Group coupon schemes and other
companies offering customer loyalty services are stealing a march
on acquiring banks and ISOs. Charles Davis argues that merchant
acquirers are in an excellent position to help retailers attract
new customers, and should capitalising on the
opportunities.
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Online couponing companies,
merchant-funded rewards programmes, and other mobile-phone-based
marketing programmes are introducing new ways for retailers to
engage customers. And merchant acquirers, and in particular banks
with both card issuing and merchant-acquiring operations, are
well-positioned to seize the possibilities they present.
A new Aite Group study,
Merchant Acquiring Opportunities: Focusing on the Merchant’s
Clients, examines this opportunity for merchant acquirers and
banks seeking to capture new revenue on the issuing and acquiring
side. The report provides insight into the changing needs of
merchants and discusses ways in which they can differentiate
themselves in the market.
Group coupon companies, exemplified
by Groupon, are rapidly finding favour among consumers, as are
mobile-marketing programmes. Merchant-funded rewards programmes are
a bit older, but merchant acquirers haven’t yet figured out how to
capitalise on the changing market, according to Adil Moussa, an
Aite analyst and author of the report.
Today, if a bank owns both credit
card and merchant-acquiring operations, volume-generating ventures
typically are linked with the issuing side and new possibilities
using the bank’s own merchant clients on the acquiring side are
overlooked.
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By GlobalDataOver the years, merchant acquirers
have offered value-added services in the form of products that
helped merchants with their payments (check services, gift cards,
etc). If the merchant acquiring industry continues to focus only on
financial transaction processing, it risks eventually finding
itself offering rewards to merchants, which will contribute to
increased margin compression.
Instead, Aite Group believes the
merchant acquiring industry should help retailers address their
real needs: the acquisition and retention of customers, and how to
make customers spend more. In doing so, merchant acquirers will
bring value to their merchants, while putting the onus on the
merchant to offer the incentives to their customer.
“If the merchant acquiring industry
keeps focusing on financial transaction processing only, it risks
going toward the next step in acquiring and retaining merchants:
offering rewards to merchants,” Moussa wrote.
“This will only contribute to more
margin compression. Instead, Aite Group believes that the merchant
acquiring industry should help merchants address their real needs
in order to differentiate themselves and truly bring value to their
merchants.”
Changing
priorities
In the early days of credit cards,
acquirers’ primary focus was getting merchants access to people who
had credit.
As credit cards grew in use and
popularity, the US market moved toward a democratisation of credit
cards, but also reached a saturation level.
Merchant acquirers then also
started to fulfill some of merchants’ secondary needs – providing a
stable transactional platform, a reduced turnaround time to get
access to funds, fraud detection services and access to capital –
but stopped short when it came to fulfilling the most elemental
need of bringing new customers to merchants.
For the bank that has both issuing
and acquiring arms, the opportunity is most interesting, especially
at the local level.
While most regional issuing banks
have been trying to offer access to large retailers via a rather
meager discount (5 percent to 10 percent), the Groupon model
demonstrates that consumers are attracted by deep discounts at the
local level.
In fact, the report finds that the
group coupon model, merchant-funded rewards, and the mobile-based
marketing demonstrate four important points:
- Merchants are willing to
offer up to 75 percent of the face value of their merchandise and
services in order to acquire new customers; - Merchants are willing to pay
a flat monthly fee in order to communicate instantaneously with
potential customers; - Customers are very receptive
to larger discounts offered by merchants, as opposed to smaller
discounts; and - Customers show eagerness to
cash-in the offers provided by local merchants.
Banks can approach their own
merchants and secure participation in a rebate programme designed
to help drive traffic to the merchant and provide the bank’s
credit- and debit-card holders with rebates at the local merchants
for which the bank processes.
Banks can actually charge for such
a programme; merchants have demonstrated, through their use of
Groupon, that they are more than willing to pay for exposure to new
traffic.
The report finds that banks are
also in a unique position to learn from the different models that
exist today and combine the best of their offers in order to reach
these customers. Banks can modify the social networking model by
adding aspects of mobile marketing technology such as instant
offers to enrolled cardholders and charge merchants for their use
of such a platform.
Banks well
positioned
“In this way, banks are the most
well-positioned party to generate revenue from interchange,
acquiring fees, and participation fees,” the report said.
“The revenue that can come from
such a programme can be very high. If we apply the average
cardholder participation [10 percent of cardholders] and their
average spending [$100] as a proxy, we calculate that the top 10 US
banks can generate an aggregate additional total annual revenue of
$51 million from interchange and acquiring fees.”
Factoring the lowest monthly fee
that merchants are willing to spend to on such programmes ($29
monthly), merchant acquirers can generate as much as $130 million a
year if only 10 percent of their active merchants participate.
“Consumers and merchants are
willing to pay for services as long as those services are
legitimate and bring them certain privileges and benefits,” the
report concluded.
“Banks positioning themselves to rebound from the effects of the
economic recession will connect their consumers in order to create
value for both consumers and merchants.”
