The Green Sheet Online Edition
April 09, 2018 • Issue 18:04:01
Cracking the merchant retention nut
Merchant acquirers and their sales partners have long been focused on the need to retain good clients. After all, it's commonly accepted that it costs more to court and land new clients than to keep current clients content and generating transactions. Despite their best efforts, however, good merchant retention has been an elusive goal for many.
An analysis by Adil Consulting LLC revealed that about one in five (21 percent) merchants switched ISOs or acquirers in 2014. Adil Moussa, the firm's Principal said in a recent interview that data has remained fairly constant in the years since and that retention trends are fairly constant across vertical markets.
Smaller ISOs – those processing less than $1 billion a year – have the lowest attrition rates (an average 13 percent a year). Many of the largest portfolios – those ranging between $10 billion and $30 billion – have the highest rates of attrition, on average 22 percent, although those with portfolios larger than $30 billion enjoy lower attrition rates (18 percent), Moussa said.
An analysis conducted by ePay Consulting Services in cooperation with The Strawhecker Group puts this into a dollars and cents perspective. The analysis suggests it takes as many as three new merchant accounts to overcome the diminished value of a single lost account.
"Attrition is the single biggest threat to the credit card processing industry, eroding prices and gutting margins to the tune of billions [of dollars] annually, and it's only getting worse," said. Cory Capoccia, President of Womply. A software-as-a-service company specializing in solutions for small businesses, Womply partners with acquirers, ISOs and merchant level salespeople (MLSs) to support merchant retention through advanced data analytics that can help spot dissatisfied merchants and keep them from bailing.
Merchant attrition has been an issue since the payments industry's earliest days. "It's always been a problem," said industry consultant Paul Martaus. "It's worsened over the years though with the proliferation of new competitors and technologies."
High-touch and high-tech
Some attrition is unavoidable, as it is tied to factors such as economic downturns, changing consumer spending habits and poor business management. TSG's research suggests that upward of 22 percent of merchants terminate acquiring contracts because they've gone out of business.
But most attrition is avoidable. Experts agree that prevention requires a combination of good technology, insightful data and analytics, top-notch customer service, good partnerships, and a keen understanding of customer needs. "You should always be on the lookout for things that help them," Moussa said.
Of lesser importance is pricing. "Pricing is not top of mind for most merchants. They [merchants] have a whole hierarchy of needs that they use to determine the value of an acquiring relationship," Capoccia said.
Some of these needs may seem mundane. Moussa, who recently began selling acquiring services to merchants, said he realized that many of his clients required printing services that they typically procured from local or national chains. So he partnered with a printer and negotiated a fee structure that allowed him to offer pricing that undercut what the chains were charging. "I'm able to offer better service," he said. "Plus, I have good margins and they [clients] see savings."
Moussa offered three keys to providing good service: understanding merchant needs, offering products and services that respond to those needs, and always being available. "It has to be a high-touch relationship," he said. "As an agent you have to stay in front of the merchant, especially when they're having service problems. People really start to trust you when they call and you show up every time." It shows that you're in the relationship to help them run their businesses better, not just to sell them products and services, he added.
While attrition seems to affect all vertical markets equally, Moussa's research suggests the less sophisticated a merchant's point of sale the more likely they are to leave for another acquiring relationship. "If all they have is a simple terminal there's nothing to stop them from leaving," he said. POS solutions with reporting and other capabilities that can help manage and grow their businesses, "that's what keeps a merchant in a relationship," Moussa insisted.
Martaus agreed. "You want to get to the point where the merchant relies on you for so many technologies and services that they aren't willing to switch because it would require too many changes," he said.
For merchants, it's not "just about checking out customers faster," said Doug Bernier, Vice President and ISO Channel Director at Clearent LLC. "ISOs and processors have to offer technologies that make it easier for them to do business, for example, data on transactions and how that piece of the business is really doing."
This has become increasingly critical as more merchants migrate to the online and mobile sales channels. "As a business transforms into an omnichannel organization, it's important to be able to collect data from all of those channels to provide one complete picture to the business about what's happening," Bernier said.
Access to data and the ability to analyze that data in meaningful ways provide a solid foundation for good merchant retention strategies. "Almost always, the more data you have, particularly from the past, either on your own or through a partner, the better your outcomes are likely to be," said Rajesh Kamath, Head of Financial Services Solutions and Incubation at Incedo Inc. A California-based technology consulting and services firm, Incedo has worked with numerous banks and acquirers on data analytics in support of merchant retention programs.
There's a downside, however: organizational siloes. "Often we find that the sales/relationship management/acquiring side of the business does not talk with the operational side," Kamath said. "Cross-functional silos make it difficult to act on analysis."
After all, operations staffs are often best positioned to make changes that help retain merchants, and they can't make changes without timely and accurate information. "Some organizations have moved toward solving this problem [by providing for] analytical flows across silos," Kamath added. "But still, many do not."
