Top 5 payments questions you wanted answered19th November 2018
We saw many pertinent and challenging questions asked by our attendees throughout the conference, not all of which were able to be presented to our panel speakers. In this article, we will look to answer some of the most popular questions asked through our audience interaction app on the day.
Q: What can retailers do to encourage consumers to move away from card transactions to new initiatives like open banking?
A: Incentives, incentives, incentives.
A study commissioned by Pinsent Masons found that over half of British adults (34 and under) would be more likely to use a PISP over a debit or credit card online if given a discount on an item they were purchasing. Other incentives like vouchers, cashback, loyalty scheme points and faster delivery would each encourage around a quarter of consumers to pay by PISP, which is still a significant number and would represent a large saving in merchants’ payments budgets.
F2F transactions could pose a bigger challenge. An incentive like those previously mentioned may work in some cases, but these would likely need to be more aggressive in order to encourage consumers to download an app, input their bank details, and then pay by the PISP in contrast with a comparably simple contactless payment. In the F2F space, a catalyst would be required to accelerate slow organic adoption, such as a viral uptake of PISPs, increased marketing investment or an alternative (but equally powerful) incentive. We have seen this before in Asia, with Alipay providing much-needed buyer protection and seeing uptake surge, as well as WeChat Pay with their ‘Red Packets’ that went viral for Chinese New Year.
Q: What is the best advice you would give to retailers in challenging scheme fees with their supplier?
A: Know your benchmarks.
Scheme fees are unnecessarily complex. There are over 70 different fees charged by the card schemes, and this complexity makes it impossible for acquirers to produce an accurate pass-through charge to merchants. Not only do merchants need to understand the underlying structure of scheme fees in order to properly challenge them, they also need to know how their acquirer is applying these fees and whether any assumptions, margin or risk factors are built in to the final bill.
CMSPI has communicated to the Payment Systems Regulator (PSR), as part of our response to the PSRs consultation on the supply of card acquiring services, that there is no justification for the complexity of scheme fees and they merely serve to increase the difficulty of assessing the true impact of fee increases. Through the IPRF, we are working to get this message across to other regulatory bodies and will continue to campaign for regulation of scheme fees as part of a fairer payments system.
Q: If there’s a c.€300k cost of changing acquirer for a €1 billion revenue retailer: does that cost stay the same for a €500 million or a €10 billion retailer?
A: Not necessarily: the cost of changing acquirer varies significantly from merchant to merchant.
Merchants are often faced with significant costs from the physical process of changing acquirers, which forces an investment decision: do the future benefits of your new supplier outweigh the costs of switching? On average, CMSPI has estimated a cost of change to be c.€300k for a €1 billion retailer, however the cost depends on a number of factors. The costs can be split into 2 main areas; hard costs and soft costs.
Hard costs – such as PSP accreditation, IT consulting and compliance – can often be fixed costs, while soft costs – like risk, time devoted and effort expended – generally vary significantly depending on the merchant and how complex the switching process is. A graph displaying the cost of change vs merchant turnover is therefore not linear and certainly not constant, although we would generally expect a larger retailer with more stores/terminals stores to face higher switching costs.
As common standards become more widespread, we expect the cost of changing acquirers to fall, as both hard costs related to migrating IT systems and soft costs related to time and risk are reduced when common standards are implemented by both the incumbent and the new supplier. For merchants seeking to consolidate acquiring arrangements in Europe, common standards could be a key requirement that ensures your next switch is significantly less demanding: resource-wise as well as financially.
Q: We’ve heard about the increasing fragmentation of the payments mix – do you think this strengthens the role of regulation or weakens it?
A: It depends on the competitive dynamic.
Increased fragmentation promotes competition between payment types, which is good in theory. However, if we end up with a number of ‘mini-monopolies’ then pricing could be high, and merchants would face the same issues they do currently – with the added complexity of accepting more payment types. For example, American Express could be considered a mini-monopoly in the business subset of consumers, Alipay and WeChat Pay could be considered mini-monopolies with Chinese outbound tourists, and so on.
In terms of regulation, there is certainly a role for it if these mini-monopolies form. It is not beyond the realms of possibility for a new – unregulated – player to come in with low fees, reach critical mass, and then increase fees due to their newfound ubiquity.
Q: Is a cashless society a risk to merchants?
A: In the short run: yes. In the long run: not necessarily.
Cash – especially in markets like the UK and Germany – is the card schemes biggest competitor: Visa and Mastercard would not be campaigning for a cashless world if it wasn’t. Getting rid of cash would increase merchants’ reliance on the schemes, allowing them to increase fees further. Currently, the cost of accepting cash is lower than the cost of accepting cards, so it is in merchants’ interests to keep cash usage high.
However, if we turn to the long term effects, the opportunities from open banking and PISPs, as well as Alipay, WeChat, and Amazon Pay, means that competition doesn’t need to come from cash. These new players have market conditions working in their favour and, with cash usage dwindling organically, there may come a point where the function of cash as a competitor is no longer required. On the other hand, the prevalence of unbanked consumers coupled with the fact that these market shifts are a number of years away, means that cash has an integral part to play for the foreseeable future.