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Driving merchant services and digital commerce

Small businesses occupy a critical place in the U.S. economy. For payments, these small merchants not only account for the largest portion of acquiring revenues, but they also play a major role in the current trend toward digital payments. For this reason, the real battle in digital payments as the economy recovers will not be for the business of the retail giants, but for that of small businesses. To be successful, merchant acquirers and other service providers will need to deliver new and better payments and commerce solutions to this diverse, fragmented merchant base.

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While “mom and pops” may seem insignificant compared to mega-retailers, their combined sales account for roughly half of all retail spending. Moreover, these businesses (there are roughly 25 million of them in the U.S.) generate an over-sized share of the retail and service industry’s new ideas and a major portion of innovation and growth.

Merchant payments services

In the U.S., small business acquiring has long been the profitable anchor in the industry, generating roughly two-thirds of industry revenues on one-fifth of the volume (Exhibit 1). Small business is a dynamic segment, increasingly competitive, and a must-win for any player in merchant acquiring.

Several trends are reshaping small business acquiring. In the post-crisis recovery, small business sales volumes have been sluggish. As larger firms grow their volumes, the mix for many acquirers will shift to lower-margin segments and impact overall revenues. As small business recovers, however, this should provide a boost for acquirers. At the same time, pricing pressure in this segment is higher than ever. New entrants have promoted set pricing and stripped out fees, establishing new reference points for many small businesses. The competition for this segment, therefore, will be rigorous.