Merchant acquiring at the crossroads: An industry reinvents itself

Historically, the merchant acquiring business has had a rather staid image: local, offline, physically intensive, processing heavy, and lacking the software element of new-age business. Bank driven, it lagged in penetration and was profitable only to those with scale. But with a surge in e-commerce and a long tail of small merchants waiting to be digitized, acquiring is newly dynamic—and increasingly attractive to banks and fintechs alike. What was once a routine processing business is now pioneering new payments models across Southeast Asia and globally.

Many factors have contributed to this transformation: the proliferation of payment methods, including real-time payments; omnichannel (online and offline) customer journeys; a tendency for companies to grow internationally; and a flourishing SME (small and medium-size enterprise) ecosystem.

Maintaining competitiveness in this complex environment demands significant investment. What’s the recipe for success? In a low-margin, high-volume business, scale makes all the difference. The
focus should be on streamlining and digitizing the merchant journey by providing rapid onboarding; simple, highly integrated systems that can accept the vast majority of payment methods; transparent and flexible pricing; and omnichannel solutions.

Previously, it was difficult to get many small merchants to accept cashless payments; low sales volumes did not justify the cost of a card reader on a shop counter. Innovations like QR stickers and software POS (point-of-sale applications that allow merchants to accept card payments directly on mobile devices) have made onboarding and serving such merchants increasingly viable. A smartphone app, for example, can be used to receive card payments via tap-on-glass technology.

Across all segments, the core business of merchant acquiring is undergoing a transformation. Merchant acquirers are moving beyond processing to become more like software businesses. Players are partnering with integrated software vendors to offer value-added services that address a range of merchant needs, including back-end business and sales support, analytics, security, and loyalty programs. Vitally, financing is newly enabled: credit access is possible for small merchants via an automated, hassle-free process.

At the same time, the importance of offering industry-specific solutions and tailored offerings has become evident. Lenders are also recognizing the data value to be gained in merchant acquiring.

It’s a big pie to share. Asia generated over $900 billion in payments revenue in 2019, nearly half the global total.





Payments also plays an expanding role in the broader financial landscape: in 2020, payments providers accounted for 44 percent of the region’s aggregate banking revenues, up from a third in 2007.

To gain understanding of this rapidly changing environment, we sought the views of three payments executives with deep experience in the field: Lawrence Chan of NETS, James Lloyd of Spring by Citi, and Pratyush Prasanna of GoTo Financial (see sidebar, “My path to payments: Leaders’ personal journeys”). Their businesses are very different, but they share a focus on merchants. Together, they embody the variety of the new acquisitions space: from the hyperlocal, largely offline landscape of Indonesia, to card-heavy Singapore, to the multinational reach of a large global bank.

Individual interviews have been edited and combined to create “conversations” on pertinent themes.

Banks and merchant business: A love–hate relationship

McKinsey: Historically, acquiring in Asia has been a banking-led business, but banks have had a love–hate relationship with it, with some divesting away entirely and others not investing sufficiently. Are banks newly charmed by the sector—and how do other players view it?

James Lloyd: That love–hate relationship? Look, I think it’s true. I think we all know that historically, merchant acquiring has been somewhat of an unloved sibling to card issuing. Certainly, in my experience, banks have tended to see the issuing side as where the money is and the acquiring
side as where the hassle is. But several things have changed the dynamic. Organizations have begun to recognize the data benefits associated with acquiring. Second, innovative fintechs have demonstrated the value of providing payment acceptance in facilitating digital commerce more broadly; the flywheel is real! Third, and perhaps especially relevant in APAC (Asia–Pacific), a range of noncard payment methods has begun to emerge at scale.

Pratyush Prasanna: Industry players such as wallets will have to build some sort of merchant-acceptance play, for sure, because the core is payments; payments is what builds the hook. So while there are many acquiring plays—including software services for merchants, online storefronts, logistics, meeting specialist needs—all of them
have a payment layer, which also gets data from the merchant. So merchant acceptance has become critical, beyond consumer growth, for many of these companies. It’s a nascent category, but there are multiple ways in which you can play in it, and whoever does so can establish a massive footprint across the region.

James Lloyd: We see opportunity for all types of players. At a high level, I’d argue that fintechs and other nonbank payment players have had the greatest disruptive impact when it comes to consumers and SMEs. Their impact regarding institutional payments, on the other hand, has been limited. We don’t feel we have some inherent right to win in this space; however, as the only truly global transaction bank, we’re confident in our right to compete—specifically, in multiregional enterprise, where we have scale-network, trusted-counterparty, and cash management advantages—as internet-enabled commerce continues to expand.

The changing face of merchant business: Online and global versus offline and local

McKinsey: In most markets, acquiring remains both deeply local and largely offline. But with the explosion of digital commerce, is the industry trending in the opposite direction?

