Amid merchant acquirer multiples and valuations hovering around record levels, the market continues to hold an optimistic view on the growth thesis for acquirers. Particularly on their ability to generate revenue streams beyond the now commoditized core transaction processing offering.
Analysts have further forecast that merchant acquiringrevenue will grow by 44% from 2016 to 2021, which is consistent with these expectations. Over this same period, transaction growth for cards is forecast to grow 37%, resulting in 7% of the gap to be covered by other means. Therefore, acquiring firms must create value outside of direct transaction growth to meet analyst forecasts.
As a result, market disruption has witnessed an influx of nontraditional participants, as well as a reevaluation of acquirers’ roles within each step of a value chain. A renewed focus has been applied to two broad areas:
- A Foundation of Capabilities Based on Core Competencies: The foundational capabilities of a merchant generate revenue streams and bottom- and top-line benefits. Thus, accelerating revenue capture in this area is crucial to counter the pressure from margin compression. For instance, partner and platform integration such as omnichannel integration and APIs can be integrated to minimize complexity and cost for merchants.
2.Dedicated to the Development of Value-added Capabilities: With advanced capabilities, merchants can develop and expand their business offerings, as well as meet changing customer needs. The best route for acquirers to develop advanced capabilities starts with understanding both internal capabilities and what merchants want to be based on their respective customer shopping journey needs; this intersection provides a road map for acquirers. Simply put, developing consumer trust in merchants requires advanced risk management such as encryption and tokenization.
In that regard, here’s how acquirers decide which capabilities and value-added services to pursue:
- When considering which capabilities to build and the resulting value-added services to offer, one must determine the segments and verticals of the merchants to be served. With the “segment and vertical” approach, an acquirer can build out a core value-services platform while customizing the offerings based on vertical specifics.
- In this approach, the focus is on consumer demand and vertical-specific innovation that is complementary to the sophistication of ecosystem players. Bank acquirers must also ensure that their go-to-market strategy aligns with the broader bank’s merchant strategy.
- Ultimately, which capabilities to pursue will be determined by a focused approach that balances the needs of each segment and vertical of the merchants that acquirers serve.
The COVID-19 pandemic provides a testing ground for acquirers’ payment infrastructure. Therefore, it has now become vital for merchant acquirers to focus on foundational and advanced capabilities that resonate with their merchant base to achieve the rich valuations that the market is placing on many acquirers.