11 Jun, 2012 11:29 | Masha Cilliers | Payment Options Ltd | London
Payment industry is heating up but is it helping merchants?

Pretty much every day we are reading about a new payment method, another start up and another way to pay online or over the mobile phone.  But if you are a retailer/merchant, how does that help you choose what is the right option for you?  I would argue that it's becoming increasingly different to filter out what is the marketing noise, what is indeed a workable solution, and finally what will actually work for you as a merchant, i.e. what your customers need, would they accept it, whould you increase your conversion and popularity?

In the not so distant past, to start a business you just opened up an account with your bank and signed a merchant agreement with them to be able to accept credit cards - Simple!  But you were limited to the one market you knew, and you needed to go and get to know all the new markets to the same degree.

Now it's a lot easier to sell online to many different markets, but the payments are often the stumbling block - e.g. the Germans just wont pay online with a credit card, and you start narrowing down your addressable segment if you dont offer the locally aceptable payment methods.

So what is the merchant to do?  Well, looking at the competition and what they do in terms of payments is not a bad start, especially at those local to the market.  Also, getting a better understanding of the customers you are targeting and how the product you are selling fits into their payment habits.  And, of course, try not to get too carried away with trying out all the new 'payment inventions' untill they are tried and tested by the market, unless of course you have a huge budget to experiment with and like being the  first comer and to have a technological edge.

Comments (10)
Added: 12 June, 2012 - 11:48 | Seeva Selliah - Royal Bank of Scotland - chennai

Point well made. With many technology innovations (recently introduced and upcoming) available to enhance payments via mobile & online channel, it is very important for merchants especially SMEs to pick the right ones matching their business strategy driven by their customer behaviour and needs.

 

 

 

While I agree with your point about a plethora of new payment methods becoming available to merchants, I'd be more concerned about the fate of the payment service providers. For decades, merchants are used to selecting the right mix of product, pack size and cost from a far bigger basket of merchandise options. They can readily tweak the same processes / best practices - e.g. consignment basis - to decide which payment methods to offer on their stores and e-stores. Besides, for e-stores, technologies like cloud-based A/B testing enable them to do this scientifically, quickly and with tiny budgets. If you'd like to know more on this topic, I'll be happy to continue this discussion offline.

Added: 17 June, 2012 - 23:06 | Alexander Peschkoff - TEDIPAY - London

When it comes to merchants and payments, there are several points to consider.

You need to distinguish between offline and online merchants. The latter group has much more flexibility in terms of payment methods they can deploy.

As for the traditional (offline) merchants, their problem is clear: the average gross margin in global retail has dropped to 2.4% in 2010, whilst the costs of accepting credit card payments remains at around 2%. The need to disrupt the status quo is so compelling, that it is now the question of "when" (the answer to which, mainly, is determined by "how"). Something's gotta give - guess where the axe will fall...

If we take the "General Merchandisers" category - to which WalMart, Target, Sears and other retailers belong - in the latest FORTUNE500 list, the total revenues is US$ 661.483B and total net profits is US$ 20.061B i.e. 3.03%. Counting out loss makers like Sears and JCPenney, the average net profit percentage is even higher. Using a quick search command in the IMAP report referenced above, the only mention of profit and 2.4 percent I could find was in the line "Profit margins of the 200 largest retailers in the world fell to 2.4 percent...", which I'm inclined to take as net margin, rather than gross margin. Just as with employee, healthcare and other costs, it might be reasonable to expect credit card fees to be in lockstep with gross margin, but there's no such connection between these costs and net margin. In any case, I haven't come across a single alternative ePayment method costing brick-and-mortar or online merchants less than credit card @ 2% MDF. I'm counting out debit card since it is not a form of alternative payment.  

At the risk of going slightly off-topic here, I can't help pointing out what happened in the aftermath of credit card regulations in Australia: Merchants (e.g. Qantas) started levying 7.5% surcharge for accepting credit cards when the regulator had brought down credit card MDF to 0.5% and repealed the "no surcharge" rule.

Added: 18 June, 2012 - 13:00 | Alexander Peschkoff - TEDIPAY - London

Good thinking, Ketharaman. However, if we take even 4% as gross margin, the problem of high card fees (relative to margin) does not become any smaller.

As for the "alternative" payment methods, merchants need a disruption, not a "Band-Aid" solution.

Big merchants carry enough weight to bring most of the elements of the payment chain "in-house". The change IS coming...

@AlexanderP: 

Not sure if you're referring to any specific retailer when you quote the 4% gross margin figure because a back-of-the-envelope calculation using figures given in Yahoo! Finance (e.g. WalMart) reveals Gross Margin of retailers to be upwards of 20%. Against that, 2% credit card MDF doesn't sound high, does it?

As for the WSJ article you've hyperlinked, I remember quoting a respected retail industry analyst in a Finextra post / comment recently. This analyst warned WalMart, TARGET and other retailers against entering payments processing by themselves and advised them to continue to use the existing banking rails. According to this analyst, not only is the status quo tried and tested, but it's also cheap, when retailers factor in the true costs of payments viz. enrolment, fraud management and fail-safe infrastructure.

Added: 18 June, 2012 - 17:24 | Alexander Peschkoff - TEDIPAY - London

Sorry, Ketharaman, I was referring to 4% net (WalMart's average profit margin is 3.5%). Regardless, 10% of gross is still a high cost for a single line item, IMO (if that was not the case, why would the retailers dedicate that much money, time and effort to the subject of payments).

I cannot comment on the cost of setting up an "in-house" payment infrastructure as I am not an expert in that field, but I've seen compelling figures related to such a business model.

Consider the following: when a consumer pays with a card, the real/incurred cost of a transaction processing and settlement should not depend (much) on the type of the card; fraud level should also be card-agnostic (it's more to do with "card present" vs "remote transaction", than debit vs credit). If debit card transactions are profitable for all the parties involved, why should a credit card transaction cost disproportionately more?..

Moreover, unless an insurance-related (volume-linked) charge is involved, why should a mechanical processing fee be %-based?

In a free market, if credit card costs are causing such a major problem for retailers, nothing stops someone from introducing an alternative system at lower costs, thus relieving retailers of the need to use credit card networks. I know that ISIS tried going on its own but eventually decided to sign up with the usual suspects Visa / MC (more on that in my personal blog post titled Do American Retailers Want To Have Their Cake And Eat It Too?). But, there's no reason why someone else can't succeed.

If merchants insist that banks should set prices in proportion to costs, there's nothing stopping banks from asking merchants to reciprocate. And, on that, the present scenario is mixed: As I'd pointed out in another personal blog post titled The Tug-of-War Between Different Pricing Models, a typical English Breakfast costs less than 50p but a typical London 5 Star Hotel charges GBP 25 for it. 

Added: 19 June, 2012 - 12:50 | Finextra member says:

Let us not forget, there is also a cost of accepting cash payments - there is no "free" option for Merchants, so they need to make sure that they minimise the fees they are paying by using whichever Acquirer is cheapest for the payment method being presented. This is fine for the big guys, but sadly, the smaller merchants don't have this luxury.

@FinextraM: That's an excellent observation. We know that it's a common practice for different acquirer banks to offer different credit card MDFs for different product categories and different transaction-times-of-the-day. However, capitalizing on the best deal has often posed a challenge for many merchants since it entails finding space for multiple POS terminals in cramped checkout bays and training their checkout staff to select the "best acquirer" for a given transaction. We're aware of switching technologies that  use "Least Cost Routing" rules to automatically route each transaction to the acquirer that gives the lowest MDF for that specific transaction - from a single POS and with no manual intervention from the till attendant.