Mercator encourages acquirers to develop value added services

PaymentsNews reported yesterday on a Mercator report titled, "Merchant Acquiring in the United States 2008: Birth of the perfect storm".

Pressure on merchant acquirers has always been strong, but things are expected to get worse. Mercator encourages acquirers to protect their businesses by focusing on value-added services leveraging payment data, among other things.

"Diversification of merchant services business models and emphasis on ancillary revenue streams generated by value-added services, fee revenue on non-bankcard payment processing, and new ways in which acquirers can leverage their data will all be necessary for continued market performance. Payments savvy merchants, who understand that the electronification of payments and the systems that support them are tools that can be used to optimize business, are after providers that can help them achieve that optimization."

Sounds a great deal like PIVAS (Payment Information Value Added Services) promoted by Gartner.

What do you think? This calls for a very different mindset from that of cutting costs. Are acquirers in your country able to think differently and develop new services to boost revenues?

Conference themes (a bit of unabashed self-promotion)

Are you looking for a conference speaker who delivers thoughtful and thought-provoking presentations on current topics facing payment executives around the world?

How and when should banks innovate? Should banks lead new initiatives, like mobile payments, or should they follow others and play a supporting role? How can banks prepare for the risk of lower interchange? Will contactless change the global payments landscape?

As many readers of this blog know, Aneace frequently addresses these topics and others from - let's say - an unconventional point of view.

Download Aneace’s conference and bio brochure here.

Are Asian banks having second thoughts about outsourcing acquiring to third party processors?

Last week, an executive with a regional bank in Asia explained to me that they were beginning to regret the decision to outsource their acquiring activities to a major third party processor. They are finding that without direct control of their acquiring business, it is now much harder to develop marketing promotions and partnerships with merchants.

These promotions have become very important for credit card issuers in Asia. They're all over the place. As just one example, I took a picture on Saturday of a Citibank promotion at a restaurant in Singapore. See other examples here of joint bank/merchant promotions that are possible when banks retain their acquiring activities.

In a separate discussion, this same complaint was echoed by another regional banker who had looked at outsourcing their acquiring activities as well, but had decided against it for the same reason. They had come to the conclusion that they would quickly lose the ability to develop promotions with merchants. Acquiring was considered too strategic to outsource.

In yet another discussion, an executive with a third party processor mentioned that there is a growing desire among Australian banks to look at issuing and acquiring holistically, in order to get more out of their payment activities. This after seeing the issuing side of the business hamstrung by interchange regulations.

Third party processors are not usually the right people to understand and offer marketing services to banks and merchants. They focus heavily on technical operations, getting lots of terminals out and churning through lots of transactions, the more the better. Now, to satisfy banks better, third party processors may need to look at things more from a marketing angle and move up the value chain a bit.

Examples of card promotions possible when banks retain their acquiring activities

You can see these promotions across Asia, where many banks are still active in merchant acquiring and see it as a useful support function for their card issuing business. Some banks are finding that without direct control of acquiring, it is much harder to develop marketing promotions and partnerships with merchants (more here on banks having second thoughts about outsourcing their acquiring activities).

I took this picture on Saturday at a restaurant in Singapore. This promotion is exclusively for Citibank cardholders. When I paid, I saw that there were several terminals behind the counter, one of them a Citibank terminal. So Citibank has an acquiring relationship with the restaurant, but so do UOB and DBS, suppliers of the other terminals behind the counter.



Then, at a Caltex petrol station, I got this offer when I used my HSBC card. The offer is stapled to the credit card slip (it could have been printed at the bottom of the credit card slip instead, and targeted based on my prior fill-ups at Caltex, but it wasn't). Again, just like the prior example, Caltex has an acquiring relationship with HSBC.



Here are a few other examples of bank/merchant joint promotions:
Old, boring cards have trouble competing side by side with new generation cards
A crowd of cards caught copycatting, doing their best to look exactly alike
Another ‘Exciting-new-card-versus-boring-old-card’ picture
Tod’s leather goods
Making credit and debit cards more valuable in the Philippines


Since I was in reporter mode, I couldn’t help stealing a picture at an iconic retailer in Singapore that every Singaporean knows, Mustafa Centre.


