Top 5 stories from Payments Dive

Earned wage access providers are pushing back against the Consumer Financial Protection Bureau’s rule proposal to treat some such early compensation payments as loans.

The American Fintech Council, which represents about a dozen EWA providers, may sue over the proposal and is continuing a campaign in states across the country to back legislation that is more friendly to the EWA industry, the trade group’s CEO, Phil Goldfeder, said in an interview.

The council, which includes the EWA providers DailyPay, Earnin, Dave and Payactiv, also plans to ask the federal agency to extend its deadline for providing commentary on the CFPB rule proposal issued last month. Currently, the deadline for any public comments is Aug. 30.

The federal agency’s move was its attempt to provide more oversight of the burgeoning earned wage access industry and its dozens of service providers that give workers access to their earned pay before regularly scheduled paydays. The CFPB’s rule proposal interpreted existing federal law as requiring that earned wage access payments that include fees and tips to be treated like loans.

“Paycheck advance products are often marketed to and designed for employers, rather than employees,” said CFPB Director Rohit Chopra said in a press release related to the proposal. “The CFPB's actions will help workers know what they are getting with these products and prevent race-to-the-bottom business practices.”

The CFPB’s move was a pivot from an initial policy regarding earned wage access that was issued under the Trump administration. The approach could change again if the Biden administration is followed by a return of Trump following the presidential election later this year.

“Earned wage access is not a loan, and it shouldn't be regulated as such,” Goldfeder said in an interview last week. “We're obviously deeply disappointed with not just the CFPB's position, but their dramatic 180 from the guidance they released in 2020, which most responsible companies built their programs on.”

When asked about the possibility of suing the agency over its EWA proposal, Goldfeder said that’s an option. “We are exploring all of our options,” Goldfeder said. “We have spoken with a number of law firms in exploring all of our options to protect American consumers and the financial options.” 

The AFC hasn’t filed a comment yet on the rule proposal, but plans to do so, and to include a request to extend the comment period. So far, 18 comments have landed in the federal rule proposal docket, most of them from individuals.

If the rule goes into effect, it will “harm” millions of Americans who have come to rely on these EWA products, some of whom might have to return to leaning on predatory lenders for early access to their earned pay, Goldfeder argued.

“Unfortunately, if the CFPB does continue to move forward with this interpretive rule as is, the companies are going to have to adjust and shift their business models,” Goldfeder predicted, saying the providers may cease offering the services or make it so expensive as to be “inaccessible to many Americans.”

The council isn’t against any type of regulation and has backed state laws requiring registration, among other measures. So far, five states, including Nevada and Wisconsin, have passed such laws and the industry is backing similar approaches in more states. Other states, including California, are leaning toward the CFPB’s approach.

Overall, the AFC opposes treating EWA payments like loans, and subjecting them to the Truth in Lending Act, among other federal laws. “Early wage access is a new emerging product that requires its own regulatory structure to ensure that consumers have the access, but also remain safe,” Goldfeder said.

In issuing its rule proposal, the CFPB said it has studied the industry and found workers with access to the services tap them 27 times per year, on average, paying interest at an annual percentage rate of more than 100%.

There are dozens of different EWA providers, with a variety of business models, some providing services directly to consumers and others through workers’ employers. Some charge fees for the services or related features, like expedited payments, and some allow users to give gratuities in exchange for the services.

Some companies are prepared for the possibility of early wage payments being treated like loans and don’t oppose the CFPB’s proposal. Those companies, including the neobank Chime and the company Clair, welcome the CFPB’s move to regulate the industry.

“We built our entire program assuming this would happen,” said Clair CEO Nico Simko, who co-founded the New York company in 2020. “We don’t make advances at Clair unless they are complying with lending (laws) and with the rules that the CFPB has implemented in the past. And so for us, the reality is, it’s another day in the office.”

A spokesperson for the CFPB declined to comment on extending the public comment period, or delaying implementation of the rule.

There was a time when ride-share company Uber’s almost imperceptible app-based payments system was an outlier.

