PAYMENTS INSIGHTS SERIES

Merchant Acquirer

Merchant Acquirers: If You Cant Beat Them, Join ThemDefend Market Share, Grow Revenues and Win New Payments Ecosystem Opportunities

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New technologies, new entrants and stricter regulations are challenging merchant acquirers position in the payments industry. The payments ecosystem is evolving at a rapid pace, becoming more merchant-driven and more digitally-focused. Whats more, consumers want different buying experiences, and merchants must seamlessly integrate payment acceptance and processing capabilities to deliver them. The status quo for acquirers is no longer sustainable.

Recognizing the need to change, acquirers are looking to innovate, which is difficult amid so many possibilities, changing consumer trends and an increasingly fragmented market. Innovationmuch of it from niche playershas focused on customer-facing elements of the payments value chain, creating only minor disruptions of the payments transaction process. Major disruptions can be valuable, but they are difficult to achieve as they rely on the ability to integrate payment acceptance innovation with robust, scalable and efficient payment processing.

To drive return on investment in innovation and to succeed in the new payments ecosystem, acquirers need both defensive and offensive strategies. Defensive approaches protect existing market share and grow revenues by improving payment processing capabilities. Offensive plays create traction for acquirers in the emerging payments market, positioning them to maximize benefits from the next major disruption.

The time has come for significant change. Only those merchant acquirers that are willing to work differently can reap the rewards of the changing payments industry landscape.

Executive Summary

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A Whole New Game: The New Acquiring Landscape

Payments is not what it used to be. The advent of smart devices has created numerous possibilities to integrate consumers shopping and buying experiences with their everyday lives. Social media integration and analytics enabled by big data allow merchants to tailor the shopping experience to market segmentsright to the individual customer level. By extension, payment technology has also advanced, tailoring to the needs of specific segments with new payment form factors, functionalities and interfaces.

The relatively low cost of innovation and decreasing barriers to entry in payment acceptance have created an increasingly fragmented market with new and non-traditional players. Some new entrants (e.g., LevelUp) focus on acquirer adjacent spaces such as merchant aggregation and online payment acceptance. However, others (e.g., Square) have built enough scale within their niche segment to compete with traditional acquirers. They began with payment acceptance and then slowly extended capabilities to integrate acceptance with payment processing.

Not only do these new entrants threaten vertical expansion within the payments value chain, they are influencing the commoditization of traditional acquirer services. This is because new entrants have effectively decoupled the payment acceptance experience from back-end processing. This decoupling, combined with persistent regulatory and public scrutiny, drives down acquiring margins, leading to merchant attrition driven by price competition.

To keep pace with the changing industry landscape, acquirers should consider a broader range of capabilities and value-added offerings. In fact, merchants are demanding value-added options because their customers are. As customers expect more choice, channel integration and customization optionsall of which are table stakes todaymerchants must keep up, and acquirers have clear opportunities to help them here.

How can acquirers achieve end-to-end integration of payment acceptance and processing? The key is to successfully integrate evolving technology and varied form factors for payment acceptance with scalable, cost effective and seamlessly integrated processing. Acquirers should focus on a mix of defensive and offensive strategies (Figure 1.)

DEFENSIVE STRATEGIES OFFENSIVE STRATEGIES

1 3

2 4

Seamless Integration ofOmni-Channel Acceptance

Integrated consumerpurchase experiencethrough omni-channelenablement

Value-addedservices toenhance anddeepen merchantrelationships

Extend paymentscapabilities andreach throughverticalintegration

Leverage corecapabilities andgrow throughinnovative partnerships

Processing Partnerships withMobile Innovators

Value-Add Capability Vertical Integration of PaymentsAcceptance and Processing

Figure 1: Merchant Acquirers Need Defensive and Offensive Strategies

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PAYPAL: TRANSFORMING THE FRONT-END TO ENABLE OMNI-CHANNEL EXPERIENCES PayPala leader in eCommerce and B2C payments with more than $16 billion in revenueslaunched a simplified online site with a mobile first emphasis. The decision to revamp a proven channel for customer service, engagement and payment was made to provide consumers with a consistent and integrated experience across both PayPals flagship online channel and the strategically important mobile channel.

