Thursday , March 28, 2024

A Remedy for Attrition Headaches

It turns out that merchants using integrated-payments systems tend to leave ISOs and acquirers less often. Here’s why—and how to sign up more of them.

Just as independent sales organizations and acquirers engage in a never-ending struggle to curtail their merchant-attrition rates, so are they also constantly on the prowl for new ways to acquire merchants.

One way they’re doing that is by cultivating software developers through the independent software vendor and value-added reseller channels. The goal is to reach the merchants served by the ISVs and VARs.

It’s an effort that requires a different sales pitch and a new strategy focused on customer service and support. It also requires fresh expectations about the work necessary to return a profit.

With the overall attrition rate, as an industry average, at 23.6%, according to The Strawhecker Group’s most recent data, the question becomes: Is the turn to integrated payments to reduce attrition rates working? Beyond that, are integrated payments aiding the formation of longer-lasting revenue streams and lower customer-acquisition costs?

The answer to both questions, albeit with some qualifications, is yes.

Sticky Merchants

Generally, merchants processing via an integrated-payments service have less attrition than merchants using conventional point-of-sale terminals, says Rick Oglesby, president of Mesa, Ariz.-based AZ Payments Group LLC.

While attrition due to uncontrollable circumstances—such as business closures—is unavoidable, it’s with the controllable attrition rate that integrated-payments merchants can have a beneficial impact. The controllable attrition rate for most providers hovers between 8% and 10%, Oglesby says. The rate for integrated-payments merchants in a portfolio might be half that figure, he says.

“The more service you have embedded into a single package, the stickier the merchant and the lower the attrition rate you have,” Oglesby adds.

Some payments providers agree. At Cayan, a Boston-based payments-services and technology company that has relationships with approximately 100 ISVs, the attrition rate as a whole in the integrated segment is “roughly half of what it could be for our direct channel,” says Ken Paull, Cayan’s chief revenue officer. “That’s a significant difference.”

At EVO Payments International LLC, an Atlanta-based merchant-services company, about 30% of the company’s U.S. merchants use integrated payments, says Brendan Tansill, president for North America. Globally, EVO’s portfolio contains more than 500,000 merchants. In Tansill’s experience, attrition rates typically are in the 20% to 30% range. In the integrated space, that rate might be 10% or less, he says.

Much of the reason is that merchants using integrated payments rely on the software the payments module is embedded in to operate their businesses. Usually, that reliance is stronger than their allegiance to the payment processor. It’s also a much stronger bond than merchants have to a standard countertop point-of-sale terminal.

In Check

Just as Cayan tracks the attrition rate for its other merchant segments, it does so with those using its integrated POS service, called Genius. “When we look at attrition for integrated merchants, it’s different than what we get for the direct merchant side,” Paull says. Approximately one-third of Cayan’s merchants use the Genius platform, but they account for half of the payments volume, he says.

When integrated-payments merchants do switch processors, it’s typically because they’re switching software providers, Paull says. In many cases, the new ISV or VAR, if not already integrated with Cayan’s network, can easily do so, he says.

“When we do see attrition, it’s usually tied to things we can’t control,” Paull says, such as the merchant being acquired and having to switch to its new parent’s POS systems. Also, many integrated-payments merchants have higher-volume businesses than those using standalone POS terminals, which may mean fewer business closures, he notes.

While it’s nice that attrition among integrated-payments merchants is generally lower than average, the question, of course, is how to keep that attrition in check.

A vital first step is to constantly monitor merchant-payment activity. When the ISO or acquirer owns the merchant relationship, which it still might, depending on the ISV’s or VAR’s model, the warning signs are immediately evident. That’s still the situation for integrated-payments merchants, even if the merchant isn’t aware of the payment processor on the backend.

“The preponderance of our business is through resellers,” Tansill says. In this situation, the reseller has a valuable connection to the merchant and can relay any issues. “If you’re in a good spot with your resellers, they’ll be in touch with the merchant,” he says. Resellers have a vested interest in cutting off attrition, he adds.

EVO, too, monitors volume patterns. If a pattern seems askew, it’s not uncommon for an EVO representative to call the merchant about the activity. In the instance of a merchant serviced directly by an ISV or VAR, there generally is an ongoing dialog between the two, Tansill says, and EVO is in constant contact with the software provider.