Uber's payments process was one of the earliest forms of embedded payments, a concept that entails the streamlining of a checkout process so consumers barely know they're hitting the 'pay' button. Businesses take a consumer's payment information when that person signs up for services, and never asks for it again. Instead, the service provider charges automatically for each transaction. 

Now, embedded payments are a part of a broader move toward service providers’ use of embedded finance, by which merchants and retailers offer consumers not only payments services, but also sell them other services such as insurance, bank accounts and loans.

As use of embedded payments rises, this primer is intended to give industry professionals and others a better understanding of the role this advancing technology plays in the marketplace.

When a payment is “embedded,” that means the process of paying is woven so seamlessly into an app or website that it is almost invisible to the consumer, Vinay Prabhakar, chief marketing officer for the Jersey City, New Jersey-based payments company Volante Technologies, said of embedded payments.

“We don't actually ever make a payment as part of the experience, the payment is a byproduct of the experience and certain actions we take,” he said.

Embedded payments have existed for years, but payments industry insiders like Prabhakar say the process will grow more common in the years to come as retailers and other merchants seek to streamline the checkout process and receive their money more quickly.

The definition can change depending on who you ask, but in general, an embedded payment is “a payment integrated into a nonfinancial service,” said Terry O'Neil, head of connected commerce and strategic growth for Citi Retail Services.

Some of the companies that provide embedded payment services are banks, but others are those that extend such services to banks and merchants. They include Volante as well as the global digital payments giant Stripe, the Oakland, California-based commercial card company Marqeta and Dutch processor Adyen.

For instance, Adyen, which has a regional headquarters in San Francisco and a U.S. banking license, lets merchants that want to embed payments services in their websites or apps use Adyen’s network to receive their money more quickly, said Blake Breathitt, senior vice president of global platforms and financial services for Adyen.

“We provide this payment processing infrastructure that they're able to run their payments business on top of,” he said.

Major financial institutions like banks are still involved in the process (more on that later), but when financial services like payments are “embedded,” you never have to leave the store, a company’s app, or the merchant’s website, in order to pay.

Embedding the payments process in an app, website or service can save consumers time, Todd Pollak, chief revenue officer for Marqeta, said by email.

The process makes “it simpler for customers to make payments directly within a brand’s experience instead of being redirected to an external payments site,” he said.

And embedded payments benefit merchants by helping them develop a long-term relationship with customers, Pollak said.

The explosive growth of embedded payments

The number of merchants offering embedded payments is only expected to grow.

The global market for embedded finance as a whole will more than double between 2024 and 2028, growing from $92 billion to $228 billion, the United Kingdom-based Juniper Research projected in an April report.

“This growth is driven by increasing market maturity and consumer confidence, supported by greater acceptance and applications,” Juniper’s report said.

The example set by Uber is "why you have tech companies and platform companies today that can create frictionless (payment) experience," said Sunil Sachdev, head of embedded finance for Fiserv.

Why is embedded finance important?

Trends in payments are moving in the direction of speed and convenience. And devices like smartphones and tablets, which grow more sophisticated by the day, offer more access to embedded payment and financial services.

“We live in a day and age where a business would say ‘I want to have the best customer experience or consumer experience possible with the people that I service,’ and that's where they would like to bring payments experience into what they're doing,” said Mike Jorgensen, head of emerging solutions and strategy for US Bank.

For merchants, embedded payments make it easier for customers to pay them directly, said Jeff Tijssen, global head of fintech at the consulting firm Bain.

Technological advances are enabling that experience, Juniper’s April report said.

Breakthroughs in advanced artificial intelligence, which is increasingly used by the payments industry, could turbocharge adoption of embedded payments by streamlining the process even further, said Agustin Rubini, a banking and investment services analyst with the research and consulting firm Gartner, which provides research to fintech companies.

“AI is helping with convenience by providing the necessary brain power to approve finance,” he said.

In an instant, an artificial intelligence program can provide the necessary checks and approve a money transfer, Rubini said.

Banks also benefit

Just because payments are made straight through a company’s app or website, doesn’t mean that banks and other financial institutions are omitted from the process.

“We’ve seen so much interest from banks, from insurance companies, from wealth companies,” Tijssen said. 

Merchants want embedded payments processing, he said, which gives banks that offer embedded finance services an opportunity to work with more businesses.

Lia Cao, the global head of embedded finance at JPMorgan Chase, the largest U.S. bank, has explained how that financial institution is actively scouting for more ways in which it can deploy embedded payments. The bank already has viable use cases in the healthcare and auto industries, but it’s seeking more opportunities, including potentially in insurance and oil and gas industries, Cao said earlier this year in an interview.

In another bank offering, US Bank, for example, provides the software merchants can use to embed payments into the shopping experience.

“US Bank is big into moving into the profit center, and helping the customer with money movement that supports their customer experience,” Jorgensen said.

Industry insiders like Jorgensen and Tijssen only expect embedded payments to proliferate, given consumers preference for convenience and businesses’ preference for speed.

“There's not a single bank that isn't actively looking at this, or hasn't launched some embedded finance proposition,” Tijssen said

Dive Brief:

• U.S. District Court Judge Margo Brodie issued a memorandum and order Tuesday, reiterating she’s not likely to approve a settlement of a class action that has pitted merchants against the giant U.S. card networks, Visa and Mastercard, for nearly two decades.
• The judge “is not likely to grant final approval” for the settlement, an entry in the docket for the U.S. District Court of the Eastern District of New York said. In keeping with that, she denied a motion for preliminary settlement approval.
• The judge granted one merchant's request to suggest to the Judicial Panel on Multidistrict Litigation that the case be shifted from New York to Illinois federal court.

Dive Insight:

For now, Brodie’s written decision is unavailable for public viewing, giving lawyers time to request redactions, according to the docket, which stipulated attorneys involved in the case should submit proposed redactions to her chamber by midday Friday.

Brodie first indicated about two weeks ago, on June 13, that she wasn’t inclined to approve the settlement, saying so in court during a hearing. The settlement, which was hammered out by lawyers for merchants and the card networks, purported to offer merchants nearly $30 billion in concessions. It would achieve the savings by reducing interchange fees that merchants must pay when consumers swipe their credit cards, and by capping those rates for five years, among other measures.

The merchant plaintiffs sued the card networks in 2005, arguing that antitrust infractions resulted in merchants overpaying interchange fees to the networks for years. Lawyers for the plaintiffs said they had worked on the settlement for eight years. The injunctive relief being sought by the merchants is related to the parties’ settlement for $5.6 billion in damages approved in 2019.

If the two sides can’t reach agreement on injunctive relief, the case could go to trial.

While the judge didn’t disclose the full memorandum detailing her opposition to the settlement, she gave what she called a “preview” of her thinking at the hearing earlier this month. 

A transcript of that hearing showed Brodie zeroing in on how the pact treats what are called “honor all cards” rules, which Visa and Mastercard each require merchants accepting their cards to abide by. Under each networks’ rule, any merchant that chooses to accept a card tied to the Visa network, or alternatively the Mastercard network, must accept all cards tied to that network, regardless of which bank issued the card.

Trade groups for retailers and merchants, including the National Retail Federation, National Grocers Association and the Merchant Payments Coalition, expressed support for Brodie rejecting the settlement. 

“This settlement was never agreed to by the retail industry as a whole and would have done nothing to end anticompetitive practices and fix our nation’s broken payments market,” NRF Chief Administrative Officer Stephanie Martz said in a press release. “The proposed reduction in swipe fees was tiny and temporary and ignored the underlying issue of how these fees are centrally set rather than allowing banks to compete to offer the best rates.”

Similarly, the MPC called the settlement a “flawed” one, suggesting in a press release that it would allow the card networks to persist in overcharging merchants. “Visa and Mastercard wanted a settlement that would let them keep price-fixing swipe fees and blocking competition,” National Grocers Association Chief Government Relations Officer Christopher Jones said in the MPC release.

