The Changing Distribution Landscape for Acquiring in the U.K.

Navigator Edition: July 2015
By: Yuriy Kostenko

Distribution of payment acceptance services in the U.K. market is becoming significantly more crowded, and intermediaries are playing an increasingly important role. This trend follows the evolution of the U.S. market over the past decade, in which independent software vendors (ISVs, which come in various flavors) became the central channel for distribution for high-growth acquirers such as Mercury and Accelerated Payment Technologies (subsequently acquired by Vantiv and Global Payments, respectively). We see this trend now accelerating in the U.K., and we believe that successfully embracing and mastering partner distribution (ISVs in particular) will be the single greatest factor for success for U.K. payment service providers (PSPs) and acquirers.

Fifteen years ago, banks were the central point for distributing acquiring and payment terminals in the U.K. Today, there are hundreds of parties directing or influencing the sale of payment services in this market. This shift is still in early stages, however, and partner distribution remains relatively informal, with no one U.K. competitor having cornered the market.

Distribution of payment services in the U.K. is becoming increasing complex, with three general classes of distributors for acquiring services: acquirers & ISOs, PSPs, and ISVs as well as others, for which payments are not a core service, but rather a complementary service typically within a broader software-based offering (see Figure 1).

Figure 1: U.K. Acquiring Distribution Landscape

Fig-1_-UK-Acquiring-Distribution-LandscapeSource: First Annapolis Consulting market observations.

This migration to a broader and more disintermediated payment acceptance distribution landscape is a function of three evolutionary waves:

  1. Banks’ ineffective outbound sales. ISOs first arose in the U.K. market more than 15 years ago on the basis of outselling the banks, which utilized an almost entirely passive approach.
  2. E-commerce product gaps. With the onset of e-commerce in the late 1990s/early 2000s, PSPs evolved to fill product gaps left open by acquirers – primarily front-end technology solutions that interface with merchant technical environments and capture payments.
  3. Integration of payments into other software and services. Payment products have become increasingly integrated into other solutions such as ePOS systems and e-commerce platforms. For these platform providers/ISVs, integrated payment services both strengthen their core product (no double entry, better data reconciliation, etc.) and help generate incremental revenue.

Today, ISOs, in the purest sense, are proliferating not as often as they did 5-10 years ago. Many of the original ISOs (CardSave, CPS) have already been acquired. Most ISOs that are thriving today (e.g., PaymentSense) have embraced the latter two trends, adding PSP capabilities and working with channel partners. Historically allies to acquirers, PSPs now also often compete aggressively as “collectors” or acquirers. Out of 60+ PSPs in the U.K. market, approximately 50% (representing ~80% of turnover) offer a merchant account. POS PSPs / terminal OEMs have tended to remain more acquiring-agnostic, but we also see this breaking down in time.

The shift towards distribution partners (ISVs, in particular) is broad and nuanced. There are many types of distribution partners, which can be separated into those that technically integrate payments into other services and those that simply refer merchants to providers of payment services. Those that technically integrate payments are the more sizable and influential, as these providers (e.g., Cybertill, ePOS Now, etc.) create meaningful value for merchants and fundamentally shift payment services from being a stand-alone service to being a component of a broader bundle.

Recent research conducted by First Annapolis suggests that the ISV/VAR/platform partner channel is not yet highly penetrated and certainly not yet mastered. Our research shows that about 65% of these providers (ePOS, ISVs, VARs and platform providers) are actively selling payment services via their website. The penetration is much higher if you include payments referrals that are not actively marketed (but rather loosely referred). The fact remains, however, that the channel is not fully penetrated (see Figure 2).

Figure 2: Payment Acceptance Offering: Selected Key Distribution Channels

Fig-2_-Payment-Acceptance-Offering Note: * Trade associations in service and/or retail industries only.
Source: First Annapolis Consulting market observations.

Currently, many payment partnerships are non-exclusive, where the approach seems to be to partner with as many providers of payment services as possible. Our research suggests that there is not a high-level of satisfaction among ISVs that partner with providers of payment services, where we do not expect this current state to remain. As observed in the U.S., we anticipate deeper penetration of ISVs with more strategic partnerships.

Within this evolving marketplace, it is critical for PSPs and acquirers to have a well-crafted channel strategy, which balances the benefits of partnership with the long-term risk of disintermediation. The most sophisticated distribution partners (e.g., Shopify, Intuit, etc.), fully brand the solution as their own and control the relationship and rights to the merchant.

The distribution of payment acceptance services in the U.K. is evolving along a path similar to what we have seen in the U.S. market. Distribution partners, especially those which technically integrate and improve upon the stand-alone payment services, are steadily winning distribution market share. This creates a great opportunity for those providers that can master these distribution channels and lock-in long-term strategic partnerships. For those providers that ignore this trend or are ineffective at adapting to partnership models, the possibilities for ongoing market share wins will become more challenging.

For more information, please contact Yuriy Kostenko, Senior Consultant,, specializing in Merchant Acquiring.

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