Displacement of cash continues to be a major source of growth for merchant acquirers. In fact, First Annapolis Consulting Inc. estimates that almost half of the 1.5 million merchants this year that will sign a new contract with an acquirer, excluding renewals, will be existing merchants new to card acceptance.
Conversion of cash payments is a major driver of card-acceptance growth, and transit payments represent a significant segment. Transit, loosely defined here to include parking, taxis and limousines, mass transit, and toll payments, is an estimated $40 billion payments market.
What’s most intriguing about transit, however, is not the raw scale but rather the potential for growing card penetration. In the parking market, for example, card sales make up an estimated 28% of total sales (chart, page tk), and only about 50% of all parking facilities are enabled to accept cards. Using the penetration rate of a large airport parking operation as a target (where card penetration is 70% of sales), the growth potential of enabling acceptance could be several billion dollars in volume.
These positive fundamentals are reason for acquirers to take notice. Of course, the transit market also is not without challenges. This article discusses the relative attractiveness of a number of segments within the transit market from an acquirer’s perspective.
►Parking. The parking industry overall remains fairly fragmented, though there is increasing consolidation at the top. For example, Central Parking Corp., Standard Parking Corp., and ABM Industries Inc.’s Ampco System Parking have a combined $1.8 billion in total sales. According to the U.S. Census Bureau, there are about 16,000 parking-lot merchants in total.
Larger parking merchants typically display a different buying behavior for merchant services than the smaller, often single-lot merchant. Large parking companies tend to be experienced with card acceptance and often reacquire advanced technical services to process for a variety of types of facilities such as office garage, airport, attendant- less, etc. Recurring payments are important for the office garage or other types of commuter lots, while an airport or attendant-less lot typically uses kiosks.
To compete in this segment, an acquirer must therefore have certain certifications and processing capabilities. For example, at Baltimore Washington International Airport, which is near our office, we can present a credit card for entry into the parking lot and for payment (i.e., no ticket, the kiosks simply recognize the card when you enter the lot). This is just one example of a differentiating processing capability that takes time and investment to build. Of course, serving larger merchants also means competing on price, which generally favors larger acquirers.
For the smaller or less-technically- advanced acquirer or independent sales organization, however, there is opportunity in the segment. According to First Annapolis’s estimates, approximately 80% of parking merchants now accepting cards are single-outlet merchants, and more than half of cardaccepting merchants have annual Visa/ MasterCard sales volume of less than $50,000. These smaller merchants are easier to serve and, as is generally the case, yield healthy margins.
Then, of course, there are the thousands of parking-lot merchants that are still cash-only. Cash-only parking operators present an opportunity for the salesperson capable of convincing them of the benefits of card payments, where innovations such as small-ticket interchange and affordable wireless devices could help spur acceptance.
►Taxis And Limos. The taxiand- limousine market is highly fragmented with more than 100,000 merchants, 95% of which are sole proprietorships, according to the U.S. Commerce Department. Outside of a relatively small number of large fleets within big cities, these merchants tend to be very small. Almost 80% of cardaccepting merchants generate less than $50,000 in annual Visa/Master- Card sales volume, First Annapolis estimates.
If anything, these merchants are too small, too numerous, and too risky for many acquirers. The underwriting guidelines of many acquirers often prohibit signing taxis and limos as merchants due to high rates of chargebacks and a high percentage of cardnot- present transactions. One acquirer we spoke with generally doesn’t service taxis and limos because the merchants tend to lack financial history and often operate the business as a part-time venture.
For those willing to wade through these challenges, however, taxis and limos do yield an attractive margin. We estimate an overall average net spread of 125 basis points. Net spread equals total revenue after interchange and assessments, divided by Visa and MasterCard sales volume (chart). The net spread is closer to 300 basis points for the less-than-$50,000 crowd.
Here’s another surprising finding about this segment: Our estimates peg the average merchant attrition rate at only about 21%. That may sound high, but this rate is equivalent to that of the parking segment, which has notably larger merchants. Attrition is defined as two months of inactivity for a previously active merchant, not based solely on account closure, which tends to underestimate true attrition. Card acceptance for taxis and limos overall is somewhat higher than for parking, but with plenty of room for growth at an estimated 47% of sales. In particular, taxis present an opportunity for displacement of cash, as any city dweller can tell you when his wallet runs dry. This displacement could get a boost as in-car payment-card acceptance technologies become more ubiquitous.
►Urban Mass Transit And Toll Payments. While growth of card payments appears to be accelerating within the markets for mass transit and tolls—17% penetration for tolls, according to recent estimates from Visa USA—these segments mostly are a sales opportunity for the few rather than the many. This primarily is due to the fact that there are fewer larger merchants, principally municipalities and regional and state governmental agencies that control the vast majority of this space.
Competing for the business of a public entity requires a more elaborate and intensive sales and servicing effort— requests for proposals (RFPs), unique reporting, audit compliance, etc.—that favors acquirers experienced with the nuances of the segment.
The larger merchant size also favors larger, lower-cost acquirers that can provide the price necessary to win a competitive auction process. (A note for acquirers interested in understanding the sales process and servicing requirements in more depth:
Many transit agencies make their RFPs and even contracts available in accordance with freedom-of-information laws. Some agencies even post such documents on their Web sites.) For the select few acquirers seeking to thrive in this segment, there are some interesting product innovations that could contribute to rapid growth in card volume. One of these is the rise of contactless toll-pass devices that use active radio-frequency identification (RFID) technology to allow cars to pass through tollbooths without stopping.
Some RFID programs now link to multiple states’ toll-road systems. An E-ZPass tag mounted on the car, for example, lets residents of New York, New Jersey, Massachusetts, Pennsylvania, Delaware, Maryland, and West Virginia drive on each state’s toll roads without stopping.
Some mass-transit providers also are using RFID technology to encourage a more convenient customer experience and, indirectly, more card sales volume. Examples include the Chicago Transit Authority, which has two versions of an RFID card, and the Metropolitan Transit Authority in New York City, which is testing a Citibank-issued MasterCard PayPass contactless card on its busiest subway line.
As these devices continue to gain traction, there also could be expanded opportunities for cross-acceptance— for example, some parking lots already accept the E-ZPass device—that could similarly provide a nice source of growth.
Transit payments will continue to provide an excellent source of growth for acquirers positioned to serve the unique niche segments within the space as displacement of cash augments the already steady growth of card sales. Acquirers targeting one or more of these segments should first evaluate their capability for serving the segment as well as the unique risk and sales characteristics of the targeted merchants.
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