Is competition, churn and increasing cost hurting the bottom line of your merchant acquiring business? Are you struggling to differentiate your offering from a swathe of “me too” competitors, or worse, looking pale by comparison with emerging fintech startups?
If so, you are not alone. Merchant acquirers everywhere are feeling the heat and searching for solutions to increase revenues and/or reduce costs.
While there are no quick fixes, there are strategies and solutions that you can employ to improve performance. Here are seven things that you can do for short and long term results:
1. Increase your merchant fees
If you are charging your merchants a fixed fee of card sales turnover and you are not accurately estimating the card scheme interchange and processing fees, then you could be incurring unsustainable card scheme costs, potentially leading to losses. And that’s before taking other fixed and variable costs into considerations.
Employing a fixed fee model means you need to be confident about the card mix that your merchants are observing, because if you’re wrong or the card mix changes over time, then your margin will reduce. Remember that card mix means both the type of cards as well as the acceptance method (eg. card-present versus card-not-present).
If analysis confirms that your card scheme interchange and/or processing costs are higher than your original forecast, then you’ll have little choice but to increase your merchant fees. If you do and the merchant stays, then you’ll increase your acquiring margin. If the merchant leaves, you’ll stop your losses which will also improve your bottom line.
2. Move to a cost-plus merchant fee model
A “cost-plus” merchant fee model is where your merchant fees are charged as a margin “above cost”, which primarily includes card scheme interchange and scheme processing fee costs. You can elect to include other variable costs too but most acquirers typically only include interchange and the larger scheme processing costs (such as the cross border acquirer fee for international transactions).
A cost-plus model means that you don’t need to worry about card mix affecting your acquiring margin. That’s because the fee that the merchant actually pays varies with the card mix. You are effectively passing onto your merchant the variable “risk” of card mix while fixing your acquiring margin above those costs.
Let’s consider a simple example. If the interchange on a card transaction is 1% of the transaction value and your margin “above cost” is 0.50%, then the merchant fee you charge might be 1% + 0.50% = 1.50%. On a $100 transaction, you’ll charge 1.50% x $100 = $1.50 to the merchant. But you’ll also use the 1% x $100 = $1.00 to cover your card scheme interchange cost and keep the remaining $0.50 as your acquiring margin. If the next transaction for $100 involves an interchange of $1.20 rather than $1.00, then the merchant will pay a fee of $1.20 + $0.50 = $1.70 instead.
So you’ve protected your acquiring margin by having the merchant pay for the underlying interchange (and potentially cross border acquiring fee).
Some merchants like cost-plus because it gives them full transparency of their merchant fee. Some don’t because it means that they carry the risk (of variability) and so it is difficult to forecast what their merchant fee is likely to be. However the benefit to you as acquirer is that it protects your acquiring margin from card mix variability and allows you to accurately forecast your acquiring margin.
3. Add Dynamic Currency Conversion as another revenue stream
My previous post about Dynamic Currency Conversion explained how it can add revenue to an existing international transaction, over and above the normal acquiring margin. DCC revenue is typically material compared to the acquiring margin, so is definitely worth considering if your acquiring portfolio contains a significant amount of international transactions.
For example, you might be earning between 0-0.50% acquiring margin on a typical card transaction (margin being what remains after you subtract your acquiring costs from your merchant fee revenue). Acquirers performing DCC typically extract between 2-4% (gross) of the value of the transaction from the exchange rate conversion. Even after distributing some of this with the merchant and other implementation partners, they will still retain anywhere between 0.50-1.50% in net DCC margin.
So DCC adds material revenue to an international transaction relative to the acquiring margin that would be earned on that same transaction with or without DCC. Whether it is worth implementing on your network will depend on your implementation and ongoing operating cost (of performing DCC). This is a complex subject so if you would like to know more about this, let me know here and I’ll be happy to discuss it with you offline. I may also write a longer post about this in future.
4. Add more volume
This seems fairly self apparent although it only works if you are making a net profit from your acquiring operations (see the first two items in this post). If you’re making an acquiring margin loss on average, then adding more volume will simply dig you a bigger hole. You first need to ensure that your merchant fee pricing strategy is delivering you a net profit from your acquiring operations. Then by adding more volume, you’ll be increasing your acquiring margin overall.
Ideally, you can calculate and report acquiring margin on a per transaction or per merchant basis. This will allow you to make sensible pricing and other decisions. Generally speaking, acquirers typically struggle with analysing their acquiring portfolio profitability at this level. But you really need to in order to know what impact additional volume is going to have. Adding “poor quality” volume (because it is adding to your losses) won’t do anything for your business.
