Who exactly are the micromerchants Square Inc. and its rivals are going after?
Square and Intuit Inc. are making waves as each signs up thousands of new merchants each month to accept cards through mobile devices, bypassing traditional merchant acquirers and their banks.
But despite the numbers, many small merchants flocking to Square so far may not represent a direct threat to traditional merchant acquirers, Marc Abbey, a managing partner with First Annapolis Consulting, tells PaymentsSource.
To be sure, traditional acquirers are responding to the competition Square and its rivals are delivering, he says.
But a key question is, how will these micromerchants perform? Abbey says.
"A common mistake we all make is assuming small merchants are a monolithic group," he says. "There is much diversity among these types of merchants and their value to acquirers. Only certain segments of small merchants are really going to be profitable."
Indeed, small merchants have diverse motivations for choosing various payments, based on their type of business and transaction types (see story).
But it is "a myth" to assume that traditional acquirers are not already doing brisk business with very small retailers, or micromerchants, Abbey says. Many traditional acquirers have a robust base of small merchants that conduct business nearly year-round, and it is willing to commit to the upfront costs of card-acceptance terminals and are, therefore, profitable.
In contrast, many micromerchants drawn to Square and its rivals are operating on a much smaller scale, are eager to use existing equipment such as a handheld phone, and may only transact business briefly or for part of the year.
As such, the profitability of these types of merchants "is a big question mark," Abbey suggests.
First Annapolis recently studied the portfolios of 21 U.S. acquirers, and more than 60% of their merchants had less than $125,000 in volume from Visa Inc. and MasterCard Worldwide in their portfolios.
On average, active merchants with less than $50,000 in annual sales volume are active during at least 11 months of the year, Abbey wrote in a report released this month.
More than 20% of active merchants within the portfolios studied had annual sales volumes of less than $10,000, he wrote.
Moreover, even the smallest merchants in the portfolios studied had relatively steady volume, averaging activity during 7.9 months of each year, Abbey noted.
Extrapolating from data Square has released so far, Abbey says many of the micromerchants the firm is attracting have relatively limited charge volume.
"It seems quite likely that players like Square are not attracting merchants with these activation and transaction levels, suggesting that there are different segments within micromerchants of similar size and incidentally, suggesting there are limits to the comparability between merchants of similar size that traditional acquirers and the mobile POS players are signing," Abbey wrote.
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