A Fundamental Shift in Payments
By Benjamin A. Cornett, Partner Marketing, Kount
It’s no secret that the evolution of payments is something that payment processors, gateways, and PayFacs need to constantly monitor and adapt to. It’s also apparent that payment processing margins are being compressed more than ever before. The result has caused a fundamental shift in payments as merchants continuously scramble to optimize consumer experiences in the checkout process.
- Regulation - Increasing regulation from institutions like the CFPB in the United States and the EU Parliament with GDPR means that payment processors must pay attention to compliance. This results in additional headcount and costs which tighten margins.
- Consolidation – Per IBISWorld, financial stress has created an environment of mergers and acquisitions which we believe will continue as a driving factor for margin compression. The bigger payment processors can benefit from economies of scale.
- Innovation – While four major players in payments see the majority of the transactions, they are losing market share, according to the same 2017 IBISWorld industry report. The top four industry players accounted for 44.7% of the industry revenue. However, technological advancement continues to bring innovation to the payments industry taking over market share. Again, the hit on margins in payments affects not just the top four, but everyone.
What is Changing?
Decreasing profit margins is causing payment processors to rise above the clutter to remain relevant in the space. This means they are shifting from processing payments to a much more holistic service offering. According to Transaction Trends, it’s time that payment processors and others in this space carve a new path led by seamless integration into services that create value for the merchant and enhance the consumer experience. We are seeing many payment processors select Kount to offer a comprehensive fraud solution at an impressive impact to revenue and profitability. While fraud protection isn’t the only solution they are offering merchants, it is one that helps merchants accept more orders, which in turn increases sales and impacts income from the basis points processors also make on the transaction.
Increased revenue and margins to offset the pressure. By selecting qualified value-added partners, payment processors can re-align internal resources to more profitable activities. While some may think, “I’ll just build my own solution”, time has proven that the ROI just doesn’t make sense in the long term. Besides internal adequate support and expertise becoming an additional risk, the speed to innovation slows. This means market share again goes to those who disrupt.
Margin compression isn’t going away. By selecting partners who can provide and create something more for their merchants, they create opportunities to upsell merchants for additional services and more importantly opportunities for better merchant retention.
At Kount, we have built Kount Central specifically to help payment processors offer one of the many value-add services merchants demand. Learn more by downloading the eBook "Protect Your Merchants. Protect Your Profits".