If chess is a game of evolution, where strategy takes pieces off the board — knight takes rook after rook takes queen — and only a few are left standing at the end, what might the merchant services chessboard look like a few years hence? The question is especially timely against a backdrop where megadeals have dominated the landscape.
In a PYMNTS interview with Karen Webster, Daniela Mielke, CEO of RS2 North America, said what lies ahead is tied to what’s just behind us, where the mergers of 2019 have been spurred by the biggest change in payments.
Increasingly, the strategy seems to be one where incumbent players focus on doing what they do best — gobble up other incumbents — in an effort to serve independent software vendors (ISVs), payment facilitators and traditional channels, such as independent sales organizations (ISOs) and banks. It’s a strategy that seems to be a reaction to the rise of tech upstarts focused on innovation, and it may not be an optimal one.
“The technology players entered the industry,” Mielke said, with a nod to “the large ones, but also a lot of small startups.”
Companies as nimble as PayPal and Stripe have played a part in changing the payments ecosystem, driving innovation throughout the industry and likely upending the traditional merchant services model. She added that these megamergers show that the traditional incumbents tend to react to increased competitive pressures in perhaps the only way they know how.
“They can’t transform their business models and innovate, so they fall back on doing what they know to do — which is [mergers and acquisitions (M&A)], in pursuit of scale,” she said.
Yes, distribution and cost advantages are useful and valuable, Mielke acknowledged. However, the mergers are creating disjointed and fragmented platforms that she noted are completely out of sync with what merchants and customers need and want — namely, an integrated payments experience that crosses channels and platforms.
Legacy Plus Legacy Begets Commoditization
If legacy plus legacy equals more legacy, particularly in a physical retail market that is also consolidating, the question must be asked: What is to be gained? The large incumbents are becoming commoditized, competing largely on price, even as the payments ecosystem is becoming more complex and global, and where regulations may be in flux. At the same time, the ISOs reselling those services, and the ISVs looking to bring payments into their business applications, are frustrated. That’s because the merchants want more than the utility of payments processing, and the ISOs and ISVs feel ill-equipped to deliver that, at least as things largely stand today.
Get ready, then, to see a bifurcation — where, as Mielke said, there will be a commoditized part of the payments landscape and, separately, the more innovative part of the equation that will own the customer interfaces. That latter subset of payments will be populated by existing large tech players or nimble, smaller upstarts. It won’t be an overnight bifurcation, she cautioned, noting wryly that “everything is slow in payments.”
Consolidation is not confined to the traditional payment behemoths. As Mielke and Webster discussed, the lines are blurring between online and offline commerce. At the same time, Webster noted, the rise of the marketplace model — Amazon is among marquee names here, of course, but there are plenty of others — is inexorable.
The largest and smallest platforms are growing as they are busily aggregating and consolidating populations of stores, products, places and ways for consumers to shop efficiently, browsing through selections with speed rather than plodding store by store.
Simplicity Amid Complexity
Simplicity is desired above complexity, and an integrated model is being pursued by the tech players, where payments exist as one service among many in a marketplace model. Mielke said such a continuum of services in one place is of high value to stakeholders, which is where RS2’s single global payments platform comes into play.
For now, at least, Mielke said there is room for large processors to process the transactions for the largest platforms, but that is a very commoditized, low-margin business.
“It would be hard to win share in that segment,” she added, “because the large [platform] players do not need to switch. It’s already so cheap, and they would rather put their scarce development resources on value-added areas. And then, in the small segment, it’s going to be about the customer experience. Commodity players, the traditional of payment players, are not going to be able to really provide that.”
The urgency of innovation becomes starker when the lines blur between online and offline commerce, where merchant services need to serve several channels. The tech players that started serving merchants’ online needs will be able to serve offline needs, too.
The tech companies that succeed, she noted, will allow various stakeholders to connect with one another seamlessly amid platforms, serving everything from payments to logistics, likening them to operating systems for customers. They are offering more value-added services to merchants, and are doing it quite well.
“That makes it actually more difficult for the more traditional distribution channels to compete,” said Mielke, adding that the question now becomes “what does an ISO do, or even a small ISV do, to compete against the behemoths like PayPal or other tech companies, given the technology resources these players have?”
Mielke pointed to Google and Apple as clear near-term winners, able to deploy what she termed as “seamless intelligence. … If you look at what Amazon has assembled, they could easily create a private network,” adding that Apple could do the same. Folding payments into platforms may be a logical next step for companies that encounter value in owning data, in an age where regulators are focused less on the cost of payments than on protecting consumer information.
“There’s always room for new, and more value,” in merchant services, she said. “And customers, small and large, are usually ready to pay for more value, especially if it helps them grow and run their business.”