The needs of merchants are becoming
increasingly complex and acquirers face a dilemma in choosing
whether to raise their merchant service charges as the competitive
nature of the industry is pushing prices down. This squeeze makes
the pricing of MSCs a delicate balancing act for acquirers, writes
Jane Cooper
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Merchant acquirers
are under pressure to offer their clients a greater range of
solutions, going beyond simply accepting card payments. The needs
of merchants are becoming increasingly complex, and as acquirers
become more sophisticated in meeting these needs, their costs are
rising. Acquirers face a dilemma in choosing whether to raise their
merchant service charges (MSCs), however, because the
highly-competitive nature of the industry is pushing prices down.
This squeeze makes the pricing of MSCs a delicate balancing act for
acquirers, especially as most players are still differentiating
their offerings by price, rather than the services they can
offer.
That is beginning to change, however, as there
is a demand for acquirers to be able to provide merchants with a
lot more than they have done in the past. Players in the industry
are no longer positioning themselves as businesses that only focus
on acquiring, terminals or processing.
“It is recognised throughout the industry that
you should also take steps in the value chain beyond your current
activities to remain a first-hand player,” Andy Makkinje, executive
advisor at Equens, tells Cards International.
“Parties are taking serious steps in
broadening their activities in the value chain,” Makkinje adds.
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By GlobalDataHe cites recent developments in the industry
that demonstrate this trend. For example, Ingenico’s integration of
Germany’s easycash into its business means that it has been able to
expand beyond its core business of hardware and terminal services.
Through the deal, which was first announced in September 2009,
Ingenico has been able to get involved in other areas of the value
chain as easycash covered value-added services such as loyalty
solutions, white-label processing, gift cards and data
analytics.
Francesco Burelli, pPrincipal at Value
Partners, comments on the changing nature of the industry:
“Merchant needs have expanded well beyond the
provision of payment card acceptance services forcing what once was
‘merchant acquiring’ to expand into a wider ‘merchant card
services’ proposition.”
The increase in demand for value-added
services such as data analytics and loyalty programmes has
increased the competition for the ownership of merchant
relationships.
“Overall the broadening of merchants’ needs
have enabled third parties, such as processors, to expand their
services that were formerly designed for merchant acquirers,”
Burelli says.
As well as the broadening of services that can
be offered, there has also been an evolution in the types of
payments themselves. Burelli points out that the merchant acquiring
industry is faced with opportunities from new segments of emerging
merchants, such as online social and gaming communities, which
present opportunities in the area of micropayments.
“This is an industry in which the competitive
pressure has always been high. But with the growth of
transaction-capture methods like contactless, the entry of new
players in the payments space – such as mobile operators – and the
increasing sophistication of merchants’ needs, there is a growing
operational and commercial complexity to be mastered,” says
Burelli.
With this
increased complexity, however, also comes increased costs. Merchant
acquirers want to raise their MSCs, but they are pressured by
merchants and their competitors to keep their prices low.
Chris Davies, managing director at HSBC
Merchant Services, comments that MSCs are rising.
“MSCs are on the rise as the interchange fees
set by the card schemes are on the rise, partially due to an
increase in their own costs. The increasing risk of offering card
payments services to smaller merchants, the mainstay of all
merchant acquirers businesses, means non-interchange charges are
also on the rise.
“Card issuers are also interested in
increasing their revenues due to economic concerns and they are
doing so by issuing premium cards with high interchange fees
attached. The more premium cards a merchant accepts, the higher
their MSC card acceptance costs will be as a result.”
Interchange fees take up the bulk of MSCs.
Some industry experts estimate that interchange fees account for
approximately 70% of the MSC, while some merchants have said that
the figure can be more like 90% of the MSC. These interchange fees,
which are paid by the acquirer to the issuing bank for each
transaction, have been the subject of merchant anger and regulatory
attention. Acquirers are stuck between the networks, who set the
fees, and the merchants who resent them, particularly as they are
unable to negotiate the interchange fees with the networks. Some
merchant groups, such as EuroCommerce, which has brought complaints
about interchange fees to the European Commission, argues that the
existence of the interchange fees distort the competition between
merchant acquirers.
While interchange has been the source of most
of the merchant discontent, the other elements in the MSC have also
been criticised. Merchants have accused acquirers of being opaque
in their pricing of MSCs as in the past they have been unwilling to
give a breakdown of the specific costs. The pricing of MSCs has
been a touchy subject for the industry and most acquirers are
reluctant to comment on the structure of their charges.
It is the remainder of the MSC – the
non-interchange part – where merchants can negotiate with
acquirers, but there is little room for them to manoeuvre.
Davies comments: “The interchange limit
greatly affects merchant acquirers’ ability to offer competitive
pricing as it makes up the vast majority of an MSC. HSBC Merchant
Services recently introduced more transparent, non-bundled pricing
for merchants, allowing them to see exactly what charges make up
the fees on their monthly invoice. We believe our transparency on
pricing will enable merchants to question rises in interchange fees
and help to drive reform of card pricing in the payments
industry.”
The make-up of the MSC
There are many elements that contribute to the
setting of the MSCs, such as network marketing costs, premium
acceptance fees, processing fees, research and development
costs.
