Acquiring vs Issuing: Which one is more important as a revenue driver for the future?

The payments landscape in the UAE and the broader GCC region is evolving at a rapid pace. Banks, traditionally focused on payments issuing as a core revenue driver, are now facing increasing challenges that will necessitate a shift towards payments acquiring as the primary driver of income for their payments divisions. The pressure on issuing business due to new regulations, the rise of domestic schemes, increased competition, and other factors, is reshaping how banks approach their payments business.

In this article, we’ll explore why acquiring will become central to the revenue strategy for payments divisions and draw insights from global markets—particularly the UK and Europe—to help banks in the UAE and GCC prepare for this seismic shift.

The Changing Landscape of Payment Issuing: The Challenges Ahead

Over the past decade, issuing payment cards has been a lucrative revenue stream for banks, primarily through interchange fees. However, new regulations introduced in many markets—including the UAE and broader GCC—are increasingly putting pressure on this model.

For example, the introduction of interchange caps in markets like the EU has led to a significant reduction in revenue for banks on issuing cards. The EU’s Interchange Fee Regulation (IFR), which was enacted in 2015, set maximum interchange rates for consumer cards at 0.3% for credit and 0.2% for debit card transactions. Similarly, in the UAE, regulatory authorities are exploring the implementation of similar restrictions to curb merchant costs and promote competition.

In addition, the launch of domestic payment schemes (e.g., NAPS in the UAE) is shifting the focus away from international networks like Visa and MasterCard, which had previously dominated the region. Local schemes provide banks with greater control over transaction fees and clearing processes, but they also come with reduced revenue from international transaction processing.

Acquiring as the New Revenue Driver

In contrast to issuing, payments acquiring offers banks the opportunity to earn revenue through a more diversified and stable model. Banks act as the merchant's payment partner, facilitating card and digital payment acceptance. With acquiring, banks can earn:

1. Transaction Fees: A percentage of each transaction processed through merchant terminals.
2. Setup and Monthly Fees: Fees for onboarding and maintaining merchant accounts.
3. Value-Added Services: Fees for fraud prevention, data analytics, loyalty programs, and more.
4. Cross-border Transaction Fees: For international merchants or global customers, these fees are significant.

With an increased number of merchants adopting electronic payments—especially as e-commerce and digital services grow—acquiring offers a high-growth, low-risk opportunity for banks. Furthermore, the business model is more resilient in the face of regulatory changes impacting card issuing, as acquiring income is not tied to the cap on interchange fees.

Global Trends and Lessons for the UAE and GCC

The shift towards acquiring as the core revenue stream is already happening globally. Banks in the UK, Europe, and the US have embraced acquiring as their primary payments revenue driver. Here’s how these regions are navigating the transition and what banks in the UAE and GCC can learn from them:

1. Europe: A Lesson in Innovation and Diversification

In Europe, after the imposition of interchange caps, banks were forced to innovate and look for alternative revenue streams. Many institutions began shifting their focus to acquiring by partnering with payment processors and POS terminal providers.

• Case Study: Worldpay and Lloyds Banking Group One of the UK’s largest banks, Lloyds, has increasingly relied on its payments acquiring business, notably through its partnership with Worldpay. This has positioned the bank to capture more merchant fees and generate stable revenue. The acquisition of Worldpay by Vantiv in 2017 demonstrated the value of acquiring as a strategic asset in payments. In fact, Worldpay's merchant services generated $4.5 billion in revenue from transaction fees alone in 2020.

2. The US: Competitive Innovation in Acquiring

In the US, the competition in payments acquiring has reached new heights. Companies like Square, PayPal, and Stripe have aggressively targeted the acquiring space by offering easy-to-integrate solutions for small businesses and global merchants alike. The result? Banks have had to reassess their acquiring offerings, moving towards cloud-based solutions and data-driven insights to compete effectively.

• Case Study: JPMorgan Chase and Square JPMorgan Chase, one of the largest banks in the US, has ramped up its efforts in the acquiring space through a partnership with WePay (acquired by JPMorgan Chase in 2017). This deal allowed Chase to tap into the SaaS-based acquiring market, an increasingly popular model. Meanwhile, Square has generated billions of dollars in transaction fees by capturing small merchants in the e-commerce and in-store sectors.

3. The Rise of Domestic Schemes: A New Frontier

In the UAE and GCC, domestic schemes are gaining momentum, reducing banks’ reliance on international networks. The UAE's NAPS (National Automated Payment System) and the Saudi Payment Network (Mada) offer a local alternative to Visa and MasterCard, providing banks with more control over fees, data, and security. These schemes present a unique opportunity for banks to strengthen their acquiring business by offering competitive merchant services and loyalty programs.

• Case Study: Mada in Saudi Arabia The Mada network in Saudi Arabia has rapidly expanded, with over 50,000 merchants now accepting Mada cards. The increasing volume of transactions has positioned acquiring as a major revenue stream for local banks, further supported by the government's drive towards cashless payments. In fact, Mada's market penetration has contributed to a double-digit increase in acquiring revenue for major banks like Al Rajhi Bank and SABB.

Preparing for the Transition: Strategic Steps for Banks in the UAE and GCC

For banks in the UAE and GCC to thrive in this evolving landscape, they must shift their focus toward becoming merchants' preferred payment partners. Here are the strategic steps they can take:

1. Develop Competitive Merchant Solutions: Banks should expand their portfolio of acquiring services, offering POS terminals, e-commerce gateways, and value-added services like fraud protection and data analytics.
2. Leverage Data for Insights: By harnessing the power of data analytics, banks can offer merchants personalized insights to help them grow their businesses, creating a deeper relationship and increasing the revenue per merchant.
3. Embrace Innovation and Partnerships: Collaborating with fintechs, payment processors, and other technology providers will help banks stay ahead of the curve in offering innovative, scalable acquiring solutions.
4. Capitalize on Domestic Payment Schemes: Local schemes present a unique opportunity to offer cost-effective acquiring services to merchants, helping banks capture a larger share of the payments pie while benefiting from favorable regulatory conditions.
5. Focus on Merchant Education and Support: With the growing digital payments ecosystem, banks should provide merchants with education and support on how to optimize payment acceptance, reduce fraud, and enhance customer experience.

Conclusion

As regulatory pressure and increased competition continue to reshape the payments ecosystem, payments acquiring will emerge as the primary revenue driver for banks in the UAE and GCC. By shifting focus towards acquiring, banks can tap into a growing, stable source of income while mitigating the risks associated with the issuing business.

The lessons learned from markets like the UK, Europe, and the US provide valuable insights for banks in the region as they transition to this new paradigm. The time for change is now—banks must evolve their strategies and embrace the opportunity to become leaders in the acquiring space.

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