By Patti Murphy
Merchant services may be a mature business, but that's not to suggest it's bereft of opportunities. "There are always opportunities," said James Shepherd, CEO of CCSalesPro, an Altoona, Pa.-based firm that specializes in training for merchant level salespeople (MLSs) and ISOs.
Sometimes the opportunities manifest as new verticals, such as the burgeoning market for cannabis-related products. Other times they arise from new products and services for existing verticals, like subscription-based services and POS installment lending.
Retailers have been offering installment payment plans, particularly on big-ticket items, for generations. However, there's a growing appetite among consumers to use installment plans to pay for everyday items, including groceries.
"Whether for purchases large or small, installment plans are redefining how consumers view affordability," said Jaclyn Holmes, director of research at Auriemma Research. "Some cardholders find the uncertainty and responsibility of paying back money borrowed on a credit card intimidating, whereas installment plans provide a clearer path and time frame for repayment." Holmes said her research suggests the product resonates strongly among debit cardholders. Four in 10 debit cardholders surveyed said they would consider using an installment plan for everyday purchases like groceries. "Bankcard agents are always looking for something to add to their product mix to get their feet in the door," said Marc Beauchamp, founder and CEO of Surv Credit, a consumer finance platform. "This is the next frontier" in merchant services.
Surv Credit has about 250 agents selling POS installment lending to merchants in verticals as diverse as automotive repairs, home improvements, and dental and medical services. And they are earning residuals on all loans. The company works with banks and finance companies on the back end, who employ artificial intelligence and other tools to make instantaneous decisions, Beauchamp notes.
The benefits to merchants include more sales and higher tickets. "You're not just fighting to save them basis points on interchange," Beauchamp said. "Instead, you're offering to give them [sales] lifts of 5 percent, 10 percent or 20 percent."
The opportunities presented by installment lending have not been lost on the card brands, financial technology firms or large retailers. Last year, Square introduced Square Installments, an installment payment option for small merchants. It's now available in 22 states. Square said its research found 68 percent of consumers would be more likely to purchase from a small or local business if it offered financing options like installment payments.
Affirm, a fintech launched by PayPal co-founder Max Levchin, disclosed in February 2019 that Walmart had tapped it to support POS installment loans at nearly 4,000 Walmart Supercenters. Approved shoppers can select repayment terms of three, six or 12 months, "with interest displayed in simple dollars," Walmart stated.
Affirm reported that it processed more than $2 billion in POS installment loans for customers of 128 stores and ecommerce sites in 2018. Mastercard estimated POS installment loans represent a $1.8 trillion market opportunity. Mastercard, along with American Express Co., has a financial investment in Divido, a New York-based developer of software that lets retailers offer interest-free installment payments.
In April 2019, Mastercard acquired Vyze, a fintech that supports various consumer financing options, including POS installment loans. Vyze works with several major retailers and brands, including Home Depot and Microsoft, connecting them and their customers with a pool of potential lenders.
And in June, Visa revealed plans to pilot a suite of POS installment loan solution APIs with a select group of card issuers and merchants. Visa said it hopes the APIs will become widely available early next year. "We expect installments to become a foundational method of payment at checkout for both domestic and cross-border commerce payment transactions," said Sam Shrauger, senior vice president, and global head of issuer and consumer solutions at Visa.
Companies large and small are turning to subscription services as a way to cut costs and generate predictable revenue streams. In ecommerce, alone, subscriptions are now generating in excess of $10 billion a year in revenues, according to McKinsey. Adding Amazon Prime to the mix doubles that total, to $20 billion, McKinsey reported.
CCSalesPro has come to rely on the subscription model for selling its training services. "We bring in a lot of money with our subscription services," Shepherd said. It's a sticky product, as businesses receiving regular payments through a subscription service are reluctant to change processors, he noted. Plus there are any number of verticals where subscription-based sales hold promise. Payment Cloud, a Sherman Oaks, Calif.-based ISO specializing in high-risk merchants, pointed out in a recent blog post that the subscription-based business model is ideally suited to the beauty industry, for example, which itself consists of a multitude of unique markets. "The reason why beauty subscription services work is because of the perception of time being saved," the company wrote, noting that this is "especially true with services that replenish, [as] consumers subscribe to certain services in order to avoid the monotonous act of remembering to purchase razor heads or skincare products."
Subscription services also make sense in business-to-business sales, like software and cloud services. Software as a service, subscription and recurring revenue business models have become a major force for economic growth on the Internet, Jordan McKee, research director at 451 Research, pointed out.
Subscription billing for cloud-based services, alone, reached $1 billion in 2017 and is projected to grow at a compound annual rate of 15.5 percent through 2020, according to Gartner Research.
"It's hard to imagine selling any form of credit card processing that has less attrition," Shepherd said. Much of the payment processing for subscription businesses today is dominated by fintech giants, like Stripe and PayPal, Shepherd noted. That is not to suggest they have the market cornered. ISOs and MLSs pursuing this opportunity, however, will need to rethink who within a business organization they need to pitch.
