Solving the Merchant Attrition Problem

by Mukesh Gidwani 0

merchants

Customer Attrition has always been one of the key challenges impacting the bottom line in any industry and so is it for the Merchant acquiring industry.

The Merchant Acquiring industry, being a highly concentrated market, has always faced stiff competition, with each acquirer focusing on winning a greater market share than their peers. However, the traditional Merchant Acquiring industry now faces increased competition not only from traditional Merchant Acquirers but also from new entrants or Fintech disruptors who have managed to win over merchants quickly through their faster turn times, improved technology and value added services.

According to Womply Insights and Goldman Sachs statements cited recently in one of the nation’s trade publications, attrition costs merchant acquirers $2 billion a year in losses. That doesn’t include the additional billion dollars that will be spent this year to replace the merchants these firms have lost.

Companies are spending more time and money today on incorporating new clients into their systems than they have in the past. This is due to the need to make clients fluent in newly acquired technologies and preparing them to accept and understand increased risks related to fraud and data security challenges.

McKinsey reports that the net revenue margin for electronic payment acquiring/ processing has been falling steadily since at least 2008, with the industry average down 5.1% from 2008 to 2018.

In effect, every time an acquirer loses a merchant, they are burning a bridge. To make matters worse, this can happen fast and without warning. It can be difficult to know when a merchant is dissatisfied. They may not show signs that acquirers are watching for and so they may not notice until it’s too late. Even if they do notice, it can be very tough to keep a client once they become dissatisfied.

Competitors, especially new Fintech firms, are happy to step into the gap left by traditional merchant acquirers and the card issuers they partner with.

Solving a problem that appears to be simple

One of the most dangerous traps in business involves solving problems that seem deceptively simple. On the surface, many problems line up perfectly with similar problems business executives have encountered in the past, and the natural inclination is that they apply the same solution that previously worked well. Unfortunately, too much is changing for old solutions to be effective. 

Consumer expectations are different

Today’s consumers have fallen under the influence of the “Amazon Effect,” which takes the “customer is always right” adage to an extreme that puts increased pressure on merchants, especially smaller firms.. Hence Merchants are always looking up to their Merchant Acquirers for value added products and solutions and quicker turn times to deliver an enhanced customer experience 

Profitability

Increasing regulatory costs along with a pricing compression to stay competent with pricing offered by peers, and declining margins make it highly difficult for Merchant Acquirers to remain profitable.

New competitors are disrupting the space

Square is most often cited, and its penetration into a market that many thought was insulated from Fintech competition has been nothing short of fantastic, but there are others in the wings and the industry will see more of them in the year ahead.

The solutions typically employed

Merchant attrition is an old problem and so we expect many to attempt to solve it the old ways. After all, most firms have become accustomed to losing a percentage of their business every year. The national attrition rate currently stands between 12% and 15%. The problem is that losing these clients is more expensive today than it has been in the past and replacing them may cost more.

But since attrition is not a new problem, the first old solution many businesses are likely to revert to will be old fashion customer service. By staffing up the call center, providing some training on conflict management and making proactive calls to customers, some firms will attempt to keep merchants happily onboard.

In an earlier time period, this form of customer relationship management may have solved the problem, but it won’t work today. Merchants don’t have time to build strong relationships with their processors and don’t see the value in staying with a company that isn’t providing as many or more advantages as its competitor. For many, especially the nation’s smallest retailers, staying with the wrong partner can lead to extinction.

Others will swing their pendulums to the other side and go high tech. Big data’s siren call has already attracted many firms, where executives are now gathering reams of client data and using expensive algorithms to let them know whether they are about to lose a customer. There are a number of problems with this approach.

 

First, the big data approach is expensive. Developing the data gathering protocols, setting up the system to hold the data (sometimes simplified with cloud computing) and then creating the analytics that will crunch through the data is not cheap. Further, it takes time to get it right. When things work out perfectly, companies can use big data to know more about their customers, but it still may not be enough to save the relationship.

Finally, it can be difficult to know whether you are collecting the right information until much later in the process. By that time the money has been spent and the customer may have moved on.

Solving for the root causes of the attrition problem

If neither old solutions nor new high tech solutions will solve the problem, what can be done about the merchant attrition problem and the rising costs that are associated with it? When seeking a good solution to any problem, it’s helpful to focus in two areas, the core causes of the problem and the most favorable outcome.

There can be many reasons that merchants switch providers. It would be very difficult to identify all of them, but we can certainly focus on a few of the top reasons. In fact three major reasons are easy to ascertain. Merchants leave when they are dissatisfied with the way their problems (or perceived problems) are handled, because they perceive their costs to be too high, or because a competitor promises a better or more complete solution.

Any solution to the attrition problem must respond to all three of these core problems or it is unlikely to be effective. Neither old school CRM nor big data analysis will solve all three of these problems.

It is also helpful to focus on the most favored outcome of a successful solution — from the perspective of the merchant customer. When we analyze what they want to see in a perfect relationship, we find that they want:

  • More transaction volume (healthier businesses)
  • More services designed to make them more successful
  • Quick solutions to the card payment-related problems they face
  • Data security protection
  • Reasonable costs

Sure, there are unreasonable merchants that want the world for a few coins, but in general we can limit their real desires to this handful of benefits.

Solving the merchants’ problems while offering them the benefits they seek is the only true way to solve the merchant attrition problem. Delivering each of these benefits and solving for each of the problems we’ve mentioned in this article could be the subject of its own paper, but if we have only succeeded in preventing our readers from pursuing a partial solution that offers little or no chance of solving their merchant attrition problem, we will consider this a success.

Every day, we at SLK Global Solutions (www. http://www.slkgroup.com/global) have conversations about these issues with our clients. The solutions they employ differ, which sets them apart and differentiates them in the minds of their customers, but the problems they are working to solve, and the benefits they are seeking to provide, fall very close to one another, as we have outlined in this article.

Read more about SLK Global’s card capabilities at http://www.slkgroup.com/global/cards_and_payments.php