Oct 8, 2007

Merchants will pay 7-9% for a full payment service which delivers sales vs. 2% interchange for payment alone

Merchants complain about paying 2% for payment processing, most of which is interchange, yet, according to a new report by Deloitte, they are willing to pay 7-9% to companies like Google that envelop the e-commerce payment transaction within the online shopping context and actually deliver sales. The study looks at online purchases only, but I am excited about how the same ideas can be applied to real-world purchases. Last week, at Welcome’s 2007 User Summit in Dubai, several banks gave presentations which showed how they were achieving impressive results by enveloping the payment transaction within an overall service that solves real problems for merchants (like identifying and attracting infrequent customers and encouraging them to spend more, which is a really big problem). These banks are already involved in real-world implementations of the ideas promoted by Deloitte in the online space.

Deloitte describes “search-to-purchase” as a new business model which views the entire shopping experience as a continuum from the first search through to the final purchase. Payment is only a small part of the overall experience (see the PaymentsNews post, “Is the Retail Payments Industry Headed for Disruption?”).

“Merchants consistently told us that their biggest commerce challenge, one for which they would gladly pay, is finding new customers. Innovations by search-to-purchase players are solving this valuable job. An unintended consequence of those innovations is an increasing merchant perception that the convenience of retail payments at point-of-sale is no longer a “hard” or valuable job—consequently, the merchants would apply pressure to pay. By contrast, merchants equate the costs associated with search-based advertising with that of a commission-based salesperson—one who works 365 days a year and brings in new customers constantly without ever calling in sick. For that level of closed sales, merchants will gladly pay more commission. Solving this difficult, valuable job is at the heart of search-to-purchase’s disruptive potential.”

“The profit margin for solving the merchants’ commerce problems and delivering new customers and/or closed sales is two to three times that of the payments transaction fee. Data shows merchants will pay between 7-9% for delivery of a sale vs. 2% for merely processing the payment.”

Deloitte provides some interesting advice to traditional payment industry players that want to avoid getting written out of the emerging e-commerce business model.

“The first step in taking advantage of the emergent ecommerce buying model is a change in perspective. The online payment experience must be viewed through a different lens. In order to obtain a larger share of the 7%-9% merchants will pay for a sale, retail payments companies need to make significant adjustments. They must think beyond the transaction itself—they should be asking themselves hard questions and looking at their own business models to see where they have a strategic advantage and how it could be leveraged in the online platform. Retail payments companies should also consider restructuring bank/merchant relationships to help subsidize advertising, further strengthening the bank-merchant relationship and preventing disintermediation.”

Deloitte couldn’t resist some crystal ball gazing. They estimate that online purchases will skyrocket from 9% of retail commerce to more than 30% within just ten years. These figures have always been way off and it is surprising to still see consultants make such bold statements. (On another note, I just read an excellent book that severely discredits MBA and Nobel-prize credentialed experts who make their living from economic forecasting. It’s called The Black Swan, by Nassim Nicholas Talib. After reading the book, you look at things differently. People that make bold economic forecasts begin to appear silly and incompetent).

At best, consultants and analysts can sometimes provide a qualitative glimpse of a potential future. Where they shine the brightest, however, is their analysis of current conditions, and that part of the Deloitte study is quite good. I almost ignored the entire report when I read the 30% forecast, but I stuck with it and am glad I did. Whether online purchases are 9% or 30% of total retail sales doesn’t matter much really, since I am interested in applying the ideas to the much larger market of real-world purchases. Whichever way you look at it, real world purchases will remain much bigger for a long time to come. Let’s fix some real world problems and make payment much more attractive for merchants, so that the 2% they pay in interchange seems like peanuts compared to advertising and promotional marketing budgets.

Actually, come to think of it, we’re just going back to the roots of the payment card industry. When credit cards were first introduced, customers were able to buy things that they might not have bought without a card. Credit card companies were essentially delivering sales to merchants. Somewhere along the line, the culture of solving problems for merchants was lost and the basic payment function became a low value (but expensive) commodity.

Here are a few prior posts on ways that payment cards can be used to help merchants attract and excite occasional customers:

How focusing on acquisition features (rather than loyalty) can lead to better protection of interchange fees

Finally, an ad about new ways to protect interchange!

Gartner: payment schemes need to offer merchants new promotional marketing capabilities at the POS to reduce pressure on interchange

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