Merchant Acquiring Strategies: Adapt and Grow in Challenging Times

According to McKinsey, the quarterly global GDP in the second quarter of 2020 could decline by as much as 35 to 40 percent. The manufacturing industry is enduring a significant drop of end-user demand, supply-chain disruptions and plant closures. Oil prices have been sent crashing to their lowest level since 2001, and gas demand has fallen by one-fifth in some cases. Hospitality and tourism have seen the most significant impact, with an almost complete shut-down in activity and bookings in many world regions.

At the same time, certain technology-advanced businesses have hit the jackpot. For the online communication platform Zoom, user numbers have leaped from 10 million to more than 200 million people a day. E-сommerce retailers and related supply chains are experiencing triple-digit order and revenue growth. The cloud gaming industry is also on the rise: for example, the gaming platform Playkey reports 300% revenue growth. 

"In every hardship, there lies an opportunity to envision and create a brighter future. We firmly believe that after the COVID-19 outbreak, service providers who are able to tap into the power of digital technologies will come out the strongest." Simon Hu, CEO of Ant Financial

“Technology has become a GVC (great virus crisis) staple, right up there with food and toilet paper”.  Ed Yardeni, President and Chief Investment Strategist of Yardeni Research Inc.

In most cases, staying afloat now means re-building internal processes and relying on technology more than before. How long will it take a company to adapt to the new realities? The speed of adaptation is directly linked to the company’s core IT platform and whether it’s ready to change.

Retail payments and merchant acquiring business appear among the worst hit. Already, in the middle of March 2020, foot traffic to stores was down by around 20 percent in the UK and by more than 70 percent in Italy and the US (compared with the same period last year). Payment volumes on POS could drop as much as 30-40 percent in the short term, McKinsey predicts.

The payment wallet industry is also affected, with some leading apps in Asia reporting 20-30% less flows, despite the growing number of users.

Acquirers are under unprecedented pressure and taking unprecedented steps in this uncertain time to relieve pressure on their merchants, especially on the small and medium businesses. One trend is the elimination of acquiring fees.

Is this generosity only for major players who process large volumes of “on-us” transactions without interchange fees? Or could any acquirer reduce the acceptance costs for its merchants while not causing its own revenue decline? The answer depends on the flexibility of the acquiring platform and if it can accommodate alternative acceptance methods.

One of the alternative acceptance methods, both hygienic and cost-efficient, is QR code payments. It is particularly suitable for merchants who cannot afford a POS terminal. OpenWay clients have implemented the QR code technologies of all major payment schemes, including Alipay, Masterpass QR or UnionPay QR, also domestic schemes.

The long weeks of social distancing have fueled the adoption of contactless and online payments. This trend is promoted by card networks, governments and major financial institutions. Mastercard alone has enabled up to 200% limit raise for PIN-less contactless payments in 29 European countries. Central Bank of Russia has required banks to limit the e-commerce acquiring commission to 1% – that is cheaper than typical POS acceptance costs and motivates merchants to prioritize sales via web and mobile. Major acquirers globally are taking steps in the same directions decreasing fees for online acquiring. They offer hugely discounted pricing and free advice on how to build a payment journey for Internet shoppers.

Now acquirers are expected to enable digital payment methods as soon as possible. It would be a strong competitive advantage to add the “true omni-channel” label to their offering. With many shopping malls now closed, the consumer journey starts with retailer websites and m-commerce apps and finishes in designated pick-up points. Those who provide a seamless payment experience has higher chances to expand its portfolio of online merchants.

Another competitive advantage is to be prepared for the increased load on digital infrastructure after people shifted from social outings to social distancing. To avoid outages in online payment processing, acquirers can deploy high-availability solutions. Some of our clients implemented Way4 even on the cross-Atlantic scale: even if their authorization system in Europe gets down, transactions would be routed to the backup online system in the US. It guarantees that a payment initiated by a consumer is completed anyway.

For multiple acceptance methods, the preferred scenario is when all clearing and settlement is handled by one system. It helps acquirers to avoid interfaces redundancies and keep their payment processing more transparent.  

Due to the combination of different acceptance methods, channels and regions, the pricing management may be a challenge for acquirers. It takes a highly flexible tariff engine to ensure that every merchant gets an optimal offering. Here are some examples of the required flexibility supported in Way4:

One of our clients works with over 40,000 merchants and offers personalized pricing to each. This acquirer company saves much time and money by configuring all tariffs on its own, without heavy customization or vendor involvement. Their pricing schemes in Way4 can be based on over 30 transaction factors. The system can even analyze the shopping cart items in real time and charge the transaction fees or apply discounts accordingly.

With pricing diversity comes complexity in revenue calculation. How can acquirers keep a healthy balance between competitiveness and profitability? What’s the lowest merchants service fee that still makes sense for the acquirer? There are several business intelligence tools that predict acquiring revenues. Way4, for example, allows acquirers to measure the profitability of every individual account in their portfolio.

With less foot traffic to merchants and their need of financial reliefs, the conventional acquiring revenue based on the merchant service charge is in decline. Some acquirers are compensating for these losses through these innovative business models:

The modular architecture of the payment platform will be an advantage for a payment company that wants to generate more revenue streams by offering advanced technology to customers and partners. Acquirers who use Way4 can expand into new business areas by connecting additional Way4 modules such as card issuing or loan management. 

To stay cost-effective during the crisis, companies are optimizing not just revenue models, but also internal operations. Acquirers can reduce the probability of internal fraud and human error by automating key payment processing routines – merchant onboarding, payment acceptance, chargeback management, clearing and settlement, risk monitoring and more. 

With the growing number of digital payments and external systems involved, it takes advanced technology to keep risk monitoring consistent across all channels. The Way4 Intelligent Fraud Prevention solution automates the analysis of over 150 parameters in transactions coming from any acquiring interface. It applies fraud-preventing restrictions in real-time – this is the key to reducing chargeback cases for merchants and saving money for acquirers.  

For most industries, the shift to automated workflows provides one more benefit – an improved customer experience. Our clients confirm that they have become more attractive as acquirers after launching 24-hour digital merchant onboarding and real-time merchant support via online portals.  

It is tempting to foster an illusion that the worst is behind us and everything will return to normal soon. Experts say that it will not: the impact on customer expectations and behavior and those of businesses is too intense, and payment players will have to deal with “the new normal”.

“Payments today are a major cost burden for many banks, and most spending maintains existing systems instead of creating change. In the postcrisis world, banks will need to reflect on how to organize themselves for change, possibly by running some of their payments businesses in a completely different way. They could, for example, consider structural moves on the use of onshoring versus outsourcing, cloud-based infrastructure, automation, and analysis-driven decisions to reimagine scale or the realignment of products.”

From “How payments can adjust to the coronavirus pandemic—and help the world adapt”, an article by McKinsey’s analysts

For acquirers, the COVID-19 crisis is an opportunity to test their payment infrastructure. How well is it prepared for the new market? Will it compensate the reduction or loss of traditional revenues by generating new ones? According to technology consultancy Omdia (formely Ovum), legacy system modernization and creating digital capabilities were the top imperatives for financial institutions in the beginning of 2020.

This crisis is unlikely the last one in modern history, and no one knows how much time is left to prepare for the next blow to the market. This is why our clients require that we equip every Way4 solution with technologies that help them survive long-term. They need both - competitive advantages for today and resilient capabilities for an uncertain future.