Across the world, the merchant acquiring industry is undergoing phenomenal change. As a result, merchant acquiring is now more stratified and complex. Lines are becoming blurred with many participants assuming multiple new roles. Patrick Brusnahan reports on Timetric’s research into this market
According to the report, Global Trends in Merchant Acquiring, pressure on profit is the name of the game at the moment in the industry. Due to this, acquirers have been forced to look for growth opportunities in new locations and merchant segments. Over the next decade, the industry is expected to move more towards specialisation and consolidation.
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Also increasing the pressure on profit margins is the market’s movement to price competition due to the commoditised nature of products and services. The situation is becoming tricky for acquirers as regulators have begun capping debit merchant service charges (MSCs) and interchange fees in an effort to actually reduce MSCs. As a result, acquirers need to explore new opportunities and evolve their current business models to survive.
Due to the intense competition and near saturation in advanced markets, acquirers are looking towards new merchant segments and emerging markets. Expansion into new areas and focusing on omni-channel acquiring is an attractive proposition for large acquirers. On the other hand, small- and medium-sized acquirers have to focus on gaining niche capabilities to improve their situation in new markets.
Analysing the situation
One area that couple be improved to gain a competitive edge is analytics. Acquirers, whether small or large, need to explore these opportunities to reduce fraud and merchant attrition. It can also aid in targeting the right market segments. Alongside the correct and capable technology, such as cloud computing, analytic costs can be kept low while also offering flexibility.
Moreover, it is imperative for acquirers to offer relevant value-added services, such as marketing tools, accounting applications and mobile coupons to gain merchant loyalty. Analytics plays a crucial role in this. Merchants could be using multiple merchant accounts and loyalty is critical in attracting transaction business.
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By GlobalDataEcommerce has grown substantially in key countries and creating opportunities. Ecommerce in emerging markets such as China, Russia and India recorded CAGRs of 56.62%, 35.66% and 34.63% respectively between 2010 and 2014.
Developed markets such as the US and the UK also registered CAGRs of 12.42% and 16.02% respectively in the same time period.
Cross-border e-commerce in particular is creating significant revenue opportunities. Profit margins are higher than for conventional acquiring, as is the potential for the number of acquired transactions.
The report stated: "This trend of expanding sales to overseas markets had gathered momentum with growth in mobile commerce. A rising number of e-commerce merchants and marketplaces such as Amazon, Alibaba and eBay offer apps to enable customers to make mobile and cross-border purchases."
Conventional acquirers are trying to adapt to a high-volume and low-margin environment. Consequently, consolidation is expected in the industry over the next ten years. The ability to offer services at the lowest possible cost has become a key objective. Timetric’s research purports that it is simpler for large merchant acquirers to enhance service offerings through the acquisition of technology vendors and small competitors with developed capabilities in alternative payment instruments, rather than developing something in-house.
In addition, this is a preferred method for expansion into new locations. Small competitors unable to cope with low processing costs offered by large acquirers are more likely to be acquired or exit the industry totally.
Alternatively, banks that manage their acquiring business in-house are increasingly likely to outsource to process to specialist organisation such as First Data and Worldpay.
Merchant aggregators are helping acquirers explore the micro and small merchant segment, an area that independent sales organisations (ISOs) have had limited success. The difference in the operating models of aggregators and ISOs is crucial into the different levels of success. Acting as a master merchant, aggregators not only ease the onboarding process for merchants, but also help them establish operations.
Although the majority of the aggregation in concentrated in e-commerce, innovations such as mobile point of sale (mPOS) technology are pushing the boundaries of aggregation to brick-and-mortar stores.
E-commerce emergence
Digital-only channels and alternative instruments such as mobile payments have created opportunities for new entrants to the market. A couple of examples are payment gateway providers and payment service providers (PSPs).
Payment gateways are software applications that act as a virtual POS. Similar to conventional POS terminals, they allow secure exchange of card and bank account information with the processor.
PSPs normally take on a wider role and offer multiple payment options to merchants through a single platform. For example, in addition to credit and debit cards, a PSP can offering cash- or card-on-delivery payments, e-wallets, prepaid cards, vouchers, and cheque-processing services.
As these are independent intermediaries, they are also able to integrate multiple domestic and international payment options in a single platform. PSPs can also offer value-added services such as risk management, fraud protection, data analytics, integration into shopping cart infrastructure, and warehousing facilities to merchants.
Merchants usually sign up to a PSP which offers them one or a multitude of acquirers or pick an acquirer and the PSP will integrate them. However, some acquirers offer these services directly.
For instance, Worldline offers all the support for hundreds of payment instruments in an e-commerce environment, which it offers in brick-and-mortar stores and for all sizes of merchant account. Moreover, some e-commerce giants, such as Amazon, can also carry out acquiring and processing in-house.
Many PSPs focus on multi-country service offerings. This is due to the complex nature of linking two different acquirers in each country. This allows PSPs to carve out a niche business proposition. Several PSPs such as PayPal, Sage and Stripe perform the role of merchant aggregators as well.
