Cards Acquiring : What are the right questions to escape value chain trap?

How we ask the question is extremely important to how we find the answer              - CK Prahalad

Much of literature and innovation propositions on the cards business has been too issuing (C2C) focused. Acquiring, the B2B side of the business (engaging Merchants), has almost been accorded a step motherly treatment. Fragmentation of networks, devices, among others could not only explain the treatment but also how a real ‘two sided’ market has been well camouflaged.

The ‘value chain’ thinking has also been a trap. A simple reading of acquiring value chain throws up the following blocks - merchant onboarding, acceptance enablement, acceptance (incl. disputes), clearing & settlement and all kinds of reporting. Going with the times, throw in a little analytics (e.g. Attrition analytics), mobile acceptance (NFC / Contactless etc.) it appears as though players are well equipped.

So is acquiring really a neglected and BAU business or is something bigger cooking? We could take a step back and look at three big drivers.

The 4S of merchant needs

• Swipe (of course you can also Dip, Tap or Click) - accepting payments. This is vanilla.
• Stock - managing stock and inventory et al
• Sell - how to sell more. Lot of thinking here on ‘offer’ management (Generation>Presentment and fulfillment).
• Supply (finance) - how to finance requirements/ working capital. (Not to forget, using financing to secure flow business, well, is quite an old trick). Players are only waking up to it in the last few months.

The 3T’s of payments business

• Tap - The front end of issuing and acquiring- Plastic, Chip cards, PoS, Mobile, NFC, HCE, Biometric, Wearables etc. fit here.
• Tube - Is the network / scheme representing the clearing and settlement rails used.
• Tank - This is the funding for the transaction (Credit / Debit / Prepaid). Extend that to merchants and it is about getting paid to manage working capital.

Direction of Payments Business *

• Free: We are almost there. Interchange caps are only increasing and once mainstream players get in, the fancy rates of new age providers will also be challenged. Low fees / near free pricing is a clear new normal.
• Frictionless: A focus area for most players. Most efforts are on ease the pain of acceptance, while supporting advanced authentication as the transaction value goes up.
• Distributed: There appears to be bias towards blockchain driven future where we can term all actions as ‘distributed’. In the same direction, earlier stages could be - eco-system / marketplace model backed by regulation and technology (e.g. APIs) 

Now that we have set the stage, when we juxtapose the above I believe a different view of the market appears.

1. Most actions today by traditional players are addressing ‘Swipe’.
2. Non-banks have been actively addressing the remaining 3 S’ along with Swipe. Networks are also active (either directly or through financial stakes)#
3. Acceptance, clearing & settlement, financing – all the three aspects are un-bundling. Herein lies the risk and opportunity. If and when Blockchain fulfills its promise, it will play at all 3 levels.

The future of cards acquiring has merchant’s business at its heart , not just transactions. The tipping point, where the balance tilts decisively in favour of players than providers, may be earlier than we think. How to address the 4S’ along the maturing direction of business may just be the question to ask.

What do you think?

* CEO of a new age payments operator in London.

# Last week a network announced stake in a ‘4S’ player. Also, a ‘Swipe’ player announced their Supply (financing) play this week.