"Our industry is designed to target the business owner. But when it comes to selling subscription payment services the person you need to sell to is rarely the owner," Shepherd said. It's usually someone in IT, and the time to sell them is when they're setting up a subscription service. "It's a challenge because of that," Shepherd added.
Shepherd recommended that ISOs and MLSs seeking to tap into the market for subscription payment processing invest time and money in content marketing. Think in terms of setting up a YouTube channel and posting educational videos on subscription billing and payment processing solutions that can help. "If I were pursuing this market opportunity, I'd invest $30 in a decent webcam [to record videos] and $400 a month in Facebook advertising, and I bet you I'd be dominating this market in about six months," he said.
Merchants selling cannabidiol (abbreviated as CBD) products represent a huge market opportunity, but ISOs and MLSs pursuing this sector may find themselves on shaky ground. "How you approach this market is mission critical," said Max Miller, founder and CEO of Paybotic. Headquartered in West Palm Beach, Fla., Paybotic specializes in high-risk markets, like cannabis and CBD merchants CBD is a non-psychoactive compound found in cannabis plants that has been shown to be beneficial in the treatment of various ailments. It is sold in a variety of forms, including oils, tinctures, lotions, drinks and edibles. U.S. businesses rang up just over $1 billion in sales of CBD products last year and are on track to exceed $16 billion in sales by 2026, according to research firm Reports and Data. But acquirers have been reluctant to underwrite merchants they know to be selling CBD products. "Know" is the operative word here. "Most vape shops sell CBD products. Acquirers don't seem to have any problems with that," Miller said. "But if the business name includes the term CBD they're getting turned down,"
The problem stems from a mismatch of state and federal laws. As many as three dozen states authorize the production and sale of CBD products. Under federal law, only CBD derived from a particular type of cannabis (the hemp plant) is legal. Hemp, which has long been grown for industrial purposes, contains very small amounts of THC (0.3 percent or less of dried leaf), the psychoactive compound commonly associated with cannabis.
The 2018 Farm Act, which exempted hemp from the federal Controlled Substances Act, didn't fling the door wide open to legal cultivation and sale of hemp products, instead tasking the Food and Drug Administration with regulating cannabis and CBD. And the FDA doesn't seem in a rush to issue regulations. "There are lots of questions we will need to answer to ensure the FDA is taking an appropriate, well-informed and science-based approach to the regulation of cannabis and cannabis derivatives, including CBD," Acting FDA Director Norman E "Ned" Sharpless, MD, said during a May 31 public hearing on the issue.
The lack of federal regulatory structure is being felt in the acquiring space. Elavon made headlines in early 2019 when it began boarding merchants selling hemp-derived CBD products, only to reverse course a few months later.
In June, Thrive Market, an online retailer of natural and organic food products, temporarily halted sales of hemp-derived CBD products after its acquirer (which the firm declined to name) threatened to terminate the business amid uncertainty over the legal status of CBD.
"We've hit the pause button on boarding pure CBD ecommerce merchants," Miller said. But not all merchants selling CBD products are getting the boot from acquirers. Walgreens and CVS publicly disclosed they are stocking shelves with hemp-derived CBD-infused products at stores in dozens of U.S. markets. "Size matters," Miller said. No acquirer wants to lose a large retail client that's selling CBD products along with other consumer goods, so they turn a “blind eye," he said. "If you're a large merchant selling CBD, there are banks that will support you." In a comment letter, the National Cannabis Industry Association urged the FDA to come up with "an interim fix" that provides clarity on the production and sale of hemp-derived CBD. "If we do not succeed in working together to reassure the card brands that they can safely support our industry, then we predict a significant decrease in CBD sales," the NCIA warned.
Miller isn't convinced FDA action, alone, will suffice. The underwriting guidelines for merchant acquiring accounts predate the emergence of verticals like CBD, he noted. "Underwriting guidelines need to be created for this product," he said.
Some ISOs are finding ways around acquirer reluctance to support card acceptance by CBD merchants. A handful of ISOs offer cashless ATMs, also known as point of banking solutions, which route transactions through regional ATM networks rather than the credit card networks.
Cashless ATMs function similarly to traditional ATMs. Customers initiate transactions using PIN-authorized credit and debit cards. Transactions are authorized in $1 increments, and carry surcharges, which typically cover merchant processing costs. A $98.32 total ticket, for example, gets rung up as a $99 transaction, and the customer receives 68 cents in change. The transaction posts to the customer's account as a cash withdrawal from a bank account or as a cash advance against a credit card balance. "This allows CBD merchants to accept cards at the counter the same as any other retailer," Miller said.
Patti Murphy is senior editor at The Green Sheet and president of ProScribes Inc. Follow her on Twitter @GS_PayMaven.
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