What you need to know about merchant acquiring in Asia Pacific

Merchant acquiring and processing across Asia-Pacific is far from homogenous. It is a collection of quite unique markets.

Indeed, in most the predominant model is competition among a few large banks, although there are a number of markets where there are ‘specialised’ domestic acquiring entities. There are also markets where international players of US origin, such as First Data and Global Payments, are present, but this is more limited than in Western Europe.

In addition to structural differences in how the merchant acquiring industry operates, there is also huge variation in terms of market development of cards and payments in Asia-Pacific, ranging from the well-developed markets of Australia, Hong Kong, Japan, and South Korea to the fast-growing, developing markets, such as China, India and Indonesia.

As a result, merchant acquiring in Asia-Pacific is affected by the extremely varying levels of credit card penetration across different countries in the region. Asia-Pacific encompasses some of the highest and lowest penetrated cards markets in the world.

For example, in Japan, South Korea and Taiwan, there were – respectively – a total of 673, 625 and 571 payment cards per 100 adults, (credit and debit only) at the end of 2011. By contrast, Pakistan had a total of just 11 cards per 100 adults.

In terms of credit cards, six of the 15 markets we cover in Asia-Pacific had penetration rates of less than 20 cards per 100 adults, while five had penetration rates of more than 150 cards per 100 adults.

Strong upward billed volume trend

Credit card POS billed volumes have enjoyed a strong upward trend in recent years, supported by strong growth in key emerging markets such as China.

China’s credit cards industry represents one of the fastest growing global markets and has the potential to become one of the most lucrative. Between 2002 and 2010, the total number of credit cards in China grew almost six-fold to 230 million, while POS billed volume increased from $2.8 billion to $681 billion in the same period.

To put this in perspective, China’s share of POS billed volumes has increased from 0.4 percent in 2002 to 33.5 percent in 2010.

Indeed, strong POS billed volume growth in the fast growing, developing markets in the region, such as China and, to a lesser extent, Indonesia, have helped mitigate some of the effects in other markets of falling consumption because of the global financial crisis.

Partly as a result of lessons learned from previous regional crises, many Asia-Pacific markets have been able to weather the storm of the most recent global financial meltdown.

As such, credit card and acquiring markets have not been as badly affected as some others in the region. Nevertheless, there has been a notable slowdown in POS billed volume in several Asia-Pacific markets.

For example, in India, Pakistan and Taiwan, POS billed volumes contracted in 2009. In Malaysia, the combined effects of regulation and a tougher market environment led to a decline in billed volume growth from 24 percent in 2008 to just 1 percent in 2009.

The market has rebounded somewhat since, with POS billed volume rising 15 percent in 2010 despite additional regulation.

In Japan, Asia-Pacific’s second-largest credit cards market in terms of the number of credit cards, POS billed volume growth stagnated in 2009 at just 0.3 percent, compared to 10 percent growth the year before.

In South Korea and Taiwan, where ATM usage on credit cards for many years was popular, cardholders have been discouraged from taking cash advances resulting in a large increase in the proportion of POS usage.

For example, Taiwan’s Financial Services Commission in 2008 issued a directive that prohibited credit card issuers from making the cash advance function on cards a focus of their card marketing pitches.

Consumer groups had been advocating for such a move claiming that the principal function of a credit card is to pay for purchases and that the cash advance capability should only be used in emergency situations, such as when the cardholder is travelling abroad.

In South Korea, the proportion of credit card POS billed volume to total credit card billed volume increased to 85 percent in 2011, up from just 30 percent in 2002.

The increase followed a series of new legislation and actions from banks to discourage cash advance borrowing as they attempted to manage the fallout from a high level of card defaults in 2003.

Many customers were using cash advance functions on one credit card to pay off the debt on other credit cards. Soaring debt levels and poor credit screening resulted in a large-scale sub-prime borrowing boom in South Korea, which led to a crisis when issuers started to rein in lending.

Growing merchant acceptance

An important aspect underpinning strong growth in POS billed volumes in recent years has been increased merchant acceptance throughout the region.

Growth has been phenomenal in markets such as China, where the number of POS terminals increased from 0.8 million at the end of 2006 to 3.3 million at the end of 2010. Low regulated merchant service charges offered by the country’s monopoly card association, UnionPay, have ensured the increased popularity of card acceptance among Chinese merchants.

There has also been strong growth in India with the number of POS terminals more than doubling between 2005 and 2010.

The emergence of the local card scheme, RuPay, a low cost solution aimed at boosting financial access, is also expected to increase merchant acceptance as it significantly undercuts fees charged on international branded cards. RuPay is initially being launched as a debit scheme only.

Regulatory changes in some markets have been somewhat of a double edged sword to the industry. For example, regulations in Australia to cut interchange not only affected issuer returns but also led to a squeeze in acquirer margins (as evidenced by the falling merchant fees charged by such three-party systems as American Express and Diners Club since 2003).

Merchants were also allowed to bring in surcharging for credit card usage. These regulations, however, have led to dramatic growth in both merchant acceptance and card volumes.

For example, the number of POS terminals in Australia increased by nearly 50 percent between 2005 and 2011 to 760,000. POS billed volume on Australian credit cards increased by 55 percent during the same period. As a result, the economies granted from increased merchant acceptance and card usage have more than made up for expected losses due to falling merchant fees.

MSCs are vitally important in the acquiring industry: after stripping out interchange, MSCs are the bulk of revenues available to the industry. MSCs in Asia-Pacific have been on a steady decline in recent years. Between 2005 and 2012, average MSC fell by 45 percent to 1.64 percent.

However, this trend is exaggerated by the growing importance of China’s credit cards market. China has the lowest MSC in the region at 0.57 percent at the end of 2012. What’s more, while this rate decreased from 0.61 percent in 2005, this is comparably stable compared to most other markets.

As mentioned above, China’s proportion of total regional POS billed volume has significantly increased in recent years from 4 percent in 2005 to 40 percent in 2011. As such, much of this decline in regional MSCs can be attributed to China’s growing card usage rather than a large-scale decline in MSCs in other markets.

In fact, if we remove China from this aggregate figure, the decline is much less severe with the resulting average MSC significantly higher.

For example, Asia-Pacific’s average MSC fell 21 percent between 2005 and 2012 to 2.42 percent. Overall, on a market-by-market basis, falling MSC in the region is not as pronounced as in other regions where there has been considerably more pressure on merchant fees.

Nevertheless, general price competition in other countries has influenced falling rates in Asia-Pacific markets outside China. Over time, these dynamics will probably squeeze smaller players who lack the economies of scale and will lead to further consolidation and restructuring in the industry.