It makes sense to specialise, to focus on doing one thing well rather than many things badly—and this has been especially true in fintech. The beginning of the space was built by looking at the parts of financial services that were lacking in some way, and creating a better version. In some cases this was a specialised product such as international money transfer, but even the fintechs looking to become banks were only interested in creating better versions of current accounts, ignoring many of the other things that banks do. Fintechs didn’t need to be everything to everyone.
However, specialising may not make so much sense today, and this is particularly true in certain pockets of the ecosystem. A turbulent market has many businesses reflecting on their models and looking for new ways to grow and survive. Some businesses will focus on their core services and cut back on more experimental areas of what they do. Others will reach the opposite conclusion: what they are doing today is too specialised and not enough to survive. They need to move into new areas to reduce the risk to their business.
The lines between different fintechs are blurring, partly through partnerships, and partly through fintech businesses looking for growth by adding to what they do as well as looking for new markets. This is especially true of acquirers and issuers—even those that may not consider themselves to be fintechs.
There is a constant downward pressure on the fees that acquirers and issuers make from their customers. It’s a competitive part of the market, and certain elements of these businesses can be fairly said to be commoditised, and differentiate themselves on the additional services they offer. This is not to downplay these services—the extra insight and data provided by acquirers, for example, can make a huge difference to how their customers operate—but it is true that the underlying service is very similar from one provider to the other. If acquirers fail to make it clear how they are different, their customers may look elsewhere and decide only on price.
But it’s not only fundamental market principles that are having this effect. Regulators have a constant watchful eye on interchange and merchant fees and only want to move these in one direction—down. With inflation rising and the cost of living increasing, this pressure from regulators is not going to go away. There are only so many levers that regulators can pull in order to try and protect consumers from rising costs, and so the downward pressure on interchange fees will remain.
In Europe especially, any business that relies on interchange fees or merchant fees alone is going to struggle to do well, if it hasn’t run into trouble already. Any sensible acquirer or issuer will already be diversifying their business and offering added value—and many are crossing over to the other side—acquirers are becoming issuers and issuers are becoming acquirers. And there is more to this trend than simply looking for another revenue stream.
Owning both sides of a transaction
The increasing use of Open Banking is likely to be a worry for card schemes. Payments using Open Banking APIs circumvent card rails, cutting down on costs and reducing revenues for these schemes, a possible reason why these multinational businesses are either acquiring or trying to acquire businesses that specialise in Open Banking. But this is not the only threat.
If fintechs that provide both issuer and acquiring services own both sides of a transaction, then that transaction becomes simpler, faster, and cheaper. Issuer/acquirers can increase revenues, reduce costs to their customers, or potentially both. Customers benefit from faster settlement, and simplified processes. When an issuer/acquirer owns both sides of the transaction, it is essentially its own little closed ecosystem with all the benefits that it provides.
A question that remains is how often this will happen and is it enough to drive issuers to become acquirers and vice-versa. If these new fintechs are targeting the right customers then owning both sides of a transaction is more likely than one might think. Businesses that are providing their customers with financial services through an issuer are very likely to be accepting payments made using these services.
Acquiring and issuing was already a game of fine margins, improving these margins for some transactions is likely to make blurring the lines between acquirers and issuers tempting enough for some to make the shift. It’s a trend we will see continue. On its own, however, it’s unlikely to shake up the four-party ecosystem or worry the card schemes too much—other, bigger changes should have them more worried. This trend will instead affect the issuer and acquirer market directly. Can the lines be blurred without too much disruption? We’re likely to see more partnerships and more M&A activity as a solution to this problem—why try and move into new parts of the payments ecosystem when there are synergies waiting to be found with other successful payment businesses? When there are benefits to owning both sides of a transaction, it makes sense to work closely with that other side.