A drive towards cost reduction and increased efficiency will provide opportunities for new players to enter the European merchant processing market, according to RBR’s research
Roles of organisations in merchant processing ecosystem vary widely
Payment Cards Issuing and Acquiring Europe 2016 shows wide variation in merchant processing arrangements across Europe, with tasks undertaken to differing degrees by banks, third party processors (TPPs) and interbank organisations.
Individual acquirers interface directly with card scheme networks in a number of countries, for example Belgium, Croatia, Czech Republic, Ireland and the UK. Meanwhile in other markets such as Bulgaria, Denmark, Finland and Latvia, this is the responsibility of TPPs or interbank organisations.
In Russia, Kazakhstan and Ukraine, most large and medium-sized banks have their own processing centres which connect to the schemes on behalf of their parent companies. These processing companies also act for some smaller banks.
In several Central and Eastern European (CEE) markets, processing centres are responsible for maintaining merchant databases. This is also the case for interbank organisations such as Nets in Denmark and Finland, SIA in Italy and SIBS in Portugal. Generally, the company which is responsible for these databases produces merchant management information too.
The lack of a standard or optimum merchant processing model creates opportunities for different types of organisation, to expand their presence and/or for new players to enter individual markets.
Understanding national characteristics is key for new entrants
Transaction authorisation tends to be electronic, with the message sent from the acquirer to the issuer via their processor, although in some cases the processor is responsible for authorisation. As with interfacing with card schemes, larger banks often carry out authorisation for smaller banks.
RBR’s report shows that in many markets, all payments are authorised, while in others, floor limits – a value above which authorisation is mandatory – are used and are generally set according to the type of merchant. In Finland, for example, airlines and car repair businesses typically have the highest floor limits, whereas restaurants and hotels tend to have lower limits, and high risk merchants, such as jewellers, have even lower floor limits. Floor limits are not common in CEE countries, and where they are used, they are often set relatively high, as in the case of Latvia, where fraud levels are low, while in Croatia they are only used for credit card transactions.
Card transactions are usually routed to an interbank organisation for clearing, for example Nets in Finland and SIBS in Portugal. In some countries, several clearing houses operate, with transactions from different schemes or card types being routed to different houses. For example, in Greece domestic Visa transactions are cleared via the Greek National Net Settlement Service (set up by Visa), while MasterCard performs clearing for domestic transactions via Banknet.
Outsourcing will increase as banks look to reduce costs
RBR predicts significant changes in the processing landscape over the next few years. Daniel Dawson, who led the RBR research project, said “As banks and other acquirers increasingly look for ways to reduce their costs and improve the efficiency of their operations, we can expect the outsourcing of merchant processing to become more common.”
TPPs are now present in most markets, and card schemes may also increase their involvement in processing activities. Daniel Dawson added “It is essential for companies to understand the complexities of existing arrangements when looking to expand their activities, and RBR’s research is intended to assist them in this process.”