ePay2014_Merchant Retention Management Report_marketingsample

Annual Independent Report

January 2014

By Sherry Seetram

Merchant Acquiring: Leading Practices In Retention Management

www.epayconsulting.com

Sample Copy

http://www.epayconsulting.com/

P. 2Merchant Acquiring: Leading Practices In Retention Managementwww.epayconsulting.com

Overview

The first merchant acquiring retention management study, conducted in 2013, surveyed a cross-section of merchant service providers (acquirers and ISOs) that collectively transacted $550 billion in bankcard sales1 for more than 1 million merchants. The study revealed important trends and challenges that impact the merchant acquiring industry.

Key industry challenges specifically impacting retention management organizations:

• Increased growth in merchant attrition• Improvement in value proposition is needed to maintain relevance and sustain margins• Gaps in technology and loose operational processes contribute to higher costs and poor service levels

Key findings gleaned from the study indicated an increasing trend in merchant attrition across all portfolio sizes with attrition rates ranging from 20 to 25%. Respondents that utilized proactive tactics to detect and manage merchant retention fared better than those that utilized reactive tactics. There is a critical need to address key operational pain points that were identified; however, the study show that more companies invest in new account acquisitions compared to investments in retention management.

Overall, the merchant business model is experiencing competitive pressure that is driving margins in the wrong direction. Merchant service providers need to transform into service-oriented providers and offer their merchants an arsenal of compelling value propositions. The need is greater now than ever before for merchant service providers to invest in technologies and operational improvements that will make it possible for them to offer customers personalized services that will increase customers’ perceived value and, ultimately, customer loyalty.

About the 2013 study:This study was developed by Sherry Seetram in cooperation with The Strawhecker Group. There were 18 respondents, with a mix of Independent Sales Organizations (ISOs) and Acquirers. The survey was administered via email and teleconferences during the third quarter of 2013. Responses were collated, analyzed, and anonymized to produce the summarized results included herein.

Notes:• For the purposes of this report, an ISO is defined as a non-bank acquirer whose primary focus is selling merchant services that utilize third-parties for most payments functionality.

An Acquirer is defined as a merchant acquirer that provides most acquiring functions in-house, including processing.• Percentages of survey results were calculated based on actual responses received from respondents, unanswered questions were not calculated in the results.1Bank Card sales is defined as Visa, MasterCard and Discover credit and signature debit card volume.


ContentsSurvey Respondents 5

Summary of Key Findings 6

Section I: Understanding The Attrition Problem 7

Attrition Trends 8

Common Measures Of Attrition 9

Attrition Rates and Reasons 10

Section II: Responding To Attrition 11

Retention Management Trend 12

Retention Management vs Acquisition Investments 13

Retention Management Approach 14

Retention Triggers 15

Key Success Measures 16

Retention Organization Structure 17

Major Pain Points In Retention Operations 18

Section III: Conclusions 19

Concluding Thoughts 20

Market Outlook 21

Appendix 22-25


Survey RespondentsRespondents fell in two main categories: Independent Sales Organizations (ISO) and Acquirers.

1Bank Card volume is defined as Visa, MasterCard and Discover credit and signature debit card volume

• ~13% U.S. card acceptance market

• $550 Billion in bankcard1 Volume

• ~87K active merchants average portfolio size

Under 10 Years

10 - 15 Years

Over 15 Years

81%

19%29%

24%

47%

Respondents Experience

Payments Industry ExperienceRetention Management Experience

Acquirer (7, 0.39)

ISO (11, 0.61)

Respondents

Source: ePay Consulting Services


Under $1 $1 - $10 $10 - $50 $50 - $250

28% 28% 28%

16%

Respondents 2012 Bank Card Volume

($ in Billion)Source: ePay Consulting Services


The merchant acquiring industry is under pressure to become more than a commoditized service if it is to remain a sustainable and viable business model.

• 5 in 10 respondents indicated that merchant attrition was trending up; this signals significant concerns about customer retention and the ability to preserve the organic business.

• The #1 reason merchants switch providers continues to be price related. Merchants are getting smarter about pricing and questioning their processing costs.

• 6 in 10 respondents indicted that their retention management practices had changed over the past 3 years. However, the culture continues to focus on price compression as the #1 incentive to offer merchants.

• In response to growing attrition concerns, organizations are concentrating their efforts on improving retention; there is consensus that it could take as many as 3 new accounts to replace the value of a lost merchant.

• 50% of respondents indicated that their most common approach was reactive retention; this resulted in missed opportunities to deploy proactive engagements with merchants.

• Operational improvement was the most common unmet need facing the participants of this study; Data and Technology were close behind. 9 out of 10 respondents indicated that many of these gaps would be addressed in 2014.

Summary of Key Findings

Understanding The Attrition Problem

Section I


50% of respondents revealed merchant attrition is trending upwards, signaling concerns with customer retention.

Understanding the Attrition Problem

Attrition Trends

Q: How would you describe your organization's annual attrition rates over the past 3 years?

