We're off to the mall - Merchants

How many purchases have you made today, coffee, lunch, food shopping? Is so common for us that we don’t think about these purchases as payments…. 

This is something that we all do, we buy stuff, but do we understand it and who are the actors involved. 

But they make up approximately 80 % of all the payments made…. Lets just let that sink in for a minute!! 80%

This episode is about Merchants a little of their history, how they work and who does what?

Today I am joined by my good friend Paul Rodgers, Paul is the Chair of Vendorcom 

Buckle up were off to the mall…..

Payments Industry Insights

History of Payments

Payment System Explained

Corporate Payments Strategy

Payment Regulations Impact

ISO20022 Standard

Digital Payments Evolution

CBDC Advancements

Cryptocurrency in Payments

Financial Technology Education

Transcript

UNKNOWN: 0:00

Yeah.

SPEAKER_00: 0:02

Welcome back, dear listeners, to Bite Size Payments. We recently discussed who is who in the payment zoo. So I've already started the conversation about merchants or retailers or traders or whatever term you want to call them. But this is a use case that we do. All of us do it. We buy stuff. But do we understand how it works and who are the actors involved? And believe me, there are many. But the merchant use case makes up for about 80% of all the payments made. Yeah, just let that sink in for a second. 80% of all the payments made. This episode is about merchants, a little of their history, how they work, and of course, who does what. Buckle up, we're off to the shops. Or is that the mall? Well, anyway, you know what I mean.

UNKNOWN: 0:51

Music

SPEAKER_00: 1:08

How many purchases have you made today? Coffee, lunch, some food shopping? It's so common for us that we don't even think about purchases as in fact payments. Today I'm joined by my good friend Paul Rogers. Paul is the chair of Vendacom and we've worked together quite a while now, I guess about 15 years while I was at ACI. We both worked on the UK Payments Regulatory Advisory Board. Welcome, Paul.

SPEAKER_01: 1:33

Paul, it's great to be here. Great to join Bite Size Payments and uncover some of the specifics of the merchant payments ecosystem.

SPEAKER_00: 1:41

Fantastic. So Paul, merchants, arguably the original use case for payments. I was trying to make a joke there about the original, original, better hadn't go there, but you know where I'm going. And the truth of the matter is they date back to some 6,000 BCE when there was a trade recorded in Mesopotamia, albeit as a trade, as I say. So traders, merchants, retailers effectively exchange goods or services for value, money. However, Merchants' main role is not payments. It's a means to an end.

SPEAKER_01: 2:16

It's very, very true. Merchants are in the business of being just that. Merchants, they're providing that availability. They're sourcing goods and services, and they're making them available through the various channels that they've got. So essentially, the term merchant is just describing a channel for goods and services that often that others supply. So they're a middleman. And I think essentially it's just a big short window, albeit a slightly sophisticated one in some areas.

SPEAKER_00: 2:53

So I guess for the longest time, merchant transactions were cash. because we didn't have other devices, but it was mostly cash. And now it's only about 30% cash, probably going down, 1% checks, and of course the rest is via card. Clearly this differs around the world where people are more attuned to cash or what have you, but it's there or thereabouts. So right now, cards and merchants are inextricably linked from a payments point of view. But let's try and get into a little about how they work. Before we do, I guess we should address a big issue, the difference between e-commerce and install. They're very different, right?

SPEAKER_01: 3:37

Yeah, there certainly is. And actually, the way we look at the merchant payments ecosystem in RenderCom, particularly when it comes to channels, is yes, definitely face-to-face and e-commerce. But we also look at call centers, contact centers. We also look slightly differently at mobile apps. in-app payments to what's going on in e-commerce. And then we also look at unattended payments of things like self-checkout, payment of road tolls, EV charging, parking, things like that. So actually, we've got at least five different channels and that adds to the complexity of this overall system. Now, cards can be used. They're the great go-anywhere payment solution and they can go across all of those different payment channels. And that's the beauty of them. Some others, cash, for example, is very much limited to that broadly face-to-face environment. So yeah, we definitely see a lot of differences depending on what channel that we're in. Obviously, cards has been used in the call center channel for many years, but we're starting to see the fraud move in that direction. So new payment methods within call centers are being looked at. But yeah, You're right. It's really important to spell out the differences between different merchant payment channels. Almost with everything, it's difficult and it's dangerous if you're going to be generic and to generalize about anything to do with merchant payments.

