Merchant acquiring: GMSC says “time for re-evaluation”

New payment offerings and providers – particularly mobile – together with pressure on merchant service charges (MSC) will require merchant acquirers to re-evaluate their position in the payments industry. This was among the conclusions at a meeting of the Global Merchant Services Council (GMSC) held in Berlin at the end of February.

The GMSC, which meets semi-annually, is a platform for industry leaders around the world to share best practices and brainstorm the future of merchant services. The deliberations ended with members formulating ten conclusions:

1. Developed markets, and in particular the US, are experiencing severe pressure on profitability in the acquiring business.

Data from Lafferty Group’s World Cards Intelligence database shows continuing pressure on merchant service charges as a percentage of credit card billed volume although this has in part been compensated for by increases in billed volume in certain markets.

2. Momentum behind mobile payments indicates that we have reached a tipping point where overall share will accelerate rapidly.

The ubiquity of the mobile device has opened up financial access in the developing world with a plethora of initiatives achieving notable success. Meanwhile in the developed world the growth in smartphone penetration has led to increasingly sophisticated mobile banking applications.

3. The progress made by China UnionPay in Asia and indications of its intentions in Europe pose a major challenge for local European operators.

The Chinese payments network is committed to following its local customers by offering services to match their increased presence in European markets.

4. Alternative / non-bank payment providers should be regulated in the same way as banks.

The growth of prepaid in particular suggests that it should be regulated in the same way as deposits.

5. 2011 is a make-or-break year for European payment schemes.

There has for some time been a variety of Europe-based payment schemes vying to provide an alternative to the traditional dominance of Visa/MasterCard but without apparent success to date.

6. Most payment innovation is coming from non-banks. Banks need to change culture to compete.

Customers, particularly those younger and more technologically inclined, require more imaginative and sophisticated payments offerings. This demand is in general more likely to be met by a host of non-bank providers with banks trailing in their wake.

7. Consumers are now driving the payments agenda – something that is often ignored by banks.

Banks risk losing their traditional roles as dominant payments intermediaries by failing to respond to – and indeed influence – customer behavior in this area.

8. The value of information relating to payments behaviour is greater than the fees currently charged for payments facilitation: payments information is a bigger commercial opportunity.

Banks have neglected to collate and classify payments information thereby failing to build a meaningful profile of their customers’ habits and exploiting the value contained therein.

9. Legislation and regulation consistently trail innovation in payments.

Central banks and regulators are aware that the rise of alternative payment mechanisms challenge their traditional approach to measurement and regulation in this area but have so far failed to anticipate and make timely responses to developments.

10. Elements of the merchant acquiring value chain need to re-assess their business proposition and re-invent: some may not have a future.

Continuing pressure on MSC – usually as a result of pressure on interchange but now exacerbated by the rise of cheaper, alternative payment options – has led to merchant acquiring becoming a low-margin business where massive scale is a prerequisite to profitability.

The decline in MSC is a feature also of a new Lafferty Report – Merchant Acquiring North America – edited and compiled by former American Express executive, Howard Allen. This is the latest in a series of regional reports examining the status of the global merchant acquiring business.

For more information on the Merchant Acquiring series of reports please contact steven.cowan@lafferty.com.