A Finextra member 29 July, 2008, 12:44 0 likes

I'm not surprised to hear about bankers in Asia questioning the acquiring model, mentioning the restrictions this puts on innovation and striking deals with third parties. Outsourcers seem to have focused purely on price and service availability as they try to pump ever greater volumes of transactions through their systems to squeeze out more profit. Perhaps we are reaching a point where focusing on quality and range of services, rather than purely on price is going to give the outsourcers a competitive advantage?

The post above discusses acquiring from a general POS point of view but the ATM outsourcing conundrum seems to be resurfacing for banks at the moment. It’s a major decision for a bank to outsource their number one customer delivery channel lock, stock and barrel. They all lament how great it would be to outsource the commodity back office functionality of the ATM like processing, maintenance and cash replenishment, and yet they don't want to lose control of the channel to a "one size fits all" static presentation and basic service offered by most outsourced providers. Surely the ATM outsourcers who will reign supreme in the post-SEPA/PSD world will be those who can offer the banks the ability to keep control of the things that are important to them (ie presentation layer, third party tie ups etc), and yet outsource the commodity back office functionality. Is this really that hard to achieve?

Jan-Olof Brunila - Swedbank - Stockholm 31 July, 2008, 08:51 0 likes

Having most of my experience from a market where 65% of all retail over the counter payments are made by visa and mastercard cards and where major banks actively work to replace as much as possible of cash volume by card payments, outsourcing of the acquiring business has not been considered as an option. In order to push out costly and difficult to price cash volume from the retail bank business system you need a reasonable level of control on the acquiring operations and a fair balance between the issuing and acquiring businesses. Successful cash replacement with electronic payment therefore needs cooperation between issuing and acquiring activities. Card acceptance at point of sale, ease and convenience, security for cardholders, merchants and also banks are key factors in this work. But also the commercial terms are of great importance. Competition between issuers on the one hand and and acquirers  on then other hand are the base for successful development in granting both customers and banks a fair deal. Since 1995 when the Swedish card market adopted an open competitive business model for cards, the transaction volumes have grown with more than 1 500 % and the payment card business is profitable for banks who invest in expanding the issuance of both credit cards and debit cards including the use at POS and and the expansion of card payment acceptance.  Only parts of the acquiring IT processing is outsourced in some, but not all banks. The interbank owned cost centre organisations have however been replaced with competitive suppliers or in-house services.  In my experience this would have been difficult to achieve if the acquiring business would have been outsourced from the banks to processor companies. It is difficult to see how a for profit processor would for its own business sign up every merchant in the country, even the self employed corner store in a remote village,  to accept all kinds of general purpose payment cards. Usually they tend to focus on the major cities and the bigger retailers. On the other hand it is also hard to imagine the board of an interbank processor  to agree on common business goals in this direction . Usually they tend to end up with the smallest common denominator thus restricting the development of the business.  In a mature market where card holding, acceptance and  POS  usage is ready and built-up, there may be an option to outsource the acquiring business from banks to processors. The regulation of the four-party model, including restricting the interchange payments from acquirers to issuers may adversely impact such plans since the business case for card issuance deteriorates while there is a possibility to widen the margins in the acquiring business. A bank that decides to become issuer only will then be on the "lost revenue" side while the processor will be on the  "wider margins" side.