When asked for comment, Visa, the largest U.S. network by volume, and no. 2 Mastercard, referred to the statements they made earlier this month with regard to the judge's leaning against the settlement.

"We are disappointed with the court’s comments," Visa said in its prior statement. "We continue to believe that the proposed settlement agreement was the appropriate resolution resulting from lengthy and thoughtful discussions with the merchant class.”

The judge’s action also prompted commentary from two U.S. senators who have introduced legislation seeking to inject more competition into the card network industry. Sens. Dick Durbin (D-IL) and Roger Marshall (R-KS) issued a statement saying: “We’re pleased Judge Brodie rejected this settlement, which we felt only temporarily provided concessions negotiated by a few lawyers behind closed doors. And we are hopeful that Visa and Mastercard will now negotiate a settlement that truly benefits our merchants and small businesses.”

However, they went on to contend that the best solution is their bill, dubbed the Credit Card Competition Act, which seeks to ensure that a network other than Visa and Mastercard is available to merchants when they accept credit card payments from customers. The senators noted in the release that Visa and Mastercard are affiliated with 83% of general purpose cards in the U.S., according to the Federal Reserve.

With the legislative proposal caught in the crossfire between retail interests and banking interests on Capitol Hill, it has made little progress in Congress since it was initially introduced in 2022.

Starting late last year, class-action claim forms were sent to about 18.6 million merchants across the U.S. who processed Visa and Mastercard payments during a 15-year period.

Now, lawyers for the merchants are wondering how many of them will seek compensation ahead of a fast-approaching deadline.

The claim forms were mailed in the aftermath of a $5.5 billion settlement that partially resolved a long-running antitrust case in which the two credit card network giants were alleged to have overcharged merchants by exacting excessive interchange fees.

Those swipe fees are what a merchant pays to accept credit card or debit card payments. Visa and Mastercard didn’t admit to any wrongdoing in the civil case as part of the settlement that was upheld by the Court of Appeals for the Second Circuit in March 2023.

To be eligible to receive money for the allegedly inflated interchange fees they paid, merchants have until May 31 to file a claim with the settlement administrator.

Given that deadline, plaintiffs’ lawyers and the settlement administrator are making a final push to get as many eligible businesses to submit claims as possible, said Alexandra “Xan” Bernay, one of the co-lead counsel for the class of merchants.

Their efforts have included educating merchants about the validity of the large settlement and working to counteract scams perpetrated by bad actors.

“We have seen some skepticism from merchants and heard from merchants who unfortunately had inadvertently recycled their mailed claim form,” Bernay said. “Fortunately, the education and outreach team have helped us reach merchant populations that may have originally been unlikely to file.”

A recent related, though separate, settlement involving Visa and Mastercard that addresses how interchange fees will be handled in the future has created a need for some additional education to prevent confusion among merchants.

Bernay advises merchants that this other settlement, which has not yet received court approval, does not impact their ability to file claims and receive money.

The case for filing

As for the court-approved payment card settlement, the work to get merchants to file claims began in earnest once the claim notices were mailed in December, said Bernay, a partner at the law firm Robbins Geller Rudman & Dowd.

The class includes any U.S. businesses that accepted Visa and/or Mastercard credit or debit cards between Jan. 1, 2004, and Jan. 25, 2019. 

While the lawyers and settlement administrator declined to provide estimates of how much money individual merchants will receive, Bernay said many claimants could receive a significant amount, given the large number of transactions they processed during the lengthy class period.

She also emphasized that while some class-action settlements tend to benefit larger businesses much more than smaller ones, the payment card case has the potential to help “every type of business.”

“This settlement touches the smallest corner bodega all the way to some of the largest companies in the country,” Bernay said.

She and an official with the settlement administrator, Epiq, say the claims filing process was purposely designed to be very easy for merchants to complete.

Merchants can go to the official claims website and enter their claimant ID and control number located in the middle of the claim form they received, or they can input their taxpayer identification number and some additional information. Bernay said the filing of a claim should take just a few minutes.

“I think people are going to be pleased with what they get back relative to the level of effort it's going to take to file a claim,” said Cameron Azari, a senior vice president at Epiq. “It’s leaving money on the table for folks if they don't.”