Reaping fruits of good data analysis
Kamath pointed to three types of data analytics that acquiring organizations can use to support merchant retention programs: descriptive, predictive and prescriptive analytics. Descriptive analytics offers a baseline assessment; it looks at trends like value and number of transactions a merchant processes, along with other factors that can help to predict a client's financial performance. Another example of descriptive analytics is analyzing clients that have already left and factors contributing to their departure.
Predictive analytics, as the phrase implies, can help identify merchants who are likely to defect. "This gives you power," Kamath said. Reductions in transaction volumes, for example, can be a predictor of dissatisfaction. So, too, may unstructured data points, such as changes in interactions with relationship managers and/or call center personnel. "A merchant who is about to leave typically will exhibit certain patterns in terms of number of calls they make to call centers, the grievances they have and so forth," Kamath noted. They may also be complaining on social media sites. Analyzing unstructured data like social media comments can be eye opening, and it's doable. "There are tools available now that leverage the unstructured data that is out there," Kamath said.
Prescriptive analytics is the "holy grail" of any analytics program, Kamath said. By adding prescriptive analytics to the mix, an acquirer/ISO gains insights not just on which merchants are likely to defect, but also what steps are needed to keep them on board. "No organization has an unlimited retention budget," Kamath said. "They want to be able to spend that money on those merchants that are really likely to leave."
All three types of analysis need to be ongoing; no strategies or processes should remain static. "It's a continuous process," Kamath said. "There are always advances in technology that can help you do more."
Womply boasts great success leveraging technology to support ISO and acquirer retention strategies. Capoccia said a recent study of 2,600 merchants using the company's acquiring partners revealed that partners average savings of $2.5 million annually from improved retention and proactive churn predictions the company supplies. "This is huge," Capoccia said. "We're helping them to make credit card processing fundamentally more profitable."
Womply has an offering it calls Insights. It's an intuitive technology and data platform that leverages payment, online review and other structured and unstructured data to support predictive and prescriptive actions to keep and grow merchant relationships. "We can identify at-risk merchants and trigger actions to intervene," Capoccia said. Insights also keeps tabs on net promoter scores, which quantify the likelihood of an individual merchant promoting their chosen acquirer to a friend or colleague.
Vertical market plays
As acquirers and their partners invest more in retention strategies, some are being drawn to specific vertical markets where the tools they have make sense. "ISOs, acquirers and processors are really starting to focus more on vertical markets," stated Rick Oglesby, founder and President of AZ Payments Group LLC. "You need to be a lot more targeted."
Sometimes, this entails outright purchases of specialty software companies. In January 2018, for example, Clearent purchased SPOT Business Systems LLC, a Utah-based independent software vendor with a strong book of business in dry cleaning. "We didn't have a presence in the dry cleaning market," Bernier said. "Now we have that as a vertical."
Clearent CEO Dan Geraty described SPOT as a "leader" in the dry cleaning sector. SPOT also has an "excellent history of customer service and retention," he stated in a press release. SPOT is now part of Clearent Software Holdings, a newly created Clearent subsidiary focused on business software offerings.
The deal also means that SPOT can now offer a broader range of services to its business clients, noted Mark Jones, SPOT's Director of Operations. "With this acquisition we will retain a high level of operational autonomy, which means our customers will enjoy the same level of service we offered prior to the sale," Jones said. "At the same time, we'll have an opportunity to enhance our business offerings through a host of resources that Clearent has to offer."
Acquisitions aren't the only way to enter new verticals. "You can build your own software, although that's probably the highest-cost option," Bernier said. Purchasing a white-label solution that targets vertical needs is another, less costly option. "More companies are offering white-label versions of their software," he added. "That provides a lower barrier to entry. The least costly route is to resell off-the-shelf technologies."
It's clear that while retention remains a significant, ongoing challenge, today's new tools and strategies can address it in multiple ways and ultimately make acquiring organizations more profitable.
SIDE NOTE: Five stages of merchant attrition
Merchants, like consumers of most products, don't just wake up one day and decide to switch processors or acquirers. They go through several stages. Most are happy until something irritating happens, consultant Adil Moussa noted. This could be any one of dozens of things including unexpected or undisclosed fees, a service that doesn't work as promised, terminal issues, chargebacks and access to funds.
This irritant triggers five predictable stages that a merchant will go through and could eventually result in attrition. Intervention is possible during any of these stages, but is best when begun during the earliest stages.
The five stages are:
- Maintenance – the merchant maintains the status quo with the relationship.
- Pre-contemplation – the idea of switching acquirers first occurs.
- Contemplation – the merchant really starts thinking about finding a new acquirer.
- Preparation – the merchant researches and entertains offers from other providers. This might also include taking to social media to query other merchants for recommendations.
- Action – the merchant signs with another provider.
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