Time to consider keeping your customer both on issuing and acquiring domains when on-us transactions are shrinking – data will be your new competitive edge
In the past banks could gain a competitive edge by offering cheaper services, knowing that virtually all customer transactions would be handled internally rather than being processed by the international card organizations. Large volumes of issuing and acquiring customers, combined with low on-us transaction costs, was a win-win situation for both issuing and acquiring business areas.
However, we can now see that this trend has reversed. Many banks, particularly within Europe, now choose to outsource merchant acquiring or have even sold this part of their business. Why? Because they could no longer see any long-term value in it — acquiring had become a business of volumes and processing efficiency, and margins were shrinking. Additionally, thanks to new interchange regulations in the region, the cost difference between on-us and non on-us transaction processing from an acquirer perspective has decreased.
More and more value-adding services are being introduced to card schemes for both issuers and acquirers. These include tokenization and support OEM digital wallets, such as Apple, Google and Samsung Pay, to name a few. As a result, many transactions are now routed through card schemes – which could eventually end up in market monopolies. The upshot of this being that there will be fewer opportunities for on-us business models.
If this trend continues, we may see the end of smaller, national payments models. There is, however, competition for the global schemes. Regional payment schemes are providing alternative payment solutions in an effort to protect their markets. You only have to look at PROSTIR in the Ukraine and NSPK in Russia to see proof of this. Then, of course, there is the European Payment Initiative, which is being co-financed by several European banks and will not rely on standard card rails.
The situation, of course, differs depending on the region. If the interest for on-us in Europe is diminishing, outside of Europe things are quite different as each region is at a different stage of development.
There are options for acquirers to route transactions directly to the bank that has issued the card, for the sake of cheaper transaction processing. Transactions can be routed to any bank on the market, i.e. via the lowest-cost option, it’s just that in many cases this is the bank that issues the card. With such an approach, an acquirer can differentiate their offering in the market and gain a competitive advantage.
At an even more basic level, merchants that have agreements with multiple acquirers – including different POS devices – can choose which terminal to use based on the card presented by the customer. But such an approach is becoming less common as it’s not cost-efficient for any of the involved parties.
For many banks, issuing and acquiring are siloed. This does not have to be the case. Leveraging synergies in a common operational model will save costs and support the creation of new value-adding services for consumers and merchants who choose to participate in the network i.e., by creating a marketplace-like experience for customers. These could include merchant discounts, loyalty, and automatic installment contracts, among other things.
There can be no denying that the importance of on us transaction is decreasing, while the importance of customer-centric value-adding services grows. And where does much of the value lie? In the data. If a bank can provide best-in-class acquiring and issuing, it should receive both data flows, which in turn can be used to create value-added services. Banks that have chosen to outsource acquiring will not be in the same favorable position.
Today it’s no longer about card rails but rather about converging retail payment rails. This is the key to opening up a world of broad payment methods including open banking, instant payment wallets and whatever the future may bring. Read more in blog "Retail Payments are Converging to Data-Rich Real-Time Payments".