How Can Acquirers Provide Added-value Services to Merchants?
The payments industry is changing. Market forces, including new regulation, increased competition and technological innovation, have forced financial institutions to reconsider business models that were previously taken for granted. One often-overlooked part of the industry that has not escaped these changes is merchant acquiring. The economic downturn has resulted in unpredictable consumer spending, slowing growth in transaction volumes and ultimately, in some cases, merchant attrition. However, as new technologies are deployed at the point-of-sale (POS) and merchants’ power increases, acquirers have become an increasingly important part of the card acceptance value chain.
In recent years, merchant acquirers have experienced a wave of consolidation similar to the rest of the payments processing industry. Numerous acquisitions, white-labelling agreements and joint ventures have resulted in a relatively small number of major players in many countries across Europe and North America, and it is widely accepted that this consolidation trend is likely to continue. The increasing power of merchants, falling merchant service charge (MSC) levels and ever-tighter margins have also contributed to this trend.
With an increasingly globalised payments landscape, cross-border acquiring has also taken off in recent years. Originally developed for the airline industry in the late 1990s, increasing demand from multinational retailers has led to the emergence of new pan-European and global merchant acquirers. In addition, the increased popularity of e-commerce has all but removed country borders from a consumer perspective, although it has caused enhanced complexity for the payments industry.
New and changing regulatory requirements have also put pressure on acquirers. For instance, under the single euro payments area (SEPA) Cards Framework (SCF), there is a drive to standardise the interface between merchants and merchant acquirers. This aims to deliver “a consistent merchant experience… when there are no technical or practical barriers preventing SEPA merchants from accepting all SCF compliant cards.”1
In this context of international expansion, consolidation and regulation, the main focus of the industry has been on improving efficiency and reducing costs. However, retailers are increasingly demanding more accurate and efficient systems at lower prices. Acquirers need to look at the wider services that they provide in order to add value and differentiate themselves from the competition, in order to stave off the prospect of becoming a commodity market.
Merchant acquirers’ investigations units are often focused on the credit risks that they face themselves. Earlier in the year, APACS reported that UK merchant fraud had grown by 26% to £47.4m, the largest jump in criminal activity in payments for all card activity. Principle examples are outright merchant fraud and potential exposure to charge-backs for disputed transactions. Merchant acquirers are also faced with another risk known as factoring, when one unregistered retailer compensates another legitimate retailer to use an account to process transactions. However, there is a strong business case for investigations to be expanded further to also support the merchants’ own fraud detection processes, as unexpected charge-backs affect a merchant’s cash flow and can ultimately result in bankruptcy.
Supporting merchants’ fraud prevention efforts is one area where extra value can be added to the acquiring process. Many retailers are facing tighter margins as a result of the economic downturn, so a potential rise in the number of charge-backs could be enough to increase the risk of bankruptcy. This can be very costly for acquirers, as they are ultimately responsible for each merchant’s activity and would be held financially responsible if a merchant is unable to meet their obligations. Online businesses, in particular, can become unviable if a large number of charge-backs occur. Acquirers have fraud investigations teams in place that can help to protect merchants against charge-backs and charge-back losses.
Therefore, it is in the best interest of acquiring banks to aggressively monitor their customer base, particularly high-risk retailers such as those selling electronics or jewellery. The first step in this process is to ensure that the correct merchant category code (MCC) is assigned according to MasterCard or Visa regulations. Card issuers use MCCs to categorise, track or restrict certain types of purchases. However, the acquirer is actually the hidden link in this relationship, as they have greater visibility to prevent business format change fraud (merchants who run certain types of high-risk businesses that lie about business practices when applying for a merchant account) and put a hold on the current accounts where necessary.
An active investigations unit may also serve as a market differentiator for acquirers, to the extent that the acquirer is able to supplement a merchant’s own efforts in protecting its bottom line. Acquiring banks are in a prime position to pick up on fraud trends, as they have visibility over a much wider range of transactions than issuing banks. For example, an acquirer can spot if an unusually large number of transactions occur in quick succession at an ATM.
According to CIFAS, the UK’s fraud prevention service, insider fraud has increased as a result of the recession and, as such, has become more of a priority for merchants. Acquirers can help identify fraudulent usage of cards at retailers, which helps the issuer detect a compromised card and protects a good retailer from an unexpected rise in charge-back rates. One example of this is where an unusually large number of refunds are being processed at a single POS. This could occur as a result of a single employee acting fraudulently by processing payments and then refunding them to avoid credit card charges. This can be pinpointed by the acquirer, providing the merchant with valuable information in their fight against insider fraud.
As well as improving the acquirers’ offering to merchants, there is a genuine opportunity for acquiring banks to work closely with the issuing team, especially if it is part of the same bank, to proactively engage in discussions on how to prevent and detect merchant fraud. Improving the communication and knowledge sharing within different parts of the industry is a key step in the fight against merchant fraud.
For acquirers and issuers to work effectively together, it is important to acknowledge their differing priorities and time constraints. The issuer effectively operates in almost real-time for fraud detection and prevention, and is likely to block cards and payments that are deemed high risk. The maximum spend on the credit card, which is at around £5000, limits the potential losses that the issuer can suffer from one defrauded card. However, on the acquirers’ side, fraud investigations tend to span a longer timescale and usually involve building relationships and providing education and support for merchants. When a merchant is fraudulent, the losses are unlimited and can escalate very quickly in a short space of time.
Acquirers face many of the same issues as the rest of the payments industry. New legislation regulating the space, particularly in relation to interchange fees, will continue to be a focus. However, the true opportunity for acquirers lies in the value-added services and technology, which will continue to play a larger role as the commoditisation of payment processing services has more of an impact on acquirers.
Merchants already focus on monitoring and investigating their customers to prevent merchant fraud, but by extending this to support their customers’ fraud prevention systems, acquirers can differentiate themselves from the competition. This can only be positive in an industry characterised by increased consolidation and high levels of competition, and where revenues and profits rely heavily on reputation.
1European Payments Council: Towards our Single Payment Area.