The First Impression

The key to reducing merchant attrition is as simple, and as complicated, as making a good first impression. The right tech helps, too.

One tactic that may help keep merchant attrition rates in check—especially when large and small businesses have even more choices for their credit and debit card processing than they did some years ago—may be to start at the beginning.

Merchant attrition happens when a merchant switches its payment-processing services to another provider. It’s long been a part of the acquiring industry. Every organization strives to keep that rate as low as possible.

But competition, as ever, is fierce. And it’s now more prevalent, especially as more small businesses adopt sophisticated processing systems that extend beyond the venerable countertop point-of-sale terminal.

Here’s evidence of that influence. Of the merchants surveyed in the J.D. Power 2020-2022 U.S. Merchant Services Satisfaction Study, 34% cited a desire for better POS and payment-processing equipment and software as the reason they switched. That’s up from 31% in 2021 and from 28% in 2020.

Accompanying this embrace of more sophisticated POS equipment and software is the growing loyalty merchants have developed for systems that cater specifically to their needs. It’s a common enough phenomenon within the independent software industry, and now it’s spreading to small and medium-size businesses and other merchants.

In fact, the services beyond payments have become so valuable that merchants may be less likely to switch if a competitor doesn’t offer a better suite of products. That’s why when processors approach merchants with new hardware and software services, the key to keeping those merchants in the fold is to make a good first impression.

“It comes down to making the first impression count,” says Jared Drieling, senior director of market intelligence and insights at Omaha, Neb.-based The Strawhecker Group. “If they have this first-impression experience, they’re likely to live longer with a processor.”

Don’t Forget Tech

For now, at least, attrition rates have calmed somewhat after spiking during the Covid pandemic. A Strawhecker report almost a year ago found that attrition collectively reached 26.7% in the second quarter of 2020, but calmed to 20.4% in the same quarter a year later, below rates seen in the same quarters of 2018 and 2019. The firm’s latest report showed a rate of 21.1%

Acknowledging there are scores of other factors when a merchant considers switching payment providers, Drieling says the onboarding experience, from sales to underwriting to enrollment, appears to be a key driver in retention. “What we’ve learned from a sound merchant experience is the best way to [retain merchants is] to know their needs and match their needs with your products,” he says.

The quality of the merchant-onboarding process is the top reason merchants switch, Drieling says. The quality of available products and services, transparent pricing and communication, and the provider’s willingness to develop new products and services round out the four primary reasons merchants take their business elsewhere, he says.

The availability of technology—a factor that gained more importance for many merchants during the pandemic—also cannot be understated.

“We know there’s a lot going on with better technology,” says Paul McAdam, J.D. Power’s senior director of banking and payments intelligence. “The technology that merchants are looking for these days is not only the basics,” he says. “They’re looking for additional services like managing inventory, managing orders, and sales-volume tracking.”

How does that show up in acquiring portfolios? Those acquirers with large concentrations of e-commerce merchants may know most intimately. When e-commerce merchants with $2.5 million or more in annual sales were asked by J.D. Power about their switching intent, 53% said they definitely or probably will switch in the next 12 months. These merchants comprised 37% of all respondents, of which there were 4,406.

“The high-level data shows you that e-commerce merchants are more interested in switching,” McAdam says. Digging deeper, of e-commerce merchants using shopping-cart software, 59% said they were definitely or probably going to switch in the next 12 months, and 57% of those using a virtual terminal said the same.

“More of these merchants are open to looking elsewhere,” says McAdam. This represents a switch from past experience. Four to five years ago, it was the point-of-sale merchants who had lower satisfaction and much higher rates of intended switching, he adds.

Constant Monitoring

Many times there are factors out of a portfolio manager’s control that can affect the attrition rate. The overall economic environments and the influx of competitors are a couple of major factors, says Vijay Sondhi, chief executive of NMI, a Schaumburg, Ill.-based commerce company and payment-gateway provider.

“Look at right now,” Sondhi says. “What is the macro environment? Inflation is up.” Merchant processors may not control factors like inflation, but that’s the point, he says, adding, “It’s very important to tease out what levers you have under your control versus the levers you don’t have under your control.”

Another way to measure attrition is to pay attention to the retention rate, Sondhi says. Retention can often get lost in all the focus on attrition, even though attrition and retention are, as Sondhi says, two sides of the same coin. To keep both numbers at the desired levels, he adds, requires constant monitoring of the merchant base.

“You have to look at whether you’re losing merchants because of a market-share gain by competitors, and who it is,” Sondhi says, suggesting questions such as: Is the rival another platform? Has there been a downturn in that merchant sector?

“In our case, we saw with restaurants that they had to immediately move to buy online, pick up at curb or food-delivery options,” Sondhi says, recalling a challenging period during the pandemic. “We went back and said we should offer restaurant merchants the ability to take QR codes [and] take the payment upfront or with a reader that you may not have had.” The idea, he says, was to adapt and make it easier for NMI’s merchants to adapt.

In another example, as consumers longed for social activity, many turned to pets, sparking a boomlet among veterinary-services providers. But access to doctor and dental offices for humans was severely restricted, effectively halting most payments at those offices. Then, telemedicine services became more available, which helped ease the impact.

Sondhi says measuring a portfolio’s attrition and retention performance is best done against baselines. “There’s no magic number,” he says, when asked if there is a sustainable attrition rate. “Disruption in the world increases every year with digital offerings,” he says. “It depends on the industry and the economic environment.”

But paying attention to these fluctuations is essential. “Any uptick in attrition should signal action,” says Ralph Dangelmaier, chief executive of Waltham, Mass.-based BlueSnap Inc., a payments and commerce platform. “There is vast competition in the current payments landscape, ranging from traditional acquirers to fintech disruptors, so this represents how merchant attrition can evolve quickly.”

In a similar approach, Dangelmaier says attrition can be countered by working with merchants at the beginning of the relationship to better understand both their short-term needs and long-term strategies. “A company that is able to provide solutions and technologies than can help a merchant set themselves apart from the competition will ultimately succeed,” he says.

Onboarding Is Crucial

That brings merchant-services providers back to the importance of the onboarding experience and its role in curbing attrition. Referring again to the J.D. Power study, of those merchants who were completely satisfied with their onboarding experience, 64% said they definitely or probably would not switch payment providers in the next 12 months. That contrasts with 38% who were not at all or only partially pleased with their onboarding experience.

NMI’s Sondhi is paying close attention to this. NMI’s IRIS CRM business announced in August a series of enhancements meant to consolidate its onboarding workflows and reduce the time it takes to process merchants. Though more work is needed, Sondhi says the goal is to make the underwriting process as seamless as possible.

A quick onboarding experience extends to device set up, too, Sondhi says. Cloud processing has made it easier for merchants to self-install their POS systems with just a connection to their WiFi networks. That can eliminate the old-school requirement of the merchant having to host a POS server on site.

Understanding that merchants lack time and patience, entities like Square, Shopify, and Stripe have expedited onboarding tools, especially for the underwriting component. Many acquirers don’t have access to the tools these tech-savvy payment providers use.

“For many acquirers, [onboarding] can be a multiday or multiweek process,” Strawhecker’s Drieling says of the underwriting process. “That wouldn’t be an issue if these merchants had the patience and time. But they do not. They expect a seamless, frictionless process. Client onboarding has become a differentiator.”