The Acquiring Market
In a world economy fundamentally altered by the COVID-19 pandemic, card transactions are more important than ever, as economies try to further reduce the use of cash and encourage the use of contactless payments. As such, acquirers have a more important role than ever before in ensuring seamless card acceptance across an increasingly greater range of merchants. Not only is acquiring more important than before, but also many smaller businesses are beginning to accept card for the first time, meaning this is a highly important time for acquirers to focus on their solutions. This rapid focusing of attention can be seen in the significant growth of contactless transactions values identified in Figure 1, in data from Juniper Research.
Figure 1: Total Contactless POS Transaction Value Per Annum ($m), Global, 2016-2021
Source: Juniper Research
In this context, it is hardly surprising that acquiring has become a highly congested market. In some cases, card issuers offer acquiring, as in the case of American Express. There is a high degree of overlap as well in what most acquirers offer. Furthermore, many acquirers will offer card processing, POS hardware and eCommerce payment processing capabilities, making this a highly complex market. This overlap is also the case irrespective of the two main types of acquirers in the market, those who are directly part of banks, such as Chase Bank in the US or Lloyds Cardnet in the UK, and third-party acquirers, such as FIS or First Data.
This fractured landscape makes differentiating acquirer services difficult. While marketing will vary, and acquiring generally forms part of a larger portfolio of solutions, most acquirers have fundamentally similar solutions that perform the same function. While there are wider solutions that complement acquiring, these tend to be around the same areas, such as expanding the reach of payments into the online area or into sales insights. However, many of these value-added services that exist are generally tailored towards larger merchants, with few tools that smaller businesses can take advantage of without additional expertise or tools. In addition, many acquiring solutions have similar pricing, with the acquirer only making a small margin on top of interchange and card scheme fees, in order to cover risk, overheads, and generate profit. While this does vary somewhat by regional or country level market, pricing between acquirers is relatively static.
Acquirers have also suffered during the pandemic, as much of the in-store spend has migrated to online channels. This is particularly notable in the restaurant area, where spend that was previously via the acquirer in-store will now be via a third-party delivery platform. As such, acquirers need to rethink their models and deliver more value to their merchants through their ISV (Integrated Software Vendors) partners, including such as card-linked analytics, CRM, loyalty and omnichannel reconciliation solutions. This is where partners such as Izicap, a French card-linked CRM and loyalty platform that is gaining momentum in Europe, can add significant value.
Due to the many pressures and competitive environment, if acquirers can successfully differentiate their portfolios, it will bring them substantial benefits. Accordingly, acquirers should be looking to find areas which are not currently well served and leverage these opportunities as compelling differentiators.
Loyalty’s Potential as a Differentiator
One area which has potential for acquirers to leverage is loyalty. Loyalty is a hugely important market, particularly given the difficulties that the retail market any many others have faced in recent years. Retailers have been struggling for some time, with very strong competition on price, made worse by aggressive expansion from eCommerce vendors. This is not a unique challenge to retail, with hospitality among one of many other sectors also facing challenges. Given these difficulties, which have been accelerated by the pandemic, it is no surprise that user experience has become the most important differentiator for SMBs, which must be prioritised as a central part of a SMB’s operating model. Loyalty and increasing the stickiness of a customer relations can be a major benefit to SMBs.
Loyalty, while highly important, can be too narrow a term to describe what is needed to change the user experience. Central to launching a loyalty scheme is the ability to ingest and analyse user data. Data can be a highly valuable resource in a number of areas, but is meaningless without the ability to analyse it. Data can be valuable when relating to specific user’s behaviours, enabling targeted marketing. This data can also be valuable in a wider sense, by allowing SMBs to better understand their own business, highlighting successful product lines and areas of potential streamlining. As such, only the introduction of both loyalty and data analytics at the same time can lead to significantly improved strategies for SMBs.
Given the importance that loyalty and data analytics have across sectors, offering these solutions in a compelling package has significant potential as a differentiator for acquirers. While acquirers offer many services throughout the financial ecosystem, such as accepting in-person payments at POS, eCommerce payments or even banking services for some acquirers, these services typically do not have direct implications for the user experience. By offering loyalty and data analysis solutions, acquirers would be doing something different, which is highly valuable in the highly commoditised landscape.
However, acquirers will require some changes, in order to successfully address this new area. As this is not core to what they do already, they may lack the expertise or technical capabilities to create a compelling solution in the loyalty and data analysis areas. Accordingly, this area is ripe for partnerships. If acquirers can partner with the right vendors who can offer these solutions, they can leverage that to differentiate their product portfolios. When seeking partnerships, alignment with target markets and ease of implementation will be important considerations for acquirers.
The Small & Medium Business Dimension
Another important element to the acquiring market is the demographics of the customers acquirers serve, particularly when considering what differentiators can be used to advance acquirer’s solutions. Of particular interest presently is the small and medium business segment, which has been attracting a huge amount of interest for some time. In a number of ways, the SMB market has been a popular target for new products and services, as well as high profile investments into vendors serving that market. This is particularly noticeable in the area of business banking, where new banks such as Azlo in the US and Tide in the UK have been very high profile.
