Omnichannel's Arms Race Has a Hefty Entry Fee

The rush to be a "one stop" for merchants by bundling mobile, Web and in-store payment technology is proving to be a heavy lift, in terms of cash, resources and IT skills.

This week, TSYS announced it is acquiring TransFirst, in part to accelerate its ability to integrate different payment channels and flesh out its product mix to include processing, prepaid and multi-channel payments. The $2.4 billion price tag is $1 billion more than TSYS spent to add a consumer-facing prepaid business just two years ago when it bought NetSpend.

The TSYS/TransFirst deal is part of an aggressive arms race, in which acquirers are leaving their comfort zones to build an arsenal of multi-channel services through acquisition and partnerships. Global Payments is also spending heavily, at a $4.3 billion price tag, to acquire Heartland Payment Systems to offer integrated payments to a wider and more geographically diverse client base.

"If a company wants to play in retail they need to provide an integrated capability or they need to partner with someone who does," said Thad Peterson, a senior analyst at Aite Group. "I don't think this is a 'nice to have' … it's table stakes."

It's not just payments, Peterson said. "It's the integration of data with display, inventory, point of sale, Bluetooth Low Energy with CRM, everything's coming together to create a unified retail whole," he said.

Acquirers have three ways to respond to mobile's disruption of traditional point of sale hardware and merchants services. Companies can build their own technology, partner with another provider to fill gaps in each company's product menu, or buy the technology by acquiring a company that provides the desired innovation.

None of these options are easy, particularly in a volatile financial market where overall payment related deals are becoming more challenging to execute.

"There's not only an expense, but there's also the process and platforms and people that are necessary to support these new functions,"  said Richard Crone, a payments consultant. "You have to have a war chest to do this, you need to be able to make, buy or partner your way into these services."

Verifone, another payments industry incumbent that's rapidly automating its merchant acquiring business, is pursuing all three options. It has acquired AJB Software to upgrade its ability to connect payment devices with 100 processors and applications covering government payments, fleet cards, stored value cards, supermarkets and convenience stores. Verifone is also collaborating with Microsoft to "future proof" point of sale terminals by enabling cloud-delivered updates for mobile payments and security. And it's testing a beacon-based in-store marketing program.  

"Verifone has a fierce competitor [AJB] in the fold, and they can also offer a new independent cloud-based service to merchants," Crone said. "This is the classic way to vertically integrate."

Verifone and TSYS are not alone. First Data late last year bought Spree to add e-commerce and earlier this year updated its mobile point of sale system, both moves are part of long technology diversification initiative that also included a huge IPO in 2015. Vantiv's 2014 purchase of Mercury Payment Systems, at a price of $1.65 billion, was another major acquisition fueled by the demand for integrated payments.

“We are in a very unusual time now where you have regulatory-driven investment, like EMV, which is a huge suck on time and money. And now we’re also seeing a response to mobile technology,” said Lynn Holland, product line manager for ACI Worldwide. “For acquirers, it’s a matter of how they can add value to the process beyond shaving a few basis points off of the transaction.”

Merchant Warehouse, another long-standing acquirer, last year changed its name to Cayan, a rebranding that reflects its expansion from traditional processing to a more rounded suite of both technology and merchant services. Just last week, Cayan partnered with Demandware, a collaboration that's designed to enable remote access to new payments technology alongside cloud-hosted EMV payments.

PayPal also spent $280 million to acquire Paydiant, which PayPal hopes will provide flexibility for in-store payments technology through remote hosting.

"The next big thing is making all of this services available from the cloud," Crone said. "That's one way to make it less expensive and another way to package services for incremental growth for a retailer without having to make a big investment in server storage or even the hardware."

Eventually, retailers will access most services through a mobile device, Crone said. "The acquirers are trying to get there as quickly as possible."