By Adam Hark
Theory has met reality in the merchant acquiring world. It's no longer just an idea that there's a ubiquitous convergence of technology and payment processing underway ‒ it's a fact. Before a merchant acquirer surrenders to this reality, however, and starts investigating which technologies may be worth embracing ‒ whether through acquisition, partnership, or development ‒ it surely makes sense that an acquirer's first inquiry should be, "What do these new technologies actually do for my platform?" The answer to this question, together with understanding the added-value contribution, will pull back the curtain on how these technologies work to lift merchant acquirer valuations.
Pushing technology to the side for a moment, it's important to remember some of the basic tenets that undergird any successful business. The "three-legged stool" analogy illustrates this idea well: if you envision a stool with three legs, a deficiency in the structural integrity of any one of the three stool legs will result in the stool collapsing. Applying this analogy to a business, whereby the stool is the business, a serious deficiency in any of the following three "legs" will result in the business collapsing:
All three of these components must be intact at all times for a business to thrive. Though the business operations component is just as critical as the other two, the place where new, complementary integrated POS and infrastructure technologies really impact a merchant acquiring platform is in their ability to substantially benefit an acquirer's customer acquisition and customer retention.
Identifying and integrating into your merchant acquiring platform the right financial technology is challenging. It requires a thorough examination and assessment of your current business from a strategic perspective. But before undergoing this introspective process and determining what type of technology might be a good fit, it's important to understand how a complementary technology may impact your business. Simply put, here are the two primary value propositions to merchant acquirers that complementary integrated POS and infrastructure technologies provide:
Payment processing is a commodity. A merchant can procure payment processing from any one of thousands of providers, and for an acquirer to compete solely on basis points and better customer service is not a sustainable strategy for long-term growth. EMV (Europay, MasterCard and Visa) capability is necessary. The problem EMV solves for merchants is its mitigation of the exposure to liability, which the issuing banks have shifted to them.
Here's the real question: As an acquirer, do you want to sell merchants something that by today's standards truly has value? If the answer is yes, then sell a business management solution that solves a cadre of problems beyond just payment processing and EMV. Sell a technology platform that makes their business environment more efficient, and their customers' user experience easier and richer.
When a merchant acquirer's products and services offering is expanded to address a multitude of operational problems, an acquirer's products and services offering is creating more value. And it's axiomatic (I would argue) that with greater value creation comes increased client acquisition and sales.
Think of all the small to midsize businesses (SMBs) out there that still accept credit and debit payments on a stand-alone terminal. Other than a contractual prohibition (for example, an exorbitant cancellation fee), what's to stop these merchants from switching payment providers? The simple answer is not much. Now think of how easy it might be for merchants to switch payment providers if they've been sold a robust new POS system, which in addition to payment processing, tracks inventory, rewards and loyalty benefits, and time clock management and payroll? The simple answer is not easy at all.
Why is this? For starters, the integration of payment processing with a robust POS platform creates a situation whereby the system cannot be removed without a massive disruption to business. Further, and perhaps an even greater hindrance to merchants switching their payments provider, is the sheer cost associated with switching out an integrated POS system. Although integrated POS systems can be had for fairly reasonable prices these days, they still represent a substantial capital expenditure for any SMB, such that it's not something a merchant could afford to change frequently.
This is just one example of how technology increases acquirer retention. In integrating payments with technology (software or hardware), an acquirer creates a system that pervades the merchant's environment, and entire systems are not easy to remove.
The primary drivers of enterprise valuation for payment processing companies, especially acquirers, are retention (or low attrition) and growth. The value that integrated POS and infrastructure technologies bring to merchant acquirers ‒ whether in the form of software, hardware or a combination of the two ‒ is in greater client retention and increased client acquisition, both of which contribute to healthy, sustainable growth. Therefore, thoughtfully and strategically chosen complementary integrated POS and infrastructure technologies must necessarily lift merchant acquirer valuations.
It's noteworthy that there are many other benefits to incorporating complementary technologies into your payments business, not the least of which is higher-margin products and services. However, the purpose of this article is to encourage payment professionals to understand and embrace the basic concept of this strategy.
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 specializes in mergers and acquisitions, growth and exit strategies, and asset and enterprise valuation for payment processing and payment technology companies. He can be reached at firstname.lastname@example.org or 617-340-8779.
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