Pressure on New Merchant Pricing in the U.S. Acquiring Industry
The price point that an acquirer must present to sign a new merchant is falling and falling dramatically in the very segments most acquirers would consider their sweet spots. It is not a news flash that the acquiring business is becoming more competitively intense, nor is it surprising this competition is visible in key metrics. Nevertheless, the degree of compression apparent in recent First Annapolis research is remarkable. In the recent past, the net spread (e.g., gross revenue less interchange and payment network fees divided by sales volume) for newly signed merchants was 60% – 70% of the net spread of merchants already on acquirers’ books, a ratio that has deteriorated badly in the last two years. Vintaging – the proportion of merchants that are new vs. old – is one of the key metrics driving top line performance, and acquirers whose portfolios are disproportionately represented by new merchants, either due to rapid growth or attrition of the base, will have much worse revenue performance, other things equal.
Figure 1: New Merchant Net Spread as a % of Existing Merchant Net Spread
2011 – 2014
The other side of the story, of course, has always been that acquirers have been able to mitigate this problem through portfolio management tactics that have involved selling additional services to the base and re-pricing segments of the base. Industry events like the Durbin Amendment and 1099 requirements have helped maintain overall margins, as well. However, we consider this equation a little tenuous – the downward migration of interchange plus pricing and the level of experimentation with bundled discount rates and flat rate/flat fee pricing suggests to us the market may not be quite so permissive of re-pricing strategies looking forward.
The primary ray of light for acquirers, however, is the level of inefficiency in the market. The amount of variation in pricing for newly signed merchants is enormous, suggesting that acquirers’ go to market strategies – their channels, offerings, and sales management – can make a world of difference. Go to market strategies will need to make a difference, in fact, given the direction of the overall environment.
For more information, please contact Marc Abbey, Managing Partner, specializing in Merchant Acquiring, firstname.lastname@example.org.
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