The Payment Gateway (PSP) Rush!

Someone asked this question recently – Why the rush to get into the payment gateway (also known as the Payment Service Provider) business now?

The payment gateway (the piece connecting the e-commerce world to the payment world) business has been growing steadily since the early days of the Internet. After a brief hiccup at the time of the dot com bust, when some of the companies (including my then employer Cybercash) either went bust or got bought out, some of the other payment gateways survived – just survived!

Of course,  Paypal came under the eBay haven and CyberSource was slowly building up its base.

I guess the tipping point was sometime in 2007/2008, when consolidations/acquisitions/VC funding gripped this segment. The TPV growth rates of the incumbent payment gateways started getting into the twenties; consolidations started happening; other payment industry players started getting into this segment; start ups started popping up. The other areas (wallet, POS, mobile payment, etc..) also exploded and started catapulting the Card Not Present (CNP) transaction volumes.

Even with all these factors, the e-Commerce B2C made up only 4.6% of the overall retail commerce in the US. According to the US census bureau February 2012 report, only about $194b of the total retail B2C  of $4.2 trillion went through the e-Commerce channels.  The e-Commerce share grew by 16% in 2011.

Retail eCommerce annual sales as a % of total retail sales in the US (Source: US Census Bureau, Feb 2012)

Just look at the growth potential!! – as the old saying goes – we ain’t seen nothin yet :-)

So, no wonder many players are getting into this PSP gold rush!  The rush in this segment is depicted below:

The rush to the payment gateway (payment service provider)

As you can see, players from various sub verticals are vying to get into and be a dominant player in this industry.  It is interesting to see how the  major players are getting into this segment. Here are some of  the examples:

1. Visa – by Cybersource acquisition

2. Mastercard – by Europay and DataCash acquisitions

3. Amex – by partnership with TNS. (I guess Amex will be doing some more acquisitions in this area!!)

4. Verifone – by Point acquisition. ( I wonder if Verifone will focus much on this segment though!)

5. First Data – by Global Gateway acquisition

6. TSYS – by using DataCash white labeling service

7. Amazon. Google – homegrown

8.  Merchants - Some of the large merchants have their own gateways that are not depicted in the above diagram.

9. Start ups – There are lot of startups such as Dwolla, Bitcoin, Trialpay and others having their own small gateways.

10. Technology service providers – Companies such as Fiserv, FIS, ACI Worldwide, Vantiv, TNS provide the technologies, products and services to setup these kinds of gateways

11. While these companies are growing in their respective geographies, they are also trying to grow in other geographies as well. Companies like Belgium based Ogone, UK based WorldPay, Retail decisions are all trying to get into the US market.

Revenue structure

The revenue for the payment gateway is very small per transaction. It is a very small flat fee charged to the merchant along with the interchange fee. However, there are other value added services (merchant services, fraud detection, international fee, etc.) that makes it attractive.

Marketshare in the US

As of early 2012, Visa (Cybersource/Authorize.net) has the largest market share with about 25% based on the handled Total Purchase Volume (TPV).  Paypal processes about 20% .  Since Amazon comprises of about 12% of overall eCommerce activity in the US, they would be the third largest payment gateway in the US.   The rest of the players handle about 35-40% of the retail eCommerce volumes.

I guess the market share will not change drastically in the years to come, but the sheer potential for growth has all these companies interested in this segment!

The key here is that these players have to focus on not only the volume growth, but to have an eye on the operational efficiency as well to be a dominant and a profitable player.

Original author: phanee
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