Merchant acquiring business has never been seen as a business that could generate a lot of cash. Acquiring is perceived as mundane business, selling a commodity to business owners. Like selling a box of nails to builders. Sometimes it is even a loss-making business used as a sweetener or as a way to give ‘something’ on top of the core business. Look at banks that also have an acquiring solution. How often do they offer card acceptance to some big businesses at loss?
Despite the common belief that acquiring is not a core business for banks, and that acquiring is just an added complimentary service to money lendings, working capital solutions and business accounts, there are significant opportunities for profit-making in acquiring.
What is commonly called a back book merchant (BB) is basically a merchant that is already in the acquirer’s portfolio. BB customers are extremely important because they are already transacting. An acquirer will (and should) have access to BB customers’ transaction profiles, cost structures, profitability data, churn propensities, and everything else.
When utilizing transaction-level data aggregated at a customer level, the quickest value-added activity an acquirer can execute is a price increase.
Acquiring profitability is very complex because the cost behind each transaction varies.
Interchange and Card Scheme Fees are hard if not impossible to understand since they are highly dependent on the type of transaction. Therefore, the acquirer has the advantage of having access to all this data.
Based on this, the acquirer should follow two steps to proceed:
Several exclusion criteria could be:
The next step is to segment the ‘cleaned’ customer pools based on some of the following attributes:
This exercise could be quite complex as there are often a large number of segments and microsegments. For instance, one acquirer segmented their customers into 30+ micro-segments.
Once everyone falls under a segment, then each segment will be given a price increase target that will bring the BB customers within each segment to a certain profitability level. This is somehow a mid-way between an individual price increase and a mass price increase. The right balance would allow the acquirer to achieve a significant revenue boost while controlling for churn as not all BB customers experience the same effects.
As acquirers do not have any transaction data on businesses that are not their customers yet, it is more difficult (or impossible) to make data-based decisions. Also, the play here is not only about revenue/profit but the number of products bought or the number of new customers. Hence why the key here is not the price level of a product but the price structure.
There are at least 50 different cost elements linked to various scheme fees, triggered by a very distinct transaction nature. For example Mastercard 3DS 1.0, Mastercard 3DS EMV, etc. To remain profitable, the acquirer has to pass (preferably with margin) each of these cost elements to merchants. On the other hand, it would be impossible to pass, in the example above, 2 types of 3DS fees from Mastercard. A merchant will never understand why he has to pay 2 different 3DS fees. So acquirers need to strive for reduction of this complexity towards merchants.
Different merchants have different transaction profiles: some see more foreign cardholders, some have more cardholders with high transaction values, startups have very few transactions a month, etc.
In other words, jewelry merchants will have a higher average transaction value (ATV) and less number of transactions, while a tobacco shop will have a very low ATV but a higher number of transactions a day. This transaction characteristic will influence the merchant’s preference towards a certain pricing structure. The tobacco shop would rather pay a percentage of the shop card turnover rather than a fixed amount of money for each transaction.
The obvious other product to bundle with an acquiring product is a terminal(POS). Although this will not dramatically increase revenues, being a tangible product that one can touch and see, the terminal could be an effective way to:
Many small merchants focus more on price elements that are fixed such as the monthly rent for the payment device (terminal). By pricing this bundle smartly, acquirers can offer higher acquiring prices by focusing on the lower device rent.
For banks that offer many other financial products, acquiring can be bundled with other products, and acquiring prices could be smartly combined with a lending product or working capital proposal for example.
One way to increase revenue streams from existing and new customers is by introducing additional price points that are linked directly to a certain type of transaction. Almost like passing a scheme fee one-on-one (with margin).
The acquirer needs to be very savvy in handpicking cost elements that can be explained easily to a merchant: why that element needs to be priced separately outside standard merchant’s MSC (Merchant Service Charge) and how the elements should be priced.
One example is Mastercard’s Global Wholesale fee that only applies to virtual card transactions with online travel agencies. This fee could easily be an additional revenue source and can be priced separately (with some margin). The fee could be explained as a very specific fee that only occurs in 2% of the transactions hence it is only fair to the merchants to treat it as pay-as-you-go instead of blending this fee in the standard MSC.
The challenge here is to find that fine balance between gaining revenue for the acquirer against introducing complexity for a merchant.
One acquirer in Germany has additional 26 price points on top of the MSC. This is extreme and could only confuse merchants and repulse them, especially for small merchants.
That summarizes briefly what a merchant acquirer can do to increase revenue through smart pricing.
As an interim pricing specialist, Retno Widuri is a payments expert and a Multilingual INSEAD MBA specialised in pricing and analytics, with private equity and multinational corporate background. She possesses a variety of skills including: Pricing & Analytics, Business Transformation, People Management, Post Acquisition Implementation, Partnership / Business Development.
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