May 1, 2006

Why merchants in some countries have multiple acquiring relationships


Why do merchants in some countries have multiple terminals on the same counter? You can see six payment terminals on this merchant's counter, all from different banks. This picture was taken in Thailand, but the practice is common in places like Turkey, the Philippines, Indonesia and India. Why do so many merchants accept having multiple terminals, each connected to a different bank? This takes up lots of couterspace and costs lots more than having a single terminal. In India, the payment industry is proud of having produced home grown terminals that cost 20% less than those manufactured by major brands like Verifone and Hypercom. But why focus on cutting 20% if you're going to install half a dozen terminals on each counter? I've been struggling to make sense of this over the past few months.

In Manila, I learned that if a merchant wants to accept American Express cards in addition to Visa and MasterCard, there is no choice but to have an acquiring relationship with Equitable Bank, the exclusive American Express acquirer. If, in addition, you want to accept the very popular Express Pay debit card, issued by BPI and several other banks, then there is no choice but to also have an acquiring relationship with BPI. This explains why many merchants in the Philippines have an Equitable terminal and a BPI terminal. Two terminals are enough to cover all cards. So why then do lots of merchants have four, five or even six terminals? The best answer I can find is this: to eliminate interchange fees.

In these countries, merchants sometimes apply a 2-5% surcharge on credit cards, or, to avoid being in breach of Visa and MasterCard rules, they offer a 2-5% discount for cash payments. This obviously discourages card usage. Banks in India and other regions use a blunt and expensive instrument to eliminate merchant surcharges for their cardholders: they have agreed to charge merchants very low interchange and processing fees when the bank's cards are used at that bank's terminals. So multiple terminals get deployed everywhere, and clerks are instructed to swipe each card in the coresponding terminal. Here is the nightmare: merchants are now trained to expect payment services to be practically free.

This is an indication of a very weak merchant value proposition. If merchants saw real value in payment, they would not be adding surcharges on cards or offering a discount on cash. Even in very high growth countries like India, banks will have trouble growing profitably until they come up with a better value proposition for merchants which doesn’t require banks to simply eliminate fees. The danger in high growth markets is that banks could become overly focused on buying market share, almost at any cost, with the hopes of establishing profitable practices later. Since merchants have now been taught that card acceptance is very cheap, essentially free, it will be very hard to convince them later to pay something.

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