and Nodus Technologies Inc.

Snap provided EVO with a single integration point for its international business, Tansill says, while “Sterling provided us with a team of more than 200 professionals with more than 10 years of experience selling and servicing integrated merchant relationships, in addition to access to the software dealer network in the United States.”

Nodus brought a software tool that facilitates integrations into enterprise resource planning technology, providing a boost to EVO’s business-to-business payments capabilities, he says.

“We have intentionally retained the focus of our integrated-payments team, fully separating its responsibilities [from] those of any other sales channel,” Tansill says.

EVO sells it services by going direct to the independent software vendor (ISV) market and indirectly via a network of more than 1,000 software dealers, he says.

“We have been steadily increasing our headcount across our sales organizations, targeting each of these two audiences, software companies and dealers,” Tansill says. “As our technology-enabled channel—e-commerce, integrated payments, and B2B—accounts for 54% of U.S. revenue in the aggregate and consistently generates the most attractive growth rates, we have been steadily adding sales resources across all subsets of this channel.”

Others, too, have adapted their sales approach to the ascending importance of integrated payments.

At Paya, Cohen says the company uses a partner-centric approach, and is much more focused on businesses than retailers. One strategy is to offer products that can do more for a business than help it accept payments, he says.

Because payments companies are selling more sophisticated products that include other business functions, such as employee scheduling, inventory management, or pricing, the sales process is a bit more involved. “There is a need to find high-caliber people,” says Helgeson. “They aren’t easy to come by.”

Click And Agree

Closely related to the sales approach is the cost of acquisition, a significant element to valuing a merchant and the merchant portfolio.

Often, the lifetime value of integrated-payments merchants could be more than other types of merchants that may have higher attrition rates or have lower profit margins. Yet, margins can be compressed with integrated-payments merchants because the software provider, often an ISV, gets a share of the revenue.

“The ISVs are sharing in the economics, depending on how big a portfolio they have to leverage,” Helgeson says, and their role in the sales process.

A portfolio of many long-time merchants might command a larger percentage of the revenue than an equally sized portfolio of merchants with shorter tenures. Generally, too, the lifetime value of integrated-payments merchants should be higher than that of more conventional merchant types, Helgeson says.

“From time to time, you may see slightly lower margins, but, generally speaking, these merchants process more volume,” he says.

Customer acquisition costs for integrated-payments merchants vary. When the category emerged, it was served by independent sales organizations, which focused on sales and shepherded the remaining aspects of actually boarding the merchant to a third party, such as an acquirer or processor, Cohen says.

“Then it changed,” he says. “In this channel, generally speaking, the variable cost of acquisition is fairly low, other than the co-op marketing dollars you do with the channel.”

What is driving down the cost of acquisition is click-and-agree capabilities, where a merchant can read the online terms and click “OK” to begin the boarding process, much like the routine with online processor Stripe, Cohen says. “The cost of acquisition is near zero.”

The convergence of payments, software, and cloud connectivity is affecting the cost of acquisition to such a degree that comparisons between integrated-payments merchants and those using countertop POS terminals may not be possible.

“It’s changed so much that I don’t know if you can compare any more because the cost of acquisition at times can be much less than even trying to get a merchant a terminal because the fit for a merchant is a quicker sales cycle,” says Paysafe’s Linden.

Another factor affecting cost of acquisition is the blending of the ISV and ISO model, Linden says. An example is Mindbody, a San Louis Obispo, Calif.-based company that sells business-management software for health-and-beauty businesses. In 2010, it became an ISO in addition to an ISV. Meanwhile, some ISOs are fully adopting the ISV model.

This blurring trend shows no signs of slowing, Linden says. “The collaboration and acquisition opportunity is there. The ISV knows the software, but the ISO knows how to sell it and get traction.”

‘A Lot of Greenfield’

This, of course, poses some challenges, such as betting on a technology. “You have to make a big bet on something, you have to make sure that’s something that can’t be obsoleted very quickly,” Linden says.

As an example, Linden says a couple of years prior to the Merchants’ Choice acquisition by Paysafe, the company looked into a social-media service for merchants. It’s glad it didn’t follow through. Today there are numerous ways for merchants to integrate social media.

“It’s a fast-moving landscape,” Linden says. The right technology at the right time, he says, “brings a whole new growth burst to payments.”

Along with that come profits. Merchants reliant on integrated payments are often more profitable for a couple of reasons, Linden says. “One, they will always be more profitable if they keep their customers longer,” he says. “The stability of the portfolio in an integrated environment is much better.”

Second, profit margins can continue to grow with these merchants if they are sold other services. A sales agent might get an immediate monthly residual just from successfully signing the new merchant, but could see that triple or better as the merchant adopts other services, Linden says.

Profits, of course, are tempered somewhat because the software developer or sales partner will want its share. But that is nothing new for payments companies, many of which have long split the revenue. What is new is that the lucrative and largely untapped potential of integrated payments lies ahead.

“There are now verticals that didn’t exist 10 years ago,” Helgeson says. “There is a lot of greenfield out there,” referring to merchants that have yet to adopt the integrated-payments model. And there is some opportunity to take market share from competitors, he says.

Cohen is similarly enthusiastic about the potential. “These developers are not disappearing,” he says. “As businesses move to the cloud in the way they deliver their solution, you need developers to support that.”

‘A Complete Picture’

It’s just the early stages of this transformation, many observe. “We would expect integrated payments would replace terminal-based merchants as the preeminent payment method in the intermediate term,” Tansill says. “The solutions are better for the merchant and enhance the experience of the merchants’ customers.” This likely will be a worldwide shift, too, he adds.

A big reason for this transformation is that merchants want and need to know more about their customers, especially as they strive to compete against online merchants that have deep insight into a customer’s purchase habits.

“Merchants are working very hard to get a complete picture of their customers, and that means they need to understand their purchase behaviors in any context or venue,” Aite’s Peterson says. “Payments are an essential ingredient to that knowledge base, and there’s almost no way to get a clear view of customer behavior if online and offline purchase behaviors are in separate silos.”