A tour through payments: part 2 (Adyen, GPN, FIS, FISV)
When a cardholder uses their debit or credit card at checkout, what happens is a merchant acquirer processor (just “merchant acquirer” from now on) will route payment information through the appropriate card network to the issuer processor of the card issuing bank, who verifies that the cardholder has the credit limit or sufficient funds to make the purchase. Assuming everything checks out, the merchant acquirer passes interchange fees to the issuing bank, pays a routing fee to Visa, takes a bit for itself, and ensures whatever’s left lands in the merchant’s bank account. They will often also do a bunch of other things for merchants, like detect fraud and prepare reports. The issuer processor that receives the payment details from the merchant acquirer via the card networks does much of the same for the issuing bank: underwriting customers, issuing the cards, and processing payments. Often times, issuer processing is supplied by the same vendor that sells the core processors that a bank uses to maintain customer data, debit and credit bank accounts, and process loans and deposits.
Through decades of M&A, merchant acquirers in the US consolidated into a handful of scale players, the most notable including First Data, Worldpay, and Chase Paymentech. These guys would distribute their products to merchants through banks and Independent Sales Organizations, which latter would install the terminals and cross-sell value-added services from other vendors. But these distribution channels are being displaced by a new breed of payment providers who offer transparent fees and easy onboarding. Square, with its cheap, smartphone-compatible hardware and point-of-sale software, was embraced by small offline merchants who didn’t have the resources to install unwieldy systems from First Data. Stripe, with its public API, was adopted by developers building the software and e-commerce platforms on which merchants ran their businesses. Adyen, with its single unified platform, gained traction among enterprises with global footprints and omnichannel ambitions.
The other thing that caught on sometime around 2015 was that the PayFacs running the payments and merchant underwriting functions of commerce platforms and business management software also began to function as banks, replicating the banking-as-a-service products offered by the likes of Marqeta and Ramp. For example, Shopify calls on Stripe Treasury APIs to allow merchants on its platform to manage cash flow and earn yield; through Stripe Issuing, Postmates can issue cards with customized spend controls to its couriers. To offer these products, Stripe partners with third party banks. Adyen, rather than rent the BIN license of a third party bank, actually acquired banking licenses of their own to gain greater control of payment settlement times. Now they’re leveraging those licenses to offer the same banking-as-a-service products as Stripe, including lending and card issuance.
A lot of these extensions were conceived to combat pricing pressure in payment processing. While merchant acquiring relationships are sticky, it’s common for large merchants to direct transaction flow to whoever’s showing the best authorization rates, which often varies by region or product or channel. Just about every acquirer claims at one time or another to have peer-leading approval rates. But Adyen’s payment volumes are outpacing the industry’s by a huge margin and 80% of their growth comes from existing customers, which means they are taking more wallet share every year despite reputedly charging higher fees. So there’s probably something to the idea that legacy acquirers – who, like Adyen, also have bank licenses in various countries, allowing them to connect directly to card schemes – are more likely to block valid transactions in the process of reconciling data across disparate platforms, resulting in lower approval rates than Adyen.
In any case, as important as approval rates are, it is now just one of many components that payment providers use to win volumes. Chase was known to loss lead on merchant acquiring to cross-sell higher margin treasury management services. The modern players are kind of doing a tech-forward version of that. Like spectators forced to stand on tiptoes at a parade, they’ve copycatted one another into an ever expanding slew of services – fraud management, analytics, issuing, capital, and KYC, along with business management functions like Payroll, HR, and Marketing in some cases. Post-COVID, omnichannel has been a major initiative for everyone, not just because it opens e-commerce heavy payment providers like Adyen and Stripe to physical point-of-sale, where the vast majority of payment transactions continue to reside, but also because it makes for a sticky cross-sell and promotes payment consolidation. Compared to maintaining connections to different merchant acquirers across sales channels and even across countries, it is far easier to coordinate online/offline interactions – ordering online, picking up and returning in store, for instance – and capture a comprehensive view on customer transactions when everything is contained on a single platform.
So what you’ll notice with the post 2005 breed of merchant acquirers is that they bundle payment acceptance and banking services to Independent Software Vendors – which latter for purposes of this post includes business management software like Toast, marketplaces like eBay, and e-commerce platforms like Shopify – who re-sell those services to their customers, often small-mid sized merchants. The legacy players like First Data and Worldpay historically went about things differently. They split the market into two categories: merchants and financial institutions (FIs). The merchant side of the house would sell, through banks and ISOs, products that helped merchants accept payments and manage risk. The FI side would sell technology that banks used to manage customer accounts, issue cards, and process card transactions, among other things. Both sides had a commoditized core with high margin cross-sales attached. The core processing systems sold by Fiserv to small-ish banks were complemented by mobile banking and bill pay; the payment processing sold by First Data to merchants were bundled with fraud detection and analytics.
Channel conflicts prevented FI products from being sold to merchants: to offer card issuing directly to merchants would put Fiserv at odds with their bank customers, who managed similar card programs. But it doesn’t make as much sense to delineate between FI and Merchant as it did a decade ago. The trio of mega-mergers in 2019 – Fidelity Information/Worldpay; Global Payments/Total Systems; Fiserv/First Data – was justified by a number of synergies: the efficiencies from combining and scaling the fixed costs of like businesses; the distribution synergies of selling merchant acquiring services through the tight relationships that core processors enjoyed with banks; and the use of issuer processing data to supposedly improve payment authorization rates. But an ancillary benefit to combining fintech-heavies (Fiserv, Fidelity Information) with payment acceptance-heavies (First Data, Worldpay) was having a more complete platter of payment and banking products for enterprises and ISVs. A few years ago, First Data positioned its omni-channel enterprise “operating system”, Carat, as a payment acceptance offering. These days, it’s a lot more than that: