Banks continue to face numerous challenges when it comes to merchant acceptance, losing distribution share with SMBs against ISVs and SaaS platform propositions. Despite this, we believe that there are sizable opportunities for banks provided they choose the right operating model and more.
Introduction
Banks continue to lose market share in the distribution of new small business (SMBs) merchant acceptance but remain an important distribution channel for physical point-of-sale merchants (Flagship estimates c.20% in the US and UK and 55% in the EU as shown in figure 1). Although banks have predominately competed against PSPs for some time, ISVs and SaaS platforms have emerged as the more meaningful competitors. This is driven by the common SMB buying cycle in which they select their underlying SaaS platform prior to their banking relationship, and a strong propensity to use the default payment acceptance option that is bundled into the SaaS platform.
SaaS/ISVs are especially powerful distributors of e-commerce payment acceptance solutions where banks tend to be significantly weaker distributors due to the more technical nature of the sale (not to mention that most banks continue to underinvest in e-commerce capabilities, and as a result, their product often significantly lags PSPs and ISVs/SaaS).
Banks’ Challenges in Excelling in Merchant Acceptance
Banks face numerous challenges when it comes to merchant acceptance (detailed in figure 2), and from an executive-level perspective, the key challenges we observe are:
- Flawed operating model: often a result of trying to rely too much on in-house operations, which distracts from higher-value distribution focus
- Over-milking the cash cow: failing to continually and sufficiently invest in technology, product, and distribution
- Difficult to work with: although appropriately focused on risk management, lawyers and risk departments can make banks challenging to work with
- Lack of specialized focus: success in merchant payments requires specialization which banks struggle to achieve when acquiring is just one of many products
- Culture clash: banks have a poor track-record for integrating fintech acquisitions driven by the challenges of migrating from a small/casual/tech-driven culture to the more bureaucratic culture of a bank
The root cause of many of these challenges is that as a product, payment acceptance is minor in the broader scheme of a bank’s P&L that demands specialization and continuous investment into product and go-to-market strategies. It is often difficult for banks to internally justify the “real estate” and resources necessary to be truly successful in payment acceptance.
Bank Merchant Acceptance Propositions
Flagship recently researched how select top U.S. and European banks position payment acceptance in their broader transactional banking product set on their websites. Key observations include:
- U.S. banks have generally clear propositions for SMB and corporate payment acceptance, with most offering similar packages and price points for SMBs (figure 3A)
- European banks have less clear and harder to find propositions, and generally do not release pricing on their website (figure 3B)
- Payment acceptance is clearly not a priority product, with most banks requiring ca. 3 menu clicks to reach the payment acceptance product page from the home page (figure 3C and 3D)
- U.S. banks use relatively generic key selling points in positioning their acceptance products, with security, fraud prevention, and quick funding commonly mentioned (figure 3C)
- European banks take a somewhat more product feature-driven approach and are somewhat more specific in their key selling points although with wide variance (figure 3D)
Why Banks Should Market Payment Acceptance
Despite these findings, fundamentally, there are strong quantitative and qualitative rationale for banks to market and focus on payment acceptance (figure 4) including:
- Quantitatively higher customer lifetime value;
- Higher deposit balances;
- Stronger overall transactional banking proposition and customer experience; and,
- Generates monetizable transactional data.
The recipe for banks to improve their distribution of payment acceptance is clear, as we describe in figure 5 below:
- Align stakeholders on the “why”;
- Bundle acceptance into the broader transactional banking proposition;
- Focus on sales force tactics, measurement, and incentives;
- Master the basics of managing existing merchants;
- Do not underestimate the power of a clear, attractive web page and digital marketing basics;
- Execute basic acquisition campaigns via bank channels; and,
- Test and learn based on campaign results.
However, it is often difficult for banks to execute on these opportunities, and many have chosen to change their operating model from in-house to various forms of partnerships with PSPs. While no partnerships are perfect, they can create a stronger combined business by combining complementary strengths (figure 6).
The most common form of partnership we observe today is a Contractual Alliance, also called a Revenue-Sharing Alliance in North America. In this arrangement, the bank acts as the primary distributor with the PSP providing the product and operations. However, as we illustrate in figure 7 below, there are other types of operating model options.
Conclusions
Regardless of the operating model chosen, we continue to believe that there are sizable opportunities for banks in payment acceptance and that most banks have the capabilities to capture these, provided they choose the right operating model for their needs and are able to muster the internal alignment to execute well. To summarize, our take on key opportunities include:
- Brand, trust, distribution: bank brands are still among the most trusted in the market
One-stop-shop: banks have the advantage of being able to offer a one-stop shop for banking and payments
- Cards + A2A payments hub: merchants want, but generally lack, a single comprehensive dashboard for all their transactions
- B2B verticals: banks are positioned to succeed in B2B verticals where A2A payments, check services (in North America), and commercial card issuing are important parts of the overall value proposition
- Float: banks have built-in models for monetizing the float benefits of merchant acquiring
Please do not hesitate to contact Erik Howell at Erik@FlagshipAP.com and Emilia Cavallini at Emilia@FlagshipAP.com with comments or questions.