SPEAKER_00: 5:21

Yeah, that's so true. But in essence, merchants act as an intermediary in the open supply chain. They connect producers with consumers and they add value through their services. But there's a lot more to it than that, right?

SPEAKER_01: 5:39

Well, there really is. And actually, one of the reasons we like to use the term merchant payments is because often we get folks just focusing in on the retail bit. That's the bit that, of course, we know that every day we go fashion shopping in our retailer, grocery shopping, high street shopping. But we actually look at it as, well, not quite the A to Z of merchant market sectors, but the A to V, airlines to vending and everything in between. We haven't got time for me to go through airlines plus automotive plus builders and merchants and betting and charities and every letter of the alphabet until I get to the end. But as we look at all of those different actors as merchants in that intermediary role, well, each of them have carved out really distinct niches in terms of what they're doing So an airline is providing a very different service to a charity or to a public sector local authority. And actually, the payment channel that's used, even the payment type that's being used, is often very peculiar to that. And it's not just payment type and payment channel, but it can be geography can have an effect on that. The average transaction value, so, so many different things. But yes, you're right. Those merchants are just that intermediary. They're buying and they're sourcing the right goods and services, trying to present those in a really, really the best possible way, trying to make them available, trying to fulfill and deliver them to you at the cheapest possible price and the quickest possible way. We're expecting probably same day delivery on some things these days. Click and collect has brought another dimension to it all as well. Ultimately, It's about how does the merchant know their customer, not just in terms of the financial side of things, but why they want to buy. What can I sell to them? Because ultimately, merchants really just need three things. They need more business, and that's either new business coming in or business upselling to existing customers. They want a better customer experience, and they want to do it with reduced costs. And actually, if the payment solution doesn't deliver at least two out of those three, then you better not bother talking to them about some whizzy new payment solution that you have.

SPEAKER_00: 8:09

You know, that's so true. That's so true. I love the point about A to V, by the way. I think that's fantastic.

SPEAKER_01: 8:19

I'd love to find the A to Z. So I'm hoping listeners will come up with that X, Y, Z.

SPEAKER_00: 8:26

Indeed. Indeed. But, you know, it's often that some, you know, sometimes overlooked that merchants are in fact corporates too, because they're buying the goods. And they often have their own bank. But that's the separate separate story and we will talk about corporates and we will talk about about banks separately but it is only right and proper to to get the point across that merchants do many other things but this point you were talking about payments from a merchant point of view so from a payments point of view it's about how they accept payments whether it's cash checks cards via a phone all the contact ways and i'm sure there's many many more but it really can be so many ways and that's often an issue too especially for large merchants who have to change their ped estate or when regulations change and they introduce something like SCA so I said ped but I guess most people will think till but they're the same things effectively now right

SPEAKER_01: 9:27

You're right. For me, the way I define these things, no matter what channel or sector or whatever payment type you're using, is interface between the merchant and the buyer, the customer, is everything. So in a face-to-face environment, that is the PAD, whether that's to facilitate direct card transactions, contactless transactions, presentation of a phone-based card transaction, or even a QR code. Some TILs and some PED devices are presenting a QR that can then be read. Then on the e-commerce side, web checkout, you're filling out your details. Sometimes each time you go, it's a bit of a bore. But also we're seeing merchants start to put card on file in place. So that simplifies the process, puts a lot more pressure on their backend integration and security and things like that. Then on mobile and in-app payments, again, we're seeing different interfaces there. We're seeing the QR. We're seeing payment links come through. And again, as I mentioned, the contact center, sometimes that was read your phone details in a probably pretty scary way and wondering where are these card credentials and expiry date details really going who's noting them down and so as we try to tighten up that interface which is one of the areas where fraud kicks in then as you say the merchant has got a lot of change to bring every time something new happens within the industry

SPEAKER_00: 11:16

yeah and I can remember Paul when we were at the PSR I can remember you were the champion of trying to pull the industry together you know I'm going to say against SCA but I mean to try and resolve it, right? You were the champion that got everyone together to get it going.

