MERCHANT ACQUIRING: THE RISE OF MERCHANT SERVICES - MCKINSEY
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Merchant acquiring:
The rise of merchant
services
The shift to electronic transactions has placed front
and center the need for merchant acquiring companies
to update and differentiate their service offerings.
Puneet Dikshit Globally, merchant acquiring has evolved over the which historically have not received a material portion
Tobias Lundberg past decade from a legacy processing and hardware of payments through B2C digital channels.
business to a full-stack software and merchant-
This has led to an unprecedented digitization of
services solution. This shift, coupled with the
small-business commerce across geographies,
fragmentation of the merchant-facing payments
mostly through marketplace platforms. Marketplace
value chain, is dramatically affecting the economics
Platforms like Amazon, eBay, Etsy, Flipkart, and
and business models of merchant acquisition
Shopify have seen seller sign-ups increase by 70 to
as it was done in the past, favoring instead the
150 percent since the start of the pandemic, based
value-added approach of the new merchant-
on their most recent filings and public statements
services players.
(Exhibit 1), while proprietary platforms are losing
The evolution of merchant services typically share. In healthcare, there has been a surge in
involves a pattern in which revenues from merchant provider participation for services like telemedicine,
processing are being commoditized, and in which in turn is highlighting a growing need for B2C
response, players seek to differentiate, either by digital payments in professional services, education,
expanding their product suite or by building scale— and other areas.
mostly through acquisitions—across geographies,
This shift to digital is driving up merchants’
distribution (e.g., integrated software vendors, bank
payments-acceptance costs, which are expected
led), and delivery channels (e.g., digital, point of
to rise by an incremental $8 billion to $15 billion
sale). Although the trends and trajectory are similar
(about 6 to 10 percent) as commerce migrates to
across regions, certain geographies are further
these higher-cost channels. Just as importantly,
ahead. As acquirers shape their priorities for the
merchants also face higher decline and fraud
next decade, the transformations spurred by 2020’s
rates on digital transactions, with ramifications for
public-health crisis will play a big part in the way
customer experience.
they rethink their vertical focus, platform strategy,
and investment priorities. As these at-scale marketplaces and platforms
consolidate their share of digital sales, they naturally
New winners and complex needs seek to lower their cost of acceptance, which in
turn adversely impacts margins for acquirers. At
compel a reevaluation of focus and
the same time, however, digitization of commerce
value propositions
has created greater willingness to pay for enhanced
As detailed in Chapter 1, one of the COVID-19 services and solutions. Merchants are willing to
pandemic’s most visible impacts on financial services accept higher fees for demonstrated value, such
has been the dramatic acceleration in shifts toward as improved authorization rates, a more seamless
e-commerce and digital payments. This is true not payments experience, or improved cart conversion
only in more mainstream verticals, such as fashion through point-of-sale financing. Even in sectors like
and groceries, but also in merchant segments like grocery, where acquirer margins have approached
healthcare, professional services, and education,
The 2020 McKinsey Global Payments Report 13Exhibit 1
Digital marketplaces are expected to account for about 60 percent of digital-commerce volume
in the next few years.
Global digital-commerce market,1
platform sales breakdown, Proprietary
$ trillion platform sales
18%/year 22%/year
Marketplace
platform sales
15.3
6.1
(40%)
6.9
4.3 9.2
3.6 (62%) (60%)
2.7 0.9
(74%) (26%) 2.6
(38%)
2015 2019 2023E
1
Includes retail; travel, media, and entertainment; food and beverages; bill payments; and others.
Source: McKinsey Global Payments Map; McKinsey Digital Commerce Benchmark
structural floors over the past few years, merchants visit segment. Just as importantly, acquirers
are willing to pay 20 to 30 percent higher rates themselves are beginning to resemble marketplaces
for better payments performance, particularly by offering solutions like payments disbursement,
when the impact on the business is positive and financing and onboarding for small and medium-size
significant. Higher-margin verticals, such as fashion enterprises (SMEs), commerce marketplace know-
and accessories, are seeing increased demand for your-customer services, sub-merchant account
financing solutions and affiliate marketing products. creation and management, and SME-facing risk and
As an example, within the fashion and accessories identity solutions.
verticals in the United States, the number of
Most large acquirers have invested heavily in core
merchants signed up for buy-now, pay-later
payment-enablement services like authentication,
solutions has nearly tripled.
fraud, and alternative-payment-method (APM)
Leading acquirers are starting to transform in acceptance and in creating omnichannel
two distinct directions: adding targeted value acceptance and settlement, but relatively few have
propositions and becoming marketplaces capitalized on the opportunity to deliver enhanced
themselves. Industry-focused value propositions value-added services to large retailers (Exhibit 2).
address market needs for service and risk levels, Given the growing willingness of large retailers to
fees, value-added features, partnerships, and back- pay for such services and to seek these from their
end integration. This approach is not necessarily current providers, this is a significant opportunity
industry specific; acquirers are increasingly for current portfolio monetization and margin
segmenting industries into groups based on protection. The focus of these investments in add-
specific needs, such as a pay-later segment, on services will be influenced by the vertical focus of
delivery segment, prebook segment, and repeat- each merchant-services provider.