You can clearly see 5 terminals here representing 5 different acquirer relationships. If you look closely, you can see the main feature that requires all these terminals – credit installments, with each bank offering their cardholders a slightly different plan.

Why doesn’t a third party processor offer a universal installment plan application that can link up to any of these banks through a single terminal? That would bring costs down for the bank, reduce counter top space for the merchant, simplify procedures for the clerk, open the installment feature up to lots of other banks that don't do acquiring, and provide the third party processor with a cool feature to help win new business.

When should a bank launch a mobile payment service? Do banks even need to innovate?

Since contactless credit cards are not taking off as fast as expected, and neither customers nor merchants are excited about tapping a card instead of swiping it, some analysts have started looking at contactless as a bridge to mobile payments, which is now seen as the next great revolution. I'm having trouble buying this.

How can contactless create the reader infrastructure that is required for NFC payments if merchants are not interested in upgrading their terminals for contactless cards to start with? If the readers are built into new generation payment terminals and cost nothing extra for merchants, then yes, the readers will be deployed over the next ten years, during the normal replacement cycle for payment terminals. If all terminal vendors build the readers into all of their new generation terminals at no extra cost, then a large portion of merchants will automatically be contactless ready within the next five years or so. Don’t hold your breath.

According to some people, there is however a much more realistic bridge to mobile payments. Contactless transit cards.

In Hong Kong and London, contactless transit cards can be used outside the transit system to purchase things at traditional shops like 7-Eleven. According to Cassis International, a supplier of mobile payment systems to banks in Asia, this creates a far better environment for banks to launch mobile trials. In fact, in response to a question from a banker attending a recent conference in Hong Kong, Cassis CEO Thian Yee Chua said that if there is no contactless transit infrastructure in the bank’s market, where the cards are commonly used both for transit as well as to pay at high frequency merchant locations, then “don’t even try to get involved in mobile payments”.

Mobile payment feels like something that is definitely going to happen someday, but it is still very difficult to see how banks can benefit and how they might even play a part. Banks may be forced to play a secondary role, if any at all. Speaking at the same conference on innovation, Chris Skinner of Balatro pointed out how all of the successful examples of recent innovations in payments come from new players, not banks. Paypal of course, but also Hong Kong's Octopus, London's Oyster, China's Alipay and others. Chris described how Wells Fargo was originally the payment institution behind Paypal but apparently didn’t see the opportunity to buy Paypal before the company was too big.

Here is a hard one for me to get my head around: should banks innovate more and lead all of these new payment initiatives, or should they follow others and try to play a supporting role?

In chairing the conference, after almost all the presentations had been made, I asked the audience for a show of hands. How many people agree that banks need to be more innovative? I was surprised to see that almost everyone agreed. And there were many more bankers in the room than technology suppliers.

While bankers themselves feel, somewhat intuitively perhaps, that they need to be more innovative, their organizations are not usually structured to promote the type of innovation we are seeing today. For example, most banks have pretty much abandoned their acquiring activities, so they are seriously limited in their capacity to impact the moment of payment, something that is needed for things like contactless and mobile. This is especially true for the major global and regional organizations that dominate the credit and debit card market. In a sense, this creates a new opportunity for national players that still have a holistic view of payment, with integrated issuing and acquiring activities. But I am digressing into another blog post. So I’ll stop right now.

Internet banking

Chris Skinner was in Hong Kong at the Financial Cards & Payments Asia conference which I wrote about earlier. Chris just did a very good post on a presentation by eBank Japan. Check out Internet banking ... but not as we know it.

"An $8 billion in assets bank, with almost 3 million customer accounts, operated by just 195 staff. 195 people in total that is. 15,000 accounts per staff member. How do they do it?"

How will banks meet the challenges of innovations in retail payments?

I chaired a conference this week in Hong Kong (Financial Cards & Payments Asia) and gave the keynote address, which you can download here.

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Many thanks to Dave Birch for giving me the idea of opening the talk with a 1964 magazine advertisement for Sheaffer pens. The ad shows a futuristic key ring that projects a holographic image of a credit card. It even shows 4 tiny buttons which could be used to enter a PIN code on the ring. The really amazing thing though is that the ad demonstrates a blind spot that we humans have when it comes to innovation: Shaeffer being a pen company, they couldn’t imagine a future in which pens would not be used to sign credit card receipts.