But while there are warning signs, the indications for an integrated-payments merchant may not be unique. To be sure, even with an ISV or VAR involved, the ISO or acquirer will still see the payment-transaction data, says Oglesby. But “as a payment company, it’s not going to see what the software company has,” he says. “It still looks like a normal payments relationship.” Because of that, Oglesby doesn’t know if the warning signs of an impending attrition are any different than for non-integrated payments merchants.

Still, merchants working with an ISV or VAR actually may provide a little more lead time by signaling their prospective departures, says Paull. When a merchant using a standalone POS terminal decides to switch acquirers, it’s often too late, he says. “They don’t call in,” he says. “They just disconnect the terminal. By the time they call to cancel, they’ve already started up with someone else.”

With integrated-payments merchants, such a change is more complex, given the merchant’s dependence on the software to help with other business operations. “In the integrated world, there has to be a coordinated switchover with their VAR,” Paull says.

When Cayan gets a call about a potential lost merchant, the notice immediately is sent to Cayan’s retention team. “We put it over to the retention team to understand why they’re planning to make a move,” he says. Quite often, the merchant may not realize that the new software provider may have a Cayan integration, or that the merchant can continue to process with Cayan because Cayan’s gateway has multiple processor connections, he says.

Getting And Keeping Them

Strategies for acquiring integrated-payments merchants differ, but they generally involve finding a niche and becoming well-versed in how that merchant segment operates. At least that should be how it’s done, says Oglesby.

An essential best practice is to target a segment where the payments company thinks it can add value, he says. “It’s becoming a much, much more product-centric environment where you have to think about the target market,” Oglesby says. For payments companies, the challenge is to not just consider the payments component, but what the merchant needs to run her business.

Oglesby cites Stripe, the online-payments company that specifically targets e-commerce merchants, as an example. Its payments module can easily be dropped into a site’s e-commerce platform. Others, like Vantiv Inc. and Global Payments Inc., have significant business from integrated-payments merchants. Processing giant First Data Corp. in January launched its Integrated Solutions Group to consolidate its integrated-payments efforts.

But, servicing integrated-payments merchants is not just for the domain of larger companies. Smaller ones can compete, but a different focus is necessary, Oglesby says. “The smaller you are, the more focused you need to be,” he says. Larger players need focus in core areas.

Smaller providers also might be able to have portfolios of just integrated-payments merchants, Oglesby says. A number of companies, like Mercury Payment Systems, did well doing that and eventually were purchased by much larger payments companies (Mercury was acquired by Vantiv Inc. in 2014). If the payments company is very large, it probably doesn’t make much sense to exclusively have integrated-payments merchants, he says. “But, if you’re small, absolutely.”

Once the decision is made to court integrated-payments merchants, the ISO or acquirer has to devise a sales strategy.

At EVO, a dedicated business-development team prowls markets looking for high-growth software vendors, Tansill says. Once located, the sales process, which typically takes a long time, begins.

A faster way to gain critical mass among integrated-payments merchants is to sign deals with ISVs and VARs, he says. The idea is that the reseller then would refer the merchant to EVO. “The software reseller would participate in the value chain as well,” Tansill says.

Using resellers can build a portfolio quickly, but requires sharing some of the revenue, while the direct-sales option takes longer, but the payments company shares less of the revenue.

Amplified Benefit

Another issue to consider with integrated payments is the burgeoning popularity of it, says Cayan’s Paull. “We see everybody and their brother jumping into the market,” Paull says. “By the time you jump on the wagon, it can be dangerous,” alluding to a crowding effect that dilutes the various sales pitches.

Cayan’s strategy has been to build its portfolio via resellers. Some payments providers eyeing the market are hoping to jump right in. But, even with resellers, it takes a while to build the relationship, Paull says. “It has to be something you’re willing to do for three to five years to really have the payback,” he says.

The payback, of course, is the reason for pursuing integrated-payments merchants. With lower attrition and generally longer tenure, the steady revenue stream lasts longer. When that is coupled with software providers in high-growth markets, the benefit is amplified.

“It’s not just for the attrition rates,” Oglesby says, “but the growth rates. If you want to speed up growth you need to focus on segments that are growing more quickly, and software is one of them.”

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