The business of payments is complicated, one reason that much written about it is incomplete or just wrong. It has been said our payments system is one that no one would today create. But this is what we’ve got. And for all the attention given to new technologies and product launches, humdrum elements such as merchant acquiring are what make the whole thing work.
Just as much financial services, Merchant Acquiring is confronting changes that threaten revenues and growth. Acquirers are fighting this in multiple ways, but all too often with tools the suited to the past rather than the future.
What is that future? To understand that we need to understand what is driving current challenges.
The challenge: Merchant Acquirers are making less per unit than in the past, sometime as little at 2 or 3 basis points (0.02%-0.03%) per dollar of spending These amounts have fallen from 20-30 basis points just a few years ago.
What’s going on? Acquiring’s core revenue product, processing transactions, has become a commodity.
And why has it happened? One reason: the ability to compare and understand pricing is much easier in today’s digital world. Think how easy it is for anyone to compare airfares, car rental, and electronic equipment prices today. It takes less and less effort for a merchant to benchmark acceptance costs, and with that negotiate for lower rates.
Related to that, lawsuits and legislation (think the Durbin amendment) have raised awareness of interchange and rebranded them (“swipe fees”). Large firms have long had staff focused on payments. Smaller firms hadn’t but with growing awareness and ease of understanding, margin compression is creeping in to smaller firms.
Merchant acquiring has its own challenges due to structure of the payments business. What a merchant pays to accept card payments– the difference between what consumer pays and merchant receives– has 3 components in the 4-party (V
isa/MasterCard) world: interchange, assessments, and acquirer fees. The first 2– interchange and assessments–are charged to the merchant acquirer who then passes them on to merchant. The acquirer has no say in what interchange and assessments are charged. However the merchant can negotiate only with the acquirer. So where does the pressure fall? On the acquirer’s piece of the pie.
Interchange and assessments are meant to compensate card-issuing banks and networks for all they do to enable card payments. Fair enough. But over the years interchange and assessments have crept up–about 1.00% (0r 100 basis points) — in the case of interchange, a good part of that relates to rewards programs that are meant to increase spending on cards.
From the merchant’s perspective, it is just increased cost of accepting payments. And since the merchant only negotiates with the acquirer, and the acquirer only controls a smart portion (~5%) of the costs to merchants, it is that 5% that gets squeezed. And the squeezing will continue for a while in the U.S., making the acquirer’s job difficult.
What’s the answer? I’ll be offering some thoughts in subsequent posts.