The payments ecosystem continues to face significant change driven by the continued acceleration of traditional online commerce coupled with the increasing relevance of mobile technology—all of which is driving a new set of omnichannel consumer expectations. Big Data/Analytics, Internet of Things (IoT), Cloud, and "as a Service" business models are creating a myriad of new revenue generation and operating model improvement opportunities and changing the nature of competition and scale economics. In many ways, what is happening within the payments space mirrors what has already begun to change the traditional technology sector.
There has been a lot of focus on the consumer end of the payments value chain in terms of emerging solutions, mobile, digital wallets, and the changing nature of retail. However, these changes are also putting significant pressure on "behind the scenes" players in the merchant acquisition, processing, and services space, including:
- Increased pricing pressure from traditional and new competitors and commoditization of core offerings - all driving an increased focus on customer retention
- Rise of ecommerce and mobile driving increasing merchant demand for integrated, omnichannel capabilities
- Pressure on historical go-to-market and customer success models as well as limited ability for certain players to drive significant EBITDA via increased scale alone
- Increasing customer expectations for support and value-added services beyond just enabling payments
These challenges are compelling payment services providers, particularly merchant acquirers/processors, to transform many aspects of their business model to be successful. Three key value-creation themes have emerged as critical for success:
There has been substantial activity among leading players in the first two value-creation areas, particularly in new capabilities and offers, SMB segment focus, and go-to-market strategies and partnerships. In addition, we see the third value-creation area—optimizing customer experience and leveraging post-sales services and support—as an exceptional and underleveraged opportunity to enhance profitability and improve retention.
This is particularly true as some players can no longer drive profitability through scale economies alone. Our experience within the technology sector, particularly around software and other recurring revenue businesses, suggests that there are several lessons learned that are directly relevant to the payments processing ecosystem.
The customer success value-creation opportunity
The payments ecosystem and key players in the value chain will continue to evolve towards software-enabled, integrated payments solutions and services. Further, we foresee growth in Cloud-enabled, potentially "as-a-Service" business models, either directly or through key partnerships.
In the transition to Cloud-enabled, Software-as-a-Service (SaaS) models, software companies have identified an increased need and opportunity to focus on improved customer experience. Doing so strengthens the role and contribution of services and support resources to grow revenues, reduce attrition, and enhance customer lifetime value. This is particularly relevant to players that have reached the point of maximum economies of scale and need to drive incremental EBITDA through differentiating products/services and enhancing customer support.
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