The vast and rapidly growing global e-commerce market accounted for $1.316 trillion in 2014, according to eMarketer. Naturally, Payment Service Providers (PSPs) have fared very well in this increasingly dynamic market to date. Whether offering platforms and gateways for receipt of e-payments, supplying tools for dealing with fraud and risk, and/or assisting in reconciliation and reporting, most have carved out a nice niche through such merchant services.
However, no industry is immune from market forces, and the payments space is no exception. Today, PSPs are under increasing pressure from several directions, including demanding merchants, mounting operational complexities and new market entrants. To add salt to the wound, those linked to traditional banks for online payment solutions are starting to lose merchants who prefer the growing number of fintech players that cater more specifically to their needs.
Merchants’ Demands: Higher Than Ever, at Minimum Cost
Merchants’ expectations and demands are escalating, forcing PSPs to provide innovative and comprehensive solutions and services that address a wide range of issues. This ‘laundry list’ can include anything from smarter tools for more efficient billing, accounting and logistics to playing a larger role in reconciliation and reporting.
It doesn’t stop there…
Merchants are now demanding low-cost cross-border options that allow them to sell internationally. They expect to pay least-cost routing and local fees for global transactions, and insist that their PSPs have broad, in-depth knowledge of regional preferences and compliance regulations in every region under the sun. And for all this, they expect negligible costs and pricing models that are completely transparent.
Deconstructing Back-Office Global Complexities
If a PSP wants to offer its merchants global e-commerce opportunities in 30 countries, it generally needs to sign an average of 50 different acquirer contracts and execute 50 complex back-end integrations and 35 front-end integrations, using 20 different types of hardware.
Then there is the cost of engaging multiple acquirers in order to enable cross-border e-commerce across all key regions. The chart below from Consult Hyperion shows the potential cost range of payment processing features for one acquirer. If a retailer or a PSP wants to cover more than one market they have to integrate to multiple acquirers thus multiplying these below costs for every acquirer. In some cases, they will end up in the 7 digit range of costs.
Card Schemes to Logistics Companies, New Entrants Invade
A wide variety of companies are now competing with PSPs in the e-commerce space, including logistics companies, card schemes, banks, e-commerce solution providers, accounting and billing firms, and POS terminal manufacturers. Most of these companies already possess a substantial customer base and are well positioned to quickly and inexpensively add payment options to their offerings.
Risk of Losing Merchants to Other PSPs
According to Innovalue, between 2010 and 2015, the number of Top 40 European banks providing in-house acquiring services shrank from 71% to 58%. Since acquiring is a non-core banking service, banks frequently prefer to offer the service, but not be the actual provider. In many cases, it simply makes less business sense for these banks to purchase solutions and develop platform capabilities, rather than to outsource these services – resulting in a trend among many of Europe's leading banks towards switching their customers to external partners for the provision of acquiring services.
PSPs have learned that their continued partnering with traditional bank acquirers often results in their losing merchants to PSPs who partner with the new entrants and the smaller merchant acquirers – who are typically more agile and often inherently global.
Since it has become crucial for PSPs to select the right acquiring partner, and since many traditional banks are distancing themselves from acquiring services, it is becoming risky for PSPs to depend on traditional banks for this critical service.
Who Will Survive and Flourish?
All of these threats are serious and cannot be taken lightly. Only those PSPs that understand they can’t ‘do it alone’ will survive and thrive. In order to make the leap from domestic-focused to globally present, they must identify and partner with companies that can compensate for what they lack, be it knowledge, connections, contracts, technology, legal and license infrastructures or funding.
Although many PSPs consider their acquirers to be little more than settlement liaisons to the card schemes, the right acquiring partner can play a critical role in surmounting industry obstacles. A strong and savvy acquirer has the ability to whisk a PSP onto the global scene, quickly and inexpensively.
Insights from the Experts
According to Consult Hyperion, an acquiring partner should provide the simplest, most comprehensive and cost-effective global solution for the PSP – and the best experience for their merchants. The acquirer should be able to safely and securely open the global e-commerce and m-commerce worlds to merchants via a single uncomplicated PSP integration that brings reconciliation, KYC, reports and support under one roof, at the lowest possible cost.
The acquiring partner should enable the PSP to continuously adapt to merchant needs, facilitate streamlined onboarding, comprehend local nuances, support flexible business models, and ensure quick monetisation for itself and its merchants. In other words, the partner should help the PSP become an organisation that is easy to do business with.
Although it may seem counterintuitive, in many cases it makes sense for PSPs to partner with a single acquirer, rather than seeking out multiple acquirers for its domestic and international needs. The reason is that an acquirer with local jurisdiction in multiple countries is able to treat every transaction in all of those regions as domestic, thus significantly reducing interchange and banking fees. On an operational level, this eliminates the headache of dealing with multiple acquiring platforms, contracts and back-end complexities. And more importantly, it significantly reduces overall costs mentioned earlier.
By Yana Persky, Business Intelligence Manager, Credorax