Through a sequence of product launches in the last years, the payment industry has stepped further into the focus of general public. Especially mobile acceptance initiatives are mushrooming around the globe and getting media attention. Up to now, more than 40 mobile acceptance initiatives have been counted worldwide, about one third of them based in Europe.
Over the year 2013, this business model was certainly being hyped from analysts and media in general. However, we have developed a set of three hypotheses, facing this business model with a pinch of skepticism:
- “The revenue potential of mobile acceptance players is limited”
- “The current business model as a pure mobile acceptance provider is not sustainable – competition will become harder in that segment”
- “Diversification is indispensable to retain market share”
Definition mobile acceptance: Acceptance of card payments via a smart phone or tablet instead of a conventional POS terminal
1. “The revenue potential of mobile acceptance players is limited”
Mobile acceptance solutions focus on small and often mobile businesses in the long tail segment. That segment is usually characterized by a comparably small number of transactions and respectively small turnover compared to the market average. Small (micro-) merchants require simple and easily applicable solutions with a low implementation effort. With mobile acceptance solutions they can take advantage of variable fees which provide flexibility, conventional acquirers usually don’t offer.
To illustrate the different pricing models of mobile acceptance providers and conventional acquirers, figure 2 compares the total payment costs of a merchant over a period of four years in relation to the average transaction value per month. For conventional acquirers two different scenarios of the average transaction value (ATV) are being shown, to reflect different types of merchants.
The steep straight & black line with an ATV of €15 illustrates the development of the fully variable fees of a mobile acceptance solution. For merchants with an ATV of €15 the turning point from which fees for conventional acquiring will be less costly is being hit at a transaction value per month of €1,850. Merchants with an ATV of €60 will reach the turning point already at a monthly transaction value of €1,200.
Figure 2 reveals the limited market potential for mobile acceptance players as mostly only small merchants would choose this model. Hence, the target customer segment and the revenue potential for mobile acceptance providers is restricted.
2. “The current business model as a pure mobile acceptance provider is not sustainable – competition will become harder in that segment”
Mobile Acceptance solutions offer various advantages such as flexibility, local mobility, an innovative payment experience and several additional services. Nevertheless, the core business of mobile payment acceptance providers is to enable and facilitate accepting and processing of card payments. Consequently, there is only limited differentiation from conventional acquirers. But for several reasons, the latter were not able or decided not to address this market segment yet. However, conventional acquirers face comparably low barriers to enter the marekt, both hard- and software can be reconstructed quite easily. In the mid-term they could seize the opportunity and underbid prices of mobile acceptance services, due to their size and a much greater economies of scale, experience and risk management expertise.
Mobile acceptance players grasped the opportunity left by traditional acquirers who might not have recognized the potential of small merchants as a relevant market segment. It is only a question of time until mobile acceptance players will face competition by traditional players looking for new opportunities. First steps into this direction can be seen by the payment processor Heartland Payment Systems offering who recently launched Leaf a solution directly competing against mobile acceptance providers.
3. “Diversification is indispensable to retain market share”
Mobile acceptance providers will have to expand their business models to compensate increasing competition. Some players have already started to do so on a geographical or on a service/product dimension. The latter strategy has been realized by Dwolla, who combines payment and commerce as well as Square, who offers wallet solutions (amongst others). Also iZettle expanded their business with a new P2P payment solution. On top, they started expanding geographically. As part of its internationalization strategy the company takes its first steps outside the European market in Mexico. Also Rocket Internet’s Payleven has to be mentioned, as they entered eight markets since their launch.
Furthermore the increasing competition will lead to price pressure lowering transaction fees and resulting in razor-thin margins. iZettle just recently launched a new pricing model with lower fees. Also SumUp reduced merchant fees for debit card payment to 0.95%. Players without strategic flexibility will lose market share. Also consolidation activities will be a further result of increasing competition and market saturation. New big funding rounds from venture and private equity firms could push this trend. But beside M&A activities and the establishment of new, big partnerships also exits will be an inevitable consequence.
A strategic repositioning will be required by most mobile acceptance providers at one point in the future. In order to retain a relevant position in the payment market, they must transfer their businesses into more sustainable models by diversification and leveraging their existing customer basis with additional services. Taking the role as mobile acceptance provider might form the basis for evolving into a player participating in the payment ecosystem, but new business models have to be found to secure a the position and generate new growth.
Summarizing the three hypotheses the business model might be slightly overhyped. Also the push of contactless payments and the emergence of wallet ecosystems around the globe may substitute mobile acceptance in the long term. Accordingly, it is indispensable for mobile acceptance players to modify and adjust their business model in order to remain relevant. Strategists and investors should keep this in mind if they plan to explore into this business model.
About the authors:
Steven Jacob is Manager and Christine Krause is Associate, both within the Payment Practice at Innovalue Management Partner GmbH, Hamburg, Germany
 Beside Mexico, iZettle offers its solutions in Sweden, Norway, Denmark, Finland, Great Britain, Germany, Spain and Brazil