How Covid Changed Payment Processing

Thirteen months ago, processors were on cruise control when it came to servicing merchants. Then, the pandemic struck and upended their business model. How have they adapted to the new normal?

For payment processors, the past 12 months have given a whole new meaning to the phrase “dynamic industry.” The Covid-19 pandemic didn’t just cause consumer purchases to fall off a cliff, it wreaked havoc on supply chains and delivery services, creating problems merchants didn’t anticipate.

Those unforeseen problems created a ripple effect through the economy that would end up ensnaring payment processors. Processors had to pivot, and quick, if they wanted to keep their merchant clients afloat.

It was hard to overestimate the impact on merchants. Last spring, many were hemorrhaging transaction volume due to public-health lockdowns that drastically curtailed consumers’ purchases in the physical locations they were used to patronizing.

Merchants had to find innovative ways to enable purchases in accordance with consumers’ newfound preference for buying in a contactless environment. That meant selling tap-and-go payments was not enough. Instead, processors had to offer contactless payments tailored to a merchant’s clientele, and, if need be, offer a merchant financial assistance when and where they could.

It was a strategy that also required increased customer handholding. But, as many processors quickly learned, failure to brush up on these advisory skills could cause their business to dry up, too.

Processors most at risk from the pandemic’s economic impact were those heavily invested in merchant segments where customer traffic dried up almost overnight—either from lockdowns or consumers’ fear of infection. Those industries included restaurants, hotels, and small and medium retailers that lacked an e-commerce Web site.

Other complications for processors included coming up with better ways to address the chargebacks that flowed from delays in the supply chain and sellers failing before an order could be fulfilled. These failures were an especially nettlesome problem for merchant acquirers because in those instances they were left holding the bag for resolving the chargeback.

‘We Did Grow’

In the face of such pressures, the most likely place for merchants to turn for help was their payment processor.

According to J.D. Power’s 2021 U.S. Merchant Services Satisfaction Study, the 51% of small and micro merchants that reported significant revenue declines in 2020 generated more servicing requests for accommodations such as fee waivers than the 49% of those merchants that didn’t report significant revenue declines.

Merchants’ increased service needs prompted many processors to let their customers know they were available to educate them about available payment technology that could help them recover transaction volume lost to the pandemic.

For example, VizyPay LLC, a West Des Moines, Iowa-based independent sales organization, saw its clients struggling and worked out approaches that could help them.

“We realized we needed to reach out to merchants to let them know there were ways we could help their business through the pandemic,” says Frank Pagano, co-founder and executive sales director at VizyPay. “A lot of merchants did not know payment technology was available that could make them more relevant and profitable.”

Like many processors, VizyPay added new applications to its platform that reduced personal contact at the point-of-sale. These included buy-online-pickup in-store (BOPIS), a virtual terminal to enable card-not-present transactions, and discounts for cash payments. The latter is a way for merchants to save on processing fees by encouraging consumers to pay in cash in return for a discounted price.

While many of these offerings were in the planning stages prior to the pandemic, the rapid spread of Covid-19 accelerated their deployment. “When Covid hit, no business knew what to expect,” says Pagano. “But, as the weeks went by, it was clear that Covid was not going away and that adjustments needed to be made in how business was conducted.”

That realization by merchants led to a substantial increase in inbound calls, especially about card-not-present acceptance, a topic that accounted for about 80% of merchant inquiries, Pagano adds.

In addition to letting its merchants know about the new services coming onstream, VizyPay also notified merchants they could put their account on pause, which would temporarily suspend payment of monthly fees and their help improve cash flow.

One of the biggest adjustments VizPay made to its business model, however, was reassigning technical-support staff to customer-service roles, as the need for tech support dropped precipitously in some segments of its portfolio. Doing this prevented layoffs and enabled VizyPay to build out its customer-service capabilities, which proved critical to maintaining merchants’ satisfaction levels.

“By keeping our staff, we had continuity in servicing our merchants and we avoided layoffs that could have impacted our business down the road as the pandemic eased,” says Pagano. “A lot of businesses that laid off workers had trouble bringing them back as the economy began to recover, because those employees were making too much on unemployment.”

The result of all these moves? Despite the hit many of its merchants took in 2020, VizyPay was able to grow its business. “It wasn’t the year we wanted, but we did grow,” Pagano says.

Watch Those Chargebacks

The severity of the impact on processors depended largely on the merchant segments they service. For example, Fortispay, a Novi, Mich.-based processor, saw a drop in volume for merchants in the lodging industry, while outdoor and sporting-goods merchants saw a big increase.

The bump in sporting goods sales was due largely to consumers’ flocking to purchase equipment such as bikes and hunting and camping gear and apparel via BOPIS and online in an effort to stay fit as health clubs closed.

“How big a hit processors took depended on the merchant segments they served,” says Greg Cohen, executive chairman of FortisPay. “The deeper your penetration in a segment, the bigger the loss.”

One merchant segment able to recover from the loss of transaction volume due to the pandemic is health care. “Our volume in that segment dropped for two months, rebounded, and has stayed steady since,” says Cohen.

Like VizyPay, Fortispay invested in improving its customer service to bolster merchant retention, especially hotels and restaurants. One step the processor took to help hotel operators was to develop in-house an application to improve management of chargebacks. The application took about five months to develop.