The refresh is part of a larger initiative to provide new consumer features, including expansion into mobile and POS payments. The new site includes a single action button for sending money now and scroll buttons to create one front door to improve consistency of customer experience across different channels. As a natural extension, changes are being considered to merchant hosted sites under this same approach, which will necessitate updates to both front and back-end technology.1

1. DRIVE SEAMLESS INTEGRATION OF OMNI-CHANNEL ACCEPTANCE The migration toward emerging payment channels has created a shift in the payment processing paradigm, which is fundamentally changing the acquiring business model and technology architecture. The traditional focus on point of sale (POS) systems must expand to integrate POS, eCommerce and mCommerce payment processing capabilities. As merchant and payment processing volume over digital channels grows, acquirers will have to explore business and technology infrastructure transformations that support seamless omni-channel experiences for merchants and their customers. This has to be done cost-effectively and with the ability to scale as needs change.

The omni-channel experience extends beyond payment method for both merchants and customers. It encompasses the entire customer journeyfrom discovery and transaction through post-transaction and loyalty (Figure 2). To enable the omni-channel experience, acquirers should build capabilities across phases of the customer journey. This includes targeting, making offers, accepting payment, reporting on the transaction and continuing customer engagement after the transaction.

Thinking about the consumer experience beyond the transaction and integrating across multiple channels will generally require innovation and transformation from within the acquirer organization. Making the transition from a POS-focused model to an omni-channel model must include:

Business integration. Post M&A business integration to ensure consistent onboarding and service across different payment channels; and

Technology integration. Replatforming of legacy IT systems to ensure the scalability of the enterprise payments architecture.

These moves ensure that disjointed business models and technology architectures do not erode incumbents economies of scale as emerging payment channels continue to increase in volume and significance.

As more merchants adapt to an omni-channel environment, acquirers that provide processing solutions for different channels under different

Traditional merchantacquirers primary oerings

Apply

Coupons/Loyalty

Initiate

Transaction

Choose

Payment

VerifyTransaction

Provide Records(Receipts)Inform After-

Market Services

Share Purchase

Insights

Manage Loyalty

Encourage Future

EngagementPro

mote S

ocial

Shopping

Target Ads

Oer Deals

Identify Markets

Personalize

Experience

Recommend

Purchases

Inform Availability

and Pricing

Loyalty

Discovery

TransactionPost-Transaction

Figure 2: The Omni-Channel Customer Journey

Defend Whats Yours: Protect Your Competitive Position

business models and technology platforms must prepare for the inevitable migration to omni-channel acceptance. They must address the implications for processing technology and business processes including onboarding, servicing, billing and reporting.

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2. DEVELOP VALUE-ADDED CAPABILITY TO INCREASE MERCHANT LOYALTY As non-traditional competitors continue to carve out niche markets in the payments acceptance space, acquirers are increasingly challenged to differentiate services and deepen relationships with merchants. By providing value-added services such as analytics or loyalty program management on top of core payment processing capabilities, acquirers can begin to close the gap and strengthen these critical relationships.

A closer look at market trends shows that in response to the changing merchant services needs, some top 10 acquirers are supplementing capabilities, moving from POS technology-based business models to models that incorporate software-based interaction and end-to-end payment processing capabilities. Value-added services are becoming a core part of the acquirers suite of products and services (Figure 3).

These acquirers are deepening their merchant relationships by including software-based solutions for value-added capabilities, either by developing the solutions in house or by obtaining them through acquisitions.2 For example, Global Payments, a top 10 acquirer, acquired PayPros, a payments company that provides integrated payment solutions targeted at the small and medium market segments. The payment related services include developer services, business applications, business services and technology platform integration.3 The ability to seamlessly integrate such value-added services into merchant systems is critical to defend against competitors.

Some mid-sized acquirers are also targeting acquisitions in payment companies. They are acquiring companies that have a combination of value-added services, as well as capabilities and a client base in online and mobile acceptance. Adding capabilities through M&A helps to reduce the development cycle and time to market, but creates potential challenges with integration, both in terms of business model and technology architecture.

MERCURY PAYMENT SYSTEMS: CREATING A COST-EFFECTIVE MERCHANT LOYALTY PROGRAMMercury Payment Systems launched the Mercury StoreCard, which incorporates prepaid, loyalty and mobile payments into one solution. Funds can be loaded onto either a physical card or digitally through Apple or Android devices. Cardholders can earn rewards with every StoreCard purchase, and use their mobile device to check balances, add funds and send gift cards to others through social media.