88% of all respondents indicated that retention management would be a top 5 strategic objective for 2014.

Unknown

Unchanged

Decreasing

Increasing

6%

11%

33%

50%


Despite the perception, by some, that attrition is decreasing, 100% of the respondents in this group plan to focus on improving retention management in 2014.


Respondents used a variety of methods to measure attrition activity; the most commonly cited metric was the number of cancelled merchants.

Understanding the Attrition Problem

Common Measures of Attrition

Q: Please describe the method you use to measure attrition

For the respondents that measure account inactivity, they look at 2 to 3 months out before recording the account as attrited. However, many respondents indicated that they do not track silent attrition; therefore, attrition rates may be understated.

Attrited and declined volume and lost revenue were identified as alternate performance indicators used to measure attrition. This varied across businesses based on the purpose of the measure (e.g., financial planning and analysis, operations performance)Inactive

Other

YoY Activity

MoM Activity

Cancellation

2%

6%

18%

18%

27%

Method


Responding To Attrition

Section II


6 in 10 respondents indicated that the incentives offered to merchants had changed over the past 3 years. Price reduction continues to be the #1 incentive.


Retention Management Trends

Q: How different are the retention offers presented to merchants today as compared to 3 years ago?

When asked to identify the top incentives used to retain a merchant, respondents cited:

#1 Price Compression

#2 Client Service

#3 Value Added Offering

Very D iff erent

Somewha t D iff er ent

Not D iff er ent

17%

11%

11%

33%

6%

22%

ISOAcquirer


While respondents recognized that any changes would take time, they were convinced that there was an obvious opportunity to reduce dependencies on compressing price and to shift the focus toward other incentives such as value-added services.


In response to growing attrition concerns, more than half of the respondents acknowledged that they had increased spending in this area over the past 3 years; yet, a greater number say they had increased investments towards gaining new accounts.


Retention Management vs Acquisition Investments

Q: Over the past 3 years, how has your organization's investment spending changed with regard to improving retention management?

Increased; 56%No

Change; 44%


For the 44% that stated “no change” in investments towards retention, more than half of this group also cited an increase in attrition. If retention is not carefully managed, the value lost from attrition may outpace the value gained from new accounts.

Q: Over the past 3 years, how has your organization's investment spending changed with regard to new account acquisition initiatives?

Decreased, 6%

No Change,

17%

In-creased,

78%


VS


Retention strategy is primarily focused on reactive engagements. 50% of respondents indicated that they practiced a “mostly reactive” approach to managing merchant retention.


Retention Management Approach

Q: How would you describe your current retention approach?Attrition Rates for

respondents that answered:

By Count: 22%By Volume: 12%

Proactive

vs

Reactive

By Count: 18%By Volume: 10%

Mostly Reactive

Even

Mostly Proactive

50%

33%

17%


Based on this data, one could infer that businesses with predominantly proactive approaches benefit from lower attrition rates. The impact of a 2% reduction in attrition volume rate could lead to sizable uplift in revenue.


About The AuthorSherry Seetram

Sherry Seetram is president and founder of ePay Consulting Services, a specialty electronic payments consultancy with expertise in the merchant acquiring and processing industry. Sherry has more than 14 years of extensive experience in business strategy and operations. She has worked with management consulting firms and fortune 500 and 100 companies in the financial services and technology industries.

Sherry is a proven expert at developing payment strategies with actionable roadmaps (e.g., market growth, revenue optimizations, products), assessing and mitigating portfolio risks, and streamlining processes and back office automation to help improve productivity and organizational effectiveness.

Prior to launching ePay Consulting Services, Sherry worked for PricewaterhouseCoopers as Management Consultant and subject matter specialist for the Payments Advisory Practice. She led several large-scale payments engagements with major payment companies and merchants and provided industry perspectives and knowledge share to practitioners.

Sherry worked at First Data as Director of Risk Products and Programs. There she helped develop and execute the first concept of risk-based pricing in merchant acquiring. Sherry spearheaded other product development initiatives related to activation and retention management strategies and has held positions in both finance and risk management.

Sherry earned her MBA from Long Island University (CW Post) and her Bachelors of Science in Finance from St. John’s University.

SpecialtiesStrategy Definition and Opportunity Prioritization• Business Strategy• New Products• Retention Management• Revenue Optimization• Market Insight and

Analysis

Time Critical and Powerful Insights • Portfolio Analysis• BI Dashboards• Predictive Analytics

Program Execution

Operational Assessments and Execution• Process Improvement• Organizational

Effectiveness• Complex Program

Management / Delivery

[email protected] | www.epayconsulting.com | www.linkedin.com/in/sherryseetram | www.facebook.com/epayconsultingservices

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To Receive your full complimentary copy of this report and other thought leadership work, please email us at [email protected]

You can also find out more about ePay Consulting Services at www.epayconsulting.com

©ePay Consulting Services 2015. All Rights Reserved.

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