Merchant Acquirers Confront Their Ethics (And Technology Helps)
The payments industry is not without its challenges, but the obstacles and ethical challenges faced by a particular area of it deserve a special look. Merchant acquiring is an area that doesn’t always get the attention it deserves, however, as it is key to signing up new merchants, dispute management, and helping lower costs to merchants, the part acquirers play in the transactions process cannot be underestimated, and nor can the obstacles they have faced.
These challenges have led to acquirers being forced to adapt to declining revenues, increased competitiveness, the introduction of new technology and new payments, and EMV. In addition, as the relationships between merchants and their acquirers have changed, acquirers have also been forced to look at their ethics, and this is not just a recent concern.
Back in 2014, a survey highlighted how 11 percent of acquirers were concerned over ethics – or perhaps the lack of them – in the industry. More recently, merchant acquirers and their ethics was recently explored in an article on Payments Source.
Merchant Acquirers Facing Up to Their Ethics
The article notes that while merchant acquirers have made efforts to build an improved moral reputation for themselves, there is a concern that questionable tactics still exists in this area and that some card brands aren’t as good as they could be “at enforcing their own rules.”
Nevertheless, it goes on to explain how technology has caused acquirers to ‘confront their ethics’. With the growing use of smart terminals and other technology, this requires the ongoing supporting of independent sales organizations, which in turn requires good relationships.
However, this isn’t the only change that technology has brought about. Changes in technology have led to new developments in the payments industry, which have all led to acquirers taking a fresh look at how they work with their merchants.
It could also be suggested that the more public role acquirers are now playing might be another reason that they have taken a look at their ethics. With so many changes to the payments industry, as a recent report illustrates, acquirers are now more visible and own a larger market share, making them higher profile, and perhaps more likely to likely to look at their conduct.
However, there is a further reason why merchant acquirers are being forced to take a deeper look at the way they sell and that’s because the old techniques just don’t work anymore. As explained in an interview with Tim Munto on PYMNTS.com, over the years way sales are made to merchants has changed.
These days, merchants prefer a consultative approach as opposed to a direct sales approach; this means building relationships with merchants is imperative, which also means building trust.
A couple of examples of questionable ethics are cited in the article, and there have been other occasions when this particular part of the industry has been accused of not acting ethically. For instance, when the Durbin Amendment was introduced back in 2011 which capped interchange fees for merchants, some acquirers didn’t pass on the full amount. While some might describe this as not acting ethically towards their merchants, it should also be noted that acquirers were not legally obliged to pass these savings on
However, that doesn’t mean the acquirer side hasn’t been trying to put its house in order over the years to address its ethics and change the way they approach their relationships with their merchants.
Efforts to Improve Ethics
One of the reasons why ethics may have been lacking in the past is the lack of regulation and certification, but there have been determined efforts to change this. Organizations like the National Merchants Association, the Electronic Transactions Association (ETA), and the Third Party Payment Processors Association (TPPPA) all offer certification programs to not only give merchants confidence, but to ensure that members are up to date with changes in regulations and the latest developments in an ever changing industry. These programs are open to all professionals in the payments industry, including sales staff and independent sales organizations.
However, perhaps most importantly, one of the elements certification focuses on is ethics in the payments industry. As stated on their website, one of the biggest aims of ETA’s Certified Payment Professional (ETA CPP) program is to “thwart inappropriate practices that may sully the reputation of the industry.”
TPPPA has also been doing their part to improve ethics, or as they put it – ‘integrity,’ by offering compliance training, education and support to financial institutions and the payments industry in general. And, the industry’s efforts of pushing and promoting transparency appear to be paying off.
More recently, several acquiring merchants have been featured in the world’s most ethical company lists, so although some companies’ ethics may have been questioned, others are making a clear effort to distance themselves from such practices.
As demonstrated by the introduction of certification, the payments industry in general has made a concerted effort to become more regulated so merchants can be confident that the company they work with is committed to conducting themselves ethically, which has led to several professional being established.
Nevertheless, it might also be fair to say that ethics haven’t always been a priority, and perhaps this is understandable given the challenges acquirers have faced over the years.
Challenges Facing Acquirers
Over the years, the merchant acquirer sector has become increasing complex as it seeks to adapt to the changing word of payments processing. As a MarketWatch report highlights, this has resulted in the area becoming more complex, with aggregators and independent sales organizations becoming part of the mix. However, it has faced many other changes too such as:
- Advances in technology. One of the most significant challenges facing merchant acquirers is advances in digital technology. More consumers are heading online, or turning to their smartphones or contactless payments. Acquirers are going to have to do more to keep up with these trends if they’re going to keep their merchants and attract new ones, and analysis of one major acquirer shows some are perhaps not doing enough to adapt to these changes.
