Guest Post: Revenue Growth Through Differentiation and Diversification

By Sonny Wooten, Vice President of Business Development at National Benefit Programs

For the merchant acquiring industry, growing revenues will continue to be a primary challenge in 2017. Transaction driven sales growth continues to decelerate and now stands at an annual growth rate of about 8 percent per year as compared to the 10 to 15 percent growth levels experienced over the past two decades. In addition, intensified competition for merchant relationships by new “payment facilitator-type” entrants, who view payments as merely an adjacent revenue stream to other products and assets they represent, will continue to accelerate margin compression.

Secondly, and perhaps one of the most recent demonstrated responses to compressed revenue margins is corporate consolidation. Consolidation clearly improves scale economics allowing for more recoverable and sustained revenue growth through reduced operating costs. The industry has seen plenty of this in the past few years and months with Heartland, TransFirst, Moneris, Sterling Technologies and more recently Payment Alliance International and Total Merchant Services. If you are like me, I find myself less surprised at more recent consolidation announcements.

Adding these consolidation trends to decelerating sales revenues will continue to compress transaction-based margins to the lowest levels in the history of the acquiring industry. Industry revenues are projected to grow by only 2 to 3 percent over the next three to five years. Likewise, continued competition created by new and often unexpected entrants such as “payment facilitator” players will accelerate margin declines by as much as a negative 6 to 8 percent CAGR, as reported in a recent McKinsey and Company report. This report also suggests that to succeed in this rapidly changing market, acquirers must examine the impact of these trends on their businesses and make clear and immediate decisions about where and how they plan to continue to compete within the acquiring value chain.

As these marketplace-driven forces continue to compress transaction-based margins, revenue growth becomes more dependent upon competitive differentiation, specialization and revenue diversification – expanding breadth of non-transaction related products offered to merchant customers.

Clearly, differentiation for smaller to midsize acquirers has never been so important. Basic core differentiators would include unique and specialized solutions that create value, improve both merchants’ and their customers’ satisfaction, and provides “stand out” product and process solutions:

• unique and cutting-edge technology and technical applications
• specialized consultative services and exceptional sector expertise
• exceptionally educated, responsive and resolute customer service
• clear commitments to building customer trust and fulfilling essential needs
• agile company culture to maintain focus on implementing innovative products, processes and services

Of course, these differentiators come at a price to all – acquirers, merchants and their customers. However, pricing becomes a much lower priority, if products are based on merchant collaborative solutions and prioritized to optimize sales, controls expenses and generally exceed merchant customers’ expectations. Thus, some reasonable margins remain possible and the acquirer’s “specialty” relationship becomes more indispensable and essential to their merchant customers.

What do merchants get from you that they can’t get elsewhere?

The second survival approach would be creating a strategic revenue diversification plan. Successful plans significantly reduce reliance on single or fewer revenue streams, which are very sensitive to changing market and competitive conditions. Revenue diversity options, if chosen carefully, will continue to support acquirers’ core missions and values, while reducing dependency on both diminishing transaction-based and POS reselling margins. Some past examples of successful revenue diversification include gift card and loyalty programs. Both add utilitarian value to merchants’ POS investments and allowed smaller merchants to replicate what consumers came to expect only from bigger merchants. Although these programs are card transaction based, most do provide some limited sources of new revenues for acquirers.

Likewise, some newer value-added products and services have recently become available through conventional acquirer sales channels. Merchant cash advance and funding are a newer service logically delivered by the acquiring industry because both risk assessment and loan satisfaction is dependent on transaction processing data and resources. Also, new merchant insight products also require transaction-based aggregated feedback to identify buyer trends and actionable marketing plans. These subscribed services are resold to merchants and new subscription-based revenue sources are created for the acquirer.

These revenue diversification solutions do have one thing in common – limited merchant appeal and application. What is needed for effective revenue diversification is more ubiquitous products and services that have broad appeal and applications, in other words, products and services used most often by the most merchant customers.

Obviously, the acquiring industry may not be direct suppliers of these services, but they can provide their merchant customers access points to these numerous solutions. An example would be National Benefit Programs, which provides merchants with a procurement portal for diverse products and services from some of the most recognized brand suppliers providing “deep” scale-driven discounts. Significant cost savings generated by this program better levels the playing field for small to medium sized merchants who must compete against larger competitors who have pricing advantages. Since these new and diverse revenues streams are recurring they contribute to the acquirer’s market capitalization and overall valuation by reducing dependency on declining transaction-based margins. Thus, acquirers gain added cash flow confidence and commitment for critical growth investment decisions.

In closing, both dynamic product and service differentiation and revenue diversification are critical considerations for sustaining business growth. Differentiation and specialization strategies will enable acquirers to define and develop more sector-specific products and solutions supported with specialized customer services. Revenue diversification can be achieved by offering non-transaction-based products and services applicable to the most merchant customers with minimal upfront investments or ongoing operating costs. The time has arrived for smaller acquirers, who wish to survive and grow in today’s disruptive and competitive market, to offer new non-commoditized products and services that generate healthier and sustainable revenues.

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