“The remainder of MSCs, usually up to a third
of the overall charge, are set by acquirers, who need to offer
competitive MSCs while still covering their own costs. These costs
include maintaining and protecting our systems – we receive regular
scheme mandated changes and have to deliver these changes within a
set timescale i.e. like the change from bundled pricing,” says
Davies of HSBC Merchant Services.
Also, points out Equens’ Makkinje, merchant
acquirers have the challenges of dealing with technical
specifications. “A lot of compliancy factors have to be dealt with
by merchants as well,” he says. For example, some merchant
acquirers have to ensure that merchants comply to the PCI DSS
security standards that are deemed necessary in order to accept
payment cards.
Davies adds that the biggest pressure when
setting the non-interchange element of MSCs is risk. “Risks include
chargebacks and merchant insolvency or bankruptcy, which has been
exacerbated by the current economic climate,” Davies comments.
The degree of risk that the acquirer has to
bear depends on the type of business that the merchant is in. For
example, restaurants and pubs are less likely to issue refunds to
customers through chargebacks because the goods will have already
been consumed. In businesses where the item is used much later –
such as wedding dresses or plane tickets – there is greater risk
that the customer will want their money back because of a change in
circumstances, such as a relationship mishap or an erupting volcano
that means flights have to be cancelled.
Davies elaborates with more examples:
“E-commerce companies that take payments in a card-not-present
environment generally pay higher fees than those businesses
involved in face-to-face transactions due to the higher risk
involved. Also businesses that take payments for goods that will be
delivered in the future pose a higher chargeback risk and their MSC
will reflect this additional risk.”
Burelli comments: “Fraud and, in particular,
credit risk are two factors that merchant acquirers are taking in
consideration in a more proactive manner during the merchant
recruitment process and for pricing purposes.”
Fighting fraud
Fraud continues to be a challenge for the
merchant acquiring industry: “Fraud will always be the constant
driver for the never-ending innovation related to security and
fraud prevention. Criminal rings are challenging the industry and
are always prompt in exploiting the weaker player in the market or
the most vulnerable point of compromise within the merchant
acquiring value chain. The fraud prevention challenge is now as
demanding as it has always been and it is a prominent challenge to
the acceptance industry,” Burelli comments.
Pressures such as these add to the elements
acquirers need to consider when pricing their MSCs in a competitive
way. Richard Armstrong, Barclaycard’s head of UK qcquiring argues
that it is about balance:
“As with all businesses, one of the biggest
pressures we face is getting the balance right to ensure we price
competitively in relation to other acquirers, but to also ensure
that we take into account the costs we’ll face to provide the
service and generating a return for the business. We go through
this process to set the acquiring fee and there are a wide range of
factors that we need to take into account but there’s also a very
healthy degree of competition in the market and that helps us focus
on getting the pricing right,” Armstrong comments.
Many of the players, in order to compete, are
focusing on building scale and expanding their footprint. Much of
the competition, argues Equens’ Makkinje. is based on price and not
on services. To be able to offer a better price, many companies are
aiming to build scale and increase the volumes of their business to
keep their costs down.
One such example was the acquisition of
montrada, a card acquiring and network service, by Equens. The
acquisition of montrada, which was previously owned by Commerzbank,
meant that Equens has been able to extend its footprint further
across Europe and get closer to its goal of establishing a
pan-European business. The deal was announced September 2010 and
means that Equens can increase its scale and grow its transaction
volumes as it continues to offer processing, switching, acquiring,
processing services across Europe.
The introduction of the Single Euro Payments
Area (SEPA) in theory makes it easier for acquirers to scale up
their operations in Europe as there should be no difference between
domestic and cross-border payments within the eurozone. Some
executives complain, however, that there are still barriers to
entry in new European domestic markets and that the vision of
players being able to offer seamless cross-border acquiring
solutions is not quite a reality yet.
“Although the retailers are looking for
pan-European solutions, it appears that not everyone is ready for
pan-European solutions. However, some parties in the acquiring
business sense the need of large retailers and are working on this.
Still a lot of difficulties are encountered, merely in the field of
connecting terminals to hosts – the protocol issue. This often is a
regional issue, which is not easy to overcome. Apart from the
protocol issue, there is the issue of domestic brands. Although
being SEPA-compliant in many cases rules, regulations and technical
aspects often prevent a pan-European solution,” says Makkinje.
The scaling up is in part of a response to
gain the economies of scale that are necessary to compete in the
acquiring marketplace. The industry remains competitive, and is
made more challenging because of the evolution of merchant needs.
Burelli comments that the consolidation is being driven by a couple
of factors: “Merchant acquiring is also a volume intensive industry
in which a minimum scale is required in order to be able to keep up
with the investment required for the continuous upgrade of
infrastructure and so scale is a key success factor. This upgrade
does not include only the system changes needed to incorporate
adjustments in rates, but also the on-going efforts required to
develop and fine-tune additional functionalities, for example fraud
prevention,” says Burelli.
The trend of consolidation is typical for a
mature market such as the merchant acquiring industry, but industry
experts argue that it is not an unstoppable or inevitable trend.
Davies argues: “Even though consolidation is being driven by the
over-riding need to cut costs through economies of scale, it is by
no means inevitable: those companies that can offer value-added
services and innovative products will always be able to increase
their market share.”