- Fraud. A major challenge for acquirers has been fraud prevention and it will continue to be so in the future. With the introduction of EMV, card not present transaction fraud is increasing, and the introduction of so many new different payment methods and cross-border payments has led to the ‘fragmentation of fraud.’ Worldpay, who published the report in 2014, said: “What is clear is that in this ever-changing electronic commerce (ecommerce) landscape fraud is becoming more difficult for online merchants to manage”. This in turn has lead to challenges for merchant acquirers, who need to find a way to combat this increased fraud.
- Greater regulation. The industry has always had to keep up with new regulations, but one of the biggest changes the industry has seen is the introduction of EMV to tackle the rising problem of card present fraud in the U.S. With the liability shift coming into force in October 2015, acquirers and merchants were urged to be ready or to be prepared for an increase in chargebacks and disputes.
- Also, although the Durbin Amendment was largely viewed as a positive thing for acquirers, it also led to challenges of its own. For instance, merchants felt more confident to challenge their current deals and negotiate better pricing, while others chose to find new contracts, which left acquirers seeking new ways to find fresh clients.
- Then there is the possibility of new regulations to consider. The European Commission introduced new regulations regarding interchange fees in 2016 to help improve transparency among acquiring banks. If further regulations were to be introduced in the U.S., this would pose yet more challenges for the acquiring banks.
- New trends in payments. New payment trends have had a significant impact on merchant acquiring and as technology keeps advancing, these changes are going to keep coming. Most recently, acquirers have had to adapt to mobile commerce and contactless payments, but there’s other emerging trends they’ll need to be ready for.
- Mobile wallets are growing in popularity, but the use of tokenization is also seeing an increase, with Visa recently announcing they are teaming up with MasterCard to expand their services. Then there is the new wave of emerging technologies, also referred to as fintech, that are waiting to shake up the industry once they become more commonplace, such as: wearables, cloud-based payments, micro payments, and person-to-person (P2P) payments.
Challenges in Global Merchant Acquiring
Another factor that has caused difficulties for acquirers is the rise of global ecommerce, or cross-border commerce. Although this has opened up new opportunities, this also comes with many challenges. Each country comes with its own regulations and its own way of doing things, which acquirers must adapt to if they are going to succeed in a new market with its own set of way of doing things.
In addition, entering into new markets is costly and often inefficient, and while there are some one-step platforms out there, more needs to be done to help acquirers and their merchants meet the challenges of cross-border trading if they are to gain their share of the considerable growth in global ecommerce, which is set to be worth $3.4 trillion dollars by 2019.
Cross-border ecommerce already experienced a significant boost in 2015, with 57 percent of survey respondents telling Nielson they had brought from overseas in the last six month. As the research company stated:
“E-Commerce is going mobile and innovative technology is allowing consumers around the world unprecedented access to products. Consumers are no longer limited to the product selection at their local store or even in their own country.”
With growth in emerging markets like China, cross-border commerce is predicted to be worth $1 trillion by 2020, and while these figures are to be welcomed, the regulatory challenges they will pose will be another obstacle that merchant acquirers will have to navigate.
Another reason why cross-border commerce is such a challenge is because of the different payment methods that are often involved. As Nielson’s research highlights, overseas customers often don’t pay by credit card. Instead, they are dependent on other payment options like digital payments or debit cards, while in some developing markets they ignore the payments industry altogether and prefer to rely on cash on delivery.
Benefits for Merchants
While merchant acquirers face new challenges, new opportunities have opened up for merchants. With mobile payments and e-commerce playing a much greater role in the payments industry, reaching out to new customers and new markets has never been easier.
The changes in the ecology of the payments system also mean that it is easier for smaller businesses to access card acquiring services than it would have been before and the Durbin Amendment made it easier for merchants to negotiate better deals, and the benefits don’t end there.
With the establishment of professional bodies like the National Merchants Federation, and the need for acquirers to build lasting relationships with their merchant, business owners can be more certain that their acquirers are more likely to act ethically towards them.
In addition, with emerging markets showing an increased interest in ecommerce buying and cross-border shopping, there are far more innovative payment options and services available for merchants today than ever before.
It has been a time of rapid change for both merchants and payment processors alike, and the merchant acquiring industry will see many emerging global trends in the near and far future, which in return will bring yet more challenges as well as opportunities. These changing times means acquirers have had to adapt quickly to new challenges, and some would argue that this has meant that looking at their ethics might not always have been a priority.
However, ethics in the payments industry in general have been a concern for some time and it has made definite steps to improve regulation, and although this might not always have been viewed as a priority by some companies, things are changing now.
Further, a move towards smarter technology, an evolving payments industry, a more public role for acquirers and a need for a consultative approach rather than a sales approach means it is more important than ever for acquirers to build good relationships with its merchants. This made inevitable that the minority of acquirers who might not have already be acting ethically were going to have to start examining their morals.