It has been said that the only constant in life is change, and that is certainly true of the payments industry. This industry has been known for its slow evolution when it comes to technology adoption, but that has changed in recent years. Factors such as commoditization, increased competition and the slowing of the economy have given new momentum to innovation in our industry — perhaps a silver lining to many of the challenges the economy has dealt us recently. In April, while at the ETA Annual Conference and Expo, I realized that the show has become a barometer of sorts for the state of this industry, and decided that for this year's "Movers and Shakers" edition, I would take the temperature of the industry by talking to some key players, asking them their opinions on where things stand and where we're headed in the future.

    The Past

   Of the industry's state over the last 4-5 years, many have commented that we have enjoyed a healthy rate of growth, one which inevitably had to slow. In some respects, we have been "spoiled" by this consistent growth that provided enough room for all the players in the industry. As Seth Kisch of global venture capital investor Battery Ventures pointed out, "The increasing dominance of electronic versus paper payments is a clear measure of the industry's success, but it also means that the growth of electronic payments has had to slow in percentage terms." Amidst this growth, changes have left the industry in a different position going into 2009 — increased merger and acquisition activity and tightening margins have led to the consolidation and commoditization of transaction processing and increased competition. Most of the industry insiders I spoke with acknowledged the high level of pricing competition in the market as one of the biggest challenges the industry has faced over the last few years — resulting in margin compression for processors and ISOs. All of these factors have played a role in positioning the payment processing industry going into a recession.

    The Present

   Like many others, the payment processing industry has been adversely affected by the economic slowdown in 2009. In the payments market, the slowdown has, to some extent, only highlighted the shift towards consolidation and increased competition that has already seen some of our industry's players shut down or consolidate their operations. At this year's ETA show for example many remarked that attendance seemed low, but those that did attend were more serious about getting business done. While business failures and tightened travel budgets decreased their numbers, this year's attendees actually felt they had been more productive than in previous years.
   What has been the year's biggest trend from a technology standpoint? Many believe, as I do, that the trend towards integrated payment solutions has captured the attention of the industry, with small and mid-sized (SME) merchants now demanding the same features as their larger counterparts. Many of these merchants continue to operate legacy ECRs, for example, with stand-alone payment terminals. The successes of larger merchants using "all-in-one" integrated systems have demonstrated the benefits of integration: fewer entry errors, simplified administration and support and better security. The SMEs have watched this development with interest and now want to gain these benefits for their own businesses. ISOs and acquirers that have begun competing on this playing field and are seeing results as they transform themselves into "solution providers," delivering real value to merchants. Almost everyone I spoke with used terms like "real and meaningful value" to describe the direction ISOs are taking in serving merchants, particularly the often underserved small and mid-sized merchant. Sometimes delivering value means helping the merchant make more of their existing equipment and set-up, particularly during tough economic times. Initiatives like PIN-based debit may not bring in many dollars for the ISO, but can have a tremendous positive impact on transaction fees for merchants. So, if there has been any silver lining to the downturn in the economy, it is the renewed focus on proving real value to merchants.

    The Future

This is where it gets interesting. Everyone I've talked to has an opinion on where the industry should go over the next five years or so. First, most expect the trend of ISOs delivering "real and meaningful value" to continue — it's clear that those ISOs that survive will be the ones who have shifted their singular payment processing focus to more of a "solution provider" offering. This evolution will be all the more important with new players entering the payments arena, a second trend we expect to hit the industry. Many believe telcos and software companies in the acquiring and issuing space will transform the landscape for existing players. This development will mean even greater competition for merchant business, forcing today's players to consider how they will deliver unique value to merchants. As Moneris Solutions USA President Greg Cohen said, "We will see the devaluation of companies that have single models efficient channel players will survive, those that choose to be a solution provider, not just a credit card acquirer."
    From a processing standpoint, most see today's decreased credit availability, coupled with increased interchange regulation, as a troubling development for the industry, resulting in less credit card profitability per merchant. However, other payment methods and technologies may become more mainstream and make up some of this lost ground. Gift cards as a payment method are growing, with a 2009 report from BAI Research and Hitachi Consulting noting that more than twice as many gift card purchasers/receivers bought or were given a general purpose gift card in 2008 as were in 2005. Retail Data Systems' John Wilkerson points to "the wider availability of gift cards at points-of-purchase" as one key factor in this growth.
   Technology will continue to center around integrated payment solutions, and converting the legacy market, according to my sources. Replacing or modifying existing dial-based payment terminals, for example, to achieve broadband internet-based transaction processing, with full security. The ability to retain existing legacy POS equipment while gaining the benefits of an IP-based solution will be sought after, particularly by small and mid-sized merchants. Ken Paull, U.S. President of PAX, a payment terminal provider, asserts that "existing technology will start to penetrate the legacy aspects of our industry, enabling more efficiency for application development, terminal deployment and maintenance." Many point to innovations such as terminals that deploy themselves, saving companies thousands in onsite technical support. Fully integrated terminals driven by "smart" payment applications and management servers that automatically update security standards are another example. Some of these technologies have already hit the marketplace, but will soon become the norm across the industry.
   Small and mid-sized businesses will continue to be the growth market for ISOs, as well as hot vertical specific niches such as health care. Providers that can offer solutions that help SMEs run their businesses more efficiently will win the confidence of these companies. Offerings that integrate payments with CRM, ERP and loyalty are one example. Payment solutions that work seamlessly with the existing cash registers and terminals that small merchants often rely upon will be big winners as well. These merchants, with limited budgets, are looking for secure payment solutions that help them maximize their investment in legacy equipment. ISOs that understand SMEs will be positioned well in the coming years.

Deepak Wanner is President and CEO of Precidia Technologies Inc. Deepak works with ISOs and Dealers to find innovative
technology-based solutions to common payment networking challenges. Visit Precidia at www.precidia.com