Acquiring: Turf Wars?

 

Jim Daly

 

Merchant acquirers are keeping a watchful eye on the bank card networks as the publicly held companies seemingly move onto turf acquirers regard as their own. Are acquirers’ fears about network ambitions justified?

 

 

 

Moving transactions from merchant locations to cardholder accounts and back is a highly complex process, but the basics of North American bank card payments are fairly simple. Merchant acquirers sign retailers to accept Visa and MasterCard credit and debit cards and give them the terminals and software to get requested authorizations from the checkout counter onto the networks’ electronic highways.

 

These highways lead to thousands of issuers’ computers. Issuers pass judgment and send the approval, or in some cases, denial, back to the merchant, all within seconds. Later, the parties settle up, with payments flowing from issuers to merchants’ bank accounts via the networks.

 

For decades, acquirers clearly understood what was and wasn’t their job, and so did the networks, which set the rules. Now, however, some in the merchant-acquiring community fret that the bank card networks have eyes on their business.

 

Banks and credit unions once owned the networks, which prevented what were and still often are referred to as the card associations from competing directly with their owners. But that longstanding model began to change in 2006, when MasterCard Inc. held a hugely successful IPO. Then Visa went public in 2008.

 

The networks, while certainly mindful that their financial-institution former owners remain their chief customers, today ultimately answer to their shareholders. And if you answer to Wall Street, the heat is on to constantly produce higher revenues and profits. The networks could easily leverage their experience in payments to offer new services traditionally proffered by acquirers, some acquiring executives argue.

 

“We think the big associations, Visa and MasterCard, clearly have designs to get into the acquiring business on a direct basis,” says Barry R. Sloane, chairman, president, and chief executive of Newtek Business Services Inc. New York City-based Newtek provides payment processing, Web hosting and other services to small businesses.

 

‘A Little Unsettling’

 

Sloane is not alone in that view. In May, Aite Group LLC surveyed 20 top acquiring executives attending the Electronic Transactions Association’s annual conference in San Diego about major issues in their industry, including mobile payments, competition, and other hot topics.

 

Some 95% of Aite’s respondents agreed with this statement: “Card networks are increasingly going to compete in merchant acquiring in the years to come.” Seemingly prepared to fight back, some 55% of the respondents agreed with the statement, “Larger issuers and acquirers will increasingly seek to disintermediate the card networks in the years to come.”

 

Aite’s respondent pool was too small to draw statistically valid inferences, but the survey’s findings still give some interesting insights into industry thinking.

 

Acquirers seem to be much more worried about how Visa and MasterCard could affect their fortunes than they are about powerful non-payments companies moving in, such as Google Inc. or the Isis mobile-payments joint venture of AT&T Inc., Verizon Wireless, and T-Mobile USA.

 

“Every year, we see a new service from one of the networks that allows banks to access some type of information that was not available before through processors,” says Adil Moussa, an analyst with Boston-based Aite. This expansion affects not only acquirers, but also some services on the card-issuing side, particularly commercial cards, he adds.

 

While acquirers are carefully watching both networks, they’re keeping an especially close eye on Visa, the world’s largest payments network.

 

“It appears they are moving to compete in new areas where they haven’t competed in the past,” says Bryce Thacker, executive vice president of marketing at ProPay Inc., an independent sales organization based in Lehi, Utah. “It is a little unsettling to have it happen on the card-brand level.”

 

Visa is no stranger to controversy, but its $2 billion acquisition of CyberSource Corp. last year and its investment this spring in mobile-payments startup Square Inc. have set off some alarms.

 

CyberSource provides anti-fraud technology and its Authorize.net subsidiary is one of the leading gateways for e-commerce merchants. Merchant-acquiring services accounted for 31% of CyberSource’s revenues.

 

Meanwhile, Visa got a seat on fast-growing Square’s advisory board with its investment. Neither Visa nor Square has revealed the size of Visa’s stake publicly, but sources say it was a few million dollars at most. Square, headed by Twitter co-founder Jack Dorsey, is the merchant of record for hundreds of thousands of small merchants and recently claimed to be processing $4 million in volume daily.

 

‘Chicken Little’

 

Together, these two moves are not sitting well with some acquirers.

 

“Many of us acquirers have our gateway services, so if Visa is out with their gateway services, they’re encroaching in our space,” says Greg Cohen, U.S. group president for Schaumburg, Ill.-based Moneris Solutions Inc. “Square acquires merchants, we acquire merchants. It’s almost not fair having the referee playing on a team.”

 

Visa also has opened its authorization platform to value-added resellers, according to Moussa. That could mean less authorization revenue for acquirers, he says.

 

Visa declined to make an executive available for an interview for this story. In a statement, the company said, “The widespread adoption of Internet and mobile technology is changing the way people connect and transact across the globe. The innovations, partnerships, and acquisitions Visa has made over the past year are all designed to help our financial-institution and merchant clients meet changing consumer expectations and maximize the use of Visa’s network to drive growth for their businesses.

