Look back in history and you find numerous, high-profile examples of complacency causing the most unexpected businesses to flounder. Take Kodak, for example, which, setting too much store by its size and longevity, failed to foresee the impact the rise of digital photography and the smartphone would have on its business.
The question for acquirers, right now, is:
Do they want to become the Kodaks of the payments industry?
All the ingredients are there: until recently, selling function-limited, classic Point of Sale POS terminals – with their relatively high transaction fees – has been enough to sustain them quite nicely.
However, as with Kodak, this only remains the case while what they’re offering is the only option. In payments, it no longer is.
There is a seismic shift going on in the world of payments, driven by new application programming interface (API)-led technologies, fueling and feeding consumers’ demand for instant, anytime, anywhere payments. This is dramatically changing the solutions merchants are looking for and, as a result, acquirers’ role in providing them.
Merchant acquiring has, until lately, been centered on selling the classic payment terminals that enable consumers to use their cards at the point of sale but have little potential for customization or innovation, to as many merchants as possible – a volume-based approach made lucrative by income from sales, leases and myriad fees.
In any market, though, such commoditization leads to competition on cost which, ultimately, makes it harder and harder for everyone to differentiate and operate profitably. In acquiring, the resulting battle over interchange fees has only drawn more merchants’ attention to just how much they have been paying – for devices delivering a fraction of the capabilities they need and expect, and epitomized by the smartphones they use every day.
Spotting their chance
Tech and software companies have spotted the opportunity this represents, offering more flexible hardware solutions fueled by groundbreaking software, with simplified, often substantially cheaper fees.
This fresh competition has squeezed those previously attractive margins and acquirers and ISOs now find themselves at a crossroads. They can continue with their hardware-based business models and hope to grow by either acquiring or break apart competitors or squeezing into new segments. Or, they can embrace the opportunity and adapt their business models to deliver multi-purpose, software-driven payment solutions while there is still chance to get ahead in this new game.
Innovators from outside the industry are providing access to dozens or even hundreds of new software applications and services that provide merchants with fresh opportunities to attract, delight and retain customers and take the strain out of their business administration at the same time, by integrating seamlessly with business operations like eCommerce, loyalty programs, inventory and staff management.
And by sitting new types of software-driven payment rails on top of the kinds of hardware most people now have easily at-hand, like their cell phones, they have managed to successfully circumnavigate traditional merchant payment solution providers and reach a rich new seam of clients.
Competing by new rules
While, in reality, many of these add-ons do not yet offer sufficient integration capability, they are proving attractive to merchants and so have fundamentally changed the rules of engagement. This means traditional merchant acquirers must now consider how they can continue to compete on a playing field crowded with new tech players, value-added resellers, independent software vendors (ISVs), and payment facilitators offering much more, at a fraction of the price.
To emerge victorious, ISOs and acquirers will need to become consultants – rather than salespeople – offering bundled solutions tailored to merchants’ needs and smoothing their transition.
Because the advantage they have over industry upstarts, is the close merchant relationships that give them an intuitive understanding of each business’s needs. They can use this knowledge to recommend just the right bundle of apps, then deepen the bond by creating opportunities for regular touchpoints based on ongoing advice about improving the shopping experience, attracting new customers and making their business more productive and profitable – with greater understanding of potential future improvements fueled by inbuilt analytic tools.
The first step is to decide which payment platform to build on. Some smart POS providers are creating closed environments to block out device competitors. Agnostic and open platforms though, that take care of integration pain points with a device independent strategy, will ultimately best serve acquirers and ISOs in making the leap to software-driven acquiring, by giving them a wider choice of features and more control over their merchant services.
There’s no doubt, it’s all to play for!