Study Warns of Contactless, Other Rising Risks for Top Acquirers

Contactless payments loom large among rising challenges now confronting even the most dominant processors in the U.S. merchant-acquiring business, according to a new study. The report estimates that acquirers processed 45.5 billion credit, prepaid, and signature-debit transactions in 2005, a huge electronic transactions market it says is controlled by five major processors. The report (“Taking Charge: Essentials of U.S. Bank Card Acquiring”) issued recently by TowerGroup, a Needham, Mass.-based research firm owned by MasterCard Inc., further points out how the fast-growing prepaid debit product has begun to register statistically, with the cards accounting for some 2.4 billion transactions last year, or 5% of the total. But the study points to a new business risk for acquirers created by the increasing popularity of a new POS technology?contactless transactions, which rely on radio waves rather than conventional card swipes. Retailers that have been making long-term investments in radio-frequency-based tags for supply-chain management are by virtue of those investments developing the capacity to take control of front-end POS systems as payment devices go contactless, the report says. Five processors preside over the acquiring market, with First Data Corp. in the lead with 51% of the transaction volume, according to the report. In second place is Bank of America Corp.–which two years ago acquired National Processing Corp., a major processor– with an 18% share. Nova Information Systems, Fifth Third Bank, and Global Payments Inc. round out the top five, leaving only a 6% share for other acquirers. As dominant as these players seem, however, their market shares are hardly cast in stone. “A lot can happen in a few years and the market will most likely require innovation between the leaders, rather than a checkbook, [to] stay at the forefront,” says the report's author, senior analyst Brian Riley, in an e-mail message to Digital Transactions News. “Innovation can come through specializing in markets, finding a way to deal with costs more effectively, and creativity at the point of entry. It surely is not an oligopoly.” Riley points to thrusts from foreign banks, such as Royal Bank of Scotland, which controls RBS Lynk, and ABN Amro Bank N.V., which has “the war chest to realize the potential of fee-based merchant processing, rather than risk based income [from card issuing],” he says. Even processors that have suffered setbacks can be expected to mount competitive threats, he says, pointing to TSYS, best known as a card-account processor but now a force in acquiring through its acquisition last year of the 50% of Vital Processing that was held by Visa USA. Visa had been running Vital as a joint venture with TSYS. Earlier this year, however, TSYS lost the account-processing business of Bank of America, which took the business in-house. “TSYS has rebounded very nicely after losing BofA,” Riley says. “Their recent purchase of Vital from Visa is very interesting, as well as some of their focus on technology and wired payments.” At the same time, Riley's report points to challenges at the point of sale as the existing infrastructure ages. POS equipment is now almost 5 years old on average, with about two years left on a typical amortization schedule, the study says. “Major upgrades will be required over the short term as contactles payments become mainstreamed,” he says in the report. But the spread of contactless payments presents another challenge for acquirers with big merchants, Riley warns. Major merchants like Wal-Mart Stores Inc. have been installing sophisticated radio-frequency-identification (RFID) technology?the same technology on which contactless payments are based?to control inventory and perform other supply-chain functions. “Once this process is ingrained, then harnessing the customer data becomes the next step,” Riley says in his e-mail. “This is an area Wal-Mart has never really levered before. RFID integration on the consumer front end can be levered into rewards tracking and point-of-sale discounting.” After that, he says, the giant merchant, which has said it wants to move into payments processing, can “weav[e] RFID into a self-processing framework [that] will create the potential to tie it all together.”