- Payment gateways help e-commerce merchants accept online transactions. They serve as the online version of a payment terminal and front-end processor for online and mobile sellers. Gateways typically sell bundled services, including payment acceptance, data reporting, and fraud management.
- Gateways have an opportunity to capitalize on the growing online processing market. BI Intelligence estimates that the US online processing market — from which gateways extract some of their revenue — will be worth about $10.7 billion this year. The market will grow to $17.5 billion by 2020, driven by the increase in online shopping. As online sales rise, gateways' addressable audience — e-commerce merchants — is getting both larger and more valuable, affording gateways an opportunity to seize and compete for more potential revenue.
- Merchants' and consumers' migration to digital is giving gateways increasing influence. BI Intelligence forecasts that US consumers will spend $385 billion through online and mobile channels in 2016. By 2020, e-commerce sales will reach $632 billion, 45% of which will derive from mobile. And certain retail categories, like clothing and accessories, are going digital at a rapid pace. All of these changes in retail give gateways different ways to compete in the online processing market.
- Gateways pose threats to the old guard as more merchants embrace the online-to-offline (O2O) business model. Many of the most successful tech companies, like Uber and Airbnb, leverage an O2O model, in which customers pay for in-person goods and services digitally. With an early-mover advantage among these types of retailers, gateways might begin to displace revenue from legacy processors because they will substitute rather than complement in-store processing volume.
- Legacy processors can still stave off disruption, however. The in-store processing market will continue to dominate the size of the online processing market, providing legacy processors with a cushion to protect them from being undermined. And cash will continue to shift to payment cards, allowing processors who choose to specialize in physical point-of-sale to see ongoing growth.
The rapid rise of online and mobile retail sales has opened up a new market for payments companies to pursue. Behind every digital transaction lies a bevy of payment providers working to route, process, and approve transaction data. While some of these functions have migrated online from traditional, brick-and-mortar environments, payment gateways are unique in that they originated [...]