Merchant Acquiring 2.0

How can Merchant Acquirers up their game to deliver value-added services to existing customers and create new business in the SME market? Peter Theunis, Head of Payments, EMEA, Endava, reveals more.

Over the last 10 years, merchant acquiring has evolved into a commodity, and players in the field are now differentiating their offers by lowering margins on transactional volume. Future-oriented growth in this space is to create an upgraded ‘Merchant Acquirer’ that will deliver value-added services to existing customers and create new business in the SME market. Merchants are ready to pay for services like loyalty, affiliate marketing, merchant self-service, and increased approval rates, especially when they result in greater customer engagement or revenue uplift. For international merchants, these value-added features are expanded to include multi-country processing support, localisation, automated, and enhanced reconciliation. Merchant priorities will therefore naturally shift from prioritising the lowest transaction costs to delivering premium services on top of commodity merchant acquiring. On the other hand, there is still the SME market that is today under-served but will have more and more need for payment services.

Value-Added Services

As mentioned before, merchants are highly motivated to invest in tools and services that generate greater customer engagement or revenue uplift. This is most noticeable with the rise of BNPL and the merchant fees that are tied to the opportunity to increase their revenue. These value-added features can be divided into 3 groups, namely: commoditised value-added services, advanced value-added services, and integrated value propositions.

At a fundamental level, commoditised value-added services are required to compete in today’s market with merchants expecting these on top of the basic transaction acquiring and processing. This includes services like alternative payment methods, dynamic currency conversion, faster settlement and funding, advanced reporting capabilities, and chargeback support. Without these features, it is difficult for merchant acquirers to compete in this rapidly changing market.

The advanced value-added services preserve margins and diversify revenue streams. Merchants can opt-in for these extra services at an additional cost and range from omnichannel reporting and analytics, advanced fraud management, card issuing for merchants, loyalty, and gift card programs to integration with merchant ERP’s to Tokenisation and integration of SoftPOS. Today’s market-leading merchant acquirers have already launched these advanced services but should nonetheless be included in other merchant acquirers’ roadmaps.

In the final group, Integrated Value Propositions will bring the merchant acquirer a clear competitive advantage against competitors in the same market. Often, they will team up with issuers, banks and/or ISVs (Integrated Software Vendors) to bring about new business cases and generate additional value. These include services like consumer loans at POS or ecommerce merchant loans with new underwriting processes based on card transaction data, easy access for merchants to financial services, etc. In this case, merchant acquirers step outside their traditional playing field to create partnerships with suppliers that can offer these features in a white-labelled way.

SMEs - The Next Big Thing

It’s predicted that revenue growth will come from SMEs and their suppliers, including a significant amount of accounting companies, including insurance brokers, real estate companies, and other professional services organisations, to drive the growth of payment services. Needless to say, it’s of significant value that merchant acquirers begin building service ecosystems for SMEs (done both through partnerships or acquisitions). Overall, SME expenditure on payments is limited so the actual growth can be found in business support services and software like accounting, salary management, logistics, cashflow management, etc. In the end, it’s crucial for merchant acquirers to have connections to market leaders in business supporting services/software and at the same time offer a ‘business-in-a-box’ solution with an extended set of APIs that can easily be integrated by SMEs.

One other factor to consider is SME diversity and the features that are distinctive to each industry further reinforcing the need to enter into integrations with partners that are domain specialists. For example, the generic retail, restaurant, and healthcare ecosystems have very few similarities, and each is structured to meet individual needs, goals, and priorities. As of last, it can be expected that marketplaces will take an important share of SME growth. It is up to merchant acquirers to develop their own marketplaces or to develop specific API-driven solutions like cross-border payments, multi-level merchant onboarding, etc. to support marketplaces. 

Conclusion

Merchant acquirers that deliver only commodity services will shortly phase-out in comparison to their innovation-focused counterparts. The delivery of added-value services is the minimum that needs to be offered to the traditional acquiring services. Focusing on one or multiple industries of the SME market to build an ecosystem of services for these markets will become even more important with the most innovative of players heavily investing to create the updated version of Merchant Acquirers. It is now up to the others to take the next steps as their relevancy is often tied to matching the speed of industry innovation.

About Peter Theunis

Peter is an inspiring leader and strategist with over 20 years of experience in payments, fintech, and digital banking. A facilitator and builder of world-class technology management and product development teams, he specialises in both start-up and scaled growth stages and is a trusted partner for clients in Europe, APAC, the Middle East, and the US. Before joining Endava, Peter held senior leadership roles in internationally recognised fintech organisations and was co-founder and co-CEO of a leading white-label payment processing provider. Besides work, and family commitments permitting, Peter enjoys a round of golf, travelling, hiking, and mountain biking in the Swiss mountains.

About Endava

Reimagining the relationship between people & technology

We accelerate our clients’ ability to take advantage of new business models and market opportunities by ideating and delivering dynamic platforms and intelligent digital experiences that fuel the rapid, ongoing transformation of their businesses. By leveraging next-generation technologies, our agile, multi-disciplinary teams provide a combination of Product & Technology Strategies, Intelligent Experiences, and World-Class Engineering to help our clients become more engaging, responsive, and efficient. Our Payments footprint covers the UK, Europe, and the US, focusing on helping clients build, integrate and support next-generation payment platforms to keep up with the fast pace nature and ever adapting digital world of payments.