Opportunities in Merchant Acquiring

The economic crisis is taking its toll on the merchant acquiring industry. Independent sales organisations (ISOs) and acquirers are facing a decline in volume transactions processed due to the decline in consumer spending. Further complications stem from the passive role that merchant acquirers play in the payment universe: for years, merchant acquiring consisted of processing transactional data captured and sent by merchants to their merchant processor. However, there are many opportunities for those who are willing to step forward and take a more active role. The pricing war that acquirers and ISOs have waged in the last years resulted in creating a commoditised market in the US, where each player lowers their margin further and offers no differentiating points to their merchants.

Figure 1: Types of Payment Received by US Retailers in 2007 (Excluding Health Care Providers)

Source: Aite Group

What do merchants want?

When asked what they want from a processor, merchants usually want lower pricing, a reputable processor to work with and products they can use. ISOs and acquirers are happy to oblige and keep slashing their prices to their own detriment and that of the acquiring industry. The question that most ISOs and acquirers should ask is not what merchants want from their processors, but what merchants want in general. When asked this question, merchants list the following:

1. Increased sales volume.
2. Increased sales ticket.
3. To gain new clients while retaining the ones they have already acquired.

Therefore, merchants would rather make more money than save US$50 on their monthly processing bill. The sad reality is that very few ISOs and acquirers fully realise that point and even fewer of them provide services to help merchants in their quest. The irony is that ISOs and acquirers have the same needs as their merchants and they choose their partners based on how they can help them achieve their goals. Yet, they fail to extend that logic to their own merchants.

Opportunities

We identified three opportunities for ISOs and merchant acquirers: capturing wallet share, fulfilling merchants’ needs and asking for longer commitments.

Capturing wallet share

For most ISOs and acquirers, increasing revenue is equivalent to signing up more merchants. Instead, ISOs and acquirers could increase revenue by simply working with merchants to help steer the cash and cheque payment volumes into card payments. Today, in the US, the payment mix for merchants is 47% for card payments, 35% for cash payments, 16% for cheque payments and 2% for gift card payments.¹

One of the easiest ways to promote wallet share capture is to offer a reward programme that offers bonus points for every dollar processed beyond the merchant’s expected yearly processing volume, especially if it is at the expense of cheques and cash.

Fulfilling merchant needs

Returning to merchant needs, some ISOs, acquirers and technology providers have innovated to fulfil those needs. The following are examples of companies that have innovated in the field:

• Heartland Payment Systems developed an application to allow merchants to sell telephone prepaid cards from the point-of-sale (POS) terminal and to offer a top-up service. Consumers can bring their old phone cards, swipe them in the terminal, add minutes to the card, and pay using the same terminal. The receipt from the terminal prints the PIN needed to complete the phone calls. This application helps merchants automate these types of transactions; it also makes use of a device already in the store and captures a card transaction for the operation.
• Merchant Rewards Network is a company that offers rewards to merchants for each transaction they run through their bank (the bank needs to participate in this network for the merchants to qualify). The reward model was proven in the credit and debit card industry with great success. Its replication to the merchant world is relatively easy. Once a merchant enrols, every card dollar that is processed by the merchant accrues points. The merchant can then use those points to buy new equipment, offer new services (such as payroll), etc. This network also allows merchants to find new clients as long as the merchants are willing to be paid in points.
• Inventrak POS Systems launched a POS device that alleviates merchants’ pain points. The system is able to track inventory and warn the merchant when inventory reaches a specified point. The POS also provides analytics in terms of what customers are buying and makes correlations between items bought by consumers. That is a powerful tool to help merchants suggest items to their consumers at the POS based on previous purchase patterns. The philosophy behind this system is simple: allow the merchant to increase sales, ticket size and frequency of visit by the client, while reducing the time merchants spend tending to their day-to-day business.

Asking for a longer commitment

Another opportunity for ISOs and acquirers is to increase the retention percentage. ISOs and acquirers should implement an automated system that sends a letter or email to merchants whose contract is up for renewal, then allows online renewal through an electronic signature. In our survey, 36% of respondents indicated that they would very likely renewal their contracts with their merchant processor. But since most merchant processors don’t bother re-signing their existing small merchants after their contracts are up, merchants don’t have a compelling reason to stay longer with their merchant processor. ISOs and processors argue that it is better to leave merchants alone and not remind them that their contract is up, since a notification may trigger a merchant to start shopping around. Processors that advance this argument speak to two things:

1. These processors are not confident about their merchant satisfaction with their services.
2. These processors are not investing in any resources to identify why merchants are leaving, nor trying to stop them from doing so.

When it comes to switching to another provider, about half of the merchants who are thinking about doing so take no action. So, ISOs have more to gain than to lose by re-signing their merchants.

Figure 2: Relationship Between Overall Satisfaction of Merchants and Their Likelihood to Renew or Stay with Their Processor

Source: Aite Group

In fact, satisfied merchants are more likely to renew their contract with their merchant processor than dissatisfied merchants (47% versus 27%), or expect to remain with their merchant processor when their contract is up for renewal (41% versus 23%). We also see that 36% of satisfied merchants were contacted by their merchant processor to offer helpful solutions, while only 16% of dissatisfied merchants were contacted by their merchant processors. ISOs and acquirers are well advised to look outside of merchant acquirers for best practices in terms of increasing consumer re-engagement into a yearly commitment. Companies such as Vindicia have a track record of getting consumers to renew contracts with providers of intangible goods such as subscriptions and memberships.

There are several opportunities for merchant acquirers. However, the players in this industry need to step up to the challenge and start capturing more wallet share by fulfilling merchant needs and asking for a longer commitment from their merchants.

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