 

“Our goal is to continue being the best possible partner and grow Visa by providing our clients with innovative products and services that ensure they have the best opportunity to grow themselves.”

 

MasterCard has been quite active on the acquisition and partnership front since its IPO. For example, in the past year, it bought for $520 million DataCash Group, a European e-commerce payment-service provider. MasterCard plans to expand the DataCash platform to launch new e-commerce, mobile-commerce, and other payment products (“MasterCard, Five Years After the IPO,” May).

 

But so far at least, MasterCard’s moves haven’t generated quite the reaction that Visa’s have in the acquiring community. MasterCard did not respond to Digital Transactions requests for comment.

 

Of course, acquirers are seldom in complete agreement about any issue, and some aren’t fretting about what the networks might or might not do.

 

“We’ve got a history of being Chicken Little in this industry,” says Henry Helgeson, co-chief executive of Merchant Warehouse, a Boston-based ISO. “The sky is always going to fall. The free-terminal guys are going to put us out of business, PayPal is going to put us out of business.”

 

Cash Hoards

 

Few acquirers would disagree, however, that largely because of new technology the pace of change in the past few years has accelerated. Data encryption and tokenization for transaction security and the coming of chip cards on the EMV standard and mobile payments are only a few technological frontiers in the throes of furious development.

 

“There is a lot of shifting of business models,” says Heather Mark, senior vice president of market strategy at ProPay. “All of these changes are giving rise to an incredible pace of innovation. We have to be prepared to respond to that.”

 

In that light, Helgeson sees Visa’s acquisition of CyberSource and investment in Square as examples of what many other payments players are doing, rather than as deliberate attempts to muscle in on acquirers’ turf. “I don’t think they made those acquisitions to get into the acquiring spaces, but to get the technology,” he says.

 

For example, with CyberSource’s technology, Visa might be able to more effectively address some of the market needs it tried to address with Verified by Visa, a system for enhancing e-commerce security by having the cardholder enter another password during purchase transactions with merchants that enroll in the service.

 

“They didn’t have a lot of luck with Verified by Visa,” he says.

 

In addition to the CyberSource and Square moves, Visa in June said it would buy Fundamo, a South African firm that provides mobile carriers and banks with a mobile financial-services platform in developing countries.

 

That announcement came just a few months after Visa announced an agreement to buy PlaySpan Inc., provider of a payments platform for digital goods in online games and social networks (“Beyond Fun And Games,” page 24.)

 

In May 2010, Visa announced an arrangement with DeviceFidelity Inc. that adds Visa’s payWave contactless technology to DeviceFidelity’s In2Pay technology, which together enable smart phones with a so-called microSD memory slot to make mobile payments.

 

The first announced smart phone to be enabled was Apple Inc.’s iPhone, for which DeviceFidelity developed a special case to hold the microSD chip because the phone itself doesn’t have the needed slot.

 

“Visa’s innovations, partnerships, and acquisitions—including DeviceFidelity, CyberSource, Fundamo, and PlaySpan—will enable acquirers and merchants to deliver an enhanced and consistent shopping experience regardless of purchasing channel, use mobile commerce, increase consumer loyalty through real-time offers, and improve their risk management,” the Visa statement says.

 

Acquirers should expect the networks to continue bidding aggressively for tech companies because both have vast reserves of cash. Visa’s latest quarterly report lists $3.6 billion in cash and cash equivalents on the balance sheet while MasterCard’s lists $2.76 billion.

 

The ‘Wild West’

 

Ask acquiring executives how they’ll adjust as they bump elbows more often with networks and they start spouting clichés such as “co-opetition” and “frenemies.” Those words indicate that neither the networks nor the acquiring industry can get along without each other.

 

“Understand how to work with them, and understand how to compete against them,” says Moneris’s Cohen.

 

Mike Passilla, president and chief executive of U.S. Bancorp’s Elavon acquiring subsidiary, says there are times when Elavon, which operates in numerous countries, finds itself competing against a network for the same business, frequently gateway business. Still, “I do not believe the card networks, as part of their strategy, have plans to be a pure acquirer,” he says.

 

Atlanta-based Elavon tries to differentiate itself by servicing not just its portfolio but also other merchants that may want only one or a few of its services. The company offers professional services such as fraud control and chargeback management to non-portfolio merchants as well as some gateway services available through its new Fusebox platform. “We don’t fancy ourselves just as an acquirer,” says Passilla.

 

While they resent the networks at times, acquirers also respect their power in the payments marketplace, especially as it changes. The Aite survey says three-fourths of the respondents believe the networks will remain the dominant payment brands in the mobile-payments era. And 90% believe Visa will build a digital wallet that competes effectively with online-payments leader PayPal Inc.

 

Perhaps what’s really changed is that with all the new technology and the changing of traditional payments roles in just a few years, players are willing to pull a figurative gun on those who may present a threat. “Right now it feels a little like the Wild West,” says ProPay’s Thacker.