CreditCards@Work: The Downfalls of Chasing Lower Rates
Most every small to medium business taking credit cards is susceptible to changing payment processors at a moment's notice. Who can blame them? Someone calls, offering a lower rate on processing fees. Their CPA tells them that they'll handle that. I used the "Ecosystem" graphic on purpose; it is a confusing market and only begins to tell the tale...
Merchants often change processors or delegate the decision to their accountants, and trust this will improve margins long-term.
Look, no one likes having to pay processing fees. Processors are seen as brokers of a commodity. With 4,000-odd middle-men out there before you ever get to the "ecosystem" in my banner to this article, commodity would seem to hold true. The statements are confusing. Many receive two or more statements from their processor -- and if they own more than one location, imagine the mess. The terms are complex and there is a lot of fine print.
But if 50, 60, 70, or more percent of your revenues ride on payment processing, choosing your payment processor is a major decision, not one to be taken lightly, delegated or made just to get "lower fees."
Practically speaking, here are some things to think about, if you're a company taking credit cards -- and perhaps a bit jaded about credit card processing.
- Security & Privacy: "Yawn. PCI compliance and security are commodities." Actually, the technology behind protection is not a commodity. We all know the horror stories of breaches to major institutions and dot-com retailers. Trusting a middleman, who promises a lower rate today, does not motivate him to put your business on best-in-class technology. They, too, will run to the lowest cost provider with your processing application and sign you up. And what about the merchant's own security? You're going to hand over your taxpayer ID, bank, routing, and other business-critical information to the next person who quotes 2.89% instead of 3.16%?
- Switching Costs: Many merchants lease equipment. Unfortunately, some have chosen proprietary devices and systems, putting them on multi-year agreements and no way to switch processors due to the out-clauses. Before changing providers, think of the importance of this decision. It is about rates, yes. But also, it is about systems costs, security and the dedication of the provider to R&D, the terms of the agreement, and so on. If you're a restaurant, this is likely the second most important partner to your business, aside from the providers of the quality food you buy, expecting freshness, consistency and timeliness.
- Trends in Mobile Payment: Once you've better qualified the two or three processors you'll consider, think about trends in your own business. Will the way your customers pay evolve in the next three years? Mobile wallets are maturing and in-store mobile payments are beginning to rise. Analysts report, in fact, that it is the merchants' own technology that has delayed in-store mobile payments. Consumers want it and the first merchants to take their payments this way can use this to command their trade zones.
Caution: Do you have leased or tech-poor equipment that will make you say "No" to 56% of your customers in the next 3-5 years?
While neither merchants nor consumers have yet fully embraced mobile payments, mobile wallets offer benefits to all stakeholders: enhanced security features, faster checkout, and loyalty integration. Each of these is a plus for customers and merchants alike, and will eventually convince both parties to embrace the technology.
US in-store mobile payment volume has hit $75 billion. Between 2015-2020, volume will rise at a compounded rate of 80%, bringing mobile payments volume to $503 billion by 2020.
What does all this mean to Mr. & Mrs. eCommerce or Corner Store Retailer?
Consumer demand for in-store mobile payment is rising 40% over the next five years. That means 150 million consumers will pay this way by the end of 2020. This represents 56% of the consumer population.
Takeaway: You do not want to be in a payment processing contract, or have aging, proprietary, tech-poor equipment sitting on your counter, that has you saying "No" to 50% of your customers.