Guest Analysis: Make Micro-Merchants Profitable With Straight-Through Processing

Peter Fitzpatrick
January 7, 2014 – Micro-merchants are estimated to grow to 20% of the total acquiring market, but acquirers are having trouble serving them profitably. This is because micro-merchants process relatively small amounts compared to their customer acquisition and boarding costs. But there is an answer: straight-through processing offers acquirers a profitable way to serve micro-merchants.

In aggregate micro-merchants represent huge potential processing volume – there are an estimated 21 million merchants in the USA with only one employee – but individually each merchant is tiny. Micro-merchants are often defined as having less than $50,000.00 in revenue per year, which delivers less than $50.00 in processing revenue at average rates. This is a problem for most acquirers, which spend hundreds, or sometimes thousands, of dollars boarding each new merchant.

Current underwriting and boarding practices are too expensive because they involve, manual identity verification, manual data entry and manual credit adjudication. These processes are in place to maintain acceptable portfolio risk levels, but each micro-merchant does not represent enough risk to spend time conducting these activities manually. While they are applying on behalf of a business, micro-merchant applications are really more like an individual credit card application than an application for a corporate merchant account. Underwriters can think of these decisions as being similar to extending personal credit to an individual.

Because micro-merchants are generally simple businesses, credit decisions are generally simple as well. This makes automatic risk and credit decisions acceptable. By connecting a digital merchant application to automated ID verification services like IDology or NetVerifty and credit services like Equifax or Experian, acquirers can build a micro-merchant portfolio much less expensively and much faster than they can today. For example, Mercury Payments reduced their cost to board a new merchant to between $5 and $15 using straight-through processing. Straight-through processing empowers acquirers to accept, adjudicate, and approve new merchant applications 24 hours a day, 7 days a week.

Straight-through processing reduces the cost of boarding a new customer by hundreds or sometimes thousands, of dollars and up to 80% of new accounts can be processed without the need for any employee involvement. Find out more on Recombo’s blog – http://pages.recombo.com/201401-MicroMerchant_StraightForwardProcessing.html

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Peter is an Account Executive at Recombo on the Electronic Transactions and Banking Team. He is focused on helping our acquiring and ISO customers increase sales by making merchant applications easier to complete and developing efficient boarding channels to reach the micro-merchant market.

The views expressed in the posts and comments of this blog do not necessarily reflect those of ETA.