Should We Blame The Merchant Channel for This Outcome?


This issue was brought to our attention by one of our regular readers. This reader represents a merchant lending company. Their concern, and rightly so, was that the cost of basic merchant hardware was being marked up so high by POS dealers and payment ISOs (independent sales organizations) that merchants were defaulting on loans in ever-increasing numbers.

In other words, a piece of hardware that should cost X is being marked up to literally 15X+ by the channel. The merchant agrees to pay 15X+ (for reasons we’ll discuss shortly) and then finds themselves insolvent. The lending company, who may have written a loan for said hardware, sees these merchants churn and their default rates skyrocket.

Here are two invoices from a sample channel provider for very, very basic pieces of hardware.

So how ridiculous is this pricing? Well, a literal 3-second search for “clover bundle” on Google Shopping brings up these results.

And doing the exact same effort for “dejavoo terminal” brings up these results.

Our math shows that the channel is marking up a clover station bundle by 1,396% and a dejavoo terminal by 3,921%. (It’s possible that second invoice is for a POS and a dejavoo terminal but $8,445 for that hardware would still be a ridiculous price unless it was a 10-register system. We don’t think that’s the case because the invoice specifies “devajoo” in the singular form and a multi-terminal system would need multiple dejavoo terminals).

Let’s first start with the merchant, who deserves most of this blame. How dumb (or lazy) do you have to be not to do a quick price check online these days? If a salesman comes to your door hocking a vacuum cleaner for $20,000, you’re not going to get on Amazon to see what the market price should be? No wonder 25% of merchants go bankrupt annually…

Further, merchants bring this upon themselves by being the worst possible customers. They’re amazingly demanding considering their high levels of unsophistication, and they take ridiculously long to sell into. This means their service providers need to make a lot of money to justify the the hassle of supporting them. What do you think is more costly to support: an adult with a stable job and healthy lifestyle, or a man-child incapable of the most banal tasks who routinely covers himself in feces at all hours of the night because he doesn’t want to grow up?

The remaining blame needs to be placed on the channel, who continues to inflate costs in a world where distribution is increasingly being disintermediated. For these two specific invoices it seems likely that the channel decided to jack up hardware prices in order to buy the merchant out of their existing processing contract (merchants don’t really read what they sign, you know). The channel then probably swapped one egregious processing contract for another, no doubt contributing to that 25% merchant churn with these predatory practices.

Merchants give the channel an opening and the channel walks in and cleans out the bank. And you still wonder why so many suppliers are selling directly and avoiding middle man representation?

We don’t reasonably expect merchants will ever change. The phasing-out of this merchant behavior will come from automation and replacement, not from merchant evolution.  Many physical stores will just become distribution centers for Amazon or virtual restaurants being run by machines. When entire groups of people can’t be bothered to educate themselves on their own livelihood there’s nothing to do but pray for a quick death.

The lenders who are unaware of these economics are complicit in the whole arrangement and will continue to see their defaults spike. Learn a little about the business you’re in. If not, you’re no better than the merchant and their channel.