For some time, it’s been clear that retail banks need to rethink their strategy. Falling revenues from traditional business lines, growing competition and the technical headaches of living with – and replacing – legacy infrastructures have all driven banks to seek new revenue streams.
Some of the most successful new revenue streams have come from areas banks previously decided were no longer parts of their core business – such as transaction processing. The return of major retail banks such as Barclays in the UK to the transaction processing business has been widely covered: likewise, banks are now packaging up their expertise in product implementation, operations, regulation and compliance and offering “Bank in a Box” services to retailers and fintechs. Moves like these make sense, helping banks to arrest the decline in profit margins seen since the Great Financial Crisis of 2007-2008 and return to profit growth in the last two years.
At Tietoevry Banking, we believe online acquiring is another area in which banks can leverage their expertise to great effect – but only if they adopt the right approach.
A huge opportunity
Historically, bank acquiring operations have focused on strong relationships with merchants and effective merchant interfaces. During the birth of the digital economy, the need to focus on the customer experience – and in particular, the need to reduce friction – led to the rise of online acquiring experts such as Adyen and Stripe. Given the serious investment required to deliver great customer experience in what banks saw as a volume market, many decided to outsource their requirements to this new breed of specialist player.
“Continued growth in e-commerce plus the advent of new ways to pay have combined to revolutionize the online acquiring opportunity”
Fast forward twenty years, and the continued growth of e-commerce plus a proliferation of new ways to pay have combined to revolutionize the opportunity in online acquiring. WorldPay report[1] that e-commerce sales are growing twice as fast as physical retail sales after the pandemic, while new transaction types linked to Open Banking, such as account-to-account payments, request to pay (R2P) and others are surging ahead with growth rates that outstrip other forms of payment such as cards or digital wallets.
E-commerce will continue to grow strongly for the rest of this decade...
...while new forms like Account-to-Account (A2A) payments are surging.
As digital becomes a bigger part of the overall economy, so regulatory scrutiny of online players of all kinds – including transaction acquiring specialists – is becoming more intense. Outsourced acquirers very often lack both the scale, balance sheet and regulatory expertise to cope with this kind of scrutiny, let alone the ability to expand their services into a wider range of geographies and vertical markets. Adyen, for instance, offers a good set of services – but only operates in Germany and the UK.
Needless to say, banks have all of the qualities needed for successful online acquiring: money, regulatory know-how, experience and technical expertise. Not to mention long-term relationships with merchants, and that all-important “X” factor: trust. However, those banks that decide to get into online acquiring need to ask themselves whether they can afford the expensive, time-consuming process of building their own e-commerce gateway – or whether an alternative strategy might be more appropriate.
Time: the essential element
“banks have recently lost ground in some markets to specialist players with less complex models. Online acquiring is an opportunity for banks to play to their strengths.”
Alongside money, timing is at the core of any business venture. Look at the Buy-Now-Pay-Later market: lending is at the heart of what banks do, so banks should have been at the forefront of BNPL. However, their retail lending models were overly complex, so banks lost market share to BNPL specialists with faster, flexible credit decision engines.
A similar argument could be made about the card market, where major online players such as Apple and Amazon have made dramatic advances, winning market share and volume through tie-ups with banks like Goldman Sachs and Chase Manhattan that take advantage of the digital players’ huge customer base and marketing power.
In brief, if banks want to capitalize on their relationships with merchants and re-enter this fast-growing segment, they may not have the time to build their own e-commerce gateways from scratch – and they may not want to commit the required resources to a complex, time-consuming engineering task. Outsourcing their requirement to an online acquiring specialist will not help them grow market share or profitability in this market, either.
Fast implementation, greater control and higher profitability through SaaS
Rather than partner with a specialist digital acquirer or build their own e-commerce gateway, banks should consider using a white-labelled gateway solution delivered as a service (SaaS). Such solutions are fully scaleable and can be branded with the bank’s identity. Technology vendors operate the gateway solution in the background, leaving merchant relations to the bank itself.
Costs are significantly reduced as the bank is not responsible for development and maintenance, while vendors can also assist banks with regulatory compliance for their gateway. Furthermore, SaaS providers with rich experience in legacy platform migrations can aid banks in making the transition between vendors as seamless as possible for their client merchants. Adopting a SaaS approach enables banks to “plug and play” new services for their merchants alongside online acquiring – such as issuing virtual cards for customers, for instance, or BNPL products.
To find out more about delivering e-commerce gateway services for merchants via SaaS, download the fact sheet below or use the contact form.
E-commerce gateway
Download fact sheet
Cover all needs a bank might have to provide e-commerce acquiring services to merchants.
DOWNLOAD NOW[1] Worldpay, March 2024: The World Payments Report 2024: