ACI Worldwide (ACIW) recently unveiled a partnership with Microsoft (via the Microsoft Partner Network) which will boost the ACI Universal Payments technology and be powered by Microsoft Azure. ACIW provides the payments software considered to be the back-end “pipes and plumbing” underlying the payments ecosystem for all its major participants. The move predominantly reflects the payments industry’s rapid adoption of technology deployed in the public cloud – an interesting turn of events given that former president and CEO, Phillip Heasley, was steadfast in his belief that ACI payments technology should be run only from ACI-owned data centers.
Core banking software vs cloud
ACIW’s 40-year-old business has been historically centered on its core banking software which continues to provide the bulk of “pipes and plumbing” for the international payments system today. A whopping $14 trillion a day passes over ACI software and 27 of the top global 30 banks are using some level of ACI’s technology for either the routing, switching and settlement of payments. This elemental use of ACI software over the past four decades has meant the underlying code has been fundamentally embedded into the banks’ systems. Added to the fact that license agreements are typically for ten-year periods, ACI’s customer base finds it extremely difficult to move away. This intrinsic nature has provided ACI with the luxury of increasing fees despite complaints from customers. ACI’s latest move to the cloud is to implement, not only its core banking software but also some of their newer merchant-based solutions for e-commerce and fraud prevention.
There are two main growth drivers for their latest cloud-based business, namely the potential in new market segments and customer acquisition. A good example of this is ACI’s procurement of Bill Pay earlier this year which provided an opportunity to boost bill payments, transactions and growth at a much higher margin rate. The second potential growth driver in the core banking segment is that of real-time payments where it is predicted that existing Automated Clearing House (ACH) payments and traditional digital payment transactions will all soon move over to this instantaneous type of payment. Whilst this will not represent an increase in the number of transactions themselves, it does represent new value propositions and use cases, such as person-to-person payments.
Segments of the payments industry
ACI’s main competitor in the core banking sector is FIS, a world-leading technology provider to the capital markets, retail banking and merchant industries, which only recently acquired Worldpay, a global leader in e-commerce and payments. FIS has been known to significantly discount pricing on their core banking software in order to gain on the supplementary software and services that ACI does not compete on. Even though there are some notable regional players (such as CGI in Canada and IBM in Europe), there are very few players that have a global footprint and the ability to successfully perform under high throughputs and uptimes.
In the e-commerce world and fraud prevention markets, the number of competitors opens up. ACI is at a disadvantage in respect of not having any acquiring relationships, whereas competitors Adyen, Stripe, and Square all do. This provides the latter with a competitive advantage when a merchant is looking for a one-stop-shop that can process a transaction at the point of sale, route it to an acquirer and through the networks to the final settlement. Fraud prevention solutions are plentiful as well, making these segments of the payments industry something akin to the Wild West.
Furthermore, the bill pay solutions segment has been a historically difficult area for ACI since their previous solution was stitched together from various platforms acquired over the years, rather than being built from scratch as was their core banking software. The intention behind ACIW’s recent acquisition of Speedpay, therefore, is to have it completely replace the other technologies to improve on uptime and throughput capacities, as well as securing Speedpay’s additional transaction volume.
Future trends for the payments industry
The one main area that ACI remains uncompetitive in is with respect to fraud prevention. The solutions that ACI has offered to banks in the past have not been found to be well suited in the detection of money laundering, an issue of increasing importance to its customers.
Another potential threat to be navigated is the forthcoming Request to Pay (RtP) trend. RtP is a secure messaging service that will be overlaid on top of existing payments infrastructure and will allow any business or individual wishing to receive a payment to send an electronic request for that payment to the debtor account. It is a model that has the potential to disintermediate many of the traditional fee-charging players that are part of the current payments value chain.
Nevertheless, it is expected for ACI to continue to do well even when the use of digital currencies eventually comes into play within the mainstream of payments. This is because, from an account management viewpoint, those new forms of payment will still need to be run through the same type of routing and switching systems.
In this age of innovation and technology, the payments world is a fast-moving place. Experts believe, however, that if ACI continues to respond to trends in the industry, such as digital payments and real-time payments, the company can be expected to maintain its forerunner position within the industry.
This call was hosted on November 21, 2019, under the title: “(ACIW FIS) The Pipes & Plumbing of the Payments Industry: ACIW Deep-Dive, Payments Ecosystem Positioning and Industry Outlook.”
You can request a replay & transcript of the Hosted Event discussed above, or any of our Hosted Events, by emailing [email protected].
Coleman Research Group, Inc. (“Coleman” or the “Firm”) sponsors events featuring a wide range of speakers (“Guest Speakers”). The opinions, estimates, projections, and views contained in this summary are those of, and exclusively sourced from, the Guest Speakers and are not reviewed or endorsed by the Guest Speakers. In respect of this summary, Coleman makes no representation or warranty, express or implied, is not providing investment, legal, tax, financial, or accounting advice, and accepts no liability whatsoever. Coleman retains sole discretion as it relates to accessing this information by clients and prospective clients.