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Merchant attrition, dwindling profit margins and mandates to secure merchant compliance with industry data-security standards top the list of concerns for acquirers and ISOs in 2010, suggest recent survey results from Aite Group LLC.
Of the 45 ISOs and acquirers that responded, 24% cited merchant attrition as the top challenge for next year.
Attrition is significant in many ways, regardless of whether merchants find a cheaper payment company or cease operating, report author Adil Moussa, an analyst with the Boston-based firm, tells ISO&Agent Weekly.
"Whoever underwrites the risk is at risk of holding the bag, and in the case of unsettled transactions or services not rendered, the merchant acquirer has to pay back the cardholders their money"should a merchant go out of business, Moussa says. "That's very worrisome for a lot of ISOs and acquirers, especially those that do their own underwriting." Underwriting is an evaluation of a merchant's financial performance that can determine risk.
Twenty-two percent of respondents said margin compression, characterized as higher costs eating into profits, would be the second-biggest challenge in 2010.
Some 78% of respondents believed that price slashing by ISOs adversely affect the industry.
"Newcomers that don't have much to offer to merchants in terms of products can only compete on the basis of pricing, forcing the industry to create a margin compression that all ISOs and acquirers seem to be complaining about," Moussa says. This can result in a heavily taxed sales force, he says. "They have to sell twice as much to net the same as they had before," he says.
Data Security
In addition, 17% of respondents said mandates to get merchants compliant with Payment Card Industry data-security standards are a top concern for 2010.
Visa Inc. has set July 1 as the deadline for devices using PIN pads to adhere to the triple data encryption standard.
Data security, competition for merchants and pressure on profit margins top the list of challenges for Kevin Lambrix, chief operating officer at Evo Merchant Services Inc., a Melville, N.Y.-based ISO. General economic conditions, such as declines in same-store sales volumes, merchant closures and the decreased availability of capital, also are affecting the industry, says Lambrix.
Without easy access to capital, businesses find it more difficult to borrow money or persuade investors to spend money to help them grow, Lambrix says.
To counter the challenges, Evo is revisiting its product mix to ensure it has services beyond core credit and debit card processing, such as electronic benefits transfer and check services, he says.
Indeed, 69% of ISOs and acquirers responding to the Aite survey said they were likely to increase spending on their sales forces. This is because ISOs are fundamentally sales organizations, says Moussa.
If an ISO sold no new accounts, within two to three years no merchants would remain in the ISO's portfolio because of attrition. They have to close sales constantly, Moussa says.
Updating Strategies
Evo also is examining its sales partner strategy in light of the economy, Lambrix says. Sales agents are paying more attention to the underwriting of their merchant applications, he says.
Agents want to ensure the merchants they sign will meet the underwriting requirements and not pose a risk to the potential revenue stream for the agent or ISO, Lambrix says. Many merchants have payment-processing histories that ISOs can evaluate, which can make it easier to weed out riskier merchants.
Evo also is updating its sales-reporting tools so agents have better information about their merchants and their commissions, Lambrix says.
Despite all the challenges, Lambrix is optimistic the company can overcome difficulties and make them into opportunities.
"We have the capital to deploy. We're building better tools for our sales partners. Despite all the challenges, we're in a pretty good position to grow," he says.
