Over the past few weeks the major payment processing vendors have reported first quarter 2015 financial results, and they show a noticeable slowdown n y/y growth from 2014 (refer to NelsonHall Tracking Service articles for detailed analysis of the quarterly results). Summary results for Q1 2015 (in USD unless stated otherwise) are as follows:

Card networks:

• Mastercard: +2.7% (2014: +13.5%)
• Visa: +0.8% (2014: +7.8%)

Payment processors:

• First Data: +2.1% (2014:+3.0%)
• TSYS: +18.0% (2014: +20.2%)
• Euronet: +11.9% (2014: +18.0%)
• Worldine: in euros, +4.0%  (2014: +2.8%)

In every case, Q1 2015 revenues grew more slowly than 2014 revenues, with the exception of Worldline, which generates and reports revenues in euros, and has signed contracts in Latin America (e.g. Brazil and Argentina) which has driven very high growth in its mobility and e-transactions services.

In general, vendors had good revenue growth in North America and in emerging payments (e.g. mobile and e-payments). Whereas, vendors had weak or declining revenue growth in non-U.S. markets (especially Europe and Asia) and mature business lines (e.g. card issuing and card acceptance). 

So what has changed?

Two key changes in the payments market have occurred:

• FX rates have changed (primarily, the U.S. dollar has strengthened), which has reduced the rate of growth, after currency conversion, in the highest growth markets for vendors
• Pricing of services has declined due to:
  • Shift to lower cost transactions. This is especially true in mature markets where transactions continue to shift from high cost channels (e.g. checks, credit cards, wires, and cross border payments outside SEPA) to low cost channels (e.g. debit cards, EFT, prepaid cards, SEPA compliant cross border transactions)
  • Aggressive cost reduction (e.g. renegotiation of AMEX/Costco contract to a lower cost contract at MC/Costco; various digital wallets, such as Google Wallet)
  • Use of analytics to minimize cost of transactions via bundling, and improved cash management.

What does it all mean?

Established payments processors and banks have done a serviceable job of disrupting existing payments systems to drive increased growth in the payments market, while driving down user cost and maintaining margins. We believe that stage of the payments market is coming to an end and traditional vendors will now experience very aggressive challenges to their existing market positions. Future cost reductions will be so aggressive that margins will fall – by a lot. For example, Google Wallet charges customers nothing for its service (and hopes to recoup costs plus a profit from advertising). Given a cost of zero for transactions, it will be hard for a vendor charging on a per transaction model to compete without completely changing their pricing model. Full stop.

Established vendors are finding success in two key areas:

• Analytics: both corporates and consumers show a willingness to pay for analytics that help them to manage payments and their financial lives better
• Aggressive cost takeout: vendors experienced in emerging markets, where costs are already exponentially lower than in mature markets, are finding it easier to succeed in the payments market today. Mature market vendors who try to hold onto current pricing levels face large losses in market share. For example, the Costco relationship represented ~8% of AMEX’s spending volume. AMEX may wish to harvest profits from its existing base of business, but it will not survive in the long run unless it finds a way to maintain (and grow) its base of business in the face of reduced pricing and ultimately changed pricing models.

The next two years will see the battle of pricing models and analytics support for clients in the payments market.