One of the greatest advantages for small and medium-sized businesses is that the solution can work with their existing POS equipment, providing them with a simple and cost-effective way to compete with the larger players.4

Figure 3: Sample Value-Added Service Capability of Major Top-10 Acquirers

Company Loyalty Reporting/Analytics

Bank of America BAMS (U.S)

OfferWise

MobilePay on Demand

iDeals

Amerideals

Standard Gift Card

Closed Loop Premium

Internet Sales Solution

Dispute Manager

MasterCard Market Vision Report

Business Track

ClientLine

SpendTrend on Statement

First Data (U.S) First Data Gift Card Program and Payroll Service Cards

Mobile Payment Solutions

Merchant Acquiring Referral Program

OfferWise & Perka

ClientLine Online reporting

eIDS

Data File Manager

Business Track

Merchant Alerts

Chase Paymentech Solutions (U.S)

Gift Card Program

Preferred Partner Program

Resource Online (ROL)

Virtual Transaction Manager

Recon solution

Gift Card Reports

Vantiv (U.S) Enterprise Loyalty Merchant Funded Rewards

Prepaid for Merchants

Direct Powered by Vantiv for Merchants

Data and Financial reporting for Fis

Citi Merchant Services (U.S)

Gift Card Program

PayWare

Business Track

ClientLine reporting

eIDSSM

Data File Manager

Source: Company websites for Bank of America Merchant Services, First Data, Chase Paymentech, Vantiv and Citi Merchant Services

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3. DEVELOP PROCESSING PARTNERSHIPS WITH MOBILE INNOVATORSWhether it is a mobile app that offers a personalized purchasing experience, an online tool that offers increased data security for online purchases, or a simplified form factor for mobile acceptance, there are countless examples of disruptive payment innovations. And more launch all the time.

On the acceptance side of the payments value chain, the proliferation of mobile technology has created an environment where a fast pace of innovation is the basis of competition. This pace, coupled with low entry barriers, has created a fragmented marketplace filled with minor disruptions. Despite the vast potential of the mobile market, no company has introduced a truly game-changing technology and business model.

Within the processing side of the payments value chain, the basis of competition is and continues to be efficiency and scalability. Although there are higher entry barrier here, marginal players can rapidly become major competitorsthink PayPal. Moreover, while processing side disruptions are difficult to achieve, they can make a great impact when they occur.

Go on the Offensive: Grow Your Competitive Position

NATIONWIDE BUILDING SOCIETY AND ZAPP: DRIVING MOBILE PAYMENTS INNOVATION In an effort to empower its customers to be able to make payments right from their smartphones in real time, Nationwide Building Society is partnering with Zappa real-time mobile banking appto launch a new mobile payments system for more than five million customers.

Zapp technology works within banks existing mobile apps, securely connecting customers and merchants.5

One opportunity for incumbents in the acquiring space to break through here is to pursue processing partnerships with innovators in mobile acceptance. Its about hedging their bets while continuing to focus on core strengths. This approach allows acquirers to invest in and integrate with emerging payments trends without losing sight of or redirecting significant resources from improving core competencies, omni-channel integration or technology replatforming.

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4. ENABLE VERTICAL INTEGRATION OF PAYMENTS ACCEPTANCE AND PROCESSING Minor disruptions in acceptance can evolve into major industry landscape shifts when a technical or business innovation fundamentally and permanently changes consumers or merchants behaviors (e.g., Square).

Acquirers can capitalize through vertical integrationextending across the supply chainwhen these opportunities arise. The good news is that acquirers have a significant competitive advantage in both scale and efficiency that makes them uniquely positioned to vertically integrate with new offerings.

The key is seamlessly integrating acceptance and processing efficiently and at scale. The strategies previously discussed in this paper can be used as building blocks to develop the capabilities needed to vertically integrate effectively. For example, acquirers can leverage processing partnerships with new or existing players to extend reach into emerging payment channels. They can subsequently use their omni-channel and end-to-end acceptance and processing capabilities to take advantage of proven opportunities enabled by emerging payment innovations.

SQUARE: CAPTURING NEW OPPORTUNITIES THROUGH VERTICAL INTEGRATIONWhen Square first introduced a proprietary plug-in card reader for processing credit card transactions using a smartphone, it targeted a segment of merchants that were largely underserved by incumbent acquirers. Square created a market and captured share by using an innovative, but relatively simple technology and a unique business model.

The success of Square caused some incumbents to rethink their business strategy. Many major acquirers have since launched their own smart phone plug-in solutions, which are competitively priced with Square.6

In most cases, however, vertical expansion requires acquirers to think proactively about the future payments landscapeand to transform their business model and technology architecture with an eye to the future. This transformation is not a single event, but an iterative process that often requires an assessment and re-envisioning of the companys capabilities and enterprise architecture and the strategic alignment of business objectives with investment dollars.

