Since 2006, the percentage of merchants switching acquirers has surged, especially mid-size retailers, according to a report from First Annapolis Consulting, a payments consultancy based in Linthicum, Md.
Smaller merchants switch merchant acquirers more often than large-volume merchants do, and, overall, that tendency continues to hold, the report notes.
What has changed since 2006, the last time First Annapolis studied merchant-attrition patterns, is that more large-volume merchants are shopping around. And that has the potential to alter dramatically how acquirers and ISOs make money.
The merchant-attrition rate among merchants with $5 million to $10 million in annual card-processing volume increased from approximately 6% in 2006 to 12% in 2008, the report states. Researchers used data from 2007 through March 2008 to make the calculations.
Churn In The MiddleBut the largest attrition-rate increase occurred among mid-volume merchants. For example, about 20% of merchants with $500,000 to $1 million in volume switched acquirers in 2008 versus about 13% that did in 2006. Other mid-size merchant categories experienced similar attrition-rate increases, First Annapolis says.
More competition among merchant acquirers for accounts, fewer overall accounts because of business failures, or a combination of those factors may be driving the shift, First Annapolis says.
"This pattern will be noteworthy if it persists because most acquirers' sweet spot—where they generate the most economic value—[falls] within these size ranges," the report states.
"It's hard to be real sure what the impact will be," Marc Abbey, First Annapolis managing partner, tells ISO&Agent Weekly. "If this is a pattern, it will be a negative for the industry because [mid-size merchants] are the most profitable merchants in the marketplace today."
The analysis shows that more merchant accounts are ready for a change than most industry observers would guess, Abbey says. "These pieces of conventional wisdom are not always accurate."
Evidence of changes is surfacing, says Jared Isaacman, CEO of United Bank Card Inc., a Hampton, N.J.-based ISO.
Isaacman says his company's mid-size merchants–with more than $20,000 and less than $250,000 in processing volume–are relatively stable. He is not seeing a lot of churn, a phrase used to describe account turnover, among those merchants.
"Typically, those are our strongest retention accounts," Isaacman says.
What he has noticed is a change in average-transaction amount. They are shrinking, and consumers are making fewer discretionary purchases, Isaacman says. They are buying household goods in lieu of pool supplies, he says.
The other trend Isaacman has observed is that start-up businesses that fail used to go under after 13 to 14 months as recently as 2004. Now, the average is closer to six months, he says.
To counter those short-lived startups and deal with shifting merchant-attrition patterns, Isaacman says ISOs should place even more emphasis on retaining merchants.
Money and time are more valuable, he says. "Retention is everything."
One way to retain merchants is through offering valuable point-of-sale equipment. United Bank Card recently introduced an integrated POS system.
The system, designed by United Bank Card, sells for about $2,000 to agents, who often mark it up by 100%.
First Annapolis' Abbey suggests acquirers examine the supply side of the merchant-acquirer relationship.
"My hypothesis is this isn't something new here in merchant behavior," Abbey says. Rather, merchants are responding to changes in the supply of processing services.
Fundamental is for the acquirer to study its own situation, he says.
Abbey's advice for acquirers and ISOs amid fluxing attrition patterns is simple: "There is no replacement for intimacy with one's own business."