Merchant Acquisition in India: How to Deal with the Disruptive Forces of FinTech

The global merchant acquisition market was estimated at US$27.8 trillion and is expected to reach US$41.75 trillion by 2026. In terms of transaction flow, it is expected to reach US$987.5 billion by 2026. {source: Daedal Research] The merchant acquisition landscape in India has undergone a similar remarkable transformation over the past two decades. Traditional banking practices have collided head-on with cutting-edge fintech innovations. These innovations have reshaped the banking ecosystem, from how businesses accept payments to how consumers conduct transactions.

Merchant Acquisition

Traditionally a core banking function, merchant acquiring enables businesses to accept electronic payments, such as credit and debit cards. In India, this sector has evolved from a cash-centric economy to a digitally empowered one. The early 2000s marked the beginning of this transformation, with banks establishing Point of Sale (PoS) infrastructure across the country. This transformation allowed businesses to transition from cash-based transactions to electronic payments, ushering in a new era of convenience and accountability.

Though the transition from cash-based to electronic payments was gradual, but the pace accelerated with the advent of fintechs. These agile and innovative startups challenged the status quo, hierarchy, and processes of banks by leveraging technology to reimagine the merchant acquiring experience. Their disruptive influence is felt in 3 key areas:

1. Seamless Payment Solutions: Fintechs introduced user-friendly payment options via mobile devices, enabling businesses to accept payments anywhere and anytime. For example, Paytm and PhonePe revolutionized the Indian payment landscape by offering digital wallets and QR code-based payments. These solutions democratized merchant acquiring, allowing even small businesses to tap into electronic payments.

2. Enhanced Data Analytics: The fusion of data analytics and technology has empowered businesses to glean actionable insights from transaction data. For instance, Razorpay, a prominent Indian Fintech, offers a comprehensive suite of payment solutions that provides merchants with real-time data analytics. This data-driven approach enables businesses to customize their offerings, improving customer experiences, higher sales, and ultimately boosting profitability.

3. Financial Inclusion: Fintechs have been pivotal in promoting financial inclusion by reaching previously underserved segments. Companies like BharatPe have developed innovative solutions that cater to rural and semi-urban areas, bridging the digital divide and bringing more merchants into the formal economy. This development benefits the merchants and contributes to the economy's growth.

The India Stack: A Driving Force for Merchant Acquiring Growth

The India Stack, a revolutionary framework of digital infrastructure, is enabling this transformation in these areas significantly. It has significantly catalyzed the financial services and merchant acquiring ecosystem. Developed by Indian government and various partners, the India Stack comprises a set of open APIs and platforms that enable secure and paperless digital transactions, authentication, and data exchange.

One of the key components of the India Stack is Aadhaar, a biometric-based unique identification system that provides a digital identity to residents. This identity infrastructure has streamlined processes like KYC verification, faster and more efficient customer onboarding for merchant acquisition, etc. Additionally, the Unified Payments Interface (UPI) within the India Stack has transformed the payment landscape, enabling real-time peer-to-peer and merchant payments through mobile apps.

This transformation has spurred the growth of digital payments and e-commerce, offering banks and other financial institutions new avenues for merchant acquisition. The India Stack's impact on merchant acquiring is evident through increased financial inclusion, reduced friction in payment processes, and the facilitation of innovative payment solutions, all contributing to the evolution of India's digital economy.

How is technology enabling business growth

Technology has been the driving force behind the evolution of merchant acquiring businesses, being the rise of fintech disruptors. Several technological advancements have played a transformative role in reshaping this industry:

• Mobile Connectivity: The widespread adoption of cheaper smartphones and affordable mobile data plans has enabled fintechs to create intuitive mobile-based payment solutions. These solutions empower merchants to accept payments on the go, eliminating the need for traditional brick-and-mortar setups and expanding revenue streams.

• Blockchain and Cryptocurrencies: Blockchain technology has the potential to revolutionize merchant acquisition by offering secure, transparent, and decentralized payment solutions. When integrated with PoS systems, cryptocurrencies can enable seamless cross-border transactions, reducing the complexity and cost associated with international payments while potentially creating new revenue sources.

• Artificial Intelligence (AI) and Machine Learning (ML): AI and ML algorithms analyze vast amounts of transaction data, enabling businesses to tailor their offerings and marketing strategies. These technologies enhance fraud detection and prevention, ensuring secure transactions for merchants and consumers, ultimately safeguarding profitability.

