Brand Relevance and Brand Preference in Merchant Acquiring

Most of the competition in merchant acquiring happens in the brand preference rather than in brand relevance.

Brand preference means that a merchant selects their provider from a list of providers according to certain criteria. For example a merchant looks at five or six providers, and finally selects one because they have a local rep.

Brand relevance means that merchants only think of one provider when thinking of merchant acquiring. For examples, occasional merchants think automatically of Square when looking to accept cards. No other company comes to mind for them.

Brand preference competition requires spending most of the efforts and marketing budget on touting one’s merits over the others, claiming some small incremental differentiation. This is therefore a small advantage over the other companies in the market. On the other hand, brand relevance competition focuses on creating and driving a substantial or transformational innovation and differentiation straight into the mind of the merchant. In both cases, this competition is based on innovation.

The Role of Innovation in Competition

There are three types of innovation in merchant acquiring. The first type forces market players to compete in brand preference. The other two types allow market players to compete in brand relevance.

1) Incremental

Incremental innovation is a small but noticeable enhancement to an offer in comparison to other offers in the market. For example, a differentiation in pricing is one way to distinguish one company over the competition. Some companies choose to tout and market their customer service while others choose to market their local presence as a differentiator.

Most ISOs and acquirers market these types of incremental differentiators as a way to stand out in the mind of the prospect with the hope to be chosen from a list of providers.

Incremental differentiators come with four distinct disadvantages:

1. Limited Market share gain: companies competing on brand preference seldom make any significant market share gain.
2. Cost: the cost of developing a differentiator and marketing that differentiator to merchants can be expensive.

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3. Defendability: since the innovation is marginal, it is very easy for other market players to copy it.
4. Little to no market perception: the market doesn’t really see any significant difference among the market players. It’s akin to a difference in color in the same car model.

2) Substantial

Substantial innovation is a considerable differentiation that brings a big enhancement to an offer in comparison with other offers in the market. Usually, a substantial differentiator involves new technology, a vertical specialization or an interest in a neglected segment of the market.

When the substantial differentiation is adopted, it becomes a must-have for the merchants. However, it also becomes a must-have for the rest of the market players to offer in order to compete.

For example, tablet-based POS is a technology-based substantial differentiation in the market today. When merchants showed an appetite for this type of offering, most other ISOs and acquirers launched a similar product. The more merchants adopted and liked the solution, they more they started asking for it. So it became a must-have in the industry, and the market players had to align themselves in order to remain relevant.

If competitive barriers are not set too high, these differentiators can be easily copied and can become a standard feature offered by all institutions. For example, Square brought a substantial innovation in the market by focusing on the occasional merchants: a neglected yet interested market segment. However, the competitive barriers were not high enough, and so everybody soon began offering a similar solution.

3. Transformational:

Transformational innovation revolutionizes the way business is done and sets a player apart in the market; so much so that they become synonymous with the market or an element of that market.

PayPal and Bill Me Later (later acquired by PayPal) are examples of such transformational products. In the case of PayPal, they are so entrenched in what they do, that there are no direct competitors offering a similar business model. Most of PayPal’s competition is, in a way, indirect

Bitcoin is also a transformational player in the market. Their business model changes how business is done and creates a disruption in the market. Whether Bitcoin survives and thrives is a different question.

 

There are three strategies to create substantial and transformational innovation in merchant acquiring and move your company from brand preference to brand relevance. To learn about these three strategies, check out this research report.