Attrition’s Complex Calculus

Merchant attrition is actually a little lower than it was before the pandemic. But don’t get too excited. The total picture is a little more complicated than that.

First, the good news. Merchant attrition, expressed as a percentage of all accounts with $5 million or less in annual credit and debit card volume, has not only returned to pre-pandemic levels, it’s actually somewhat lower.

After soaring to a disturbingly heady 26.7% in the second quarter of 2020, the attrition rate had calmed to a level of 20.4% a year later, below the rates seen even in the same quarter of 2018 and 2019, according to The Strawhecker Group, an Omaha, Neb.-based research firm.

“It was a little rough 12 months ago,” notes Josh Istas, senior director of analytics at Strawhecker, with a hint of understatement. “Things are trending in the right direction.” Then, he adds a caveat: “There are a lot of things we don’t know yet.”

Indeed, there are. The pandemic claimed its share of victims among merchants, but many sellers have contrived to tame it with technologies like online ordering and contactless payment. Now, a more complex—and quite possibly, more difficult to master—set of problems confront the independent sales organizations and other merchant-service providers looking to capitalize on the improvement inherent in those attrition numbers.

‘So Much Frustration’

The complicating factors aren’t new, but they are taking on greater salience as ISOs and independent software vendors vie for merchants that aren’t on the cusp of failure but are eager to switch to any provider that can cut them a better deal or provide new services.

The general movement to digital technology in retailing and hospitality—a legacy of the pandemic—has much to do with this, as some ISOs struggle to meet client demands. “Agents are losing merchants because they can’t give proper support, and they’re frustrated. There’s so much frustration out there,” says Denise Shomo, president of Cutter LLC, a Wyomissing, Pa.-based firm that specializes in acquiring merchant portfolios.

At the same time, conventional ISOs must contend with competition from integrated-payments providers, the outfits that weave payments capability into the general business software they develop.

“There’s increased attrition if all [ISOs are] doing is transaction processing. With tightly embedded payments, attrition is next to nothing,” contends Todd Ablowitz, co-chief executive of Denver-based Infinicept Inc., a platform provider for payment facilitators, the practitioners of embedded payments.

As processors scramble, not so much to keep merchants afloat as to keep them, period, that embedded-payments concept is not without it adherents. Greg Cohen, chief executive of Novi, Mich.-based ISO Fortis Payment Systems LLC, admits merchants “don’t always tell you” why they’re leaving for a rival processor, but, he adds, “a more integrated business will win where a less-integrated business will lose.”

So, how are conventional ISOs—if such a phrase is still meaningful—responding? They’re far from conceding defeat in the battle against attrition. For VizyPay LLC, based in Waukee, Iowa, much of the attrition they’re seeing in their portfolio can be chalked up to changes in ownership. It’s a crap shoot whether the new owner will stay with VizyPay, says Frank Pagano, the company’s executive sales director, and sometimes he or she doesn’t.

His strategy is to detect signs of attrition and get to merchants before they even start talking about moving on. “When we get a cancellation call, there’s not much we can do,” he says. “Once they’ve made that decision, it’s too late.” Instead, the company uses the information it has to try to predict which merchants may be itching to switch, and then confront the underlying issue.

Then there’s the question of merchants that could be at the start of a downslope financially. One particularly effective tool here, Pagano adds, is a cash advance to help merchants before they lose the struggle to stay solvent. “A lot of the attrition we see is because the merchant is not able to pay the standard fees,” he says.

‘Signing Up’

The tool in the effort to get to merchants before they announce they’re leaving is called predictive analytics, and it’s starting to win popularity among processors as they work to keep merchants from moving to competitors. Once these merchants are identified, the solution can be new payments technology.

“[M]erchants with NFC are 5% less likely to leave than merchants without NFC. Additionally, merchants with an online presence are 2% less likely to leave than merchants without an online store,” notes Arcum Partners, a firm that specializes in helping acquirers predict attrition, in a paper posted on its Web site. “NFC” refers to near-field communication, the technology that makes contactless payments possible.

VizyPay has been busy developing this approach. It keeps a list of the 50 or so merchants it believes are most likely to leave the portfolio in the coming month. Then, it works on “how we reach out and offer a solution,” says Pagano. “We’d love to get in front of an individual before it’s too late.”

The “solution” for some processors could be to enable merchants to discount for cash. With just two states—Connecticut and Massachusetts—still prohibiting the practice, some ISOs are looking to it as a means of tethering merchants to their platforms.

And merchants’ willingness to at least consider the idea has grown in recent months, another legacy of the pandemic, some observers say. “Before Covid, merchants were not terribly receptive. Now, merchants are signing up,” says Paul Rianda, a California-based attorney who specializes in merchant acquiring.

Programming at the terminal for cash discounting—sometimes called surcharging—allows merchants to offer a lower price at checkout if the customer pays in cash rather than using a credit card. By encouraging cash sales, the practice allows the merchant to sidestep the discount fees card networks set for acquirers, which pass the levies on to merchants, typically with a markup.

‘Hard to Discern’

The practice could win yet more adoption if Visa Inc. and Mastercard Inc. follow through this spring on adjustments in credit card interchange rates that could net issuers nearly $900 million in additional revenue, according to estimates calculated last year by research firm CMSPi. That total is the net of rate increases in various categories and cuts in a few others. The two big networks have postponed the adjustments for two years running, and aren’t expected to hold off yet again.

The technique can help bind a merchant to an acquirer portfolio, since it benefits merchants’ bottom line and may not be available from another provider. To be sure, not all observers are seeing growing demand. “Sales agents are pushing [cash-discount software], but we don’t see a lot of merchants asking for it,” observes Cutter’s Shomo. She adds, however, “I do think we’ll see more of that with the coming price increases.”

One thing is for sure. Predicting attrition and managing technology to reduce its toll on merchant portfolios are two trends likely to only grow stronger in the wake of the pandemic. Attrition rates have calmed down remarkably in the past year, but, as Strawhecker’s Istas says, “it’s hard to discern” at the moment whether that trend has staying power.