• Biometric Authentication: Biometric authentication methods such as fingerprint and facial recognition provide a layer of security and convenience in the payment process. Fintechs have leveraged these technologies to create frictionless and secure payment experiences, which can foster trust and repeat business, contributing to long-term profitability.

Challenges in the merchant acquiring business

• Increased Competition: The merchant acquiring space has become more competitive with the entry of fintech companies, payment processors, and non-bank entities. This competition has led to a price war, as players try to attract merchants by offering lower fees and more favorable terms, thus impacting profit margins.

• Market Saturation: With banks and fintechs, competing for the same set of merchants acquiring new customers and retaining existing ones has become a challenge, putting downward pressure on prices.

• Rising Costs: Operating in the merchant acquiring industry involves various costs, including technology infrastructure, compliance, security, customer support, and marketing. As technology requirements and security standards evolve, the need to invest more to maintain their services and compete in a competitive landscape drives up costs.

• Changing Payment Preferences: As payment preferences shift toward digital and contactless methods, the cost structure of payment processing may change. Some digital payment methods, like mobile wallets, might have lower associated fees than traditional card payments, impacting revenue.

• Merchant Negotiations: Merchants are becoming increasingly informed about payment processing fees and terms. This awareness empowers them to negotiate for better rates, putting pressure on banks to offer competitive pricing.

• Commoditization of Services: Payment processing services can sometimes be perceived as commoditized, i.e., merchants might prioritize cost over other factors when choosing a payment processor. Thus, creating a distinction and a constant urge to innovate puts pressure on investment and margins.

• Investments in Innovation: While necessary for long-term success, investments in new payment technologies, fraud prevention measures, and customer experience enhancements can initially increase costs without an immediate corresponding increase in revenue.

Addressing the challenges

To address the challenge of declining profit margins, banks need to consider various strategies:

• Value-Added Services: Additional services, such as analytics, loyalty programs, or marketing support, can differentiate a bank's merchant acquiring services and help acquire new customers.

• Cross-selling: Banks can leverage their relationships with merchants to cross-sell other financial products and services, creating additional revenue streams.

• Cost Efficiency: Optimizing operational processes and technology infrastructure can help reduce costs and improve overall profitability.

• Partnerships and Collaboration: Collaborating with fintech companies and other players in the ecosystem can lead to new revenue-sharing opportunities and innovative services. Traditional banks have an extensive network and customer base. By partnering with fintechs, banks can extend their reach to previously untapped markets, fostering financial inclusion and driving economic growth, ultimately leading to increased profitability.

• Segmentation and Targeting: Focusing on specific industry segments or niches allows banks to tailor their services and pricing, potentially capturing more value from specialized offerings.

• Flexible Pricing Models: Offering tiered pricing or customized fee structures based on transaction volume or other criteria can attract merchants while maintaining profitability.

• Customer Retention and Loyalty: Prioritizing customer satisfaction and providing excellent customer support can lead to higher merchant retention rates and reduced churn.

Endnote

The merchant acquisition business in India has traversed an incredible journey from cash-based transactions to digital ecosystems that empower businesses and consumers alike. Fintechs have been the catalysts of this transformation, leveraging technology to disrupt traditional practices and create innovative solutions, all while emphasizing profitability.

As we look to the future, a harmonious partnership between Banks and Fintechs that focuses on collaboration and innovation holds the key to unlocking its full potential. By combining strengths and aligning goals, these entities can co-create a dynamic ecosystem that enhances convenience, security, and accessibility for merchants across India. Embracing profitability as a shared objective while remaining adaptable in the face of evolving technologies will undoubtedly pave the way for a thriving and sustainable merchant acquiring industry in the years to come.

Nagarro has been working with leading acquirers in evangelizing business models for collaboration between incumbents and modern acquirers. We are innovating on VAS offerings for better market positioning for acquirers. Our approach focuses on coming out of the shadows of traditional acquiring, adopting a digital-first strategy, and reimagining merchant acquisition. Some key areas that Nagarro is engaged in are the integration of merchant solutions, invisible payments, PoS, SoundBox, and QR-based offerings.

If you are interested in learning more about what we can do for you, contact us.