By Patti Murphy
ProScribes Inc.
I recall the first time I saw Jack Dorsey, co-founder of Block (nee Square). He was a 30-something upstart, his rolled up sleeves revealing an armful of ink, presenting at a regional acquirers association meeting his vision for providing payment processing services to micro merchants.
Few in attendance seemed all that threatened by Square. I wondered why, until a few years later reports started flying about Square's balance sheet. At one point, the company was losing tens of millions of dollars a quarter. The naysayers seemed to have it right: it was not economically feasible to support card acceptance at these small businesses.
But Dorsey was onto something: even really small businesses can be big business. Sure, Square isn't just a small business payments platform anymore. Neither is it a money loser. In the 10 years it's been in business, Square has built a technology stack that supports all types of financial services. But micro merchants formed the foundation upon which the business was built.
Micro merchant can mean different things to different people. Generally, in the ISO/agent community, it means a merchant account generating less than $5,000 in monthly purchase volume. The residuals from these accounts barely cover costs, I've been told. But here's the thing: micro merchants don't always stay that small. Amazon and Ben & Jerry's are two examples of just how big micro merchants can become.
The U.S. Census Bureau reported nearly 5.4 million new businesses were created in 2021. Some of the largest numbers were recorded in accommodation and food services, retail trade and healthcare and social assistance.
Presumably, most of these were micro businesses. But let's say just 1 million of these were micro merchants that want to accept credit and debit cards, and that each of these received $2,000 a month in card payments. That's $2 billion a month in card payments in search of processors/acquirers.
True, a lot of new businesses fail. Data from the Bureau of Labor Statistics suggests 20 percent fail within the first two years. But then, most ISOs/agents have merchant churn rates of 20 percent or more a year. At least when a micro merchant goes out of business the hole in an agent's portfolio is small.
The challenge for ISOs and agents is to find a way to service micro merchant accounts without going negative. Dustin Magaziner, managing partner at Paybright, told me recently that he's meeting the challenge.
Paybright took a page from Square's playbook and developed what it calls a "mini merchant solution." It uses a pay-as-you-go model and provides these merchants with free terminals/dongles. Agents earn money on transactions but aren't left holding the bag on Schedule A costs.
"We absorb all fixed costs—monthly, annual, PCI, minimums—on our end," Magaziner said. "We find that although we may be negative on a few accounts, the program as a whole is overwhelmingly positive."
Where Paybright differs from Square is that it offers these merchants a local solution with a local person, the signing agent, to turn to if and when there is a problem. Magaziner was quick to note that he seldom gets complaints from micro merchants. Most of the headaches associated with these small accounts involve complaints about billing, like $10 monthly PCI compliance fees, processing minimums, etc., he noted. "You can eliminate a lot of the headaches by eliminating these nuisance fees and the disgruntled calls they generate," Magaziner said.
Merchant services is about relationship building. Micro merchants, if successful, aren't going to remain that small for long. As one of these merchants grows, so does its processing volume. When the volume gets large enough, the merchant can be moved to a different pricing model, and value-added services like merchant cash advances can get added to the mix.
Another upside to forging relationships with micro merchants is that they can provide an entree to other, more profitable relationships. Magaziner related during a recent Merchant Sales Podcast how he landed one of his first big accounts after a referral from a micro merchant that was generating just $10 a month in residuals. 
Patti Murphy is senior editor at The Green Sheet and self-described payments maven of the fourth estate. Follow her on Twitter @GS_PayMaven.
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