What's next for payment aggregators?
The ranks of POS payment aggregators – payment service providers (PSPs) that act as the merchant or record – are growing. Square, Intuit, and PayPal are the most visible players, and there are new market entrants on a regular basis. They are lured by the promise of a large untapped market and low cost of customer acquisition. Early entrants targeted micro-merchants, occasional sellers, and highly mobile but low volume businesses like home service and repairs. Most of this new breed of PSPs started with mobile acceptance in mind, but have been actively transitioning to tablets and fixed POS across a range of hardware.
As the market matures aggregation appears to be on a collision course with traditional merchant acquiring. PSP’s and aggregators are becoming the “gateway drug” for new card acceptors. You can almost hear the pitch: “Come on… try taking cards… it will make your business grow…”
Aggregators offer an attractive option for new merchants. Accounts are easy to set up, with minimal information required for application. The services offer free hardware (a stripe reading dongle) and good software (an app) including a fully functional POS platform and feature set. Pricing is easy to understand. At low volumes, the costs are acceptable. If an aggregation client is a true micro-merchant or is content to remain small, they may never have any reason to look beyond these services for their payment needs.
For growing merchants, however, the limitations of aggregation become clear. A typical rate of 2.75 percent plus a per transaction fee is well above the prices charged for most merchant accounts. That difference is especially stark in the wake of regulated debit interchange (unless the merchant has an average ticket value under $9.00, when the flat rate is actually a better deal). ISOs and acquirers are catching on. Anecdotally, I have heard more than one ISO say that they rarely have trouble converting an aggregation user to a more traditional solution.
There is one other critical and very real limitation. The networks have a $100,000 annual limit for any single merchants using a PSP. Given the standard mix of cards, any merchant doing over $175,000 in card volume is going to have to consider their options. That’s less than $500 a day.
Keeping a client requires PSPs to have a migration path for those growing merchants. For PSPs with a migration path, the volume limitation offers an opportunity to retain customers steer them to deeper, longer term relationships. Those that cannot offer a smart transition plan are doomed to lose their fastest growing and most profitable customers.
Aggregation offers ISOs and acquirers a unique opportunity. They can quickly board and begin servicing new customers, giving the merchant a kind of “provisional” status. This allows the processor time to monitor transactions, evaluate risk, and perform real due diligence without making the merchant wait. The acquirer can then offer to transition selected merchants to a direct account at an appropriate time, using the collected data to optimize service offers and pricing. A processor could cynically transition the merchant without changing the pricing, reaping a windfall (as happened with many processors in the wake of Durbin), risking the loss of the relationship in exchange for short term gains.
Without a migration path, customer acquisition is limited largely to new or very small businesses, and merchants will be forced to leave in the event of growth. With one, the gateway drug of aggregation can turn into a long term relationship. Unlike controlled substances, however, card acceptance can be good for you in the long run.
Aaron Press Aaron Press is Founder and Managing Director of Point02 Advisors. Prior to that he was Lead Strategist, Payment Solutions, for digital security provider Gemalto, and Director of Market Strategy for Chase Paymentech