It is possible for incumbent acquirers to vertically integrate and overcome new entrants first mover advantages if they exist. But this can happen only if acquirers leverage their competitive advantages in payment processing. This demands a clear business strategy and the vision to align business and technology capabilities to the strategy. Further, acquirers must integrate at an enterprise levela mixture of legacy, newly developed and acquired capabilitiesto go to market in a seamless and efficient manner.

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With a number of defensive and offensive strategies at hand, how do merchant acquirers know where to begin taking action to solidify and grow their position in todays payments ecosystem? Each acquirer will follow a different plan depending on their end game, and Accenture Payment Services has significant experience and offerings to help every specific situation:

Business Process and Technology Architecture Transformation. Accenture helps acquirers ensure that business organization, processes and capabilities are aligned with omni-channel integration. Through our cards reference architecture and High Performance Banking process model, we help acquirers define business requirements and develop a transformation roadmap to reach their goals. We help acquirers architect and design their IT systems to meet business needs, assisting throughout the transformation journey, including managing change and integrating legacy systems.

Value-Added Software and Program Management Capabilities. Accenture helps acquirers round out their product offerings with value-added services that support merchants goals to provide complete consumer purchasing journeys. We offer the necessary industry insight and perspectives, drawing on experiences with more than 50 major payments clients worldwide and more than 1,500 professionals dedicated to payment engagements, as well as know-how in business process and application outsourcing.

Processing Partnerships for Mobile Payments Innovation. Accenture helps acquirers assess the latest digital trends and identify value and success drivers in the mobile space to target, evaluate and engage potential teaming partners to enhance return on investment potential and reduce risk. We bring experience collaborating with leading players including SAP, Fundtech, Clear2Pay, and other industry leaders. We can leverage our integration and systems experience to ensure a smooth and efficient experience with any potential teaming partners.

How Accenture Can Help

Become a Champion: Actions for a Winning Way Forward

Strategy Options Actions Cost* Impact*

Defensive

Omni-channel and integrated consumer purchase experience

Transform business process and technology architecture.

$$$ $$$$

Value-added services to enhance and deepen merchant relationships

Acquire value-add capabilities in software and program management.

$$ $$

Offensive

Processing partnerships with innovative, high-growth players

Target innovative players in mobile acceptance to enter into processing partnerships.

$ $$$

Vertical integration of payment acceptance and processing capabilities

Re-envision business strategy and assessment of payment capabilities.

$$$$ $$$$

* Cost and impact are for illustration purposes only.

Growth and Market Strategy Exploration for Vertical Integration. Accenture helps acquirers identify the end-state required to meet strategic challenges in a dynamic environment and chart a path to get there. Accenture can bring global experience on business strategy, enterprise architecture and IT operating model design to help acquirers develop actionable outcomes and achieve a sustainable, high performing business.

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Conclusion

Notes

The acquirers foothold within the payments industry is being challenged. New technologies and regulations have removed barriers of entry for niche players, whose innovative products and services are blurring the lines between the traditional roles of the retailer and acquirer.

1 Ingrid Lunden, TechCrunch PayPal is Rolling Out Its First New MobileFirst Website Globally, March 8, 2014.

2 Rick Oglesby, n>genuity Journal, Why Software is Changing the Face of the Acquiring Industry.

3 Global Payments, Global Payments to Acquire Pay Pros, a Leading Integrated Payments Technology Company.

4 Mercury, Mercury Unveils Mobile- and Social-Powered Gift Card and Rewards Services to Help Small Business Merchants Grow, January 30, 2014.

5 Nationwide, Nationwide and Zapp Join Forces to Deliver New Mobile Payments Technology, January 15, 2014.

6 Accenture Research

To defend existing market share and grow revenues, acquirers must transform from payment processing companies to true merchant teaming partners that focus on the whole customer purchasing journey. The market is becoming increasingly fragmented and the pace of innovation will continue to accelerate. Now is the time to act on defensive and offensive strategies to maintain existing market share and pursue exciting new revenue opportunities.

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For more information on the series, please visit:

www.accenture.com/paymentsinsights

To find out more about this topic, please contact:

Jonathan Magder Accenture Strategy, Financial Services jonathan.magder@accenture.com

Swee-May Ngeow Accenture Payment Services swee-may.ngeow@accenture.com

Matthew Friend Accenture Payment Services matthew.friend@accenture.com