I don’t think so => “VARs and the traditional integrated payments software model is heading for the merchant acquiring graveyardSubmitted by Preston Todd Advisors | M&A Advisory, Strategy Consulting on June 9th, 2016
Authored 6.6.2016 by Adam T. Hark, Managing Director, Preston Todd Advisors
“Will PayFacs Kill the VAR Model”, by PMNTS makes an interesting argument, but I don’t buy it. The PayFacs model has been around for a long time. Though not always marketed as “PayFacs”, the master merchant account configuration with subordinate processing accounts isn’t new to the acquiring industry. Here are my top 5 reasons why this article’s prediction won’t come true…at least not any time soon.
1) The PayFacs model has always had limitations in regards to underwriting risk. The risk exposure in the PayFacs model is more conducive to serving micro merchants and smaller merchants with minimal annual credit and debit card volume, and small average ticket sizes. As such, the PayFacs model isn’t an ideal solution for midsize and larger merchants with greater risk exposure.
2) Acquirers who have successfully made the pivot to integrated solutions, whether POS or end-to-end business management solutions, possess the expertise and knowledge base to work with their VAR/technology partners which is particularly important to midsize and larger merchants who require sophisticated, customizable solutions. The Square and Stripe model, by way of example, provides more of a cookie-cutter, one-size-fits all payments solution which works best with small and micro merchants.
3) The article completely discounts the nimbleness of the acquiring community. As fast as payments and technology are co-evolving, the leading acquirers are keeping pace. Savvy acquirers are known for their ability to anticipate future trends and adapt their business models to ensure they remain relevant and necessary.
4) The data simply doesn’t support the article's argument. Our payments consulting firm has databased diagnostic data from hundreds of acquirer processing portfolios, from the small (500 merchants), to the large (30,000 merchants). Our data shows that over the past 30 months, same month, YOY retention analysis evinces a distinctive trend when you compare account retention to charge volume and revenue retention: account losses consistently run 10 to 15 percentage points higher than volume and revenue losses. The data suggests that the section of the market being captured by PayFacs is in fact the small and micro merchant segment. There is no data to suggest that PayFacs are capturing the medium and large merchant categories in any statistically meaningful way.
5) primary argument being made in this article is a process argument, and it’s the wrong one. It’s true that being able to get “turned on immediately” for payments processing without having to go through what can be a time consuming process of filling out a merchant application and waiting for approval eliminates a friction point for most merchants. But which merchants? Our data suggests that while speeding up the process to accept payments does in fact have value to small and micro merchants, midsize and larger merchants who expend consequential resources researching and investing in robust, feature rich integrated POS and business management solutions know and accept that this investment in infrastructure takes time, and as such, the time it takes to fill out the merchant application isn’t really burdensome.
Conclusion: Are Payfacs disruptors? Yes. Will PayFacs be “segment killers” and send the traditional integrated payments software model to the “graveyard”? No. The PayFac model is gaining traction in the acquiring space, but not with midsize and large merchants...at least not yet in regards to market share of sizeable merchants. I would argue that the best case for PayFacs capturing market share of midsize and larger merchants is the article’s argument that was least touched upon: omni-channel. I believe omni-channel is the access point for PayFacs capturing the larger merchant segment. It’s not about the process, it’s about the functionality. Midsize and larger merchants are seeking platforms which will make the consumer’s purchasing experience seamless, whether they buy in-store, online, or mobile, and this is where PayFacs can really add value and make a dent. The extent to which PayFacs can facilitate omni-channel, where all consumer facing payment channels tie back to a single interface, is the real threat that PayFacs pose to the traditional integrated payments model.