Merchant perspective

One business that has gone through the claims submissions process for the payment card case is Pigment, a regional retailer in San Diego that sells design-savvy gifts, flora and furniture.

Filing a claim was “super seamless and easy to do,” said Chad Anglin, Pigment’s co-owner. He estimated the process took him three minutes.

Anglin said it was “wonderful” that businesses like his are eligible to receive money for the allegedly excessive interchange fees they paid.

While Anglin declined to say how much cash compensation he expects Pigment to get from the settlement, he said the funds would help the business weather uncertain economic times in the future and any seasonal lulls.

“It's always nice to have a little bit of a cushion in case you have slower months, so we'll just probably put it in savings and use it if need be,” Anglin said.

Outreach efforts

Bernay’s team and others have needed to confront some skepticism among merchants that the payment card settlement is legitimate and will provide real monetary relief, she said.

As a result, the plaintiffs’ lawyers have worked with Epiq Systems and the (W)right On Communications public relations agency on an education and outreach program.

These educational efforts have included a focus on reaching underserved populations. Bernay said there has been “good progress” made in that regard. 

She has highlighted in discussions with business owners and former owners that they are still eligible to file claims if their businesses have declared bankruptcy, closed or been sold to a new owner in the years since the class period for the case.

Additionally, the outreach participants have partnered with a variety of trade associations to help them raise awareness about the settlement and get key questions addressed.

The groups the team has partnered with include FMI – The Food Industry Association, the National Restaurant Association, the National Retail Federation and the American Beverage Licensees. 

The settlement outreach team has hosted webinars for FMI members and the lawyers have fielded questions that have come up about the claims process.

For example, some members had concerns about claims forms going directly to stores rather than their corporate headquarters because they worried they might be missed and not received by the appropriate person, said Jennifer Hatcher, FMI’s chief public policy officer and senior vice president, membership. This could result in the claim forms not being included in the consolidated aggregate of a member’s forms, she said.

“It's helpful to be able to have that direct contact with the class counsel to be able to navigate this,” Hatcher said.

Fighting scams

Meanwhile, one challenge the outreach team has faced is that some businesses and individuals have tried to mislead merchants about the steps required to claim money from the settlement.

One group falsely told merchants they were required by the court to sign up with it, Bernay said, and another had someone purporting to be the celebrity Snoop Dogg leave a voicemail directing people to a scam website about the settlement.

“We were not able to track down the actual perpetrators by name,” Bernay said of the two examples described above. “Despite that, the court in the case issued orders for them to cease and desist,” she added.

The lawyers have repeatedly had to seek court intervention to halt scams perpetrated by some third-party filers, which are groups that typically offer to file a claim for merchants in exchange for a percentage of their recovery.

Third-party filers are allowed to operate if they are not misleading class members, and they can help drive up the percentage of claims filed, Bernay said.

Before using a third-party filer, Bernay recommends merchants examine what credit card processing data the settlement administrator has. She said if the data appears largely correct, merchants should consider whether a third-party filer is “going to get me X percent more that will justify giving up X percent of my recovery.”

“For many merchants, it is not going to make sense to give up significant percentages of the recovery to which they're entitled,” Bernay said.

Assisting merchants

One third-party filer helping merchants with the payment card settlement is called Collectively, a software platform led by Manor Ventures CEO Louis Teplis. Collectively provides an online platform for merchants to match, file and collect from many settlements.

Teplis said his company helps its clients gather additional data, which can be shared with the settlement administrator to maximize recovery. 

Collectively will receive a percentage of the recovery merchants get in exchange for the services it provides, and Teplis said the company helps merchants who otherwise may not take the time to file a claim.

“We like to say that doing nothing is not an option because it just doesn't make sense to leave money on the table,” he said.

The Federal Reserve plans to attract up to about 8,000 financial institutions to FedNow, its new instant payments network, and it has at least 1,000 in the pipeline to add, a Fed official said this week.

