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The Pareto Principle on Steroids: How Big Data Can Help Merchant Acquirers Gain Actionable Intelligence

Balazs Fejes

EVP, Co-Head of Global Business, EPAM
Blog
  • Financial Services

What if there was a way for your merchant acquiring business to dramatically improve profitability—without making any new sales? Thanks to new big data capabilities, there is. Let me explain.

The History of the Merchant Acquiring Industry

As anyone involved in the payments industry can tell you, merchant acquirers have always been a critical part of the retail payments process, acting as intermediaries to enable merchants to accept payments from cardholders, whether domestic or international.

When credit cards were first introduced to the general public in the late 1950s, the process was entirely manual. Retailers were only allowed to accept payment up to a pre-assigned limit that varied according to the type of merchant. Transaction slips would be completed manually, signed by the customer and deposited with the acquiring bank, which would then obtain settlement from the card issuer and pay the merchant. The process was arduous, slow and unsustainable.

Over time, technological innovations paved the way for merchant acquirers to automate these manual processes. The IBM computer, telecommunication networks and payment terminals were just three of the early advances in technology that enabled customers to make their purchases with the swipe of a card. And by the mid 1990s, the advent of the internet was opening a new payment channel for merchants and cardholders alike.

Further advances in technology saw the introduction of Europay, MasterCard and Visa (EMV) and other measures to control fraud as business volumes continued to grow exponentially thanks to the increase in the acceptance network, the availability of credit and the convenience of paying by card instead of cash. With these changes in consumer preference and technology, the growth in the market for merchant acquirers was set. Their strategy? Sell, sell, sell. In other words, sign as many contracts with as many merchants as possible. The more merchants you worked with, the more profit you made. Right?

For many years, that was the thinking—more merchants, more payments, more profit! Pricing was a secondary consideration, basically driven by whatever the market would bear rather than the underlying costs. And, due the inability at the time to consume these enormous amounts of data required to measure profitability accurately, there wasn’t any information available to disprove the thinking. Acquirers were restricted to working with the tools and data they had available, but ultimately the focus of these businesses was about acquiring—not analyzing.

The Challenge Facing Today’s Acquirers

Over time, investors have seen how the card-payments industry has continued to grow and wanted to get in on the action. Financial disintermediation around the world also resulted in rafts of new players entering the market as consumers demanded more and different ways to pay. In the process, merchant acquiring has become a far more complex business that requires serious investment in order to compete. And serious investment demanded serious growth in business volumes, particularly as competition began to kick in. What had previously been an unglamorous but essential service with reasonable returns on investment for acquirers has today morphed into a high-tech business operating on razor-thin margins.

Where once merchants looked to their acquirers to provide their customers with a seamless payment experience, their focus is now on reducing the cost of providing this service. For example, it is now commonplace for merchants to use multiple acquirers, choosing the most competitive bid for each type of transaction. Meanwhile the never-ending quest for growth in market share has intensified competition among acquirers and resulted in a downward spiral in pricing to gain—and keep—more clients.

Unfortunately, today it has become all too common to find merchant acquirers continuing to process huge volumes of transactions for their customers with remarkably little insight into which merchants’ transactions are profitable and which ones are costing them money. 

How Merchant Profitability Analysis Can Help

In recent years, technology has continued to evolve as a result of three vital innovations: cloud computing, big data and increasingly sophisticated business intelligence tools. As a result, it’s now possible for businesses of all kinds to automatically process, transfer, analyze and store huge volumes of data.

What does that mean for merchant acquirers? Well, thanks to the cloud, acquirers can now bring together vast amounts of data from dozens—or even hundreds—of sources and collate them in a single place. The advancements in business intelligence mean that acquirers can now view their business volumes in a single dashboard with the press of a button. Then, by applying logic to allocate the internal and external costs associated with processing each transaction, it is possible to determine the profitability of every single transaction.

By using these tools, acquirers have started to realize that many of their "best" merchant customers may not be profitable at all and, worse still, may be dragging down the profitability of the entire portfolio—not so much “golden geese” but rather “dead ducks.”

What Can Merchant Acquirers Do with this Newfound Information?

With this newfound level of data and analytics now available at the fingertips of merchant acquirers, it begs the question: Now what?

In the old days, acquirers could rely on Pareto’s principle of 80/20 to see them through. But this is no longer good enough. Nowadays, acquirers need “Pareto on Steroids” to segment their portfolios and sort the wheat from the chaff. They need to use these newly available tools to understand the business mix of each and every merchant customer at a transaction level. Then they need to use this information to provide a roadmap for a return to profitability by eliminating the loss-making transactions, or, in some cases, even cutting ties with the merchant completely.

With the level of data and analytics now available, there is no reason why acquirers should not be fully equipped to make the best decisions for their businesses and ultimately improve their portfolio profitability. The wave of technological innovation that once enabled them to enter the market can now help them to improve profitability.

To get to that place, merchant acquirers need a trusted technology partner with deep domain knowledge who can provide them with sensible analysis and dependable, accurate results necessary to segment their clients according to profitability—and help them course correct where necessary. Ultimately, this can help acquirers optimize their portfolios and dramatically improve profits. All without even making a single sale. 

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