Wake Up Banks — Stop Missing Out on Commercial Deposits Revenue

2023 profoundly changed the financial services industry. Bank failures, the rapid transition to deposit gathering, and a more active regulatory environment changed investors’ expectations moving into 2024. The capital markets are demanding — and rewarding — more conservative balance sheet management. In other words: more deposits and fewer loans. Historically, many banks have kept merchant services and acquiring as a commercial product “add-on,” but bank-led merchant acquiring is perfectly positioned for a renaissance.

Merchant acquiring creates recurring non-interest income, attracts deposits, increases cross-selling opportunities, and lengthens overall customer lifetimes. In addition to being a fundamentally attractive business, it’s a massive market: $72B in revenue growing at 6.9% CAGR through 2027 (Boston Consulting Group, Global Payments Report 2023).

Banks are well-positioned to compete in the merchant acquiring space, particularly among small and medium-sized businesses (SMBs). Here are four reasons why.

1. Banks Have a Back-Book of SMBs Latent with Merchant Opportunity

A mere 10% of businesses use their primary financial institution’s merchant services (Jack Henry). Why so few? Because developing and implementing an effective go-to-market strategy for merchant services is difficult within a bank. Merchant services is often siloed from “core” banking, putting a premium on orchestrating many functions — sales, marketing, risk, compliance, and technology — as well as complementary lines of business.

But regardless of these internal challenges, banks’ existing relationships with thousands of business customers is a major advantage over their merchant acquiring competition. By tapping into this back-book and leveraging propensity models to target the most promising prospects, banks can build upon their existing products, reputations, and customer bases.

2. Merchant Opens the Door to Cross-Selling

Approximately 70% of SMBs use one or more value-added service from their payments provider (McKinsey). Merchant acquiring opens the door to cross-selling many different types of products because merchants — especially smaller ones — want to purchase financial products from their payments provider to keep things simple. Credit cards, advanced fraud protection, and accounting solutions are among the most attractive value-added services.

Banks have tremendous product depth and breadth that processors, fintechs, and software platforms offering merchant simply cannot compete with. By positioning around this product bundling advantage and capturing the right prospects at the right time, banks can acquire more profitable and stickier merchants.

3. SMBs Seek Guidance — Tipping the Balance Toward Banks

40% of SMBs purchased merchant services through a salesperson or consultant (McKinsey). At the end of the day, merchant acquiring is complicated. Most merchants aren’t payments experts — they’re entrepreneurs looking to start and grow their businesses. While merchant-led onboarding is important, and an area where more tech-savvy upstarts often have an advantage, there is still a large portion of the target market that wants a guided, “do-it-together” experience.

This is great news for banks because of their massive and highly trained sales teams. These financial consultants already know how to build relationships, cross-sell, and support clients effectively. With the appropriate go-to-market strategy, this distribution advantage gives banks a leg up against their competitors.

4. SMBs Prefer Comprehensive Solutions Over Low Pricing

Merchant is often perceived as a race to the bottom where you can only compete on price. Yet 86% of SMBs would switch to a higher-cost provider for a better customer experience (Jabian Journal). The success of major fintechs in merchant — Stripe, Square, and others — was not due to more competitive pricing. It was due to better customer experiences for SMBs.

Banks can create great customer experiences by leveraging their access to unique financial data, especially for existing customers. By tying payments data together with data from other products — loans, lines of credit, lockbox, and more — banks can better recognize merchants’ “moments that matter.” No other player in the merchant acquiring ecosystem can create as comprehensive a view as banks, and this view helps banks better serve clients, proactively offer relevant products, and differentiate their merchant offering.

The Opportunity

The current financial services environment creates a compelling case for merchant acquiring. Banks can find new deposits, increase recurring non-interest income, and deepen and lengthen relationships with customers — all through one line of business.

Great opportunities, though, often present great challenges. Aligning different functions, partnering with other lines of business, creating the right go-to-market strategy for your client base, selecting vendors — it can be difficult to know where to start.

That’s where pAIwares comes in. We have helped banks of all sizes mobilize their assets to drive merchant acquiring and grow broader commercial revenue. If you’re looking to grow commercial banking, contact us to learn more about how we’ve helped financial institutions like yours.