Pratyush Prasanna: Ninety percent of merchants are still offline in a country like Indonesia. So how do we build acceptance, both offline and online, and move those merchants into omnichannel? Unlike many other parts of the world, Indonesia has quite strong omnichannel plays, or at least there is that intent. It’s a very interesting mix, where omnichannel is a very big part of the total pie. We need to come up with more such offerings for merchants.

Lawrence Chan: It’s not that easy for every offline business to go online. Online payment has many more dependencies outside its control—logistics, delivery, and so on. It differs for various merchant segments and use cases. Although the online infrastructure may be there, the economics of the business may mean that it can’t be automatically converted. But as consumer needs change, online will continue to grow. Will it be dependent on logistics, on the distribution infrastructure, and therefore will it be centrally managed by a few large companies? Over time, I definitely know, this challenge can be overcome, as we’ve seen in many, many other markets.

James Lloyd: A global bank focused on multimarket corporates can have an established presence in various markets, with client relationships and infrastructure in place, and so be well positioned at that higher end and online only. But when you’re dealing with smaller domestic merchants, in general, they’re probably better served by local banks or fintechs. The economics of this customer segment are very different, their functional requirements are different, and they don’t have the same pain points as a large multinational. My personal view is that offline acquiring for domestic players will largely remain with domestic providers.

Proliferating payment options

McKinsey: A wide variety of payments technologies are emerging—both consumer payment devices, such as wallets, and acceptance devices, such as mobile POS terminals—with, as yet, no clear winners. To win over merchants, how important is it to offer broad, multischeme acceptance—say, 90 percent of volumes in the market?

James Lloyd: When we talk about acquiring, people often tend to focus on cards, but cards may be a secondary consideration, especially in Asia. Take India, for example: you have instant payments via UPI (Unified Payments Interface), international cards but also a sizable and growing local scheme (RuPay), e-wallets, BNPL (buy now, pay later), and so on. In the next five years, that mix will continue to evolve. We need to be payment agnostic but also pushing for ubiquity of payment.

Pratyush Prasanna: Will a holistic acquirer win against one that’s very targeted on a niche segment and can only do 30 or 40 percent of payment volumes accepted in a particular country? As a wallet, for instance, you’re always balancing whether you want to be a broad-based acquirer or an acquirer for your wallet. As a merchant, who do I value more? And how do I make that choice?

Lawrence Chan: These days, we’re no longer in the credit card or debit card or QR business. We’re really in the credentials business. I’ve never thought it
was important to determine which form factor will “win.” Moving payment credentials safely to enable the payment to be made—yes, it can be done by card. It can be done through a QR. It can be done online. I’m a big believer in user experience: the best user experience will win the day, assuming safety and security are common across all payment credentials. In Singapore, for example, and other places where we have hawker food





—and potentially wet or oily fingers—we’ve seen that QR payments, which don’t require anyone to touch a device, have really helped the user experience for both the seller and the buyer.

Pratyush Prasanna: Most merchants want the menu to be as wide as possible; you don’t want customers to walk away from a transaction because a payment method isn’t available. So spread is key for any acquiring play. But even with spread, if you don’t have very high acceptance rates, merchants will say, “I’m not going to use this.” It’s as simple as that. Almost everyone is brutally militant about acceptance rates these days, including us.

Capturing the opportunity: The playbook

McKinsey: What’s the playbook for winning in merchant acquiring in Asia? Is the endgame for every acquirer to become a “one stop shop” merchant services platform?

Lawrence Chan: I’ve always said that user experience, security, and price point are crucial factors in retaining customers. In addition, I can add one more point that would help win the day, which has been a big part of payments for a long time, and that, I believe, is loyalty. Why would the consumer use payment option A versus B? What’s in it for me as a buyer? Most of the time, it’s to do with loyalty. Of course, if the loyalty is great and the user experience is not as good, the loyalty has to be really good. So if I’m asked to force rank, then user experience would still be ranked number one, and loyalty comes a very close second. Both of these can be provided by almost all the form factors that we have today.

Pratyush Prasanna: It’s been very difficult to enforce customer loyalty with the modes of customer acquisition we’ve been using—if not impossible. Customer loyalty and customer repeated usage are things that, frankly, all of us are still trying to understand and make it so that what works is a playbook, is replicable.

On the other hand, merchant behavior is quite driven by inertia. My dad runs a small shop; once he uses something for acceptance, he’s not going to change it unless you come back with a hugely superior product or you tell him you’ll give it to him for free. So merchant loyalty is almost assumed once you have a footprint. It’s quite easy to build—difficult in terms of logistics, but once you build it, it’s there.

James Lloyd: As ever in this space, the balance is between volume and price. Right now, some of these nonbank players are serving a lot of small clients, who are paying top dollar for relatively limited volumes. Of course, in aggregate, these volumes can still be very sizable. As these players increasingly seek to service enterprise clients, the margin becomes compressed, and, not unexpectedly, the level of bespoke client maintenance increases.

