Top ten merchant acquirer Vantiv Inc. agreed to acquire software-as-a-service (SaaS) payment provider Mercury Payment Systems LLC for $1.65 billion. The acquisition is evidence of a growing trend in the merchant services space of merchants abandoning traditional POS systems for vertically integrated, big data-driven solutions. For ISOs wedded to standard POS terminals and pitches based on cheaper rates, better watch out.
In a May 12, 2014, conference call, Charles Drucker, Vantiv's President and Chief Executive Officer, laid out the reasoning behind the acquisition, which heavily involves the ISO channel. He said Mercury has one of the world's largest sales forces and provides Vantiv with the equivalent of 13,000 feet on the street "to actively mine the channel." He also emphasized that Mercury offers Vantiv the opportunity to expand into one of the fastest growing areas in payments.
Vantiv cited research that said the integrated payment channel is expected to grow to over 30 percent of payments volume by 2017. "The movement from traditional, terminal-based payments to integrated payments software is gaining momentum," Drucker said. "And we expect the integrated payment channel to grow significantly faster than the broader payment industry."
Mercury CEO Matt Taylor added that, especially among small and midsized businesses (SMBs), the integrated payment solution is "really taking off." This trend is especially important to Vantiv because the acquirer estimated Mercury had penetrated only 10 percent of the SMB market. "We see a lot of opportunity for growth," Drucker said.
Drucker stated that "powerful secular trends" are contributing to the rise of the integrated payments model. The declining cost of software, when combined with the ability for said software to vertically integrate payment services with other business processes, is driving the demand for integrated, omni-channel technology solutions, he said. In addition, the software can be more easily and cost efficiently upgraded, leading to the increased displacement of traditional POS terminals, according to Drucker.
Vantiv believes Mercury's SaaS model provides just that, and Mercury's growth history underscores that belief. Vantiv said the number of software solutions Mercury has "shipped" to SMBs grew by 69 percent from 2010 to 2012. Further, Mercury operates an already formidable network of 600 application developers, 2,430 resellers and 88,700 merchants. Also, Vantiv said potentially 3,000 total developers could write software for Mercury's SaaS solution, while its reseller channel could expand to 5,000 dealers.
Based on its innovative distribution model, Mercury has grown from the 35th largest acquirer in 2005 to the 11th largest today, Vantiv said. The Vantiv-Mercury tandem thus creates a "winning combination of technology, distribution and scale," Drucker stated.
Rick Oglesby, Senior Analyst at Double Diamond Payments Research, said the Vantiv acquisition is another indication that the traditional ISO business model is running out of steam. For decades, ISOs have relied on competing on price and the distribution of terminals that were barely differentiated from one another. But that model is proving to be no match for independent software vendors (ISVs) selling integrated, highly differentiated payment solutions.
The ISV model is a "far more efficient acquisition model for acquiring than has been the ISO model for a very long time," Oglesby said. "The ISO model is effectively getting phased out at this point because the ISV model is far more effective. … Dropping terminals on desks and competing on price is definitely losing out to the ISV model which is based on the value of the overall software package."
Oglesby sees a so-called clash of the titans brewing as large acquirers have purchased their way into the integrated payments market, with Global Payments Inc. gobbling up Accelerated Payment Technologies and Payment Processing Inc., while Vantiv acquired Element Payment Services Inc. and, now, Mercury.
"It's really compelling at this point and time because those are two mega acquirers that are readying themselves to take on the other megas with the most productive acquisition channel that the industry has seen over the last 10 years," Oglesby said.
For ISOs the future is clear – either they can partner with ISVs or become ISVs themselves, he stated.
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