Nobody would dare mistake merchants for being sophisticated. In fact much of the payments processing landscape has built their business models on the hopes that merchant don’t ever get smarter. In fairness to merchants, payments processing is intentionally nebulous so as to obscure payments margins from the paltry value they provide – here’s a primer on that ridiculousness.
Yet malicious disposition aside, payments processors have discovered something of note in the merchant psyche.
If you were to ask a merchant to pay you $100 per month for something valuable, they’d shirk at the idea. We’ve written before on the perceived ceilings of product pricing in brick and mortar, and it’s driven by irrational behavior.
But somehow merchants are okay with paying $300, $400, or even $500 more per month than they should for payments processing. That’s money right out of their bottom lines for, quite literally, nothing of value (though we’d love to hear an acquirer rationalize their margins versus a competitor).
What gives?
Over the past several decades merchants have been conditioned to accept payments shenanigans as a way of life. They know they have to accept cards since it’s such a large – and growing – percentage of total customer spend so there’s no real way around the card mafia. Add in that properly reading a processing statement requires a PhD and most merchants totally ignore processing until a new payments processor, vying for their business, shows them how much they’re being gouged.
In our view anyone who provides a solution of value should ride the payments rails and become the beneficiary of this merchant behavior. The payments processors get their money first, automatically, and are even infrequently questioned about increasing prices for no return of value, as crazy as that sounds. If you sat in the meetings we did you’d learn that when a processor turns the payments crank they make more money, not less.
Think of it this way. You’re a payments processor with 10 customers. Each customer pays you $1 per month. You feel like you’re not making enough money (for no justifiable reason since COGS keeps coming down thanks to software scalability) so you decide to increase your rates to $1.50 per month. Now instead of make $10 per month you’re making $15 per month. Well in this scenario one merchant might leave – so you’re making 9*$1.50, or $13.50. This is $3.50 more than $10 a month, so even if you have fewer customers you’re making more money.
Magic.
We’ve even heard of software companies that have partnered with payments processors automatically adding their fee to the merchant’s monthly statement without any backlash – irrespective of the merchant even using or knowing about the software!
If you’re selling something to brick and mortar it’s worth examining how to attach yourself to the payments rails, plain and simple.
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