The world of payment processing plays a crucial role in the operations of small- to medium-sized businesses (SMBs).
When discussing payment processors in the context of SMBs, the term mainly refers to the consumer-facing payment interface and gateway, Zhu said, with companies like Square, Stripe and PayPal leading the way — and not the literal technical processors operating on the backend, like Worldpay and others.
“There are some clear name-brand leaders,” Zhu explained about the consumer-facing options in the marketplace, with PayPal and Square accounting for 38.6% and 25.7% of user share, respectively.
“What’s interesting is that Square services a lot of smaller businesses, but it has a much lower share among bigger chains and as a percentage of total retail transactions,” Zhu said.
The two brand favorites not only lead the pack in popularity but also have a baked-in upper hand when it comes to retention. Joint research undertaken by PYMNTS Intelligence and Enigma found that 85% of Main Street SMBs are highly satisfied with their current payment processors.
Still, that means that 15% of Main Street SMBs aren’t — and SMBs that are thinking of switching their payment platform represent an attractive market for these smaller providers with less than 10% of user share to tap.
There is an opportunity for emerging entrants in the market to cater to the specific needs of SMBs by offering user-friendly, cost-effective and reliable solutions.
“Ease of use, lower transaction fees and reliability are factors and features that everyone cares a lot about,” Zhu said.
The rapid growth of mobile payments, contactless transactions and buy now, pay later options has led to higher expectations from SMBs around faster, more secure and frictionless digital payment solutions.
“The consumer experience is always the bleeding edge of what technology can deliver, then businesses start to catch up over time,” Zhu said, noting that independent software vendors are now starting to merge with payment software to evolve payment processor offerings beyond simple transaction processing to include a wide range of services.
“There is so much rich data that can be collected from a credit card swipe that can be used for things like marketing promotions, understanding customer loyalty and customer behavior, and even understanding your price demand elasticity,” Zhu explained.
Data collected from payment transactions can also be leveraged for further insights and analytics that streamline and improve business operations.
“What we’ve seen is that payments are the foot in the door, and anyone servicing small businesses from a payments perspective really needs to start thinking of payments as a platform for offering a large variety of services,” Zhu said.
Those services can increasingly be targeted along sector-specific lines.
For example, 78% of hospitality SMBs consider fraud prevention crucial, while consumer services businesses, for their part, prioritize processors offering multiple payment options.
Younger SMBs (those less than 5 years old) are interested in platforms that provide banking and credit services, with 37% also expressing a desire for marketing services.
“The complex needs of hospitals (including HIPAA compliance), integration with electronic health records, and streamlined billing and payment processes all create opportunities for specialized payment solutions as well,” Zhu added.
“With the data you collect from a terminal, you can actually lend to businesses,” Zhu said. “There’s the ability to give loans and get repaid by a percentage of the card transactions that are processed by the platform, as well as use the data to get a better understanding, from a lender’s perspective, of whether the business is safe to lend to.”
Zhu also highlighted the growing acceptance of card payments in traditionally cash-heavy industries, such as construction and manufacturing. Surprisingly, 50% of construction SMBs expressed interest in processors offering banking and credit services. This demonstrates how payment processors are expanding their reach into industries that were once resistant to card payments.
“It’s hard to get your local carpenter or electrician to accept a card, but if you start bundling that with certain banking and credit services, it becomes more attractive to them,” Zhu said.
The focus on delivering more value to customers beyond transaction processing is something that Enigma is closely tracking. The company sees “roughly 40% of all credit and debit card transactions,” Zhu said, allowing it to collaborate with payment platforms and help them access valuable information about their customers.