Pratyush Prasanna: Fraud monitoring is becoming an extremely important service. We’ve had merchants come to us because our competitors had no fraud management systems. So that’s key: having very effective systems and cutting down on clearly fraudulent transactions. All of us need to be careful that growth does not come at the expense of fraud, which is a real concern in our part of the world. Another thing we can offer is KPI (key performance indicator) based analysis. Merchants, especially the not-very-large ones, are coming to us and saying, “Hey, we don’t have an in-house analytics team; can you provide that service?”

Are regional plays possible?

McKinsey: We haven’t yet seen the emergence of a big regional player focused on merchant services. With the right stimulus, can the Square or Stripe playbook be replicated and scaled in Southeast Asia?

James Lloyd: It’s not surprising that a single player hasn’t yet provided a fully regional solution for offline or smaller businesses. The payments and merchant-acquiring landscape is so varied across the region. The differences in experience within and between markets are immense—probably more differences than there are commonalities. Pick any market in Asia, and you’ll find unique characteristics. Can all these be covered effectively by a single regional player, at scale, across all client types? That’s a tough nut to crack.

Pratyush Prasanna: I think there’s definitely scope for a company that can address these new value propositions and become big as a consequence. I think that in the next three to five years, regulations are going to become much more efficient across the board, as we can see happening in Indonesia and India. I do believe there’ll be an opportunity to amalgamate some services and build a play which is completely merchant focused but regional.

Lawrence Chan: What’s important is to keep developing our skill in payments—to be dominant, to be relevant, to keep reinvesting back into the business, to keep improving the user experience, keep improving safety and security. The support, from an institutional or a funding standpoint, is there. Any player who is credible, I believe, will be able to attract the necessary investments. So I’m confident there will eventually be players from Southeast Asia that can win in this region—if maybe not quite yet.

James Lloyd: Will there be a single player who can cover online and offline, local and regional, regional and global, in addition to all of the value-added services we mentioned? I suspect not. But maybe the more instructive answer is, will we see the emergence of several regional players who have some scale? Absolutely. I think we’re seeing it today. What I’m most excited about is seeing some local players emerge. It’s just going to be an ever-evolving landscape with a lot of creative destruction in the payment space and ultimately, perhaps, the emergence of a small number of scale players, each concentrating on one or more of those verticals. The future is about those new companies picking segments and market clusters in which to win. It’s going to be an exciting ride.

The new frontier: Exciting opportunities ahead

McKinsey: What does the future hold for merchant acquiring in Southeast Asia? Will this pace of change persist, and what are the new frontiers of the sector?

James Lloyd: Is acquiring finally coming of age? Maybe. But it will be in a very different form from what we see in North America or Western Europe. In addition to the myriad payment methods and ever-evolving landscape, it’s worth remembering that a lot of the technical infrastructure is still being developed. But increased mobile connectivity, tech-savvy consumers, market digitization, and favorable demographics represent key drivers in the region’s transformation into an e-commerce hub postpandemic. All the latest trends—from the growth of online direct-to-consumer to the rise of social commerce—converge here.

Pratyush Prasanna: Traditionally, Asia was not a hub of payment innovation by any means. However, that has changed drastically in the last ten to 12 years, with China leading but also a lot of innovation in India and the geography in general. That’s the most exciting part: the pace at which innovation is changing the lives of common people. The way that we do payments has fundamentally changed. And this is just the start: on both the consumer and merchant sides, I do think that there will be significant changes in payments. It’s what keeps me excited about the sector.

Lawrence Chan: I think the industry has been over the years, and will continue to be, successful. If there’s any bright light at the end of the tunnel as a result of this terrible pandemic, it’s that people are more used to digital payments—I would say across generations. It’s still maybe easier for the younger digital natives and more challenging for the more senior ones. But even my parents in their 80s, they’re much more comfortable today than before.

Pratyush Prasanna: And then there are social sellers, or individual merchants—they’re changing the game with manual transfers, which are emerging as the proxy for cash transactions in Asia, especially in Vietnam, Thailand, and Indonesia. It opens up a new opportunity, but how do we cater to them? It’s a challenge. Social commerce is also a field that wallets can disrupt quite fast, because the cost of transacting on wallets is low, it’s easy, peer-to-peer is there for all wallets, and so on. I think it will help us grow.

James Lloyd: I’d never underplay the opportunity in Asia. The innovation coming out of China has obviously been tremendous. Attention has also focused on India—again, huge innovation and a lot of exciting developments happening from an infrastructure perspective. Increasingly, many people are also looking at Southeast Asia as a potential hotbed of activity—clearly a very fragmented region in itself but really interesting things happening, very different business models emerging. I would be crazy not to predict anything but tremendous growth in this region. A lot of the innovation is here; a lot of the vibrancy is here; a lot of the change is here. It’s so challenging to make this work across markets. I’m biased, perhaps, in saying I think it’s the most exciting region on the planet.