The 2020 McKinsey Global Payments Report 14Exhibit 2
Small and medium-size enterprises are contributing to a growing share of value-added services
in payments revenue.
Value-added services (VAS) revenues captured by merchant services providers, Large
by type of service and business size, 2019
$ million Small and medium size
~70% of all VAS ~30% of all VAS
Merchant size: Mostly large Merchant size: Mostly small and medium
Growth rate: 8–10% per year Growth rate: 40–45% per year 18,975
1,771
Gross margins: 40–60% Gross margins: 50–70%
92 94%
299 150
495
518
644
1,955
3,853 93% 59%
66%
4,025 34%
88%
5,175
41%
91%
9%
Data Fraud Enhanced Financing Marketing Software, Loyalty Payroll, Tax, Customer Other Total
analytics payments support cloud, and gift employee accounting, support
and design management and legal
Source: McKinsey Payments Practice
Acquisitions have helped build at-scale, multi-geography solution.
geographic and capability scale, but Although continued consolidation is likely, an
not solution scale increasingly important tactic is for acquirers to
The consolidation in merchant acquiring over the invest in building a set of scalable solutions fit
past several years has enabled acquirers to build for purpose for priority merchant segments. As
scale across geographies and to enhance their margins on traditional payments services continue
suite of capabilities to stay competitive in the face to be compressed, solution scalability will become
of next-generation merchant-services platforms, increasingly critical to sustain the business’s
including Adyen, Checkout.com, and Stripe. economic viability.
However, this spate of acquisitions has also led In addition to the scalability of solutions, significant
to acquirers being laden with numerous regional, untapped opportunity lies in enhancing the
duplicative, and subscale solutions, adding to scalability and sophistication of data infrastructure
technology overhead. Over time, this will impede to enable targeted use cases around enhanced
efficiency and interfere with acquirers’ ability to authorization, fraud, and performance-based
serve multi-geography merchants, especially in payments arrangements. For example, payments-
digital segments. Some of the largest acquirers are services providers are offering performance-based
saddled with 12 to 15 different regional gateways or arrangements that include authorization warranties,
platforms that leave them, unlike next-generation which are fee constructs linked to fraud reduction
acquirers, ill-equipped to offer their clients an based on advanced analytics.
The 2020 McKinsey Global Payments Report 15Exhibit 3
Most revenue growth in merchant services is from small and medium-size enterprises.
Deconstruction of revenue growth, merchant services, US market example1 Value-added services
$ billion (including hardware)
Core processing
Share of growth 27% 0% 72% 98% 76%
coming from SMEs2
1.8 23.7
1.5
1.8
18.7 29%
-0.1
26%
74% 71%
Revenues, From From price From new From new Revenues,
2017 volume growth changes 4 VAS sales merchants 2019
of existing
merchants3
1
Total excludes network assessment fees.
2
Small and medium-size enterprises, classified as businesses withapproach to partnerships and develop models that payments acquirer or processor and bring
deliver more value to merchants through their ISV together proprietary and partner solutions into
partners—for instance, merchant cash advances, a single platform for larger merchants, which
point-of-sale financing solutions, analytics, and also enables bundled economics and better
omnichannel reconciliation. value creation.
In emerging markets, ISVs are steadily gaining • Investing in SME channels in emerging
share, but most of the sales still leverage geographies to capture share. The shift toward
traditional agent-based or direct models. Bank- ISV-led models across markets is imminent;
owned acquirers have an advantage in many of acquirers need to assess their strategic posture
these markets but often lag in sales and product to address this trend. The build-out and scaling of
sophistication. In these markets, acquirers still have direct-to-SME models will be capital intensive but
the opportunity to invest in building a point-of-sale potentially more lucrative if acquirers can create
platform-based business that enables them to serve SME-focused one-stop-shop platforms. Investing
a broad swathe of merchant needs and monetize the in these channels and value propositions over
SME relationship in a more holistic fashion. the next 18 to 36 months, before these markets
tilt toward ISV-led models, will position them to
Trade barriers and government compete much more effectively.