While there are nearly 10,000 financial institutions in the country, only about 9,200 of those banks and credit unions are actively using Fed services, so the central bank’s goal for FedNow isn’t necessarily to draw them all, FedNow Head of Payments Product Dan Baum said Wednesday.

So far, about 700 financial institutions have connected to the network since it was launched last July, and the central bank has been eager to lure more to the system in the interest of creating as much reach for the network as possible. The new system will allow consumers and banks to settle payments in seconds, as opposed to days, and provide services at all hours and on weekends.

“We see the policy objective to be to get everyone that's willing to, and can, and can make a business case,” Baum said in a wide-ranging interview with Payments Dive. “We expect that to be somewhere in the 7,000 to 8,000 range at the end of the day.”

There are some 1,500 smaller financial institutions largely dependent on paper checks so the Fed doesn’t expect to lure them all to FedNow, said Baum, who is a senior vice president at the Atlanta Federal Reserve Bank.

That said, FedNow has at least 1,000 financial institutions in various stages of FedNow onboarding, Baum suggested. “We have a very robust pipeline of very interested (FedNow) customers in the four digits,” he said.

While about 60% of the institutions that have signed up for FedNow can receive payments, a smaller 40% have signed up to send payments, Baum said. That likely reflects some concern about the potential for fraud, though the Fed is seeking to address those risks through circuit-breakers, as in shutoff controls; working with stakeholders; and analyzing anomalies in data.

The rate of FedNow sign-ups has been seen as slow in some corners of the industry, particularly with respect to a few large banks still not joining in yet. That experience echoes a slow pace of adoption for FedNow’s private sector rival, the RTP network, which was launched by The Clearing House in 2017.

Still, the start of FedNow last year seems to have instigated more interest generally in the real-time payments capabilities, with the bank-owned RTP posting a faster rate of adoption since its FedNow competitor’s launch in July.

The Fed is unlikely to ever mandate use of the FedNow system, and it would likely need new authorities to make that happen, but it could seek to boost bank adoption, if needed, by provide pricing incentives, or other types of incentives in the future, he said.

“We certainly have a toolkit on the shelf,” Baum said. “I'm not sure we're ready to pull the things off the shelf because we're seeing the numbers that we want so far.”

The Fed envisions a variety of potential use cases from basic capabilities like catering to the movement of funds in digital wallets to supporting earned wage access tools to enabling the faster settlement of major transactions, like buying real estate or a car, Baum explained.

Aside from those consumer uses, the central bank is also keen to assist business-to-business payments. That’s especially true for big corporations that manage cash flow to the hour and that are making investments around the world, Baum said.

Other countries have moved ahead with real-time payments at a faster rate than the U.S. In particular, Brazil has developed the Pix system and India has deployed the Unified Payments Interface.

The FedNow management team is open to learning from those first movers’ experiences and the various officials working on such systems meet regularly, Baum said. The key objective, informed partly by those other countries’ experiences, is to make the system easy to use and safe to use, he said. He noted the success of Brazil in using QR codes in connection with its system.

Brazil’s Pix system is also making headway in enabling the use of that system across borders. The U.S. mega payments processor Fiserv is supporting the Brazilian government in extending the reach of Pix into other countries. Brazilian users of Pix may be able to use the service in the U.S. as soon as the second half of this year.

For FedNow, cross-border capabilities might not be far off either. The Federal Reserve is aware of keen interest from the industry in cross-border capabilities, Baum said. But that will have to follow on creating a solid domestic network first, he said.

“When we build the value of the domestic network, and we can bring the value to the other jurisdictions around the world, I think you'll see us move more quickly,” Baum said, in speaking about the possibility of cross-border FedNow features. “Best guess is we’re at least a couple of years out before you'll see us in the cross-border business.”

Fiserv’s point-of-sale business for small merchants has been growing like a weed. Now, the mega processor is counting on that Clover segment for more growth, expecting the unit to double revenue over the next two years.

Clover is among a crop of industry competitors offering more than just payment acceptance in serving small and medium-sized businesses. Such point-of-sale providers seek to capitalize on the shift to cloud-based software and the surge in entrepreneurship spurred by the COVID-19 pandemic. 

