ISOs and merchant acquirers alike foresee a variety of challenges and potential new revenue in 2010, but exactly which ones differs between the two types of organization, the results of a recent Aite Group LLC survey suggest.
For example, among the 17 merchant acquirers surveyed between July and October, 24% view see utilities as a source for new merchants. Among the 28 ISOs responding to the survey, the largest percentage—18%—forecast e-commerce as a top emerging market.
The responses are emblematic of ISOs’ and acquirers’ differing outlooks for 2010, says Adil Moussa, the Aite analyst who wrote the report. Though ISOs and acquirers work closely together, the objectives of each type of organization can vary greatly, he says.
Asked which top three challenges their organizations face in 2010, 36% of ISOs cited merchant attrition at the top. Margin compression—a shrinking of profit margin on products and services sold—was cited by 24% as the second big challenge and PCI compliance efforts—at 21%—as the third.
The recession trumped other issues as the top challenge for 24% of acquirers. Thirty-five percent of acquirers said PCI compliance was the second most significant challenge. The recession makes a repeat appearance, as 29% of those acquirers that did not select the recession as the top challenge apparently did so for their third choice.
This type of difference reveals each organization’s differences, Moussa says. “At the end of the day, merchant acquirers were on the hook for noncompliance issues,” Moussa tells ISO&Agent Weekly. “They are the ones that have the contracts with Visa and MasterCard and need to make sure the ISOs and merchants they work with are PCI compliant.”
The responses highlight possible investment strategies for each organization in 2010, he says. “[Acquirers] really need to spend money on [PCI compliance] to get their merchants compliant. That type of pressure ISOs don’t really have.”
ISOs and acquirers also differ on issues that could affect the payments industry in 2010. Larger percentages of ISOs say price increases are likely in 2010 than do merchant acquirers, with one exception.
More merchant acquirers—87%—believe that card networks will increase their fees to acquirers, while 82% of ISOs believe that will happen.
Otherwise, 82% of ISOs says interchange will increase in 2010, compared with 75% of merchant acquirers that do.
Interestingly, 71% of ISOs also say the card networks will introduce cards in 2010 that carry higher interchange rates. Only 44% of merchant acquirers predict that.
Also , 47% of ISOs believe a government entity will regulate the interchange system in 2010, compared with 25% of merchant acquirers that do.
Debit, Too
The price of debit card transactions is likely to increase in 2010, most survey participants believe. Sixty-nine percent of acquirers say PIN debit rates will increase, compared with 79% of ISOs that do.
“This event, if it happens, would mean a lot in terms of potential income selling or cross-selling PIN pads, or setting up merchants to accept PIN debit transactions,” Moussa says.
In 2010, 75% of ISOs expect signature-debit rates to increase, compared with 62% of merchant acquirers that do.
Signature-debit price increases would mean ISOs and acquirers can adjust their qualifying rates—the rate at which a transaction is assessed assuming it meets conditions such as card present with full magnetic stripe data.
ISO and acquirer debit rates often encompass signature and PIN debit as a way for the companies to build profit margin into these transactions, Moussa says. And, because many merchants often buy based on the qualifying rates, rate changes can be deciding factors in which merchant service provider the merchant chooses, Moussa says.
And, while 21% of ISOs surveyed say card networks will start working directly with ISOs, no merchant acquirer predicts that will happen in 2010.
An ISO’s nature of primarily selling merchant accounts may account for some of the differences in how participants responded, Moussa says.
Merchant acquirers, because they are part of a bank, often are more in touch with more parts of the payment system, such as paying attention to which banks issues which types of cards, he says.
“An ISO is really isolated,” Moussa says. “They’re not part of the bank. The nature of their business and their exposure, or lack thereof, to other elements in the payments ecosystem make them view the world different from one another.”
