The Next Great Payments Opportunity: Commoditization

Investopedia defines “commodity” as:

A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers.

Payment processing has been a commodity since its inception, but it hasn’t always been used as raw materials in the production of other products. Now, however, the fastest growing processors are the ones that facilitate the use of payments as an input, completing the commoditization cycle and creating the next great payments opportunities.

A variety of banks created Visa and MasterCard in order to enable financial institutions to offer payment instruments that could be accepted at any merchant, anywhere in the world. To do so, they created standardized authorization, clearing, and settlement frameworks that merchant acquirers could use to offer payment acceptance to merchants in a way that provided global coverage and interoperability to bankcard issuers. It’s important to also understand that this standardization was the most important thing that ever happened in the payment industry, it offered thousands of companies to enable electronic payment acceptance around the world, and to benefit by earning a percentage of the many trillions of dollars in transaction volume that would follow.

There’s another important implication. By creating standards, the payment networks not only made payment cards globally interoperable, they also commoditized the industry. By definition payment acceptance offerings had to meet network rules, and these rules forced a convergence of diverse offerings into a single standardized product, so payment acceptance has been a commodity since day 1. Payment processors and terminal manufacturers followed the networks’ lead, deploying multi-network processing solutions and for-purpose payment acceptance hardware that enabled any card to be accepted by any merchant in an out-of-the-box, yet highly commoditized product.

Integrated software vendors (ISVs) have been using payments as an input into the production of their POS systems for decades, but primarily for just the largest of merchants. However cloud computing has reduced the cost of software delivery, making integrated payment solutions more accessible to smaller merchants, thereby making payments as an input far more popular. This trend has gathered momentum to the point that companies that specialize in helping ISVs include payments in their applications, such as Accelerated Payment Technologies, Element Payment Services, PayPros, and Mercury Payment Systems were growing a rate that outpaced the rest of the acquiring industry by a 3X multiple until they were swallowed up by Vantiv and Global Payments. Other integrated payment firms such as Stripe and Braintree continue to be some of the fastest growing firms in payments.

It’s important to note that facilitating the use of payments as an input to the products of other firms is a pure commodity play. Integrated payments firms like those mentioned above continue to make it easier and easier to use payments as an input, speeding the process of payments devaluation into raw-material status. Integrated payment is the next big commodity play that will be dominated by scale-driven firms, strategies, and pricing. In short, the integrated payments player is the payments processor of the future: large, untargeted, undifferentiated, and facing ongoing pricing compression. So as Vantiv and Global duke it out to be the largest commodity distributors, what is the rest of the world’s merchant services providers to do?

We believe that there are 6 options, each one requiring a specific set of competencies. Payments firms should be deeply involved in self assessments to determine the option that best fits their business, and they should be aggressively investing to close any gaps and to maximize their growth potential. To learn about the six options, contact us about our most recent report: To Be or Not To Be an ISV?

For more information about the report, To Be or Not To Be an ISV? Integrated Payments Strategies for Merchant Solutions Providers, email research@doublediamondgroup.com.