Clover has been a boon to payment processing giant Fiserv: Its revenue jumped 30% in the fourth quarter, over the year-earlier period, and the business generated $2.1 billion in revenue last year, largely aided by selling existing merchants more services. Clover’s strength has made it a crucial part of Fiserv’s growth algorithm, said Oppenheimer Analyst Dominick Gabriele.

“Clover just keeps kicking butt,” Gabriele said.

Milwaukee-based Fiserv has set ambitious growth targets for Clover, including planting a flag in international markets and generating revenue of more than $4 billion in 2026, the company shared at its investor day last November. 

But in the highly competitive cloud-based point-of-sale market, which Autonomous Research pegs at about $5 trillion, Clover has no shortage of rivals targeting the same retail and restaurant clients. Toast, Shift4, Shopify, Lightspeed Commerce and Block’s merchant unit Square are also gunning to take share from legacy point-of-sale providers such as NCR and Oracle.

Just as Fiserv seeks to rev up Clover’s growth, the head of digital payments company Block, Jack Dorsey, has set his sights on improving Square. A co-founder of Square, Dorsey took the helm of the business last October. “You can’t underestimate Jack Dorsey’s focus,” Gabriele said.

San Francisco-based Square aims to move upmarket, after revamping its sales efforts last year to better keep up with competitors. As Square becomes more competitive, it’s a “significant head-to-head competitor for Clover,” said Bank of America Securities Analyst Jason Kupferberg.

Notably, Clover contrasts itself with Square on at least one promotional webpage geared toward restaurant operators. In catering to restaurants, Clover now has 80% of Toast’s functionality and is targeting 100% by the end of this year, Bank of America Securities analysts wrote in a March 20 note to investors. 

Rivals will continue to put pressure on Clover’s goals. To achieve those, analysts and consultants said Clover will need to make headway in other countries and keep signing merchants up for ancillary services it offers, such as inventory management or customer engagement. 

For Fiserv, Clover hitting its growth targets is an “absolute must,” said TD Cowen Analyst Bryan Bergin. “The most important metrics coming out of Fiserv are (from) Clover,” he said. “This is kind of the diamond asset in the organization, and you can’t have that roll over.” 

Clover spreads

Clover serves about 700,000 businesses with its point-of-sale hardware and software, mainly in restaurant, retail and services verticals, said Dan Bjerke, Fiserv’s global head of Clover. The restaurant vertical is its largest.

About 80% to 85% of Clover’s merchants each process $200,000 to $250,000 in sales annually, he said. Clover was acquired by First Data in 2012 for $56 million, and First Data, in turn, was acquired by Fiserv in 2019 for $22 billion.

Clover’s $272 billion in annualized sales volume tops that of Square and restaurant rival Toast, Mizuho Securities Analyst Dan Dolev noted late last year. With an Android operating system approach, Clover enables merchants to pick and choose apps to help them run their businesses.

“There’s a good value proposition around these modernized platforms, where it’s not just that payment processing capability, it’s the software upsell that comes with it that’s really sticky,” Bergin noted. 

That’s given Fiserv confidence to project Clover’s revenue will reach $3.5 billion next year, and $4.5 billion in 2026, according to Fiserv’s November investor conference presentation.

To achieve those targets, Fiserv seeks to add more Clover clients and grow with them. The company has projected the percentage of Clover revenue coming from value-added services —  which was in the upper teens each quarter last year —  will jump to 27% or more in 2026. 

Expanding Clover’s international footprint is crucial to the plan, analysts said. Clover has nascent operations in Argentina, the U.K., Ireland, Germany and the Netherlands. The company expects to bring Clover to Brazil and Mexico this year, and add Australia, Singapore and Hong Kong by 2025.

It’s “been very hard for various players to move overseas with some of these platforms,” Gabriele said. Block has struggled with that, as has PayPal, he added. “If you can do it, it’s a huge deal,” he said.