SPEAKER_01: 11:32

Yeah, I became known as Mr. SCA for a while there from 2016 through to, well, even into 2022. And it was just great to almost, not just champion the merchant's perspective on that, but actually champion the merchant payment ecosystem perspective because everybody in the chain needed to respond. And the regulators were putting the issuers under pressure in some ways, quite rightly, to control fraud in this area. But actually, this was a whole ecosystem change that needed to be put in place, very analogous to the big change that happened back in the early 2000s with chip and pin that everybody needed to get together. It was a system change. It was an infrastructure change. It was an educational change with the consumer. And we're still going through some of that today. But regulatory change will always keep hitting the industry, but it's only one of what I see as four big drivers of change in the industry. And it's mainly coming from external factors. So I see tech change, it's going to bring change. And we've seen that with the inception of FinTechs. A lot of FinTechs aiming at this merchant payments ecosystem and not necessarily the backend payment systems. So we see change with standards. So you've got PCI standards, EMV standards, largely around cards, but also we've seen legislation change that is driving change in the payment world, GDPR, consumer duty, PSD2, interchange fee, legislation changes. And that then links in to the fourth real driver, which is regulation. And so when the regulators take hold of the legislation, then they really cause a change. And one of the things that I often say in the industry is that regulation drives both the pace and direction of change in merchant payments faster than anything else. It has a much, much greater effect. SCA was a real case in point there.

SPEAKER_00: 13:46

Yeah, absolutely. And, you know, credit where credit's due, Paul. You actually pulled the industry together to get us an answer.

SPEAKER_01: 13:54

Yeah.

UNKNOWN: 13:57

Thank you.

SPEAKER_00: 14:02

Okay, so let's change gears a little. Who does what? We have, let's be frank, Paul, so many players in this ecosystem. You know, we have cards issued by banks. We have merchant acquirers. We have processors. We have ped manufacturers. We have network providers. And of course, some of these overlap and there's a whole bunch more. There's no point in just creating a whole list. But there is a huge number of players. and quite a complex process.

SPEAKER_01: 14:35

Certainly is a really complex process. When I started Vendacom back in 2003, it was really quite straightforward. There were card schemes, there were issuers, there were acquirers, payment gateways were starting to really have a stronger effect. There were the merchants and the consumers. And we now have identified over 30 stakeholder groups within the merchant payment system. Of course, beyond the kind of big six or seven stakeholder groups, the others are, they sit around the fringes maybe, but actually in some sectors, they're still pretty important. And so, yes, the schemes, the organisations that provide the rails or the network, that's still the heart of the industry. The banks. Now, I make a distinction there between the banking as the source of funds and the issuer as the provider of the payment token. Now, a lot of folks use terms in the merchant payments ecosystem a little bit lazily, and I think it's really important to be really specific. The issuers really are an intimate part of this payment ecosystem, but actually they don't play a strong part in the merchant payments pieces, perhaps they should. A lot of that burden for on the acquirers to act as that intermediary and they're still really really important but the acquirer processor gateway world has got really confused and really overlapped in the last few years and so who does the merchant have their relationship with is it exclusively with the acquirer as it used to be or do they have an acquirer relationship which is pretty much 100% of the time but they'll also have a payment processor or several payment processes and perhaps multiple payment gateways and that largely depends on perhaps what sector you're in and whether you're taking lots of international payments whether you're an international merchant because again we cannot think solely within geographic bounds when it comes to merchant payments many other payment mechanisms person to person and so on tend to be very very geographically bounded and it's so much easier than this complex merchant payment ecosystem. But then, as I mentioned before, there are the interface providers. There are the big payment terminal providers. But again, many, many other hardware interface providers within that. And also, the pure point-of-sale providers are actually often confused with the payment interface providers. And actually, a point-of-sale system in merchant language is very different from the payment system, the point of sale system, shouldn't be confused with the payment world, although it overlaps, because that point of sale system is the end point of what is our stock management system, a logistics system, a supply chain system, perhaps our employee cashier sign-on system, all of that inventory loyalty, all linked into that point of sale. And of course, then, you also have to think about the consumer as a really key stakeholder in this. Consumers are becoming more and more savvy about what they want, how they want to be protected, the choice they have, the availability of competition. And we like to look at the consumer or the payer in a really distinct way in terms of merchant payments because we define merchant payments as those inbound payments to merchants. If you put merchants at the centre payments. Those inbound payments are distinctly different from their outbound payments. In one of the previous podcasts, we were talking about the citizen and the consumer, and I think those are very important terms. In fact, back in 2007, I coined the phrase citizen-consumer because on that inbound side, in fact, I wanted to truncate it to sit-zoomer, but the editor of that particular magazine just thought I was going a little bit too far with that term. But I think it's important to look at the citizen consumer as one of those important payers, but also a really distinct definition within this area is also to recognise inbound B2B payments. And those B2B payments being very distinctly different from the sort of payments that you're talking about in the Payment Zoo podcast. where you were talking about bulk payments and paying suppliers and paying staff and so on. Very important payment areas, but not merchant payments. And so we look at, say a builder's merchant, you have the complete range from the everyday builder's merchant that you and I would go into to buy something for our homes to the builder's merchants that deal with citizen consumers, but also deal with the trade, right through to builder's merchants who only deal with the trade, But those are still inbound merchant payments, even though at that stage the consumer is not really very involved. So that's really an important area to look at the different types of payment, because, again, some of those merchant payments are being offered by more than just cash or card these days.

