The more things change, the more things stay the same.
The merchant acquiring, processing and services industry has seen its share of headlines so far this year, with big players coming together in waves of deal-making to get bigger, and provide a greater range of processing and payment services. The year started off with a bang, as Fiserv struck a $22 billion megadeal to acquire First Data, aiming to offer “a one-stop shop” for integrated offerings to banks, merchants and service providers.
More recently, Citigroup said it will establish a merchant services unit, focused on helping retailers to accept a range of payment solutions. Reports swirled this week that Bank of America may walk away from its merchant acquiring joint venture with First Data (through its Bank of America Merchant Services [BAMS]), and focus on bringing its own payments business to market.
The Guiding Principles
However, despite the new entrants, and the bells and whistles that come with the continued embrace of digital commerce, a few constants still dominate the landscape, even if banks are becoming more tightly integrated in the processing arena. These constants should remind and guide acquirers, and shed light on what their clients really want. As Neil Randel, CEO at First American Payment Systems, told Karen Webster, that is reliability.
In short, those who sign on with firms (including First American and its competitors) to process their payments — from the smallest to the largest merchants, to government entities — expect to get their funds consistently and constantly, in a world where business takes place 24/7/365. It’s a way of life for online marketplaces, Randel pointed out.
From a merchant’s point of view, he said, the demands are simple: They want to be sure that if the expectation is to be paid same day or next day, those transactions will be processed and completed as promised. Easier said than done, at least where technology is concerned.
As Randel told Webster, “In the last 10 years, we’ve seen the development of gateways. So, now you’ve got business software potentially integrating into a gateway, and the gateway is boarding the transaction to the card associations for authorization and settlement. … There’s another layer or potential layer of failure, to a certain degree, when you’re going through a gateway versus having just … a PC dialing directly into a front-end authorization platform.”
For First American’s clients, the portfolio of businesses and governments the company deals with each day, “security is a big deal,” said Randel. He noted that there has been greater awareness of, and efforts to combat, identity theft, which has increasingly been a favorite tactic of fraudsters.
In addition, “we’re trying to get our merchants PCI-compliant,” he told Webster. “We’re trying to make sure they have a real understanding that ‘this is serious business if you were to be breached.’ There are certainly consequences that come from the card associations, and reputational risk[s] to [the merchants], as well [as reputational risks] to us.”
How Some Players Are Positioning Themselves
Speaking of the headlines around First Data, Fiserv and others, where consolidation will ostensibly remake the merchant services landscape, Randel said one guiding strategic principle for, say, JPMorgan and Chase Paymentech may have been the desire to take third parties out of the equation. That might perhaps be tied to know your customer (KYC) concerns that would have required the firms to be sponsors for their merchants. The same strategy may be in BAMS’ sights, he added.
Might it be the case, too, for the bank-as-processor model, as seen in Europe and Canada, to be more fully realized on U.S. shores? Perhaps — but, as Randel noted, there is room for a range of independent players, as “nobody is going to get all the businesses.”
Generally, and strategically speaking, software is an ever-important element that drives businesses to look for solutions that include payments. Randel noted that, for companies like Global Payments, the strategy seems to be one of acquisition — owning and promoting “two parts of the income stream: the software that you are selling to the individual end-user merchant and the payments, so you can monetize it all and have a stickier merchant business. If I’ve got a merchant that is going to be with me for years, and if I buy the software and can keep the merchant for 10 years, well, the economics of that is absolutely huge.”
Webster remarked that many companies are embracing the PayFac model, to which Randel responded, “For certain SIC codes, it may be fine.” For the firms with their own settlement systems (as First American does), there remains the ability to do instant settlement. “We are thinking about it, but we have not taken the plunge into it,” he said. “Right now, we are doing next-day settlement.”
Should the company, at some point, look to do same-day settlement, a partnership may be in the offing. “We are not really getting that many requests for it,” he added.
With a nod toward the megadeals and new partnerships being struck, and some partnerships reportedly being broken up in payment services, Randel said, “We go through this every so often. … I understand the value that [FIS] creates for Worldpay, given their banking — and especially core processing — business. And the capability to cross-sell seems to be behind the Fiserv and First Data [deal]. Those may be outliers, but I think they will give the opportunity for other deals. There are certainly some up-and-coming processors out there that are large, but not ‘mega large’ — so we will see mergers of equals.”