The squeeze is on for European acquirers. A wave of consolidation, both global and local, is sweeping through the industry. The rise of intermediaries like PayPal and Square are increasing pressure to lower costs and reduce the friction of onboarding. Merchants want greater transparency in payment processing fees, so they can negotiate better rates. Acquirers must take note of these changes and adapt if they want to survive and prosper.
By 2022, the EU card-acquiring market will be worth USD 14.7 billion in net revenue, Aite Group estimates. That’s why there are so many technology upstarts trying to carve out a piece of a lucrative market, and so many larger acquirers opening their wallets to fund acquisitions.
Merchant acquiring is on the cusp of fundamental change. Merchant businesses are increasingly run by millennials accustomed to user-friendly consumer tech, cloud-based SaaS offerings, and apps and they expect their partners to be technologically on par.
Many existing merchant service providers are hampered by legacy platforms, rigid processes, and paperwork. Unless they can break away from the mindset and culture of an outdated business model, they are unlikely to make the leap to next generation acquiring services, leaving at danger of being reduced to pure payment routing providers.
Anemic growth
Europe is not alone in navigating treacherous waters. McKinsey analysts point out this is a global issue: ‘Important underlying trends will likely continue: ongoing consolidation—both regionally and globally; increasing investment requirements (eg, driven by the shift from physical to digital sales channels); and, most critically, the need for acquirers to transform from payments processors into software and technology-based companies.’
But European acquirers also face the added peril of relatively anemic growth, which McKinsey projects as a 2.4 percent increase in card volume for 2020 in Western Europe (just 1.1% for the UK and 0.4 percent for Central Europe).
Meanwhile, merchants are looking for increased transparency in processing fees, which acquirers traditionally have been able to veil within a complex schedule of charges that only an expert would be able to figure out.
Meanwhile new players, technology-based competitors like iZettle and Square, broke the traditional model by offering fixed and clear processing fees and elimination of traditional long-term contracts. Furthermore , EU regulators capped interchange fees in 2015—and have recently won agreement from Visa and Mastercard for additional limits.
Merchants have become much more educated about what goes into fees. As a result, many acquirers now offer more transparent interchange-plus-plus fees, identifying what goes to the card scheme, how much to the card issuers, and what markup is accrued by the acquirer. Naturally, with more transparent pricing, merchants are able to negotiate for reductions in that markup, squeezing profits.
The ugly side of onboarding
The emergence of new players has also illuminated the slow process of onboarding merchants.
The onboarding process for merchant card-present acceptance is time consuming and defies the global movement to digital business. It can take 2-to-3 weeks, or more, to onboard a merchant. Would anybody today buy a mobile phone and be willing to wait that long before they could start using it?
It’s time for acquirers to confront this issue before it’s too late. If Amazon can promise one-day or two-day shipping, why can’t acquirers provide merchants with web-access ordering and fulfilment in a matter of a couple of days?
Emergent technology-based competitors offer online ordering, drop shipment, and self-install with relatively little friction—some providers offer readers for free, or even provide simple to use smartphone dongles through retail channels. Most acquirers provide little more than online brochures, and rely on reams of paperwork that must be faxed and processed. If anything is in need of digital transformation, onboarding is it.
Urge to merge
Acquirers must respond and adjust to these forces of change. Larger companies are doing so by gobbling up competitors and technology enablers at a rapid pace—First Data buying up smart POS developer Clover, and now itself being absorbed by Fiserv; WePay selling out to J.P. Morgan Chase; PayPal snapping up iZettle; Vantiv taking over WorldPay and subsequently merging with Fidelity National Information Services Inc.
The European payments market is already in an unpreceded wave of consolidation, says the Oliver Wyman consulting firm. It predicts that ‘traditional acquirers and processors will continue to merge with revenue and margin driving e-commerce acceptance providers of the latest generation, in order to survive financially and stay relevant for merchants who expect a complete range of highly complex services.’
Keys to success
The business world today is driven by software and services, not by hardware. Acquirers can control their costs by adopting payment devices based on open systems that leverage open platforms.
Either they stay as they are, which bears the risk of becoming “just” a processor or they do change. They can change in two directions:
Become more international, following and supporting larger clients on their global and omnichannel journey. They would need to be able to enter new territories quickly either by buying a local acquirer or entering the new market directly.
Seriously enter the SMB market, which requires adopting a more merchant-focused perspective just like the ISVs and PSPs of this world; that means being more accessible and more transparent in pricing. Most of all it requires thinking outside of the traditional payment processing box, becoming more solutions-oriented to help merchants overcome business challenges. This requires fast execution and adaption, based on migration to open, hardware-agnostic, cloud-based infrastructure.
Next-generation acquiring will require flexibility, innovation, and adaptability. That’s the antithesis of legacy hardware and business models, which rely on closed, captured markets to lock-in customers and keep margins high.
About AEVI
AEVI provides the content, services and the device-agnostic platform to enable merchant payment solution providers to move and manage their classic payments propositions into a new value-added world of apps, payments and smart devices. The AEVI Platform helps merchant payment solution providers at any stage of their digital strategy to tailor solutions to their merchant base.
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