Merchant Acquiring – Winning in A Digital World

(MENAFN- Financial Software and Systems) The Middle East and Africa are among the strongest frontiers for digital payments globally, with revenues predicted to grow from US$ 22B in 2020 to US$ 62.8B by 2023. Spurred by a highly digitized population, strong Central Bank support, and a lockdown-induced spike in consumer demand, digital commerce has gained significant traction. This is true not only in more mainstream verticals, such as fashion and groceries, but also in merchant segments like healthcare, professional services, and education, which historically have not received a material portion of payments through B2C digital channels. UAE consumers, in fact, the region is amongst the highest digital spenders in the world. On average consumers in UAE spend US$122 per e-commerce transaction. For reference, the average value for e-commerce transactions in emerging and developed markets is $22 and $76 respectively.


The shifts in consumer behavior have unlocked significant new market opportunities. Traditionally merchants considered payment acceptance as a cost center. Retail businesses spend about 2 percent on credit card processing fees. The fees creep up to about 2.5 percent for card-not-present businesses. Merchants across sectors understand that they must be fully connected with consumers and are rethinking their acceptance and payments needs and journeys post COVID-19. Alongside the clear opportunity to enable the growth in online payments, there is considerable scope to displace more cash payments in the face-to-face environment and better integrate the virtual and the physical worlds. The implementation of a solid payment strategy will prove to be an opportunity for merchants to gain a revenue advantage.

Riding on the demand wave, the acquiring space is experiencing a dynamic transformation. More opportunities are opening for a diversified range of players, Fintech providers, newcomers in new payments service provider (PSP) roles (telcos, FMCG players, payments processing companies), and even card issuers local, regional, and global payment providers to capture market share as regulatory changes allow new players to enter the payments business. They are competing for the same segments, introducing disruptive technologies, and bringing rapid innovation. Whether by introducing payment-services licenses or issuing open-banking regulations, the region’s regulators and governments are looking to attackers to help them achieve ambitious digitization goals, such as Saudi Arabia’s target for 70 percent digital payments by 2030. Tech giant Facebook, for instance, plans to expand Facebook Shops to WhatsApp and Messenger by adding experiential elements and convenience to the online shopping experience. These companies’ broad reach and technological prowess give them a strong foundation for competing in a field where the ability to rapidly develop, tailor, and refine customer propositions confers advantage.

Firms such as Dubai-based Careem (acquired by Uber for US$3.1billion in 2020) are launching super apps and have emerged as local champions, expanding from ride-hailing to grocery delivery and payments. These super apps are building a platform for retailers to create more value for customers and merchants. They process a billion shopping sessions every day, and we want to help those consumers find more of what they're looking for right away. Elsewhere, Egypt is home to Halan, which recently secured an investment of US$120m and offers financial services from buy-now-pay-later to microfinancing, as well as ride-hailing and grocery delivery. Similarly, Algeria-based Temtem, which started out as a ride-hailing app, recently launched Temtem ONE, it's very own version of a super-app. incorporating e-commerce, transport, and delivery.

The country is also seeing the emergence of new acquirer processors, BNPL, and alternative lending players to take advantage of the growing commerce market. In April 2021 Tamara raised $110 million in a Series A round from U.K.-based FinTech unicorn, Checkout.com. Australian BNPL giants Zip and Afterpay quickly followed suit, with Zip announcing the acquisition of Dubai-based BNPL FinTech Spotii for $26 million in May and Afterpay injecting $10 million into UAE player Postpay in June.

Just as importantly, traditional acquirer processors are beginning to resemble marketplaces by offering solutions like payments disbursement, financing, and onboarding for small and medium-sized enterprises (SMEs), commerce marketplace risk, and identity solutions. Emirates NBD, for instance, has plans to partner with auto-sellers, insurance, and real estate agents.
A Kaleidoscope of Players and Business Models.

Given the ever-expanding value chain, as a new wave of players enters the market, fragmentation, payments commoditization, and compressed margins are inevitable. Many players are thinking differently about their technology and business models to grow and scale whilst lowering risk and costs. A kaleidoscope of business models is emerging to keep pace with fast-changing customers and markets:
> Do-it-Yourself - Established large-scale market players are investing heavily in enhancing their value proposition to safeguard market share. They may prefer a “build over a buy” technology model, especially during a time of economic uncertainty like today to avoid upfront costs and annual licensing fees associated with software-as-a-service in favour of custom builds that use internal resources. These acquirers are vertically aligned and create, package, and distribute their products and maintain direct merchant contact and control, and have a 360° merchant view. Acquirers who pursue a ‘Make’ strategy must be backed-up by the right level of investment to keep pace with constantly evolving market demand.

> Collaborate with Competitors - New entrants are partnering with established payment processors, with proven technology and innovation capabilities for their processing infrastructure. For established acquirers, these companies seek scale by delivering technology or business processes to other companies. The upside for acquirers is that they can maintain direct customer contact and control, with the innovation and payment processing burden shifted to a specialist, scale player. The model is viable when two companies pursue distinct market opportunities with very different approaches and resources. In fast-growing, competitive markets where acquirers are directly competing for the same merchant segment and need to maintain a rapid innovation rhythm, this can however place the new player at a disadvantage in terms of ability to introduce innovative products and propositions at speed and low costs.

