The merchant acquiring market in Europe is operating on solid grounds of continuous transaction growth, however the cost pressures in the industry increases are very high primarily due to new regulation, such as PSD2 and Interchange Fee regulation.
Interchange Fee caps shaking up the market for acquirers
The new Interchange (IC) regulation that came into effect end of 2015 means that across Europe a total of €1bn will simply be taken out of the payment ecosystem per year, which has a direct impact on the cost situation amongst all parties, acquirers, processors and issuers included – writes Roger Niederer, Head of Merchant Services, SIX Payment Services.
The basic thinking behind the regulation is to make sure that merchants are paying lower Interchange fees to the issuer via the acquirer, in some cases as little as a third of what they used to.
Unfortunately, this does not come with the highest level of transparency, as a whole set of fees for operational and technical services remains unaffected. Currently many merchants are still paying the original amounts.
The intention of the European Commission (EC) was to squeeze this behaviour out overnight. However, if we look at a similar situation in Australia, the change took between two and three years to implement.
As a result, competitors are seizing the opportunity to attract new merchant customers by offering new lower prices than merchants are accustomed to. This may result in customers being ‘bought’ from the competition, often at terms that can not sustain quality on a long-term basis.
This leads to the question of what sort of price reduction should be offered to existing merchants? Of course, if acquirers go out and attack a new market with very attractive pricing, they are likely to be in trouble when their original customers become aware of the differing pricing.
How long can anyone remain in this environment? The leeway resides with those who have economy of scale. They are able to absorb relatively small costs to acquire new merchants and can offer much more competitive pricing structures compared to existing contracts.
Merchant acquirers must decide if they want to be a front runner or not. If they decide to be a leader in this market, then competitive pricing does have a positive effect on new business, but they are in danger of giving away too much at the start.
The incumbents in the market are competing with each other knowing that prices will decrease. The real question is: how fast? Obviously, competition in the market is a good thing, but you can ultimately destroy your own market, sooner than expected, if you overdo it.
So, how can the industry combat this? Cooperation is one thing and this can be very successful to prevent competition becoming over-detrimental. The other idea is to offer new services, particularly value added services.
These could be different loyalty schemes, a higher level of data analytics, and other products in order to justify the chosen price point. Acquirers need to make sure that if their existing customer base is being targeted, their price is acceptable.
Their pricing might not always be the cheapest, but it has to be an attractive price for the range of services on offer. It is important to have the right balance between the price being offered and the services being provided.
We have seen that if acquirers are able to effectively market higher levels of service, they can keep their relationship with their customers, despite the competitors offering lower prices. If they are competing purely on price, then it’s unlikely to be a battle the higher-cost issuer will win.
Our focus is on providing value added services such as data analytics and loyalty programmes that offer tangible benefits to merchants. We are one of the few multinational payment service providers in Europe that can offer clearing and settlement in local currencies. We deal with at least five different currencies and we can offer local settlements without any foreign exchange risk.
Transactions numbers are increasing by at least four or five per cent per year. In certain markets, such as Poland, the rise is in double digits. However, these transaction levels are increasing regardless of the services being offered to the merchant, purely due to market trends. The key for most acquirers is to remain close to their merchants, deliver the best solutions and keep a loyal client base.
There are also new players in the market to consider, such as Apple Pay and Samsung Pay. So it is important to make sure that, from the client’s perspective, a payment services partner can offer all of the different options, from FinTech start-ups to the big players. The defining need of a merchant is to make sure that all relevant options are catered for at their point-of-sale.
We believe it is key is to have a proven system that offers multinational, multibrand, multilanguage and multicurrency capabilities and that is something that SIX Payment Services is unique in offering. It is also essential to work both with and for the customer when it comes to turning payment from a commodity into a success factor.
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