Until relatively recently, the acquiring and issuing processes were, for lack of a better way to put it, miles apart. However, things are changing. There’s a confluence of acquiring and issuing now occurring in the payments industry, with acquirers now offering payment products and services that were once available only through issuers. Getting involved in issuing has strong potential to help ISOs and acquirers increase their revenues, as well as to fuel merchant service enhancements that also bolster the bottom line.
Before discussing this convergence, it is important to make a distinction between acquiring and issuing, as well as to discuss interchange and how it works on both sides of the fence. In an acquiring scenario, a financial institution (“acquiring bank”) maintains and services contractual relationships with merchants so that these merchants can accept credit and debit cards as a form of payment. In an issuing scenario, public or private companies—including “issuing banks”—enter direct contractual relationships with consumers and/or businesses by issuing one or more credit or debit cards to them. Both issuers and acquirers must be registered ISOs, meaning they are sponsored by a financial institution (if they are not financial institutions themselves) Every card issued has an issuer statement on the back clarifying the issuer’s identity.
Interchange, meanwhile, is a fee paid between banks for accepting card-based transactions. Issuing banks earn interchange, and acquiring banks pay it. The issuing entity deducts the interchange fee from the transaction amount paid to the acquiring bank (i.e., the merchant’s bank), which then pays the merchant the amount of the transaction minus the interchange fee and an additional, usually smaller, fee charged by the acquirer Instead of paying each fee separately, merchants negotiate and pay a “merchant discount” to their acquiring financial institution, which is typically calculated as a percentage per transaction. The merchant discount rate may cover a wide variety of services provided to merchants by their acquiring banks.
It’s imperative to understand that interchange varies greatly by the type of card, type of merchant, and how the transaction is acquired. For example, the issuers are incented to issue business rewards credit cards, as the interchange fee for transactions completed with these cards will be higher than for other types of cards.
But what type of confluence of issuers and acquirers is occurring, and why? Primarily, acquirers are adding issuing products to their lineup. Square, which has rapidly grown into one of the largest payment processing entities in the U.S., also offers Square Cash, which allows users to make payments from an app linked to their debit card, without incurring a fee. PayPal has blurred the issuer-acquirer line by launching a credit card of its own, while Stripe has entered the issuing business with a new product that enables its business customers to offer their own proprietary virtual and physical cards. Stripe Issuing is certified as an issuing processor and, under the issuing umbrella, offers support for Apple Pay and Google Pay.
Additionally, payment technology provider Aliaswire now features PayVus, which aims to streamline payments for small businesses by combining A/R and A/P. This is accomplished by issuing a small business or commercial credit card to ISOs’ and Acquirers’ merchants and settling a portion of the merchant’s credit card deposits to the credit card. Aliaswire provides a revenue share of the Interchange generated when the merchant makes purchases with the card. ISOs and Acquirers can use the revenue share to reduce merchant processing fees. This new approach to merchant acquiring may yield significant savings through the reduction of interchange rates paid by merchants.
Acquirers had, and continue to have, a number of reasons for bringing issuing products into the mix. Increasingly, they have found themselves struggling with margins because of the ease with which merchants can accept credit cards, even though these services with so-called “low rates” usually bring the gift of unwanted fees.
Regardless of what is sparking the struggle, though, getting into the issuing game is a great way for merchants to expand their portfolio easily and with minimal risk. This is especially true given that every business makes business payments, whether for supplies, rent, or to vendors for merchandise to be re-sold in their establishments. Acquirers can—and should—capitalize on this. After all, they are already selling a service to these businesses. Adding to that service by offering B2B payments via a quick, simple online portal makes perfect sense. B2B payments are a big deal these days, exceed $1 trillion annually, according to Visa.
Then, there is the ability to improve merchants’ accounts receivables, paving the way for stronger customer relationships and an improved merchant financial picture. Many suppliers offer discounts on payments when those payments are received within a very short window following billing. Acquirers can make it easier for their merchant customers to remit these payments and lessen the burden of doing so with reduced staff by following the lead of the players mentioned above and assuming the issuer role.
Simply put, acquirers that go with the confluence flow have the power to offset fees, minimize the financial sting of interchange and make more money, as well as to offer faster funds settlement and reduce merchant attrition. It is, in short, a win-win situation all around.