SPEAKER_00: 20:21

There's a lot of confusion here. And we were speaking just before the podcast and you were chatting about terminology and the terminology here that gets confused in the sense of retail banking, retail payments and merchant payments. And while they are mixed together from a bank point of view, in fact, they're very different worlds. Just be useful to get your thoughts on that because I know it's something that's important for you to try and differentiate.

SPEAKER_01: 20:50

It really is. And I'm sure that actually when I was, I know actually when I was setting up Vendacom way back in the day, you don't really have to think about it too much of that, but it's become much, much more nuanced And I think it's important to recognise that banking is not payments. And there's an overlap, but banking, particularly when you think of it from a regulatory point of view, banking resilience, the interoperability of the core banking system, the ability for one organisation to pay another bank to bank is really important. And those transactions... sit within the banking domain we see payments as distinctly different and we see that the payments being very much around the transactional complexity and again this is where I make a distinction between inbound payments and outbound payments from any corporate and those inbound payments I think are really distinctive and they're perhaps those inbound payments are supported by the retail banking sector and the retail banking rails but because we have got this dual term that retail banking is understood one way within banking and the term retail or retailing is understood differently within the merchant world I think it's really important that we start to move towards the term merchant payments for those inbound payments and actually I think from a regulatory point of view, it would actually create a lot more simplicity if we saw the banks regulated by the CMA, Bank of England, and perhaps a piece of the FCA. And we saw the payment systems regulator really focusing on those everyday economic driver payments in the merchant payments arena. I think it would bring a lot more simplicity. And it would also give a lot more clarity when we talk about terms like open banking. Open banking is not one thing. It's multiple things. If you conflate open banking with account-to-account payments, as the regulators currently do, then you're looking at one dimension of open banking. You're looking at a customer or an everyday citizen consumer perhaps making a payment from one account to another, perhaps one of their own accounts to another account, that is a payment. That's not a merchant payment. They may be paying off their credit card bill. They may be paying a financial institution. They may even be paying a friend because that is a purely banking domain payment. Once you start to move into the merchant payments world, open banking really should be looked at as bank-based payments. extreme of which is direct debit, but then you start to move into everyday subscription payments where you've got a regular payment out of your account, perhaps by standing order, or you've got a card on file that the merchant is pulling a payment from. And so if we distinguish merchant payments, we end up in a much simpler world with much better clarity in terms of how to drive proofs of concept around new technologies, to regulate, how to create different regulatory requirements, because actually, do we need to provide the same level of support and protection in a business-to-business transaction than we do in terms of protecting vulnerable consumers? Perhaps not, I would argue.