So how do you add more volume if you’re confident that doing so will actually deliver additional acquiring margin?
5. Differentiate through functionality
If you can add functionality, then you have the option to charge more for delivering more. Like the previous item, this sounds obvious until you realise that most merchant acquirers are under constant pressure to reduce merchant fees (from competition) and many struggle to differentiate. Unless you have the volume to win a price war, you need to differentiate on functionality. Otherwise your acquiring margin will continue to be “commoditised” away.
What kind of functionality should you be adding? This will clearly depend on your current market positioning, merchant base, expertise, implementation resources and other factors. Only you can decide what kind of functionality makes sense.
Here are some options for you to consider:
- Add interface support in your payment devices for electronic cash register (ECR) systems that are commonly used by your merchant base (or target merchant base if you’re looking to expand).
- Partner with those ECR solution providers to provide packaged solutions to relevant merchant segments.
- Collect additional information at the payment device and report it back to your merchants on their reports (such as product codes, operator IDs or loyalty card numbers).
- Support “new generation” forms of payment devices such as tablets and mobile platforms with larger user interfaces (UIs) to display richer information.
- Tokenise your card data to minimise your merchants’ exposure to card fraud (and the associated compliance obligations).
- Reduce the friction of applying for a merchant account through simplified sign-up, real or “near” time risk assessment and fast turnaround.
- Provide rich and easy-to-access reports online with search, “slice-and-dice” and export data functionality.
- Support online acceptance for shoppers and merchants (MO/TO).
- Add card brand acceptance relevant for your merchant segments (eg. UnionPay International).
- Add Dynamic Currency Conversion or Multi-Currency Processing and target merchants with material international card traffic.
- Offer card security assessment and implementation services to complement your merchant acquiring offering.
6. Sell more effectively and more often
Assuming that you are pricing correctly, then growing your business means that you’ll need to add more merchants, and ideally, better quality merchants. Quality is subjective and depends on your combination of functionality, pricing and market focus. You may be a lower margin / higher volume acquirer, or conversely target fewer merchants that deliver higher margins. Whichever approach you take, you’ll want to find ways to broaden and deepen your pipeline.
Here are some suggestions to get you thinking:
- Get more merchant prospects into your sales funnel by asking your merchant sales team to increase their cold call work rate. The reality is that a sales “push” every so often can lead to a spike in qualified opportunities. Measure your sales people and create a competitive environment to drive performance.
- Establish referral partners to generate leads. Incentivise them with a fixed fee for a qualified lead or a share of net acquiring margin (if your systems can support this). If you support DCC, give them a share of the DCC revenue.
- Use your technology partners as lead sources (eg. ECR software vendors, payment device vendors, payment service providers etc).
- Ask your existing merchant base for leads and give them a fee holiday or other incentive for doing so. A referral from an existing and happy customer is more valuable than a cold lead.
- Create an offer for trade associations that serve your market segments.
- Conduct a targeted marketing campaign to your preferred segments with a built-in offer such as a holiday on the payment device rental for the first 3 months, or reduced merchant fees for a longer term commitment.
7. Reduce your acquiring costs
Finding ways to reduce your variable and/or fixed costs will improve your bottom line. The variable costs of acquiring include things like paper roll consumables, statement printing and delivery, telecommunications, risk assessment, merchant approval processing, dispute management and payment device acquisition, staging, installation and swap-out. Fixed costs include staff costs, systems, utilities and office space. Any economies will impact your bottom line.
For example, if you are paying for paper roll consumables now, you might be able to push this cost onto your merchants. You could provide the option for electronic delivery of reports only (no paper) and reduce your postage and handling. You might be able to implement a more efficient merchant risk assessment and approval process that is less costly and provides a better customer experience, as well as faster implementation times. Perhaps you can refinance your payment device fleet and lower your capital cost? Or maybe you can eliminate permanent office space for some roles (eg. sales, customer relationship management) that can work remotely or that are mostly on the road?
While you don’t want to cut costs to the extent that service or functionality is degraded, any cost reductions will achieve a net benefit to your bottom line. If you can extract some cost reductions while also achieving more volume or more more sales or more margin, then you’re way ahead!
To summarise, here are the seven ways to improve your merchant acquiring bottom line:
- Increase your merchant fees.
- Move to a cost-plus merchant fee model.
- Add Dynamic Currency Conversion as another revenue stream.
- Add more volume.
- Differentiate through functionality.
- Sell more effectively and more often.
- Reduce your acquiring costs.
Hopefully some of these will work for your particular circumstances and have a beneficial impact on your business.