Report: Acquiring Will Boast Robust Growth, But ISOs Must Change Tactics to Cash in

By John Stewart

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The good news for merchant processors is that the U.S. acquiring market will turn in a robust performance over the next five years, growing at an average annual rate of 10.5%. The bad news, at least for acquirers that remain wedded to conventional terminals and conventional sales tactics, is that app-based devices like smart phones and tablets will claim an increasing portion of that market.

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That’s according to a research report due out on Thursday from Omaha, Neb.-based Adil Consulting, which surveyed more than 800 small merchants in March and April to find out how they are processing transactions, what they are looking for in a processor, and what makes them switch processors.

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What the firm found was a gaping disconnect between what ISOs and other traditional acquirers are offering and what small merchants want. “[The disconnect] has always existed, but it wasn’t a big problem until the new players and new technologies emerged,” Adil Moussa, principal at Adil Consulting, tells Digital Transactions News, referring to technology vendors offering payment and reporting applications to small businesses based on devices other than traditional terminals. “Now merchants are saying, ‘There are other solutions out there.’”

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The overall acquiring market is looking pretty healthy, according to the report, entitled “Understanding Small Merchants And the Methodologies to Acquire Them.” Total processing volume will total $4.71 trillion this year, up a healthy 12% from 2012, the report estimates. Small merchants, the bread and butter of independent sales organizations, value-added resellers, and other acquirer-related businesses, account for about a third of that volume but will mirror the growth rate of the total market.

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By 2017, Adil Consulting forecasts processing volume will top $7 trillion, for a 10.5% average annual growth rate. The small-merchant market will generate more than $2.3 trillion in volume by 2017, again matching the growth rate of the overall market, the report says.

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But for individual ISOs, it will take innovative technology, along with a new understanding of the mentality of small merchants, to claim an increasing share of this market, warns report author Moussa.

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For one thing, PC-based terminals, e-commerce, and especially app-based tablets and smart phones, will carve out an increasing share of the overall volume. Adil Consulting expects the conventional point-of-sale terminal to account for 57% of total acquiring volume in 2013, down sharply from a 76% share as recently as 2007. The so-called app-based devices, which only began to emerge six years ago, will control a 2% share this year, growing to 5% by 2017, the report forecasts.

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“We expect application-based terminals to keep grabbing more market share at the expense of POS terminals as Square and other players push out more solutions

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and move up the market in terms of merchant size,” says Moussa in the report, referring to Square Inc., the 4-year-old San Francisco company that has established a dominant position among app-based POS providers. The report estimates that Square accounts for a little more than two-thirds of all volume processed through tablets and smart phones.

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Two factors explain the fast rise of app-based POS platforms, says the report. One cause is the easy integration of loyalty and inventory-management capabilities. The other stems from the rush to convert merchants to POS gear that can handle chip cards on the Europay-MasterCard-Visa (EMV) standard. This is leading merchants to investigate alternative POS equipment and software, says the report.

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But keeping current with POS technology is only half the battle for merchant processors looking to retain—and gain—market share. According to the report, ISOs and other acquirers must refashion their approach to small businesses. Instead of using corporate-sounding language and talking about merchant acquiring, processors should think about ways to help the business increase customer count and make more money, says the report.

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“What a majority of ISOs and acquirers fail to understand is that merchants are not in the business of merchant acquiring and they don’t care much about learning about the processor or the merchant-inquiring industry,” the report says. Successful acquirers, says Moussa, will focus on solutions that automate tasks and save merchants time or build up business.

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“Technology companies, because they’re not coming from the banking industry, look at solutions, not at ‘this is how we’ve always done business,’” Moussa says.