> Collaborate with TSPs - Some players have opted to outsource their processing infrastructure to a third party, enabling them to achieve scale, lower technology, and operating overheads. Pure play technology providers seek growth by manufacturing white-labeled technology products that are invisible to end clients. The cloud is the technological and economic foundation for unleashing market opportunities, and the technology partner assumes responsibility for functional and technology roadmaps, enabling new players to keep up with agile, asset-light players and create value by tapping into resources and capacity that they don’t have to own. Acquirers benefit from direct customer contact and control, and they retain a 360° customer view. This scenario is most common among players, who see acquiring as a core business but want to keep costs low.

The technology service provider’s software architecture, roadmaps, risk management expertise, and local regulatory savvy adaptation to, ongoing industry innovation and regulatory changes or mandates will be crucial attributes for partnering with the service provider.

> Ecosystem Play - Pure payments players must form business models that create value beyond payments transactions alone. Ecosystem partnerships offer benefits such as rapid innovation, operational efficiencies, scalability, and a better customer experience. To avoid diminishing returns associated with market commoditization, acquirers seamlessly package complementary markets products into their own offerings. The core acquiring system is also available to third parties that want to use the system to power embedded offerings. By bundling products in new ways—acquirers can unlock a multitude of new growth opportunities and emerge stronger.
Shopify is partnering with Stripe and its financial institution partners to build Shopify Balance, the business account designed to help merchants take control of their finances. BNPL companies, for example, are embedding their product into the checkout process at the point of sale rather than being an overlay that customers navigate separately. As an example, Network International, is collaborating with buy now, pay later (BNPL) provider Tabby to expand the credit market and enable its UAE e-commerce merchants to offer consumers the option to split their purchases into interest-free payments with a ‘buy now, pay later (BNPL) credit.

> Resellers - To improve reach and scale, acquirers are breaking capabilities into sellable micro-units that can be offered and consumed via APIs. This enables any other player—a retailer, a Bigtech, or a business—to use these components to weave transactions-related capabilities into more offerings. This will increase the competitive stakes, but it will also create new partnerships and revenue opportunities.

The specifics of the response will be determined by the acquirer’s circumstances, the size and characteristics of its merchant portfolio, and the nature of the retail environment in its home markets. For acquirers, the key to success in this flexible, fluid environment is to adapt to one or a combination of models to support strategic ambitions. As a starting point, acquirers banks evaluate the areas they want to develop their own capabilities and products, and in which parts of the business they could benefit from partnering or sourcing capabilities and products.


Architecting Value for Growth:
The mandate for merchant acquirers is clear. The merchant segment is a complex, at-scale business and market leadership requires a laser-like focus on rapid value creation. Each model discussed above is underpinned by certain foundational capabilities that make it work. For example, acquirers that want to succeed must have a flexible payments tech stack that offers an integrated payments experience; evolve an open services ecosystem to deliver contextual experiences that create customer delight, and invest in intelligent risk management frameworks.

Simplify the Payments Stack:
As retailers transform their business to serve omnichannel customers, acquirers need to step up to simplify the payments stack and support cross-channel commerce experiences -- online-to-offline or vice versa. Acquirers that can provide all-in-one omnichannel acceptance capabilities position themselves to successfully deliver a simpler payment solution to their customers. The key benefits include:
• Eliminate complexity and operational redundancies that a multi-back-end architecture creates, such as channel-specific merchant onboarding, numerous settlement file formats, and multiple settlements cut-off times.
• Enable easy integration via application programming interfaces (APIs) and provide choice to merchants related to channels and payment methods
• Leverage high-quality API opens new routes to market through third parties and create a channel for complementary value-added services (VAS)
• Improve payments coverage via acceptance of multiple payment methods, especially local and alternate payment methods across channels
• Optimise infrastructure costs for merchants via support for low-cost payment acceptance modes -Soft POS, QR codes
• Stable, reliable processing capabilities to accommodate spikes in transaction workloads
• Configurable parameter and product flexibility along with seamless, cross-channel integration of offerings—both standard payment acceptance offerings and value-added services—is essential
• Data-driven architecture to enable acquirers to leverage descriptive and diagnostics data that can be shared across the enterprise for real-time response to specific customer and merchant triggers

Build a Strong Pool of Value-added Capabilities:
Price differentiation is becoming less relevant when compared to the range and the quality of VAS offered to merchants. Traditionally acquirers have offered dynamic currency conversion and basic fraud prevention tools. The challenge – and the opportunity – is to extend this approach to add an innovative catalog of ancillary services that enrich the customer experience. Examples include EMI at checkout, working capital loans, instant virtual cards at checkout, recurring subscriptions, lending products, and autonomous payments -- that can be seamlessly accessed by customers to manage their financial lives.

Monetize New Data Flows:
Acquirers are leveraging data for deeper insights to provide new ways to expand a merchant customer base and to reduce a merchant’s overall transaction cost and risk of accepting payments. Rather than relying on just one stream of data, acquirers are combining data sets to get a full 360º view of the merchant and customer shopping experience. For example, leveraging data insights to offer working capital loans to small merchants or loyalty-integrated payments. It is also possible to gauge the demand for “buy now, pay later” (BNPL) payment methods and other emerging trends such as QR codes and self-checkout.

Strengthen Fraud and Security:
Intelligent, data-driven anti-fraud technology that can authenticate transactions seamlessly in the background based on customer and merchant risk profile -- mitigating risk, and permitting more qualified transactions to occur—thus lowering merchant cost and increasing revenue.

A fast-expanding market is fuelling massive changes within the payments landscape and will require acquirers to adapt their strategy, business, and operating models, and go-to-market approach to keep pace. At the core of this change is the need for technology agility. Pure play technology processors such as FSS are gearing to support these transaction scenarios by providing robust, industrialized plug and play infrastructure that acquirers can plug into to serve global at scale merchants as well as smaller businesses.

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