J.P. Morgan has brought its merchant services business to Asia, focused on e-commerce and other businesses that need to accept digital payment methods.
Its move is part of a wave of global banks looking to reassert primacy in the merchant acquirer space of payments, with Citi and HSBC among those institutions that had once retreated and are now revitalizing this business.
“Five years ago, few merchants accepted payment by digital wallets. Today that’s the leading method of payment. We saw a need for a platform to provide regional solutions in alternative payments,” said Philip Glickman, head of Asia-Pacific Merchant Services at J.P. Morgan, in Singapore.
The key word is “regional”. J.P. Morgan recently expanded its acquiring solution to Singapore, South Korea and New Zealand, in addition to Australia, India and Japan, with Hong Kong planned by the end of the year. Glickman says it’s important to give large clients a consistent experience. But it also reflects the need for scale in a business that is increasingly aimed at serving small and medium-sized retailers.
The banks exited…
In the recent past, acquiring depended on merchants accepting credit-card payments, particularly “card-present” payments, that is, from customers paying with plastic in a store. Such scale was only possible in Asia’s most developed markets where credit cards are common.
But “card present” models didn’t work in emerging markets, where most merchants took only cash and didn’t want to pay the fees associated with a credit card.
As a result, global banks found Asia too expensive to serve, so they left the field to local banks. In 2017, Citi sold its Asia acquiring business to Wirecard (the now-defunct German fintech). HSBC had retreated even earlier, having sold down its shares in Global Payments Asia Pacific, a joint venture for its Asia merchant acquiring business, in 2012.
Other banks, such as J.P. Morgan and Bank of America, which have huge acquirer businesses in the U.S., had never built merchant services for Asia beyond a few multinationals operating in developed markets.
…and fintechs took over
The introduction of QR codes and mobile-wallet payments, along with the rise of digital commerce, suddenly changed the way merchants could get paid, but these “alternative” payment methods didn’t sync with global acquirers, whose businesses were built around credit cards. More fundamentally, these “alternative” payment methods required software solutions, not processing solutions.
As banks stopped investing in the acquiring business, fintechs took over.
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This included both “traditional” vendors such as Fiserv and Worldpay (part of FIS), as well as new players such as Adyen and Stripe. A host of Asian digital businesses such as GoTo and Grab also launched their own merchant acquiring services.
Global banks might have been content to leave acquiring to fintechs, but those software businesses have begun to add new services on top of payments, such as liquidity, trade-finance or other working-capital solutions. Fintechs were leveraging acquiring to muscle in on turf where banks still make money.
Moreover, the acquiring business in Asia is now too big to ignore. McKinsey, in a September 22 report on Asian payments, says 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,” the consultancy said.
Returning to the fray
Now global banks are returning to the fray, both to defend their other business lines as well as to take advantage of what they view as newly attractive segments of acquirer business.
What are those segments? As noted by McKinsey, acquiring remains a low-margin, high-volume business. An acquirer must manage all kinds of payment methods, including real-time payments; they must support merchants interacting with customers both online and offline (also known as omnichannel); a growing demand for cross-border payments; and the rise of SMEs as the major customer segment, rather than large corporations.
The very nature of digital commerce creates its own scale, however. “Local markets were once isolated. Now they’re global,” said J.P. Morgan’s Glickman.
The bank’s merchant services business in Asia will stick to big and fast-growing customers that need a regional solution, rather than go after purely domestic business.
“We’re focused on larger enterprise clients and new-economy names” with huge flows of business and payments from the region, Glickman said.
“Intra-Asian payment flows are growing fast,” Glickman noted, as Asian economies grow and their governments encourage transitions to digital business models.
Other global banks are also competing for this business. Citi launched its merchant services business, Spring. HSBC has beefed up its omnichannel merchant services. Standard Chartered teamed up with fintech Assembly Payments to go after digital-economy clients.
Banks see their value proposition as being high-touch, with client representatives at hand able to package transaction-banking services, from FX to trade finance to cash management.
Ari Sarker, Mastercard’s president for Asia Pacific, told DigFin in a separate interview that he welcomed the return of banks. “When banks play in the acquiring space aggressively, they’re better than a fintech providing some new innovative creation. Banks also bring lending, short-term financing, and working-capital financing.”
Sarker says the best outcomes are when banks and fintechs collaborate “if done in an open-loop environment”, that is, not within a closed environment where the payments processor is also issuer and acquirer.
This would suggest the traditional payments processors are happy to see the big banks return to Asia, to counter the rise of superapps and emerging networks that exclude the incumbents. Revenues from payments business in Asia may be big and growing, but the competition between banks, fintechs, and domestic digital ecosystems is now full-on.