Finding the 'pot of gold' in small-merchant payment processing
As American Express and Citigroup clashed over which issuer would get the coveted Costco Warehouse credit card business, one area remained undisputed and out of their hands: Payment processing for Costco's small business clients.
That role is held firmly by Elavon, a unit of U.S. Bank, which will mark its 20th year in April as the provider for small businesses that seek payment processing as part of their Costco memberships. First Data has a similar role with Sam's Club, providing the payment processing for more than a decade for members of the Walmart-owned warehouse retailer.
The merchant warehouses "are not in the payment processing business, but they know it is a necessary evil," said merchant acquirer consultant and industry researcher Paul Martaus. "Costco is incredibly loyal to Elavon because they know the payment processing service they provide works, and if it isn't broke, don't fix it."
Haggling over a couple of basis points on processing services makes no sense when you are more interested in the customer service being provided, Martaus said. "I'm fairly certain it is a pot of gold for Elavon, and all they have to do is perform."
Elavon has service centers at Costco stores and helps set up merchants for card-present or card-not-present payment card acceptance. It offers the Poynt mobile POS system or the Talech with Elo terminal common in restaurant settings.
"When a business has a membership with Costco for supplies, water and equipment for their offices, one of the most popular services is buying discounted credit card processing through Costco," said Ian Drysdale, executive vice president of business development for Elavon. "That's what we provide."
First Data has been doing much of the same type of work with Sam's Club members, pushing EMV acceptance and mobile POS terminals from is Clover family of products.
"Sam's Club is an important partner, as we are both laser focused on meeting the needs of small businesses," said Debbie Guerra, senior vice president and head of SMB Direct at First Data.
Working with a retailer warehouse with the reach of Sam's Club requires First Data to be ahead of the technology curve to help merchants understand the quickly evolving payments industry. But it's not an overwhelming task, Guerra said.
"The U.S. small business opportunity is large and our direct sales force and ISOs all have a degree of specialization, so we don't view this as adding pressure," Guerra added. "From a technology standpoint, the pressure to be ahead of the curve is really being generated by market demands."
As consumers demand more flexibility in how they pay, First Data says its Clover terminal helps merchant clients meet that demand. "We like to say Clover helps 'future proof' a business because in addition to accepting mag-stripe, it can also accept EMV and NFC [Near Field Communication] transactions," she said.
The contrast of conflict and stability in Costco's world illustrates how many "moving parts there are in card acceptance and the processor, acquiring side of these businesses," said Brian Riley, director of card services for Mercator Advisory Group.
Elavon's role with Costco is one of those "happy relationship" stories in payments that are much harder to find on the card issuing side, Riley said. "Costco has a lot of negotiating power on the card side that they don't have on the merchant acquiring side. You could certainly try to bundle those services, but they choose not to because they are not a payment processor."
Through its exclusive relationship with Costco, Elavon has been able to help small merchants tackle EMV chip card acceptance. Elavon has been at the forefront of EMV conversion, saying that 80% of its merchants should be accepting chip in 2017, with the remainder seeing less urgency to migrate due to the nature of their businesses.
As much as anything, the contracts between a warehouse retailer and their payment processing providers are nearly written in stone. Neither Elavon nor First Data would disclose the terms of those contracts, and the warehouses did not disclose which companies handle their own in-store transactions, but Elavon said its member processing deal with Costco is "long term."
Elavon's Drysdale goes as far as to call his company's relationship with Costco "probably the longest-lived and most successful partnership of its kind in the industry."