Aite busts merchant retention myths

Aite Group LLC, an independent research and advisory firm focused on business technology and regulatory issues and their impact on the financial services industry, conducted a survey of merchants between May and August of 2008, to determine what made them stay with their ISOs or acquirers.

In its report, Merchant Retention: Five Assumptions Put to the Test, Aite measured five factors typically associated with merchant retention. Merchants were asked to rate each factor's importance in deciding whether to keep or discontinue relationships with their service providers. The factors are listed in merchants' order of importance:

• Pricing: 80 percent
• Switching is too big of a hassle: 72 percent
• Products: 57 percent
• Complexity of conversion: 51 percent
• Local bank: 50 percent

Forty merchants each were surveyed from these verticals: brick-and-mortar, restaurant, health care and e-commerce. The impact note indicated most of the e-commerce merchants surveyed were newer businesses compared to the other three verticals; 65 percent of respondents in the e-commerce sector had never switched processors.

The report also noted that 40 percent of restaurant operators and health care professionals have never switched processors since they started accepting card payments compared to 45 percent among the brick-and-mortar merchants.

Assumptions questioned

The assumptions Adil Moussa, Aite Analyst and author of the report, explored include:

• Merchants using value-added products stick with their processors.
• Overall satisfaction brings higher retention.
• Cross-selling other financial services increases retention.
• Certain acquisition channels influence merchant retention.
• Merchants' satisfaction with specific processor factors enhances retention.

Surprisingly, the first assumption is false, according to the report. The Green Sheet asked Ken Musante, Vice President and Chief Sales Officer of Moneris Solutions Inc. and frequent contributor to The Green Sheet, for his reaction to this news.

"If every month [the merchants] are getting a large bill for payment processing, they best be getting a significant benefit," Musante said. "Just cross-selling isn't sufficient. Sales professionals need to cross-sell services that make switching providers more of a 'hassle' – Aite's word, not mine. PIN debit, for example, requires merchants to swap PIN pads. ... That is difficult."

Insights emerge

Moussa was most surprised to learn the majority of attrition happens in the first three years after a merchant account is established. He said this is significant because boarding a merchant costs around $1,000, and acquirers only make $500 to $600 per year on the average account. So, acquirers don't even make money on a merchant account until the third year in many cases, he added.

Moussa takes the most frequently cited reason for merchant retention, pricing, with a grain of salt. He said that after careful analysis, it seemed pricing may have only been the spark that caused merchants to leave or stay. He believes overall satisfaction is what makes merchants stay with their processors.

"ISOs and acquirers need to work on enhancing their image in order to increase merchants' overall satisfaction," he said. "This image makeover should start in the customer service area."

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