The Next Great Payments Opportunity: Integration

The Next Great Payments Opportunity: Integration

The Next Great Payments Opportunity: Integration

Rick Oglesby

Rick Oglesby

Rick Oglesby heads up the payments research division at the Double Diamond Group. He is a respected industry veteran and research professional with more than 20 years of industry knowledge and solid research methodology experience.

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Investopedia defines a "commodity" as: "A basic good used in commerce that is interchangeable with other commodities of the same type. The quality of a given commodity may differ slightly, but it is essentially uniform across producers."

Some would argue electronic payment processing has been a commodity since its inception, but it hasn't always been used as a raw material in the production of other products. Now, however, the fastest growing processors are the ones that facilitate the use of payments as an input, completing the commoditization cycle and creating the next great payments opportunities.

Roots: the standardization of payments

Two associations of banks created Visa and MasterCard in order to enable financial institutions to offer payment instruments that could be accepted at any merchant, anywhere in the world. To do so, they created:

  • standardized authorization;
  • clearing and settlement frameworks that they could use to offer payment acceptance to merchants in a way that provided global coverage; and
  • interoperability to bankcard issuers.

This intentional commoditization of payments created a huge opportunity – it enabled banks to sell a standardized payment acceptance solution to tens of millions of merchants around the world. The opportunity was so large that the banks and payment brands couldn’t realize it on their own, so they aligned with payment acceptance technology firms (processors) and distribution firms (ISOs) to create global networks of technology and distribution partnerships that could tap the worldwide opportunity. All experienced explosive growth and participated in the many trillions of dollars in transaction volume that followed.

The quest for payment reinvention?

All good things must come to an end, however, as has the age of explosive growth in the payments industry. The market has become saturated, leading to a queue of payment salespeople waiting at the door of every merchant, all with offers of lower and lower prices. ISOs and acquirers are almost universally seeking to re-invent themselves, complaining of excessive competition, the inability to differentiate themselves and constant pricing compression.

There is a group of providers, however, that has already reinvented payments.

Integrated software vendors (ISVs) have been using payments as an input into the payment systems for decades, focusing primarily on the largest of merchants. They offer payment processing as just one of many features within a software package that is designed to meet a wide variety of the payment and non-payment needs of specifically targeted merchant categories.

Over time, cloud computing has reduced the cost of software delivery, making integrated payment solutions more accessible to smaller merchants, and smaller merchants are buying. Thousands of new ISVs are now flooding the market seeking to offer specialized solutions to at least 1,300 merchant verticals. The few payment companies that specialize in helping ISVs include payments in their applications, such as Accelerated Payment Technologies, Element Payment Services, PayPros, and Mercury Payment Systems, were growing at a rate that outpaced the rest of the acquiring industry by a multiple of three until they were swallowed up by Vantiv and Global Payments.

Other integrated payment firms such as Stripe and Braintree continue to be some of the fastest-growing firms in payments, and the growth rate of these firms far outpaces the growth of payments overall, meaning a significant volume shift from non-integrated to integrated solutions is underway. Integrated software vendors and the payments companies that enable them clearly represent the future of merchant services.

Necessary narrowing of focus on merchants

This trend represents the next great opportunity for ISOs, ISVs, value-added-resellers (VARs), acquirers, processors and payments technology suppliers. Merchants are thirsty for specialized solutions that solve the problems of their specific businesses. The cloud, the Internet, the mobile device, and the app-store provide platforms for the delivery of specialized solutions in a cost-effective way, and the worldwide explosion of ISVs means that companies are lining up to tap the opportunity.

Most seek partners to help them distribute and monetize their products. The payments companies that have been serving those needs are already growing explosively, yet the market is still largely untapped.

SMBs on the horizon

The stars are aligning to create the next great opportunity in merchant services: integrated payments for the small- to medium-sized merchant. Tapping into this opportunity requires an approach that is entirely distinct from legacy acquiring, processing, distribution and technology business models.

The approach for each firm depends on its ability to specialize in a specific merchant segment, its distribution model, its distribution scale and its software development capabilities. By assessing its capabilities across these dimensions, each firm can select an approach to unlock participation in the next wave of explosive growth.

And those that don't adapt will be left behind.

The statements and opinions of the writer do not necessarily reflect those of TSYS.

Other Articles by Rick

Rick Oglesby

Rick Oglesby heads up the payments research division at the Double Diamond Group. He is a respected industry veteran and research professional with more than 20 years of industry knowledge and solid research methodology experience, and he specializes in merchant acquiring, new product development, product management, and emerging payments strategies.

Rick is a recognized thought leader in the acquiring and mobile payments spaces. He is respected as an industry expert that has presented at numerous events, including Money2020, ETA, Mobile Contactless Innovations, EPCOR, and TAG Fintech.

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