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ments solutions and to connect various systems and platforms than it was just five
years ago. Coupled with hardware advances
such as smartphones and tablets, point-ofservice (POS) systems are transitioning from
payments-only terminals to software solutions that help merchants operate their business, such as practice management software
for medical providers or order management
software for restaurants.
These changes will intensify competition
and result in accelerating price compression.
According to forecasts from McKinseys U.S.
Payments Map, total electronic payments
volume is expected to grow by about 7 per-
34
McKinsey on Payments
May 2014
Exhibit 1
Electronic
payments volume
is expected to
grow at about 7%
annually over the
next five years
$ trillions
2013-18 CAGR
Percent
Large merchants1
7.0
7.3% p.a.
Medium-size merchants2
6.6
Small merchants3
6.3
5.8
6.2
5.4
4.9
4.6
4.4
4.2
4.0
3.8
3.6
8.2
3.5
3.2
3.1
2.3
0.9
1.0
1.1
1.2
1.2
10.2
0.8
0.8
1.2
1.4
0.9
1.0
1.3
0.8
1.1
0.6
2008
2012
2013
2014F
2015F
2016F
2017F
2018F
0.6
35
36
McKinsey on Payments
Exhibit 2
Increased
competition will
result in accelerated
processing margin
compression,
especially among
small and
medium-size
merchants
May 2014
2013-18 CAGR
Percent
50
40
-2.1%
Small
merchants
-7.6
Medium-size
merchants
-5.8
Industry
average
-5.1
Large
merchants
-2.6
30
1
Exhibit 3
Margin
compression will
result in payments
processing revenue
growth of only 2%
to 3% annually over
the next five years
20
-3.5%
10
0
2008
2009
2010
2011
2012
2013
2014F 2015F
2016F
2017F
2018F
2013-18 CAGR
Percent
Large merchants
Medium-size merchants
2.2% p.a.
Small merchants
12.9
10.7
12.8
12.8
13.4
13.8
14.0
14.3
3.3
3.5
3.5
2.9
3.0
3.1
3.2
3.2
4.3
4.6
4.7
2.0
4.3
4.5
4.7
4.3
5.7
5.6
5.6
5.7
5.9
6.0
6.1
1.7
2012
2013
2014F
2015F
2016F
2017F
2018F
2.5
3.7
4.5
2008
37
38
McKinsey on Payments
May 2014
kind will enable existing POS software companies to grow in two ways: by participating
directly in payments economics by virtue of
owning the gateway, and by expanding into
smaller merchant segments with lower-cost,
cloud-delivered solutions.
ISVs will become increasingly relevant partners for the distribution of payments processing. Almost all of this growth will occur
in the small and medium-sized merchant
segments. Many new, small-business payments solution providers are looking to established acquirer-processors or ISO sales
forces as a potential route to market; the
economics of this segment, however, will not
support payments only distribution.
Exhibit 4
Description
Examples
Transactions acquired
via a software POS
solution (non-terminal)
12.8
3.0
(24%)
8.3
(65%)
4.7
(33%)
2013
POS solution
provider1
8.9
Micros Symphony
NCR Aloha
2.3
(16%)
7.3
(51%)
CAGR
2013-18
Percent
14.3
1.5
(11%)
2018F
Online
business-tocustomer
e-commerce
Traditional
9.4
-2.5
Retail e-commerce
Transactions that
originate at terminals
or merchant data
centers and route
directly to the
payments processor
Terminals connecting
directly to
processors
39
intensive industries who lack national merchants IT staff but whose needs are too
complex for the packaged payments solutions available today. However, the general
trend toward cloud-based delivery of payments functionality will slowly erode VARs
revenue streams from installations, servicing
and upgrades.
Over 500 payments gateway companies
enable connectivity and provide other
value-added services for U.S. merchants.
40
McKinsey on Payments
May 2014
Payments networks
Among all industry participants, payments
processing networks will be least affected by
todays disruptions. Because they are paid on
a per-transaction basis, the networks are
likely to ride the wave of continuing volume
growth unless a new competitor figures out
how to displace them. How that volume will
get onto the networks is another question.
To ensure a continuous flow, networks are
striking deals (see Chase and Visas decision
to create Chase Merchant Services, which
could aggregate and lock up merchant payments volumes for the next 10 years).
Banks
As economic and regulatory forces compress
margins, banks will look for ways to improve
41
may need to rethink what it means to partner with otherstodays competitor could
be tomorrows partner. Finally, companies
seeking success in the evolving environment should strengthen their strategic
planning and mergers and acquisitions
skills so that they can quickly react in what
is likely to be a dynamic environment over
the next several years.
Jason Hanson is an associate principal in the
Chicago office, and Robert Byrne is a principal in
the San Francisco office.