Report: Consolidation, Security, Debit Are Top Challenges for Acquirers

The merchant-acquiring industry can expect more market consolidation and more attention to security, and it also will have to adjust to the secular shift away from credit and toward debit, according to a new assessment of market trends from Mercator Advisory Group Inc. Portfolio sales and acquisitions of smaller processors by bigger ones are nothing new in the acquiring business, of course. But some of the more recent deals have been pretty dramatic, notes David Fish, senior analyst at Maynard, Mass.-based Mercator and author of “The U.S. Merchant-Acquiring Market 2009: Accelerating Change in a Down Economy.” Fish notes that the No. 1 acquirer, the Chase Paymentech Solutions joint venture of JPMorgan Chase & Co. and First Data Corp., broke up last year. And this year, Bank of America Corp. said it would sell its big merchant file to a joint venture controlled by First Data (Digital Transactions News, June 29). “We've got a lot of churn in the marketplace, not only at the portfolio level but at the provider level,” Fish says. Fish adds that outright portfolio sales are off, probably because of the recession, but bank failures have caused some portfolios or even entire acquiring operations to change hands. The most notable example was the failure of the bank that owned Humboldt Merchant Services, a sizable processor that's now part of Schaumburg, Ill.-based Moneris Solutions Inc. (Digital Transactions News, Sept. 18, 2008). “Private sales are down, but on the other hand, when trouble occurs, that stimulates portfolio transactions,” Fish says. Banks, meanwhile, are imposing their brands in the acquiring businesses, but Fish says the long-term trend of banks farming out the back-office processing continues. Banks or non-bank processors operating under banks' brands account for 69% of U.S. charge volume, up from the 67% noted in last year's report, Fish says. But in processing the actual transactions, non-bank firms handle 57% of volume compared to just 43% for bank-owned processors. That split shows that banks like to offer a full menu of services to business customers under their own names, even if they don't do the actual job themselves. “The more services the acquirer can cross-sell the better, and being part of a bank allows providers more opportunities to cross-sell,” he says. And whether they work for a bank or for a non-bank processor, virtually all acquiring executives nowadays are worried about data security because of the computer breaches at retailers and large acquirers such as RBS WorldPay Inc. and Heartland Payment Systems Inc. “I think that the demand for systemic fraud controls and security has really never been greater,” says Fish. But while end-to-end data encryption is all the rage, especially because of Heartland's push into the technology, Fish isn't sure if it will have staying power. The so-called chip-and-PIN card, which carries a microprocessor and requires the cardholder to enter a PIN for authentication, has better security than the magnetic-stripe cards that dominate the U.S. and wouldn't need the end-to-end systems now under development, Fish notes. Chip-and-PIN cards are common in Europe and are coming to Canada. “Whether or not chip-and-PIN comes to the Unites States … will determine whether end-to-end encryption is anything more than a short-term solution,” he says. Besides paying closer attention to security, acquirers that built their business around credit cards may need to adjust their strategies in anticipation of even more debit volumes as the recession and a new federal law constricts credit card usage, according to Fish. Debit card transaction volumes are now much higher than credit card transaction volumes, and debit dollar volumes are just about equal to those for credit (Digital Transactions News, Aug. 3). “It really necessitates a more holistic approach by the acquirer,” he says. “The payments mix may be subject to additional forces [in] the shift toward debit.”