Card Not Present to Card Not Relevant
26 June 2017
What is the future of merchant acquiring? Time to re-think?
Australia, and the world, is addicted to mobile phones and derivative devices. First we had Card Present card payment systems. Then the internet drove Card Not Present (CNP) systems. Now mobile phones are driving ‘Card Not RELEVANT’ (CNR).
The maturity cycle is creeping closer to a peak and constant changes are making it more difficult for merchant acquirers to sustain and grow their business. As it stands the traditional acquirer model enables merchants to accept card payments by acting as a link between merchants, issuers, and payment networks. Their role provides authorisation, clearing and settlement, dispute management, and information services to merchants. This is clinical, precise and cost-bound, with little thought given to the customer experience.
The merchant acquiring industry is dominated by a few large players across the globe, with the top ten acquirers in the world handling nearly 50% of the global cards transaction volume. According to Capgemini report on Challenges and Opportunities for Merchant Acquirers (2012), industry consolidation has resulted in acquirers having multiple inflexible IT systems which hinder innovation.
Challenges making it more difficult for merchant acquirers to sustain and grow their business include:
1. Geographical expansion
If you have a hammer everything looks like a nail. Developing economies should provide opportunities for card acquiring and merchant services as they migrate from paper to electronic. India appears to provide a huge opportunity, especially in the face of the great demonetization event of November 2016. Likewise the Philippines. But is it more likely that natively phone based payment services, like Wechat and Allipay, or Indian equivalents, will prevail? These offerings are slick, merchant friendly and trusted and accepted by the consumer in a broader context than just payments. Why would Indians or Filipinos adopt cards when they could simply use a native phone application?
Australia and other Western economies think of the card as the modern, convenient way to pay. It’s entrenched in our thinking and lifestyles. But in a developing economy where there are no cards, this thinking doesn’t apply. China demonstrates that a billion people don’t need a card to make modern ePayments. Kenya’s MPESA provided another case study of an entire population that migrated to electronic payments without cards or acquiring.
2. The demise of plastic
The virtual card has made its mark and it is an accepted way to transact. Plastic cards might have peaked in Australia as people realize that they can simply store their card numbers in an eWallet on their phone and use tap and go at POS or CNP for remote shopping. Issuing a virtual card saves distribution costs and eliminates some risk of loss and theft. But why even have a card?
China is leading the way to CNR with WeChatPay and AliPay, which do not rely at all on card schemes. MasterCard and Visa cards are relatively small potatoes in the domestic Chinese consumer payments market. However Chinese eWallet payments are overtaking card scheme payments in global value transacted with 800-million Chinese consumers holding e-wallets on their phones it’s still early days!
Virtual cards are perhaps a stepping stone to the elimination of cards altogether - CNR.
POS is a battlefield in Australia. We have new POS entrants with mobile and cloud models displacing traditional providers, and the integrated eftpos model based on the Card Present paradigm is under pressure. Card emulation on a mobile device helps bridge the gap between the Card Present world and consumer preferences, but it only goes so far. Card Not Present goes a bit further into the natively mobile world, but introduces charge back risks and higher merchant service fees.
Chinese tourism is increasing in Australia, and tourists want to use their own domestic payment wallets at POS since they generally don’t have or use cards, this means retailers have to accept AliPay and WeChatPay. This is highlighting to merchants and acquirers that the models are different – cards require one integration approach and wallets another. In the wallet to wallet scenario the concept of acquiring simply does not exist. Retailers need two systems, and there are lots of new entrants in the market helping them with the second system, e.g. AsiaPay, LatiPay, RoyalPay.
Is this sustainable? All signposts to me – consumer preference, economics, regulation - point towards a shift in the long term. CNR.
Sell or diversify?
Has the merchant acquiring market reached its peak? Many people will argue the opposite. An analogy in the energy market is the debate about the future of coal. Not surprisingly, I’m in the renewables camp, and perhaps I’m biased towards change more than the average person. A decade ago, investors were positive about the future of ATMs but then tap and go became a mainstay of Australian consumer behaviour. ATMs peaked and transactions are now in decline, forcing providers to revisit plans.
Can acquirers re-position so that they’re not totally reliant on cards as a payment mechanism? A challenge is that they are behind the scenes, sandwiched between retailers and banks.
Locally, the New Payments Platform (NPP) provides Australian acquirers with the opportunity to diversify, as it’s based on account to account payments, not cards. It is more aligned with the eWallet world. PayPal was a foundation member of the NPP, and much of the thinking in NPP is geared towards allowing bank customers to do what PayPal customers have been able to do for years.
All good things to come to an end. Acquirers should contemplate this.
Rod consults in strategic management and innovative solution delivery in the banking and finance industry. He has experience in Australia and internationally and is an expert in payment services, e-commerce and transaction banking.