Issuers & Acquirers: the Threat from Online Payment Providers

In an earlier blog I described a scenario in which online payment providers, such as PayPal or Google Checkout, would disintermediate issuer/acquirers at the POS in the physical world, as they already have done online.  A potential catalyst could be the emergence of mobile marketing services for physical-world shopping (e.g. location-based or social marketing) that would steer the consumer towards online payment providers.  This would allow online payment providers to consolidate transactions from physical-world merchants, thereby increase their market power relative to merchants and acquirers and force interchange rates down.

However, issuers and acquirers have deep relationships with their customers (cardholders and merchants) and perform activities that online payment providers would not be able to replace in their entirety, such as credit management and clearing and settlement).  The interesting question is therefore if these activities would enable issuers and acquirers to defend their position at the POS or if there is an opportunity for online providers to disintermediate?

To answer this question, let’s go through the customer touch points that issuers have with cardholders and acquirers have with merchants and assess the extent to which these would enable issuers and acquirers to prevent POS disintermediation.

Issuer/cardholder touch points:

·   Customer acquisition/activation: unaffected by POS disintermediation.  However, with lower interchange fees, issuers are unlikely to retain their current level of product innovation and marketing

·   POS authorisation: online-only transactions are likely be one- step, in that there is no physical proof of identify, such as a signature or pin required.  Although the online payments industry could develop an alternative approach, cardholders may view this as less secure and more susceptible to fraud

·  Statementing/credit management/collection: largely unaffected.  Issuers would no longer have access to transaction-level information, so online payment providers would need to provide statements or integrate their data with the issuer

·  Customer servicing: the majority of service enquiries relate to statements, credit management or payments and would be unaffected.  However, issuers would no longer be able to assist the cardholders with disputes, as transactions would go through the online payment provider

·  Loyalty/marketing offers: disintermediation and lower interchange fees would likely leave issuers unable to continue loyalty and marketing programs.  However, online payment providers would likely be associated with new marketing programs that carry greater benefits to the customer

·      Cross-sales: unaffected.

Acquirer/merchant touch points:

·  Merchant acquisition/negotiation/activation: unaffected.  Merchant acquirer fees would likely not be affected to the same extent as interchange fees, so acquirers should be able to continue their activities as today

·  POS authorisation: similar to cardholders, merchants are likely to view an online-only model as less secure and more susceptible to fraud than the card-based model

·  Clearing and settlement: unaffected.

·  Statementing and analytics: As with issuers, acquirers would no longer have access to transaction-level information, so online payment providers would need to provide statements directly to merchants or integrate their data with acquirer-statements.  As an extension, acquirers would no longer be able to provide data analytics services to merchants

·      Related banking services: unaffected.

Having assessed each customer-touch point, there are two areas where the card-based model appears to be superior to the online-only model; POS security & fraud prevention and disputes.  Tomorrow’s blog will look at these areas in more detail and assess the potential for issuers/acquirers to leverage these to prevent disintermediation.