By Adam Hark
As I sit down to write this, I'm not sure if I'm doing so as a mergers and acquisitions professional in the payments space, or simply a payment professional seeking to impart some insight – and truth – into the payment processing community.
I've spent the better part of the last decade advising buyers and sellers, investors, and non-industry curiosity seekers on the ins and outs of valuations of merchant processing residuals, merchant portfolios, ISOs, processors and payment technology platforms. I've been witness to, and participated in, the payments industry's evolution over this same period, and I must say, things have really changed.
When I first started consulting in early 2006, payment processing was the technology that merchant acquirers were selling to merchants. Merchants used payment processing technology to operate more efficiently and grow sales by taking advantage of the ever increasing consumer usage of noncash payment types.
Back then, payment processing had come a long way since the 1990s, when e-commerce was but a glint in Authorize.Net's eye, and most brick-and-mortar merchants always had a "knuckle buster" (for all you young'uns, that's a manual imprinter) at the ready for when their new stand-alone POS terminals inevitably went down.
Fast forward to the present day, and it's stunning how things have changed. Let's face it: the simple act of processing an electronic payment has become commoditized, and the merchant service providers who sell this service have become fungible (meaning they are so alike they are interchangeable and thus can easily replace or be replaced by one another).
As a payment consultant with an all-access view of the industry, I can honestly say that if someone were to ask me today to become a partner in a payment processing company whose totality of products and services consisted of providing businesses with the capability to accept and process credit and debit card transactions, my answer would be (politely), "No thanks."
Instinctively, today's business owners know they can get credit and debit card processing from any one of many providers, just as they do with their cable service, telephone service, etc. ‒ you get the picture here (hopefully).
Yet, year after year, the industry continues to buck what many investors and industry operators "in the know" have averred: the payment processing industry is undergoing consolidation, particularly in the small and midsize payment service providers (ISOs and agent offices) sector, and such entities are either being acquired by larger companies or are simply going out of business. This is because of the two aforementioned realities: electronic payments have become commoditized, and the merchant service providers who sell this service have become fungible.
If we accept these premises, however, how do we explain the fact that contrary to the consensus notion that the industry should be shrinking in terms of the number of payment processing companies in operation, it is thriving, and merchant service providers are as ubiquitous today as they have been in the past?
If you are successfully operating in the payments industry today, one of the following applies to you:
I submit that if your company is in the latter situation I just described, EMV has become a proverbial life raft that is artificially supporting your business, and it will continue to do so only until a majority of merchants have successfully upgraded their POS systems.
The new reality is that payment service providers, if that is, in fact, the only service or product they provide, are dying out. The ones that appear to be doing well haven't yet figured out that they are mistakenly assuming that their ability to satisfy merchant demand for EMV-compliant POS solutions means they are now payment technology companies. This perception is really, really wrong ‒ and dangerous if you're trying to create long-term value in your company.
EMV is not payment technology, at least not in a sense that it will create value for your merchant acquiring business and a sustainable model for the future. Think of it this way. True payment technology is like elective surgery: it's optional in that it solves problems or issues people want to fix, but don't need to fix; it's a high-growth area; and it's extremely profitable (often realizing margins in excess of 80 percent).
EMV POS technology, such that it is, is like emergency surgery: it's necessary; low growth (people only get it when they have to get it); and low margin (perhaps not in the short term with the initial profit on the EMV upgrade, but there's no long-term, high-margin, subscription-based revenue model).
Merchant acquirers who think they work in payment technology because they can provide new EMV-compliant POS solutions to their merchants, in addition to transaction processing, are not in the payment technology business. And when this EMV-induced roiling of the merchant population tails off, these entities will be exposed: their service offering will still be a commodity, and they themselves will still be fungible.
ISOs and agent offices that are benefiting from this EMV-induced boon need to realize and accept that this upturn is fleeting. The notion that new EMV-driven business equates to your firm being perceived as a payment technology platform provider, and that the marketplace will value your business as such, is a delusion. And it's an extremely dangerous one if you're thinking about availing yourself of a strong valuation on a three- to five-year exit strategy.
If you want to truly build value in your payment company, find technology partners who have solutions for your merchants' wants and needs that go beyond credit and debit card transaction processing and PCI compliant POS offerings. Consider technology partners with mobile POS alternatives, specialized gateways and end-to-end software solutions designed for specific verticals – there's a lot out there.
Adam Hark is Co-Founder of MerchantPortfolios.com, a dba of Preston Todd Advisors Inc. With over a decade of experience in the payments industry, Adam consults in M&A, creating enterprise value, growth and exit strategies, and asset and enterprise valuation for payments processing and payments technology companies. Adam Hark can be reached at email@example.com or 617-340-8779.
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