intervention hinder market expansion • “De-cluttering” infrastructure. The spate of
and enable local wins acquisitions has led to often redundant data and
The economic slowdown has increased many software platforms that are burdening at-scale
governments’ willingness to accept additional merchant acquirers, hindering their ability to
investment avenues, somewhat counterbalancing compete with next-generation players that have
the impact of recent trade disputes. The competing built more integrated, scalable solutions. There
priorities of regional governments are likely to is a dramatic need for rationalization of software,
interfere with companies’ ability to enter into new data platforms, infrastructure, etc. to enable
markets organically. Acquirers will need to consider acquirers to support merchants efficiently
regional sponsorships, acquisitions, or joint ventures across geographies, verticals, and devices.
to enter priority markets. • Aligning and simplifying organizations to
This “slow-balization” is also expected to fuel the mirror emerging and at-scale merchant profit
growth of regional supply chains. This will create a pools and needs. Segmenting customers into
need for regionally integrated solutions, especially enterprise (and within this marketplace models,
in B2B payments. Acquirers that have been slower pure-play subscription, travel, at-scale retail)
to pursue the value pools in B2B digital commerce, and SMEs (and within this direct, bank-led,
due to its multi-geography complexities, may now ISO/ISV/VAR led, partner-led) and organizing
be able to pursue opportunities at a regional level. the business around segments based on how
customers buy is critical to compete effectively.
Preparing for 2021 and beyond Such alignment will enable acquirers to invest
appropriately in sales effectiveness and
As acquirers and merchant-services players reorient
commercial enablement, thereby improving
to prepare for the next decade, several key areas
go-to-market and pricing approaches as well as
require focus:
progress tracking.
• Investing to transform into a platform business
• Directing investments to digital ISVs and
for larger merchants. Most large merchants
payments-adjacent offerings. With traditional
are grappling with the accelerated shift
processing revenues under sustained pressure,
to e-commerce, which has created more
acquirers should focus investment on scaling
pronounced payments digitization needs
integrations with digital ISVs and creating
at the point of sale, including contactless
payments-adjacent offerings where they have a
payments, enhanced authorization, fraud and
value-added play (e.g., POS financing, rewards
chargeback mitigation solutions, financing at
redemption at point of sale, SME financing)
point of sale, sub-merchant onboarding, and
Acquirers should better monetize their role
payments remittances. Acquirers have a unique
within the value chain as an enabler between
opportunity to shift from being a traditional
The 2020 McKinsey Global Payments Report 17issuers/service providers and merchants, e.g., • Rationalizing customer processes. As the
explore the material opportunity to act like a number of devices, interfaces, payment means,
marketplace or and “app-store.” and channels continues to increase, acquirers
are in a privileged position to aggregate,
• Differentiating through data. Differentiate
triage, and monetize a “guaranteed best route”
solutions on data and monetize data more
experience. A customer journey-based view of
effectively to enable enhanced authentication,
payments evolution is critical to its enablement.
fraud, and chargeback use cases. The shift
to digital has created a much greater demand
for enhanced authorization, real-time data
connectivity, better data-enabled fraud, sub- The merchant acquiring industry will likely see
merchant underwriting decisions etc. Acquirers continued consolidation on the acquiring side and
possess a gold mine of data but the complexity sustained fragmentation on the distribution side.
of disparate platforms, unclear data strategy, Growing commoditization of processing will need
poor data architecture, and limited build- to be offset by improved sophistication of solutions
out capabilities have impaired the ability to and enhanced back-end efficiencies. Competing
effectively monetize this asset. effectively will require scale not just across
• Avoiding complacency on alternative payment geographies and verticals but across solutions
methods. The growth of APMs, fueled by as well. As merchants across sectors rethink their
evolving regulation, ongoing innovation and acceptance and payments needs and journeys post-
retailer interest, will necessitate their inclusion COVID-19, the acquirers who orient themselves to
in acquirer portfolios. APM strategies must innovate around these needs and journeys are best
evolve to a point where acquirers have a clear positioned to win.
view on when and how to directly integrate
vs. license through APM aggregators or other Puneet Dikshit is a partner in McKinsey’s New
consolidators. In addition, as APMs capture a York office, and Tobias Lundberg is a partner in the
growing share of transactions, acquirers will Stockholm office.
need to refine pricing/revenue/fraud models to The authors would like to acknowledge the
drive value. contributions of Diana Goldshtein and Tamas Nagy
to this chapter.
The 2020 McKinsey Global Payments Report 18You can also read
