Acquiring in the UK: Service Focus as a Platform for Growth
UK consumers’ love affair with payment cards continues. Wallets are designed to hold more cards than ever before and the room left for cash keeps getting smaller. Even though consumers have reined in their credit card use in the past year, debit card use and overall payment card balances continue to march ahead. In the second quarter of 2009, the value of card transactions in the UK reached £95bn, well above the value of cash payments. Consequently, card payments are the most important payment stream for UK merchants.
Given this backdrop, merchants now see a close link between their ability to accommodate customers’ appetite for card payments and the ability grow their business. Merchants have become as eager to swipe payment cards as they once were to collect bank notes and place them in the cash register tray. Card payment solutions are, therefore, a critical business requirement and relationships with the providers of these solutions – namely merchant acquirers – are among the most important business relationships for merchants.
Merchants’ expectations in relation to acquiring facilities are relatively straightforward. Payment card facilities are expected to be able to work the way cash registers once did – they are meant to be simple to set up and operate, and robust enough to handle high volume of customer payments each day. Like all other business expenses, the cost of merchant card facilities is closely scrutinised. However, the functionality of payment card facilities is even more important. For the providers of payment solutions, this means that service and product functionality are the main competitive battlegrounds.
This is clearly evident in the UK merchant acquiring market. UK merchants are considerably more focused on service and functionality than pricing. Yet, for the most part, their service expectations are well beyond current practice. Understanding these gaps in detail is the starting point for the acquirers intent on capturing a greater market share and cultivating deep relationships with their merchant customers. This article outlines some of the current service gaps in the UK market and discusses them in the context of the opportunities they present for the UK acquiring community.
In August 2009, East & Partners researchers spoke to 505 UK merchants with an annual turnover between £2m and £50m. The research covered a range of payment card and acquiring issues, including the composition of merchants’ annual receivables and the satisfaction with the service and support provided by these merchants’ acquirers.
East & Partners’ research confirms the importance of card receivables among these UK merchants. Three-quarters of the merchants’ yearly receivable streams consist of payment cards, with debit cards taking up a dominant proportion. Cash payments, by contrast, account for 7-17% of annual receivables, depending on merchant’s business size. With the high reliance on cards, there are many acquirers vying for a slice of the opportunity.
The competitive landscape in the UK acquiring market is very rich but highly concentrated. In other words, although there is a wide range of acquirers, the lion’s share of the market is held by two market leaders. Together, these market leaders account for some 55% of all primary relationships with merchants. There is some tendency for the merchants to bundle acquiring with wider transaction banking arrangements, although this trend is not particularly pronounced. For the majority of merchants, acquirers are seen to play a more ‘specialist’ role in terms of their banking needs.
One of the most interesting research findings is the clear supremacy of service and product functionality over the cost of payment card facilities. This is best captured in the reasons for merchants’ churn intentions.
Across the UK market, the relationships between small- and middle-market merchants and their acquirers are generally well established. Despite this, one-fifth of the merchants have plans to change their principal acquirer before February 2010, presenting clear evidence that many merchants feel pent-up frustration with their acquiring relationships. Trying to understand this frustration, East & Partners spoke to these merchants about what reasons might cause them to change their current acquirer. The top three reasons for considering a change of acquirer are shown in Figure 1.
As shown, almost one in two merchants name “better service and support” as their main reason for considering a change of provider. By contrast, a comparatively low (15%) of merchants say “substantially reduced pricing” would be their main reason to start shopping around for a new acquirer. Service, therefore, trumps price.
To offer an acquiring product or strategy manager actionable insights, the statement “service trumps price” clearly requires further qualification. East & Partners analysed this in some depth, as summarised below.
Out of the 17 service issues covered in East & Partners’ research, the three most important are:
The merchants’ satisfaction with the performance of acquirers in these areas reveals considerable room for improvement. For instance, ‘quality and speed of transaction error correction’ is a service issue merchants are least satisfied with, even though it is the second most important service requirement overall. But by far the most worrying single disconnect between merchant expectations and acquirers’ performance exists for the most important issue, namely terminal support.
Going a step further, merchant experiences with terminal support are best exemplified by the time merchants have to wait to have their terminal replaced in the event of a malfunction. Figure 2 shows that more than three-quarters of merchants report having to wait a remarkable 72 hours for terminal failures to be corrected. This is clearly a source of dissatisfaction for merchants as it means they must either try to divert payments to cash or rely on the dated ‘click-clack’ machine as they wait for their terminal to be replaced.
What is also interesting in relation to service support is the competitive performance of different acquirers in the UK market. Across the 17 service issues investigated by East & Partners, there is no clear leader in satisfaction. For instance, looking at the top three most important service issues, there are three different market leaders in customer satisfaction. These results suggest that the available offerings differ in service focus and that no one offering has successfully integrated all the key service requirements.
East & Partners’ research continually shows a strong link between satisfaction performance and future market share movements. But when it comes to service satisfaction, success does not depend on wholesale market dominance in every service area (although this, of course, can’t hurt). Applying the familiar rule, success in the top 20% of service areas will generally drive some 80% of the positive market share outcomes. Needless to say, an acquirer that is able to achieve strong customer satisfaction across top three service areas discussed above stands an excellent chance in the UK market.