SPEAKER_00: 24:49

Paul, I think you've outlined the differences here between retail banking, retail payments, and merchant payments, and why it's important to separate them. I think that's really, really a crucial step forward, and I think you're doing a a great job driving that debate. But at the moment, it is complex, it is confusing, it's difficult to understand who necessarily is doing what. But one of the things we do need to discuss is fees. Many of the listeners will know the term interchange fees, probably won't understand exactly how it works, but effectively it's how the banks, the acquirers and the networks split these card fees. And there's been a lot of regulation. You and I have been involved in that level of regulation for a long time. So interchange fees have been a hot subject, but those fees are pretty much always embedded in the price. Wasn't always the case. It used to be this price for cash or check this price if you wanted to pay the fees because the fees were effectively on top but effectively now that's not the case but it is still true to say that the merchant still pay the fees and they pass it on to us

SPEAKER_01: 26:09

that's correct and it's very difficult to take the fees out and kind of explain to anybody why they might be paying more because they're paying by card most people buying stuff in stores or buying a service wouldn't expect to pay any more. Some merchants still try to say, well, card fee, card purchases only over£5 or£10. But yeah, the ability to surcharge was pretty much outlawed in the, particularly through the European interchange fee regulations that came through that restricted interchange fees to 0.2% for debit cards and 0.3% for credit cards. But actually, those interchange fees didn't cover everything. And so for corporate cards, there is still an ability for merchants to surcharge. Some of them do, some of them don't. And often the card fees there are higher because there aren't any caps. So you can understand why the merchant might want to surcharge. But of course, interchange fees grabbed the headline because they were the overt subject of the regulations but actually that's just one part of the overall fees that are paid when you look at the kind of overarching fee the merchant service charge that often contains the interchange fee but can also include other fees like a fee that's relevant to card present transactions as opposed to card not present transactions PCI and payment security compliance fees SCA exemption fees or authorization fees. Those are just other fees that can be levied on the merchant. There can be setup fees at the beginning of a contract. There can be card machine and prepared rental fees as well. So it's quite a complex area and it's no wonder that the merchants have been confused about this. Now in the UK, the payment systems regulator has really moved in in the space quite strong over the course of the last year with their merchant services review. And they've put some very strong directions in place for the key stakeholders in this in terms of contract lengths, in terms of transparency on all of these fees. So I think it's getting clearer, but there are still some holes that I think the regulators need to pick up on.

SPEAKER_00: 28:48

Yeah. Is it true to say that on most transactions, it's about 2.5%, 3% of the cost of sale? Yes. Yeah,

SPEAKER_01: 28:55

that's right. I think we can see it sub 2% if you've got particularly high value going through a particular acquirer. If you're in a less fraud-prone industry sector, those sort of things all help. If you're in a slightly more questionable sector where chargebacks, because that's another charging recourse system that probably warrants a podcast all on its own, then you're going to be paying higher fees up front. And for convenience, things like pay-by-link, we're often seeing those types of transactions levy a higher fee.

SPEAKER_00: 29:42

Yeah. But at least we forget, you know, it's also true that there is cost of cash processing, right? And while the cost of cash to our society is typically about£7 Merchants have to pay banks to process that cash that they get from the store. Obviously, they don't do that from e-commerce, but cash isn't free either. So if I was just to summarize it, Paul, basically, the merchant's business is to sell goods or services for value, i.e. money. They process the vast amount of payment transactions to enable those sales and the cost of the processing of those transactions are typically embedded in the price of the goods. or the services that we buy. I think it's also true to say it is the most dynamic. It is the most volatile end of the payments market with consumers and citizens. Things happen fast with them first. Yeah. What's going to happen next?

