COMMENTARY: How Merchants Are Methodically Moving Issuing Under Their Tent

Little by little and step by step, merchants have been taking tighter control over their payments businesses. No longer merely the endpoint in a cardholder’s lifecycle, merchants are leveraging fintech in ways not possible just a few short years ago.

This is why we’re seeing the big fintech-centric acquirers like Square, Stripe, and Adyen investing heavily in issuer services.  Now, if these companies are successful in gaining banking licenses, we will see the market come full circle. By full circle, I mean back to when financial institutions were both issuers and acquirers. 

But this time, there is one big change, and it’s going to redefine the issuing market.  

Merchants have long been the tail on the donkey, the donkey being card networks and financial institutions. Now, more merchants than ever before are driving issuer services. Hence, we see pay-later products like buy now, pay later (BNPL) taking off. But I believe that’s the tip of this change. 

Merchants have long offered credit at the point of sale, but needed a bank to originate those loans. Now, regulators are ready to enable and control market expansion through fintech banking charters and merchants are hungry for payments that offer a lower cost of acceptance with all the benefits of credit users. The result is that you can expect to see a lot more credit products offered directly by acquirer-issuers to merchants.  

Fintech is capable of enabling dynamic forms of credit, whether for gig workers and small businesses to buy equipment and supplies or consumers to buy products or services. It’s a built-for-purpose world we live in, and credit is no different. These types of POS-credit products, like BNPL, are peeling off credit card transactions and forcing traditional issuers to come to grips with a new competitive force they haven’t had to deal with in the past: merchants.

This is where we can see the market coming back together again. Where once financial institutions held all the (credit) cards, now merchants will be the dealer, and that’s making a lot of institutional players very uncomfortable. That’s because they know that soon it won’t be necessary to use your credit card at the POS, and that opens a whole new world of digital possibilities.

The merchants themselves will offer the option of paying later in various forms, incorporating these services into their workflows and their rewards programs, and, oh yes, erasing interchange fees—especially interchange fees for rewards and business cards. This is why Visa and Mastercard are investing in new networks that don’t process credit and debit cards. And, don’t forget, what’s happening for credit is also happening for debit.  

Next year, I look for acquirers and merchant processors to embed more varieties of credit more deeply into their POS workstreams and incorporate credit into services for segments like gig workers and small business owners. They can do this because fintech is making it possible to realize the promise of payment steering. New technologies like payments orchestraters empower merchants to incorporate business rules into their acceptance workflows. Machine learning is deepening their ability to understand and predict buyer behaviors. And, most important, acquirers are becoming licensed lenders themselves. 

I believe the new network-like ecosystems that acquirers and processors are creating will fundamentally change the issuing market. In 2021, we’ll see merchants digging deeper into the payments value chain, whether through private investments or M&A.

The result is that merchant-driven credit offerings will supplant the financial-institution products that have so long dominated the market. Financial institutions will fight back the old-fashioned way—by lobbying Congress to keep credit under their control and huddling with the card networks. That won’t be enough to address what’s coming at them.

–Patricia Hewitt is principal at PG Research & Advisory Services LLC, Savannah, Ga.