Across the Asia-Pacific region, micro, small, and medium-sized enterprises (MSMEs) account for more than 97% of the total number of businesses, contributing significantly to the region’s economic development and playing key roles in driving innovation and competition.
Financial literacy, technological sophistication, channel preferences, and growth ambitions vary widely across the MSME market, giving rise to a broad set of business types, ranging from single-location shopfronts to omni-channel multi-location retailers, to merchants that focus on e-commerce only, and everything in between.
The diverse set of payments acceptance needs presents challenges for banks and merchant acquirers in tailoring models to the needs of MSMEs.
How payment players are leveraging opportunities in the MSME market
Despite smaller total payment volumes relative to larger corporates, MSMEs drive the majority of revenue for acquirers. This revenue pool is poised to expand further as digital payments continue to rise and merchants opt for more sophisticated routing payments to cheaper payment methods, which will further compress acquirer margins.
While few have managed to fully capitalize on this opportunity, several players have found success building solutions targeting specific verticals or focused segments. Options for food and beverage companies, for example, include point-of-sale (POS) solutions, inventory management, table reservations, loyalty programs, and delivery partner integrations. Healthcare solutions include integrated insurance and government healthcare claims when a patient pays, practice management software, and telehealth solutions. In the realm of e-commerce, meanwhile, pre-built stores allow businesses to set up and sell online within minutes.
It is not uncommon for MSMEs to tap into a range of solution providers to help them run and grow their business. This means that MSMEs often must knit together various payment methods from different acquirers, such as one for accepting cards and another for e-wallets, purchase an accounting software license, engage a loyalty program provider, work with multiple delivery couriers, apply for loans from non-bank financial institution (NBFI) lenders, and so on.
The challenge for incumbent banks to meet MSME needs
The starting point for incumbent banks in payments and acquiring has traditionally been in-store terminal solutions. They have lagged newer specialist payments providers that offer not only more comprehensive omni-channel acquiring solutions but also value-added services that extend beyond just payments acceptance. As a result, e-commerce and omni-channel providers have been looking beyond incumbent banks to meet their needs.
Outside of payments acceptance and acquiring, legacy practices employed by incumbent banks to assess MSME credit eligibility, such as precluding younger businesses and imposing rigorous documentation requirements, often make the hurdle too high for businesses to access credit. The same segments of MSMEs to which incumbent banks do not typically pay sufficient attention are often the ones that need it the most, such as young businesses with cash flow challenges, significant upfront fit-out, equipment, and other costs, and fluctuating day-to-day operational costs like wages and inventory. This has opened the door for NBFI lenders and payments specialists to provide faster credit application processes and more innovative credit products to MSMEs.
Newer payments specialists have emerged as frontrunners in the MSME space over the last decade or so. This is reflected in their customer base, revenue, and valuation growth. Newer entrants started with gateways for e-commerce payments and subsequently expanded their product suite to enable omni-channel payments acceptance. These specialists are now making inroads in the value-added services space, such as loyalty platforms and analytics, hardware, such as integrated POS systems, and lending, such as merchant advances with repayments directly deducted from settlements.
Nonetheless, significant opportunities exist for incumbent banks. Incumbent banks have the advantage of holding business banking relationships with MSMEs and can leverage these relationships to offer a tailored range of products and services that both cater directly to the MSMEs’ needs and pain-points around payments acceptance and assist them in running and scaling their businesses.
Four levers to gain an advantage in MSME payments
Banks and merchant acquirers wanting to gain a competitive edge in the MSME payments space should focus on four key foundational elements:
Tailoring propositions to address the need for omni-channel experiences
Providing a strong offering across a diverse set of payment methods, such as cards, real-time payments, and e-wallets, and channels is important to ensure banks can meet the specific needs of various MSMEs. For incumbent banks, whose payments solutions have typically been more anchored in more traditional hardware and POS solutions, further investment in e-commerce solutions is necessary to provide an omni-channel offering.
Implementing a digital-led onboarding and servicing model
Offering seamless digital journeys to enhance efficiency, reduce costs, and provide a frictionless experience for MSMEs. Cloud infrastructure that features open architecture with an application and orchestration layer can enable integrations with external ecosystems and services, allowing payments providers to quickly develop and offer new services to customers.
Driving payments innovation across geographical borders
Innovations such as mobile terminals and real-time payments help MSMEs reduce friction and save time and interchange costs. As innovation expands across borders, hosting the payments technology platform on the cloud means banks can reach new geographies and comply with local data requirements. Similarly, global cloud providers with a multi-jurisdictional footprint provide banks with the possibility to harmonize their offering across geographies with a common technology platform and operating model.
Providing value-added services beyond core acquisition services
Leverage technology and available data to give better insights and solutions to MSMEs, beyond the provision of basic banking accounts and payment methods. Banks are best positioned to help MSME owners understand and manage cash flow with predictive analytics and visualizations, as they have visibility into the transaction inflows and outflows of the MSME’s business accounts.
Setting the foundations for success in payments innovation
For incumbent banks and merchant acquirers to support the abovementioned key areas of focus, platform modernization and consideration of enablers pertaining to technology and infrastructure, partnership models, and their respective operating models is required.
Regarding technology and infrastructure, cloud-based infrastructure provides the foundation for a scalable, secure, and resilient technology platform. By implementing open architecture with an orchestration layer, banks and merchant acquirers have a platform that can leverage APIs to combine and process both self-owned and external messages across different payment types.
As for partnership models, in an evolving landscape, it is often not feasible to do everything in-house. By leveraging open infrastructure, banks and merchant acquirers should look to integrate partners that provide innovation, such as alternative payments acceptance, or specialize in a component of the value chain that benefits from scale, such as fraud monitoring.
In terms of their operating model, internally, banks and merchant acquirers need a fit-for-purpose operating model that effectively runs and governs open architecture, partner integrations, and in-house operations. The right go-to-market sales teams and post-sales servicing teams will also be crucial to help MSMEs discover and adopt the right solutions for their businesses.
Banks and merchant acquirers do not need to approach this alone. Partnerships and integrations can help build out the value chain and accelerate time to market with new products quickly, especially with the right cloud-based infrastructure in place.
This report was jointly authored by Oliver Wyman and AWS.