SPEAKER_01: 30:42

Well, it's anybody's guess. And so I've been around this industry long enough not to be too confident about my crystal ball. And I'm often asked to talk about the net 10 years, the next 20 years, no sane person talks much beyond about the next three. Although we've got a pretty good idea of what might be coming down the line. Things like open banking, it's actually been talked about for the last five or six years, as if it's going to be the next big thing within the next three to five years. Well, most of those predictions were made three to five years ago, and it's not quite there yet. So we've got a good the idea that some of the things that are coming down the line are likely to happen and we're a lot more positive about what bank based payments will bring to the merchant payments landscape if the regulatory ecosystem gets behind it in the right sort of way so new legislation opening up things like bank based payments is definitely going to shape the future so the payment services directive number two set that in train we're now hearing about PSD3 coming down the line with tweaks and a few advances in that. So we're watching that with bated breath. And there are also new standards in the industry or big step changes on standards. So the new PCI version 4, which comes into play early next year, is going to create quite a bit of a change, potentially upheaval, but also some really good opportunities for merchants to take some of the decision-making backend into their own hands, particularly those merchants who have got a really good IT security, general cybersecurity approach to things. It'll be less prescriptive from a payment point of view. But we're also seeing central bank digital currencies on the horizon. Now, again, that's not a three to five year. I'm not going to say it's even a five to 10 year pipeline issue. But one of the key things that I always look at here is when we're talking about what's happening next is let's not get too fixated about what's going on purely within the payments world. It's actually really important right now to look at what the general economic situation is. Merchants are not flush with cash and it doesn't matter how many bells and whistles your new payment technology has or your new whatever compliance deadlines your new regulation or standard has. Merchants live in the real world and they are actually spending most of their time right now trying to optimise the payment systems they've actually got. So we need to just recognise the start point and where we actually are. The other key thing is what are consumers looking for here? That's actually going to drive this quite a lot as well. And ultimately, they're looking a good value. They're looking for something that they trust. And if we keep adding lots of choice into the system, that age-old dogma of the regulator, we want to see choice, we want to see competition. I'm not actually sure that's right in every case. Consumers want, yes, a bit of choice. Yes, they want to feel that there's competition that's driving costs down. But actually, they want to see stuff that's ubiquitous and that their friends and family have used for a while. And that's, for me, the crucial thing when we talk about what's happening next. How do we define next? Lots of payment solutions suppliers would like to see next, meaning the next quarter, because that's what they are trying to sell to. But actually, the adoption and deployment of payment solutions and changes in payment systems is largely generational. And so, again, I would say there's a distinction between the deployment of a new payment system and its adoption by the consumer. And I look at it as really having about a five to ten year, possibly more, gestation period. And I think we need to just live with that reality. Lots of people say, oh, look at contactless payments. It was adopted so quickly Well, in the UK, it was introduced in 2007. We started to see some uptake when some of the big acquirers and schemes and issuers threw hundreds of millions of advertising and incentive budgets at the industry to catalyze a deployment. And so we saw around the 2012 Olympics and so on. We saw around TFL going to contactless cards on the underground. we saw a catalyzing effect. But it really wasn't until 2017, 2018, and then a big surge with COVID that we really saw the contactless adoption. And we're going to really see that with everything else. It's only when something really foundational, like chip and pin, where the whole industry is mandated to move, that we see a rapid adoption. And even then, chip and pin took from 2002 to arguably around 2008 or 2009 to really start to become ubiquitous. So I think there's lots of things in the pipeline. Don't put too much money on betting what the future holds, but other than it's going to be full of change and you need to stay very, very close to the action to find out what's going on and what will truly succeed.

SPEAKER_00: 36:54

Paul, I think that's such wise words. People forget that these instant overnight things took 10 years. I think that's quite fascinating. And it's axiomatically true if you look at the dates. So Paul, as ever, thank you for your comments there. I think it is really true that some of these things, as we think is instant, really were 10 years in the making and then they became an overnight success. I think that's very true here. But thank you for your insights and your thoughts. We've really got to get into the key subject of data and you know who owns that data maybe that's a podcast we could do together soon definitely okay cool for now paul thank you so very much absolute pleasure to have you on the podcast

SPEAKER_01: 37:37

it's been great to have this opportunity to share some of the eccentricities of this wonderful world that i live in

SPEAKER_00: 37:44

absolutely thanks mate thanks Thanks to Paul there for guiding us through merchants. I think it's always important to make the difference, as Paul so eloquently helped us go through, the difference between retail banking, retail payments, and merchant payments. Merchant payments, after all, account for some 80% of all the transactions in the world. So next time you go to the shops or the mall, or whether you buy online, you'll know a little bit more. We've gone through a little bit of their history how they work and who does what see you soon cheers oh just before you go if I could ask one favour just one favour if you've enjoyed the podcast please tell a friend it's by far and away the best way to get the message out thank you so very much indeed