Profit Squeeze, Interchange, and PCI Top Acquirers’ Gripe List

Results from an Aite Group LLC survey of merchant acquirers and independent sales organizations released on Monday show that processors consider “margin compression,” high interchange, and dealing with the Payment Card Industry data-security standard as the top three challenges facing the acquiring industry. The results, part of a report called “The State of the Merchant Acquiring Industry,” are not statistically applicable to the entire acquiring community because they are based on responses from only 11 firms. They do, however, reflect what acquiring executives have been saying anecdotally in press interviews and at conferences in the past few years. Asked to list the top three challenges facing their institution, 73% of respondents said margin compression, 64% said high interchange, and 55% said compliance with PCI, the card networks' rules and standards for protecting data. Far behind was product strategy at 27%. The future of the card networks, economic conditions, and government intervention all came in at only 18%. The profit pressure derives partly from the increasing commoditization of the acquiring business and partly from merchants' willingness to shop for new processors, according to Adil Moussa, an analyst with Boston-based Aite. “You have the bigger merchants driving significant volume, threatening to leave you,” he says. Merchants also are banding together in ways they haven't before, he says, noting the creation of the Merchants Payments Coalition, a National Retail Federation-affiliated group formed to challenge steadily rising interchange rates. “You have the merchants getting smarter about the business,” Moussa says. Acquirers and ISOs today are deriving lower revenues from highly profitable leases or sales of point-of-sale terminals, adding to the pressure on discount rates?the percentage of a card sale the acquirer charges to the merchant to cover total transaction costs. Some 81% of merchant processors' revenues came from discount rates in 2006 compared with 77% in 2002, according to the survey. The share of revenues generated by terminals fell from 9% to 6% in that period. But interchange, while set by Visa and MasterCard and paid to the card issuer, is by far the largest component of a merchant's discount rate. Acquirers typically pass interchange on in full to their merchant clients and are usually the first ones to hear merchants complain when rates go up. In today's competitive environment, that puts the squeeze on the non-interchange part of the discount rate. “Interchange is going higher, but also the discount rate acquirers can get away with is getting lower,” Moussa says. The pressure on bank card discount rates is spurring acquirers and ISOs to offer profitable new products ranging from merchant cash advances to American Express and Discover acceptance to automated clearing house services, he adds. Meanwhile, reflecting the grumblings of retailers and other merchants who often must bear considerable cost and effort to become and stay PCI compliant, acquirers and ISOs say their PCI burden is heavy too. “It's something else that's added to the daily work of acquirers,” Moussa says. “It's a lot of additional resources that were taken away from what they were doing previously.” Aite's respondents came from a telephone and e-mail survey of the nation's top 70 acquirers and ISOs between September and November. Two of the 11 respondents rank in the top 20.