We’ve always said that businesses who switch to a new merchant acquirer get lower merchant fees than loyal customers who stay with the same acquirer for years. Most businesses probably accept that concept across a number of business services but they will be astounded by the size of that pricing gap. New evidence suggests that gap is up to 48% and growing year on year.
The US experience
The new evidence is published by 2 leading US payment consultancy firms, The Strawhecker Group (top graph) and First Annapolis (bottom graph) who each conduct extensive benchmarking every year on merchant acquiring pricing strategies. First Annapolis’s research shows that on average new merchants who switched acquirers in 2014 received up to a 48% discount on merchant fees in comparison to similarly sized merchants who didn’t switch. Strawhecker Group shows similar trends albeit their analysis looks at merchant acquirer gross margin (after deduction of merchant acquirer processor costs) where the gap is lower.
Whilst this is US research, it is highly relevant to the UK market and I would expect the trends to be very similar if UK data was available. This is because the UK merchant acquiring market is dominated by the same merchant acquirers who lead the US market and who export their pricing expertise and experience from the US to the UK. WorldPay, First Data, Global Payments and Elavon (cumulative UK market share of c.65%) are each US headquartered, controlled or have sizeable US operation.
In the First Annapolis data the level of discount for the smaller merchants ($100k – $250k) is an outlier and looks too low in 2014 at only 7%. The only rational explanation we could offer is that this could be the impact of increased adoption of mPOS technology like Square, iZettle, etc which is more expensive. Unlikely this explains the full difference and may be an error in the data.
Similarities to the UK
The research also indicates some other interesting trends which are also annecdotally seen in the UK market. The price gap in merchant fees between switchers and non-switchers is growing significantly year on year for 2 reasons :
The extent and frequency of merchant fee increases that merchant acquirers impose on their existing customers is growing. We hear this all the time from merchants:
- Regular portfolio wide price reviews now happen frequently, For example, most acquirers have taken the opportunity with the forthcoming Visa debit changes to improve profitability with rate increases higher than their own cost increases
- New merchants who may have been excused from “normal” merchant fees like PCI compliance fees, authorisation charges or even MMSC will have these applied within 18 months of joining
- Small, repeated rate increases are applied that you will hardly notice. Did anyone notice their authorisation fee increase from 3.85p to 3.95p recently? A rounding error in isolation but multiply by a few billion transactions and its a tidy profit figure.
- New merchant fees are introduced – PCI compliance fees, Terminal “Maintenance” fees to name but a couple. Look out for more acquirers recharging Card Scheme fees in 2015
The level of competition in the market from ISO’s, PSP’s, etc is growing and they are much more aggressive on pricing even though they sell the same product:
- They don’t have a large “backbook” of existing customers on high margins which they have to protect
- They know they are competing in a fierce price sensitive market for every merchant. Merchant acquirers obtain customers from other channels such as bank branches where there is no competition and they can charge premium merchant fees
- The sheer number of new entrants and options for merchants is increasing at every level. The retail banks and their merchant acquiring spin-offs are gradually losing their grip on the UK market as Visa and Mastercard license more UK acquirers (First Data, Secure Trading, etc) and European acquirers enter the UK market with compelling cross-border propositions. Technology firms like Stripe and Braintree offer improved integration capabilities that bank spin-offs can’t match. ISO’s are now viewed as serious alternatives by most merchants having shown that they are long term, reliable suppliers.
Market pricing is moving so quickly and there are such variances across the market that now, more than ever it is essential that merchants shop around for merchant services. But we would say that!!