Will Commerce Platforms Kill the Legacy Stars?
"We can't rewind, we've gone too far"
The Big Picture
Global Payments’ decision to sell its payroll business led me to ask: Do payroll and payments belong together? But that prompted a more important question: What’s the fastest way to an SMB’s heart (or wallet)? The answer: A commerce platform.
SMBs are complex and rely on multiple vendors to run their business. Combining important functions under one roof offers third parties an opportunity to deliver significant value to SMBs.
Unlike single-solution legacy providers, commerce platforms offer an all-in-one (or most-in-one) solution to SMBs—hardware, point-of-sale (POS), business management software, payments, payroll and capital, among others.
Since 2019, commerce platform revenue grew at a 26% compound annual rate, far surpassing legacy providers.
Commerce platform revenue increased from 14% of the total in 2019 to 26% during 2024, while the contribution from legacy providers fell from 82.5% to less than 69% over the same time.
Will commerce platforms kill the legacy stars (providers)? Or are they already dead? Despite generating revenue growth above the market over the past five years (8% vs. 7%), legacy payments companies trade at a market cap-weighted NTM P/E of 14x, a 36% discount to the S&P 500. Interestingly, legacy payroll companies trade at a market-cap weighted NTM P/E of 30x, behind only commerce platforms, despite generating the slowest revenue growth (6%).
So why the doom and gloom for legacy payments companies?
Debt load. Fiserv and Global carry moderate-to-high leverage. Sustained high rates will increase interest expense and make future acquisition opportunities less attractive or limit them altogether. To the contrary, PayPal is in strong financial shape, providing flexibility to buy back stock or make transformative acquisitions, if desired.
Complexity. Fiserv and Global represent the combination of numerous acquisitions over the years, creating complexity that weighs on innovation. While not as acquisitive, PayPal admitted it spread itself too thin, distracting the company from its core strengths.
Poor capital allocation. Global is unwinding its ill-fated TSYS purchase in pursuit of its widely panned Worldpay acquisition. While this stacks complexity on top of complexity, it also precludes the company from pursuing more optimal capital allocation priorities over the near-term, including paring debt to a more reasonable level, aggressive share buyback, and lower risk tuck-in acquisitions that expands Global’s presence in the most attractive areas of payments. The company seemingly abandoned its effort to acquire software companies in under-penetrated payments markets, going so far as to sell AdvancedMD.
Competition. The crux of the matter—bears believe legacy providers will increasingly be removed from the payments value chain, as platforms, marketplaces and software companies that were once partners become competitors as they move more fully into payments.
What can legacy providers do to turn the tide?
Accelerate adoption of their commerce platforms. Both Fiserv and Global have ‘good’ parts—Fiserv's Clover accounted for 28% of its 2024 Merchant revenue, while POS systems and software are projected to contribute 12% of revenue for the combined Global and Worldpay. Global is consolidating its retail and restaurant point-of-sale systems under its leading Genius platform. And while Fiserv and Global are selling their commerce platforms to new customers currently, both plans to focus on accelerating adoption among existing customers.
Buy more software companies. Fiserv, Global, and PayPal would benefit from adopting Global's former strategy of acquiring smaller software firms in underpenetrated payment markets, in my opinion. Global's software presence includes K-12 schools, universities, property management, events, and communities.
Expand internationally. Fiserv and Global have established international distribution, giving them an edge in less penetrated card markets where commerce platform adoption is in an earlier stage than the U.S.
Ride the secular wave. I believe global card payment volume will grow in the high single digits over the next five years. By matching or approaching this rate, Fiserv and Global would outperform expectations embedded in their share prices.
My bottom-line. I believe commerce platforms will continue to capture a disproportionate share of SMB-related revenue, with Intuit (QuickBooks' criticality to SMBs) and Shopify (powerful commerce tools, significant market opportunity) best positioned. However, legacy payment companies aren't as doomed as the market suggests. They have the tools to compete but must pair them with the appropriate strategy: accelerate adoption of their commerce platforms among existing merchants, leverage distribution for international expansion and acquire software and commerce tools in under-penetrated payment markets.
The Players and Numbers
Commerce Platforms: Intuit’s QuickBooks, Shopify, Fiserv’s Clover (for SMBs) and Carat (for enterprise), Toast, Global Payment’s Genius platform and business management software in K-12 schools, universities, property management, events, and communities, Square, and Shift4’s SkyTab for restaurants, sporting and entertainment venues.
Legacy Payments: The remaining portion of Fiserv outside of Clover and Carat, the remaining portion of Global Payments outside of its Genius platform and software, and PayPal.
Legacy Payroll: ADP and Paychex.
Cloud-Based Payroll: Paycom Software, Paylocity and Dayforce. Paycor HCM was recently acquired by Paychex.
Shopify is an e-commerce platform for SMBs. The company provides payments (processing about 62% of total GMV), integrations for third-party payroll, and loans through Shopify Capital. Shopify is moving up-market to enterprises and in-store to support omni-channel commerce for its customers.
Clover, Fiserv’s platform for SMBs, integrates payments with proprietary hardware, business management software, and third-party apps. It leverages Fiserv’s distribution channels, including direct sales, financial institutions, and partner organizations. Clover and ADP recently announced they will be offering their customers an integrated solution that combines Clover with RUN, ADP’s payroll solution for small businesses.
Shift4 Payments integrates its payment platform with its technology solutions, including SkyTab POS for restaurants and bars and SkyTab Venue for sports and entertainment venues, and over 550 hospitality-focused software companies via its proprietary gateway.
Intuit combines QuickBooks, the dominant financial management software suite for SMBs, with payments, payroll and loans. QuickBooks is expanding into the mid-market, offering a fully integrated solution—Enterprise—payroll, payments and marketing via Mailchimp.
Toast serves table-service restaurants in the U.S. with a unified commerce platform and strong local sales presence, driving top-tier growth. The company’s 140,000 locations represent approximately 18% of total U.S. restaurants. Toast is moving down market and into food and beverage retail and expanding internationally.
Square is transitioning from a payments tool with added features to an end-to-end commerce platform for small businesses with integrated payments. Food, drink and retail represent half of Square’s volume. The company is investing in field sales and forming partnerships to boost distribution, targeting vertical-specific, horizontal, and third-party sales organizations.
Disclosure: I am long Intuit, Paychex, Dayforce, Global Payments, Fiserv and Shift4 Payments. I do not hold a position in any of the other stocks mentioned in this report. This report is for informational purposes only and is not a recommendation to buy or sell any stock. Finally, while I rely on the information in this report to guide my investment decisions, you should not, because I cannot guarantee its accuracy.