“What the hotel industry was going through really shined the light on the need for better chargeback management,” says Cohen. “We also added some fraud-detection tools for card-not-present transactions.”

As the pandemic progressed, card-not-present (CNP) volume not only grew for many processors, but came to represent the bulk of their volume.

‘A Pretty Easy Fix’

Two processors that saw CNP volume grow to become the majority of the business are Calgary-based Helcim, which has sales offices in Seattle, and New York City-based OLB Group. Helcim has seen CNP volume grow to 70% of its volume, compared to 55% pre-pandemic. E-commerce volume represents 65% of OLB’s business, up from 50% before the pandemic.

With more consumers looking to purchase in a contactless environment, Helcim added online ordering for restaurants to enable them to accept orders for curbside pick-up or delivery using their own staff.

Redeploying existing staff proved to be key for restaurants, which operate on thin margins to begin with, because third-party delivery services charge anywhere from 15% to 30% of the ticket on every order.

Helcim also made it a point to educate merchants about many of the applications available on their platform that could help their business, but which had not been switched on, such as online invoicing and payments by email.

“Making merchants aware of this was a pretty easy fix, as all it required was an email marketing campaign,” says Helcim chief executive and founder Nicolas Beique. “Merchants can get laser-focused on just accepting cards in-store or utilizing one or two applications within a platform, which is why ongoing merchant education is something we plan to continue post-Covid.”

The processor took steps to streamline merchant onboarding, too, an area where many small merchants felt processors fell down the past year, according J.D. Power. Helcim now allows merchants to digitally set up an account, make changes to their account, and order equipment.

“From a technology standpoint, merchant-satisfaction levels are good. Where there has been a falloff in merchant satisfaction is where personal-service interactions take place, such as account onboarding, which can be a moment of truth of interaction,” says Paul McAdam, senior director of banking and payments intelligence at J.D. Power.

“Merchants rate self-service technologies higher than human interaction, and during Covid we saw more processors shift to self-service technologies such as online chat and automated phone systems,” he continues.

E-commerce is another area where processors have seen increased demand from merchants during the pandemic. This is a turnaround. Before Covid, e-commerce was not necessarily an easy sell to merchants with physical storefronts.

“But once stores started shutting down or saw business drop because of the pandemic, the ones without an e-commerce site realized they needed a new sales channel,” says Ronny Yakov, chief executive for OLB Group, which works with e-commerce platform provider Shopify Inc. to help merchants develop sites.

Besides e-commerce, OLB saw an opportunity to adapt an online-ordering application in development for the food-service industry. OLB realized that entities such as hospitals employ frontline workers who could not work remotely and so had to patronize the cafeteria safely. Providing the ability to order ahead and pick the meal up, rather than stand in line, was just the ticket for this market, Yakov says.

In addition to online ordering, the app simplifies reordering by storing past orders. The app also connects to the kitchen display system for order fulfillment and facilitates payment using stored account information. OLB, which is seeing about 95% of its pre-Covid transaction volume, says its food-service and cafeteria clients generate about 12 million transactions annually.

‘Inclined to Zoom’

While contactless payment options are what consumers have expected most from merchants the past 12 months, contactless has meant more than tap-and-go or scanning QR codes. Merchants are looking for other options, such as pay-by-text and virtual gift cards.

That’s why Fattmerchant Inc., an Orlando, Fla.-based processor, teamed last year with Gift Up, a United Kingdom-based application provider that enables the sale of virtual gift cards.

“This agreement allowed our merchants to sell virtual gift cards to customers when in-person transactions weren’t an option,” says Suneera Madhani, chief executive and founder of Fattmerchant. “Our clients could add the virtual gift card feature for no additional cost and Gift Up waived its fees for the first $5,000 in gift card sales.”

While virtual gift cards have been a hit with merchants during the pandemic, so too are consumer-loyalty programs. Fivestars, a San Francisco-based provider of loyalty and rewards applications, grew it business by 50% in 2020 despite the lockdowns that crippled many businesses.

Like it or not, merchants will continue to face a fragmented market when it comes to consumers’ purchasing habits. As a result, payment technology will need to be tailored more to the merchant’s brand and the clientele the merchant attracts than to whether the purchase takes places at the counter, online, or via mobile app.

“Payment solutions need to be fitted to the type of shopping experience the merchant wants to present across all its shopping channels,” says Brian Dammeir, president, North America, for payment processor Adyen N.V.

As an example, Dammeir points out that, while BOPIS has been a big hit with many merchants, it doesn’t necessarily work well with high-end merchants. “High-end merchants are more inclined to do Zoom sales [rather than BOPIS] because they can show consumers around the store and highlight merchandise,” Dammeir says. “We’ve worked with [high-end merchants] to build payments around those customer experiences.”

‘A More Dynamic Approach’

So what lessons has the pandemic taught the payments industry? If nothing else, it has shown processors how quickly their business can turn on a dime when confronting an existential emergency. It has also shown merchants that consumer purchasing habits will be forever altered once the pandemic subsides.

That means contactless payments, e-commerce, online ordering, virtual gift cards, and refreshed rewards programs will be table stakes for processors. “If nothing else, the Covid pandemic has shown processors they need a more dynamic approach to payments,” says Adyen’s Dammeir.

Chalk it up to the pandemic giving a whole meaning to the phrase “dynamic industry.”