SMBs are a popular target because they typically have not been served very well by existing solutions, in banking but in other areas as well. Access to finance and new technologies has brought on particular challenges, which vendors across industries are beginning to address. Acquirers deal with SMBs and generally offer tiered payment solutions depending on business size, but there is very little in terms of value-added services specifically designed to benefit a SMB audience.
SMBs in general do not have a vast amount of insight into user behaviour, as they lack the specialised tools that larger businesses have. This in effect creates an uneven market, where larger businesses have advantages in terms of scale and technological capabilities, making it difficult for SMBs to thrive by comparison. Larger businesses tend to be highly data driven in how they operate, relying on tools such as demand forecasting and digital loyalty programmes to inform wider business strategy, as well as using digital tools to leverage omnichannel retail strategies. For SMBs, this is not an easy task to compete with, as many smaller businesses lack these capabilities. Therefore, the idea of loyalty and data insights tools that can enable a SMB to act more effectively to match user behaviour is highly compelling.
Acquirers are well placed to sell these kinds of solutions into SMBs in a way that other vendors are not. SMBs typically do not have nearly as many business relationships as larger businesses will, meaning that an acquirer will be one of only a few vendors who already deal with the SMB. Acquirers will also have terminal hardware deployed with the SMBs already, as well as the data that these generate. As such, there is a window of opportunity for the acquirer to translate these existing relationships into a wider one, broadening the relationship and increasing the average revenue per customer. However, in order to achieve this success, acquirers must not only offer new solutions in loyalty and customer insight, these solutions must be well judged, specifically for the needs of the SMB market.
Simplicity Is Key to SMB Success
We have already outlined how SMBs lack access to advanced tools for loyalty and data insight, but this is only part of the challenge. Not only do SMBs lack access to the tools, they also lack the expertise, digital awareness and time to take advantage of such tools if they are available.
Therefore, the challenge is not only in tailoring tools that can be suitable for SMBs, it is also in creating tools that are easy to use and deliver added value without requiring massively onerous changes to the way SMBs operate.
This is a significant challenge, given the highly complex nature of the loyalty and data insight solutions market. There are a huge number of different tools and platforms around that can tailor any aspect of the way a business operates across retail and many other sectors, from personalised marketing via email and A2P messaging, to loyalty apps and cards, and many other elements. As such, for SMBs who are not highly digital in the way they already operate, this is incredibly intimidating. Picking the right solution, which focuses on the specific element that can add value, is almost impossible.
However, this does not mean that SMBs should ignore the digital loyalty and data insights area and the benefits this can bring them. The benefits are simply too large to ignore. In the face of the pandemic, businesses which have deployed effective digital strategies have fared better than those who have not. This has brought into focus for many the need to go digital, as business challenges are more severe than ever.
What then is the solution? The ideal scenario is one where the SMB has access to a tool that is simple and quick to use, but also able to add value. This scenario requires a platform that emphasises breadth of capability over depth. While this sounds limiting, SMBs do not have the capabilities to take advantage of complicated platforms. Simplicity and ease of use become the most valuable characteristics in this context. If a platform can deliver a broad portfolio of loyalty and data insight solutions, then this will be a success.
This conclusion brings us back to the potential role of acquirers in this scenario. With limited business relationships in place for SMBs, the acquirers can act as a trusted partner to highlight effective solutions that can add value to a SMB’s operations. Acquirers also have access to the right data to make these platforms work.
Figure 2: Multi-partner Process versus Streamlined Acquirer-driven Process
Source: Juniper Research
By having access to transaction data, acquirers can leverage data analytics capabilities to find insights in previously untapped sources of data. In effect, under this scenario, the payment card can act as the loyalty card, gaining some of the benefits of a loyalty card scheme without the formal requirements. Acquirers will also be able to integrate data and loyalty insights into existing management information dashboards and KPIs, adding loyalty data alongside more familiar financial metrics. Acquirers can also add value by giving SMBs access to experts who can help to craft successful digital strategies for SMBs, alongside existing relationships.
What Acquirers Must Do to Leverage this Opportunity
In this article, we have outlined that there is a significant opportunity for acquirers to address this market, but what are the next steps acquirers should take to address this effectively? Firstly, acquirers must thoroughly assess what they offer to SMBs, and if this offering is tailored enough to appeal to this unique market. Are the services being offered simple but effective? Secondly, they should explore what capabilities they have in loyalty and data, with a view to how they can incorporate this as a product within their wider portfolio. Thirdly, they should look to partner with third-party vendors who can offer compelling but simple platforms to their SMB users, to add value to their propositions. Izicap can add significant value here to acquirer relationships, by enabling additional data and loyalty capabilities to merchants in a simple but effective way. Fourthly and finally, acquirers must look to effectively market themselves as more than just an acquirer to their SMB customers, instead becoming a more well featured trusted partner and business accelerator for them. Data and loyalty are one important way they can achieve this. Acquirers must act now to capitalise on this opportunity, as many acquirers and other stakeholders will be looking to target the SMB market at this time, particularly in the ongoing wake of the pandemic.