With international expansion, Fiserv evaluates regions where the Clover brand and value proposition resonate, Bjerke said during a February interview. The processor’s history in other countries gives it an understanding of local nuances, including different payment schemes, competitive dynamics and government regulations and compliance, he said. The company then leans on its local distribution channels in those markets to sell Clover. 

Fiserv’s joint ventures or referral programs with some banks; ties with software vendors and independent sales organizations; and direct sales experience allow it “to reach those local businesses in ways that others don't, and I think that's another accelerant of the growth that we've experienced,” Bjerke said. 

Clover also aims to expand in verticals where it has a budding presence, such as in government or education, executives have said. 

Bjerke declined to comment on the dollar investment Fiserv plans to make in Clover this year. At Fiserv’s investor day, Fiserv CEO Frank Bisignano seemed to needle Block, mentioning Fiserv has 12,000 software engineers alone, whereas Block has capped its entire organization at 12,000 people.

Having more engineers and salespeople will matter, Gabriele said. “This is a scale business, so the more money you can throw at it in a successful way, the better outcome you’re going to have,” he said. 

Clover is increasingly important to Fiserv, particularly since growth in the company’s financial technology segment has lagged that of its merchant segment. Clover made up about 25% of Fiserv’s merchant segment revenue last year, but the company expects Clover to drive about 75% of that segment’s growth through 2026, UBS Analyst Tim Chiodo noted in a recent note to investor clients.

Analyst opinions are mixed on whether Fiserv can achieve the growth targets. Autonomous Research Analyst Ken Suchoski said he hasn’t spoken with any investors who believe Clover can reach its revenue goal for 2026.

BofA’s Kupferberg said he wouldn’t call Clover’s ability to meet its targets “a layup,” but ultimately, “I would not put it past Fiserv to be able to achieve these Clover goals,” he said.

Square seeks to simplify

Although Clover tends to serve larger businesses than rival Square, which made its name with micro-merchants, there is overlap between them, especially as Square chases larger clients. 

About 60% of Square’s merchant clients generate less than $500,000 in annualized gross payment volume, as of the fourth quarter last year. Of that group, a slightly larger portion generates less than $125,000 in annualized GPV.

As it pushes upmarket, Block’s merchant unit has overhauled its sales approach. Square has mainly connected with customers through its website, but last year, the company verticalized its sales teams and added outbound salespeople. Dorsey has said the business needs to play catchup after falling behind competitors in that regard.

“What Clover has, and offers, that Square doesn’t is a salesforce,” said Ken Musante, founder and president of Napa Payments and Consulting. A Square spokesperson declined to make an executive available for an interview and pointed to comments from the company’s most recent earnings calls.

During Block’s fourth-quarter earnings call last month, Dorsey suggested the company may reconsider Square’s distribution approach. When an analyst asked about willingness to partner with banks or ISOs to get Square’s products into the market, Dorsey said executives are “definitely open” to the idea. 

Still, the most important element for Square, Dorsey underscored, is the product itself, which he’s seeking to improve while simplifying the business. 

Square’s market share gains have slowed and the business hasn’t identified defined growth targets as Clover has, analysts noted. But Square is under pressure to grow, too. In the near to medium term, Square needs to demonstrate 10% to 15% gross profit growth, Bergin said. 

Bjerke largely brushed off the competitive threat Square poses now that Dorsey is again focused on the business, saying Clover doesn’t get “distracted.” He pointed to Clover benefiting from Fiserv’s ownership, which has operating leverage and a balance sheet that allows for investment in the business. 

Ultimately, “the market is big, and there's good, competitive solutions out in the market,” Bjerke said.

To that end, despite differences among cloud-based point-of-sale providers and their approaches, there’s room for many to succeed, analysts and consultants said. In the U.S. restaurant industry, for example, UBS analysts estimate some 40% to 50% of locations are still using legacy providers, according to a January note to investors.

When it comes to Clover and Square, “I don’t think it has to be an either or,” Musante said. “My expectation isn't that Clover and Square are stealing as much from each other as the two of them are stealing from Shift4, FIS and Global (Payments).”