Merchant Acquirers stepping out of the commodity corner

Merchant acquirers stepping out of the commodity corner

There have been many developments in the world of payments in the past few years, as companies have consolidated and expanded into other parts of the value chain. Acquirers are feeling pressured to move out of the commodity corner, yet the response is often not adequate.

There are acquirers that have ventured into the PSP domain by purchasing other platforms, but these have resulted  in solutions “bolted and molded” onto each other, thus still not delivering the seamless end-to-end solution they were hoping for. Other acquirers are attempting to deliver additional services of their own, such as reconciliation, billing, and data analytics. However, as the majority of these acquirers use third-party processors, they are dependent on the quality of the data they are receiving from these legacy platforms. Most processors are operating on 20-year-old technology and are therefore unable to deliver data on such a granular level that it would create an opportunity to truly offer value towards merchants.

Acquiring commoditized

Consolidation among acquirers has led to large, inflexible organizations that tend to have multiple legacy systems in place. This in turn has led to high maintenance costs and has slowed down innovation. Further down the value chain, payment gateways started off mostly as an integration layer but slowly began to offer more and more value-added products and services, such as fraud and risk management, merchant onboarding, data analytics, and their own billing and settlement engines. These enhancements have resulted in increased merchant loyalty while commoditizing acquirers in the process.

Acquirers traditionally process and collect card payments for their merchants and are responsible for aggregation and reconciliation. The rising number of PSP’s, combined with increased regulatory pressure on merchant service charges, has reduced merchant acquirers to price fighters with small margins. Acquirers have outsourced the technical processing almost without exception and are proving to be less tech-savvy, innovative and capable of rapidly deploying new solutions into the market than payment service providers. This has led to acquirers holding only their principal membership and licenses: not the merchants and their loyalty they desperately need.

Gateways are fundamentally different from acquirers in their setup. Gateways are sales organizations in essence, aimed at expanding the number of connected merchants as fast as possible. In terms of culture, payment gateways clash with traditional acquirers, considering the fact that acquirers are the ones with contractual obligations to the card schemes. The acquirers risk (financial) consequences if their merchants do not meet the requirements set by the card schemes.

Infrastructure

Besides the different corporate cultures, acquirers are facing substantial technical and infrastructural challenges. Most acquiring platforms do not allow for speedy technical integrations with their gateway/PSP partners by design. This makes for lengthy and complex projects, time and time again. Additionally, there is only a handful of acquirers that have the in-house capabilities to do the technical transaction processing; most acquirers use a third-party processor such as TSYS or First Data. They are thereby forced to work with the information coming from these external processors who are not able to deliver the granularity in the data that is required to truly offer value added services. At the end of payment value chain, it is the merchants that are suffering from these limitations. They have to rely on the PSP’s ability to leverage the data from the acquirers’ external processing engine in their analytics module.

Acquirers in the traditional value chain

Offering a complete value proposition

The acquiring-processing landscape is a true oligopoly with 10 to 15 processors controlling 80-90% of the business. This has not exactly forced these parties to innovate and to upgrade their platforms and capabilities. Processing architecture is mostly old and cumbersome and not built to supply parties that want to offer innovative and real-time data insights towards merchants. In turn, merchants that are looking for new business models and for access to detailed and real-time transactional data will be disappointed, as they have to muddle through the inflexible chain that is currently in place.

Challenge means opportunity

The technical misfit with many of the acquirer’s gateway partners forms a challenge, but it also harbors an opportunity. Acquirers that succeed in wrapping a modern API around their existing infrastructure will be well positioned to expand connectivity rapidly, and this is what some acquirers in the market have indeed been doing. Layering a modern API on top of the existing platform, however, is not yet a full-circle solution.

An acquirer is typically associated with one or more external processors, which means that most acquirers are consistently leveraging legacy processing technology. The fact that every third-party processor has developed its own independent systems has resulted in a lack of harmonization and has been slowing down innovation in the card processing industry significantly, as new solutions would have to be developed for each processor separately.

This underlines the enormous opportunity for those acquirers that succeed in developing their own processing engine capabilities. Having your in-house processing engine directly integrated into the schemes will open the door to optimally leveraging interchange management for instance. This allows acquirers to bring significant cost advantages to their merchants, and as such, delivering all payment intelligence to their merchant channel through a single API presents a unique opportunity to claim loyalty and expand customer base.

Acquiring 2.0

The position in which many acquirers find themselves nowadays shows that the payments industry as a whole has been in the shadow of many other aspects of the financial services industry, such as lending, investments and corporate finance. This again has everything to do with the idea that a payment is a mere commodity, but this view on payment processing is too narrow. The information that can be leveraged from each transaction can help merchants learn more about customer behavior, issuer behavior, success rates and popularity of different payment methods and endless other information-rich data points that they can use to their advantage.

Because the industry has been deprived of radical innovation for such a long time, there is so much to gain and so much up for grabs. Innovative players like Adyen offer the full end-to-end solution, including their own in-house processing capabilities. They are able to deliver all of this through a single API and have been very successful at claiming the loyalty of the largest merchants in the world. Rome was not built in a day however, so for the acquirers that find themselves being forced to make a move, the eternal dilemma of “build or buy” will apply.  

Investing in technology both on the front-end and on the back-end and subsequently being able to offer a truly seamless end-to-end solution will deliver an unparalleled level of granularity to the information that these organizations are able to deliver to their merchants. Value added services like these are exactly what is going to help acquirers step out of the commodity corner.

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