Thursday , November 21, 2024

As New-Merchant Pricing Slips ‘Dramatically,’ Squeeze on Acquirers Ratchets up

Price compression in the merchant-acquiring business is nothing new, but research from First Annapolis Consulting shows it may be much more intense than previously thought.

“The price point that an acquirer must present to sign a new merchant is falling and falling dramatically in the very segments most acquirers would consider their sweet spots,” says Marc Abbey, managing partner at Annapolis, Md.-based First Annapolis, in an article released Tuesday in the firm’s newsletter. “The degree of compression apparent in recent First Annapolis research is remarkable.”

As a measure of this compression, Abbey points to acquirers’ net spread, defined as gross revenue minus interchange and network fees divided by sales volume. This spread among recently signed merchants hovered between 60% and 70% until about two years ago, Abbey says. Since then, it has “deteriorated badly” and is now at the 52% level for merchants with annual volume between $1 million and $5 million.

The story isn’t much better among smaller merchants. New merchants with $250,000 and $500,000 in volume are yielding a 57% spread; those with $500,000 to $1 million are at 59%. Only the very smallest merchants, those in the $100,000-to-$250,000 band, have shown improving yields. They are generating a spread of 93%.

As a result, acquirers that have sustained high attrition or rapid growth, and are thus serving a large percentage of new merchants, are experiencing the most compression on spreads, Abbey points out.

While acquirers historically have approached this sort of problem with tactics like repricing certain segments and selling add-on services, Abbey advises that these measures are likely to prove less effective than in the past. The reason is that increasing acquirer reliance on methods like interchange-plus pricing, bundled discount rates, and flat-rate pricing are leaving merchants less tolerant of traditional repricing tactics, he says.

If there’s good news in the trend, it lies in what Abbey says is the “enormous” variation in pricing found among new merchants. This variation, suggests Abbey, could allow acquirers to beef up net spreads by concentrating on merchant segments where the variation is greatest, such as merchants under $500,000 in annual volume.

“Acquirers’ go-to-market strategies—their channels, offerings, and sales management—can make a world of difference,” Abbey says. But he adds this warning: “Go-to-market strategies will need to make a difference, in fact, given the direction of the overall environment.”

Check Also

Fiserv and ADP Team up and other Digital Transactions News briefs from 11/20/24

Fiserv Inc. and ADP have agreed to offer as a package Fiserv technologies such as Clover …

Digital Transactions