Currently, the merchant acquiring relationship is a bit of an odd-child when it comes to the wider banking relationship among Canadian businesses.
"Only 15% of Canadian merchants have their main in-store merchant acquiring the relationship directly with their primary business bank."
While banks in the Canadian market have generally encouraged their business customers to consolidate their broader business product holdings, only 15% of Canadian merchants have their main in-store merchant acquiring relationship directly with their primary business bank.
This is one of the reasons that smaller players have been able to enter the Canadian market and win significant share in the acquiring space, particularly among micro-merchants. Square, for example, is significantly overrepresented among merchants with $100,000 or less in revenue per year compared to merchants in higher revenue bands. Although part of Square’s success was its payment terminal offering, which was a more tailored solution than its larger acquiring competitors, it has been able to achieve significant traction among new start-ups because the acquiring relationship has not been traditionally included as part of the main business banking relationship, and so these merchants have had to look outside of their main bank for their payment acceptance needs.
So what?, I hear you ask. The tiny volumes processed by micro merchants are not highly profitable, and so long as these new challenges remain ringfenced in the acquiring space, there is little threat to the broader banking relationship! This might be a valid assessment… if these new players were happy to just focus on payments acceptance. However, as PayPal has so successfully demonstrated, having a more comprehensive view of business receivables provides a wealth of data that is not otherwise available, offering a significant advantage when it comes to validating lending applications. While this has been mostly focused on the online space, Square Capital is making inroads among brick-and-mortar merchants by leveraging its receivables data. The ability to repay these loans as a portion of receivables is just the icing on the cake, offering the flexibility demanded particularly by micro-merchants.
OK, you concede. But surely lending is the only business line under threat? For now, that may be the case; however, it is only a matter of time before these newer players start to leverage all of that merchant data and those acquiring and lending relationships to broaden the banking relationship. If a business’ employees are logging onto a Square terminal at the start of their shift and off at the end, what’s to stop Square taking over the payroll function? Not defending the existing markets will inevitably invite incursions into other potentially more profitable business lines.
"Anything that an acquiring bank can do to simplify the overall banking relationship will provide a significant advantage against new challengers in the acquiring space."
Is there no hope for incumbent acquirers? Fortunately for them, there is always hope. Part of the solution may come from devising more ‘anchors’ to lock merchants into existing relationships. By consolidating the acquiring relationship into the broader banking relationship, business banks can help to simplify the overall banking relationship for their merchant customers. As I so often find myself telling our clients, RFi Group research from across the globe has shown time and time again that small business operators are critically time-poor and looking for simplicity in managing their finances, so anything that an acquiring bank can do to simplify the overall banking relationship will provide a significant advantage against new challengers in the acquiring space.
The other potential defence will be to take on these new entrants head-on. Providing a tailored solution that addresses the pain points they experience in the payments acceptance space will give these merchants no reason to look outside their existing relationship for merchant acquiring, and will thus not provide an ‘open door’ for new competitors to begin relationships with these business customers. One of Square’s key strengths has been the range of functionality it offers to merchants beyond simply accepting card payments.
RFi Group data shows that it is not just micro merchants that show poor integration between their payment acceptance solutions and other business management systems; this suggests that there is a gap in the market to offer this integration to deepen engagement with existing merchant customers. If acquirers do not offer these services to their customers, there will be nothing preventing new players from moving up the value chain as they achieve saturation among micro-merchants.
There has never been a better time to be a merchant in Canada, at least from a payments acceptance perspective. New, innovative market entrants are starting to provide the integrated and tailored solutions demanded by Canadian businesses, and incumbent acquirers will need to take heed and adapt, or else risk losing share to their more agile competitors.