One of the many changes in the payments industry that we have been tracking at Mercator Advisory Group is the evolution of acquiring, from a generic service like a bank account to a series of specialized and customized technology offerings. Financial risk is a fact of life in the acquiring business, fundamentally resulting from the architecture of the card payment ecosystem. Merchants get paid every day for transactions that they submit for processing, but consumers only get billed monthly. If a consumer disputes a transaction after they are billed, the acquirer must absorb that refund if it is not able to recoup those funds from the merchant. If a merchant is truly a fraudster, they can process million of dollars in phony sales before they fold up their tent, leaving the acquirer with no funds to offset the resulting consumer disputes.
Merchant acquiring as a business is built on low margins and large volumes, and the acquiring industry overall has built good checks and balances to ferret out the bad apples from the merchant bunch. However, not all merchants are bad apples; there any many legitimate merchants that operate in industries like nutraceuticals, pornography, firearms, gambling and the like, where external risk factors come into play. Businesses that must comply with government regulations or risk shutdown and sanctions from agencies like the CFPB. EPA, FDA, ATF and others can create huge risks for acquirers if they operate in a non-compliant fashion. Traditional acquirers typically maintain a list of business types that they will not support, labeled as “high-risk,” meaning that the acquirer does not want to invest in risk management resources to support those markets.
Non-traditional acquirers have grown by specializing in these niche markets ignored by the mainstream acquirers. Investing in resources to fully understand and dimension all of the sources of risk in a vertical market, and establishing processes to audit merchant compliance, enables alternative acquirers to operate successfully in many high-risk segments with loss rates in line with what traditional acquirers see on mainstream businesses. These specialized acquiring services have enabled significant growth in many of these vertical markets by enabling consumers to feel confident using their branded payments cards for purchases.
Overview by Don Apgar, Director, Merchant Services Advisory Practice at Mercator Advisory Group