The Global Market
The merchant acquiring industry recorded positive growth momentum over the past five years.
This has been attributed to electronic payments, government efforts to make economies cashless, and the emergence of e-commerce. Other factors include a decline in card fraud, due to EMV technology, multifactor authentication and fraud analytics.
Moreover, the use of open application programme interfaces (APIs) has increased small merchants’ access to online payment acceptance.
The total value of acquired transactions rose from $12.2trn in 2010 to $22.9trn in 2014 at a CAGR of 16.92%. In addition, the number of acquired transactions totalled at 167.2 billion and spiked to reach 268.7 billion transactions at a CAGR of 12.06%.
These positive signs are set to grow until 2019, according to Timetric. In addition, to factors that previously supported growth, increased focus on new markets, both in terms of merchant segments and expansion of card payments in new regions will drive growth over the next five years.
Mobile and contactless technology will play a critical role in promoting card-based micropayments at physical POS terminals. Timetric estimates suggest that the total value of acquired transactions is likely to increase from $25trn to $39.2trn between 2015 and 2019 at a CAGR of 11.93%.
Moreover, the total number of acquired transactions during this period is expected to increase from 300.3 billion to 421.8 billion at a CAGR of 8.87%.
The impact of the cap
Although a cap on interchange fees has a greater impact on card issuers’ profit margins, it also affects merchant acquirers. The impact can very if the changes are limited only to interchange fees, and acquirers are not obliged to lower MSCs. There is a lag time between a reduction in interchange fees and adjustment in MSCs.
However, Timetric’s research suggests that the market is improving in terms of availability of information and merchants are now quicker to claim discounts from acquirers following a cut in interchange fees. Acquirers operate on thin margins and further pressure could decrease the industry’s appeal.
A reduction in MSC fees could result in a multitude of negative effects. Lower profit margins, impaired investment in the market, and less free value-added offerings are just three examples.
There has been a global focus on consumer protection and lowering transaction costs over the last five years. For example, in July 2010, the Dodd-Frank Act was enacted in the US on interchange fees charged by debit card issuers. According to Regulation II, the debit card issuers should not charge an interchange fee in excess of $0.21 plus 0.05% multiplied by the value of the transaction, plus a $0.01 fraud-prevention adjustment, if eligible.
These regulations resulted in a significant reduction in interchange fees in the US. The total debit card interchange revenue generated by card issuers in the US fell by 24.3% during 2011-2012 to reach $15.4bn in 2012. Analysts believe that this could encourage card issuers to renegotiate revenue-sharing agreements with acquirers.
In addition, merchants may demand the benefit of lower interchange fees to be transferred in terms of lower MSCs, which in the US are almost twice those of developed countries in Europe. This can be a concern to acquirers, if regulators choose to bring them in-line with their European counterparts.
The European Commission (EC) has enacted changes in MSCs that impact the bundling of debit and credit cards interchange fees. From 2011, merchant acquirers in Europe were required to disclose charges related to each scheme and card type. The EC reports that merchant fees paid by retailers in the EU currently exceed 10bn ($13.3bn) a year.
In June 2012, the Reserve Bank of India (RBI) declared the MSC structure for debit card transactions. It capped the MSC for debit card transactions at 0.75% for a transaction amount up to INR2,000 ($34.1) and 1% for transaction values exceeding INR2,000.
Moreover, in China, the State Council approved a change in MSC effective from February 25, 2013. New charges are up to 25% lower than previously. The new MSC varies from 1.25% to 2% and includes 0.9% for issuance service fees, 0.13% for the clearing house online service fee, and a 0.22% transaction fee.
CNP fraud
While the percentage of card fraud out of total card transactions decreased throughout the last decade, in absolute terms, the value of card fraud has risen. This has been mainly driven by card-not-present (CNP) fraud, which is particularly relevant for acquirers as the majority of losses due to chargeback are borne by acquirers and merchants. Although the initial incidence of fraudulent transactions is borne by the card issuer, liability can be shifted to merchants and acquirers. Moreover, in cases which merchants fail to provide a refund, the incidence of loss shifts to acquirers.
New technology and a rise in e-commerce activity provide opportunities for CNP fraud to cybercriminals. According to Visa, chip-and-PIN-based cards have helped to reduce credit card fraud in more than 113 countries.
CNP fraud is fairly difficult to contain due to a few reasons. Low awareness among customers and merchants, malicious computer applications (such as malware and spyware), legacy systems and ease of use with stolen cards are all keeping CNP fraud in the market.
Cybercriminals are harder to track as they can operate from countries that may not necessarily cooperate with foreign authorities and can target thousands of people simultaneously. From a technical perspective, they are less constrained than other types of criminal and can develop new threats faster than can be anticipated.
Digital security is largely created to slow down and reduce unauthorised entry into payment systems or ‘perimeter security’. These methods are limited in their impact on targeted attacks. Once a hacker gets through the perimeter, there is nothing to stop them. This is assuming that a customer or merchant hasn’t been tricked into providing access already.
