Moving from Switch to Acquirer to Switch to Issuer

The place of acquirers in the payments industry has become a prominent topic in recent years. One reason why is that acquirers are no longer absolutely necessary for the authorization of payments thanks to the introduction in various markets of the Switch to Issuer model.

What is the prevailing model?

Here is a quick refresher on the difference between acquirers and issuers.

Under the still prevalent Switch to Acquirer model merchants process eCommerce transactions through a payment gateway (AKA switch) that connects to their acquirer which passes the transaction via the credit card scheme to the issuer for authorization. This process verifies that the credit card is valid and that the intended payment does not exceed the balance allowable on the consumer’s credit line. If the authorization request is approved, the transaction goes through; if it is declined, the transaction does not go through, and the customer must present a different form of payment.

After a payment is authorized, a hold is placed on the cardholder’s money and the card issuer sends approval to the card network, which sends approval to the acquirer, which sends approval through the gateway to the merchant.

Later, the transactions are cleared and settled through the same path. During clearing a card issuing bank exchanges payment transaction processing information for the authorized funds with the merchant acquiring bank. Settlement is the buying and selling of transactions among merchants, processors, acquirers, and card-issuing entities and begins when the merchant submits a transaction to their processor and ends with the transfer of related funds to a deposit account. Typically, the merchant actually receives their money in their merchant account with the acquirer after a clearing and settlement period that takes a minimum of 24 hours.

What is the Switch to Issuer model?

This process is simplified with the Switch to Issuer model. Instead of routing the transaction from the gateway to the acquirer, the merchant sends an authorization request from the gateway to the issuer via the card scheme. However, the role of the acquirer is kept for clearance and settlement.

The Switch to Issuer model has two main benefits: 

• It cuts down the number of “hops” the transaction must take for authorization, reducing the possible points of failure and speeding up authorization times.
• Lower fees to be paid by merchants.

Currently, Switch to Issuer is supported by the gateways operated by Cybersource by Visa and Mastercard Payment Gateway Services and is not available in all geographic markets. For example, it is present in Australia and New Zealand, but not across much of Europe.

What impact does ‘Switch to Issuer’ have on acquirers?

The increasing competitive pressure on processing margins makes it likely that Switch to Issuer will become a popular choice in markets where it is present. For acquirers, the implementation of such a system could be a double-edged sword.

On the one hand, if all authorization traffic were shifted to the issuer, removing the need to handle authorizations would lower acquirers’ costs. They would no longer need to maintain super responsive infrastructure that can handle authorizations in milliseconds. Acquirers also won’t have to keep up to date with the semi-frequent changes mandated by the credit card networks related to the authorization of payments. Instead, they could just make money from their role in clearing and settlement.

However, by eliminating their role in authorization, acquirers will get rid of their source of real-time transaction data. This real-time data provides the basis for much of the value added services, such as fraud prevention and data analytics, that make up a growing proportion of acquirers’ revenues.

Where acquirers’ future lies?

The future for acquirers doesn’t look rosy if they are left with just signing up merchants and paying out settlement funds. The option of Switch to Issuer will only sharpen the need of acquirers to work on their value proposition to merchant clients. To maintain and grow revenue share in the payments value chain acquirers are going to have to offer more competitive pricing on their rates and place even greater emphasis on providing value added services to their client portfolios.

On the chargeback management front, Justt can help acquirers do just that by providing a dashboard for tracking merchants’ chargeback data. Justt can also offer acquirers’ merchants the possibility of easily outsourcing their chargeback problem and achieving higher win rates.

Contact Justt if you would like more information on how acquirers can improve their value-added service offerings. For more insightful news on payments topics read the Justt blog.