Are You Ready for the Payment Revolution?
The credit card processing industry began a full steam march toward change in 2011. For instance, merchants saw the beginning of a mass migration towards the adoption of new mobile technologies that promise to change the way they accept payments. The industry also saw new legislation that brought public awareness to the high costs of accepting card payments, and new startup companies introduced groundbreaking services to not only help merchants accept payments but also make them smarter marketers while simultaneously lowering their processing costs.
It is my belief that the processing industry is about to undergo a disruption unlike anything is has ever experienced, and that these changes are eminent and unstoppable. Why? Two reasons:
First, and not surprisingly, merchants are fed up with the traditional credit card processing industry. Everywhere they look they are getting hit with more and more fees. It’s not uncommon for a merchant to be paying 4-5% in effective costs when all of their fees are added together against their total card sales. Not only that, but the merchant services industry is notorious for extremely poor customer service. Instead of supplying a product of value and giving merchants fair pricing, most providers rely on locking merchants into contracts with a goal to collect as much in fees for as long as possible. It’s a “churn and burn” industry and merchants have had enough of it.
Second, the new technologies and services that are entering the market promise to be different. These services are promoting features that include the complete elimination of nearly all of the most common fees imposed by traditional processors; such as cancellation fees, monthly fees, annual fees, PCI compliance fees, statement fees, batch header fees, AVS fees and nearly every other fee you can imagine. When it comes to processing costs, many of these services are offering flat rates that are easy to understand and don’t include any hidden downgrade surcharges. As you might have guessed, this is music to most merchants’ ears.
Below you will find my predictions for the top card processing trends for this coming year. Be sure to follow us on Facebook, Twitter, and Google+, or by email and RSS to stay informed as we track these changes.
Mainstream Merchant Adoption of Mobile Smartphone Processing
The popularity of iPhone and Android devices has given rise to companies like GoPayment and Square. These companies offer free card readers, free setup, no monthly or annual fees, no contract, and flat processing rates. Square reported that it has shipped nearly one million card readers since its launch in 2009 and GoPayment is likely not far behind. Not only do these services make great mobile options, but they are also great backup options in the event of a service disruption from a primary processor.
Mobile processing popularity has spurred traditional processors into offering similar smartphone apps and card readers in order to compete, but generally under traditional merchant account pricing models. Merchants will need to be careful so as to not fall prey to copycat services that lock them into expensive fees and long-term contracts.
The Rise of Digital Wallets
Not only can smartphones be used to accept payments, they can also make payments. Numerous companies are revving up to win the race of digitizing consumers’ wallets. These companies include behemoths like Google, Visa, PayPal, MasterCard and Verizon Wireless as well as startups like LevelUp and AisleBuyer.
2012 will see the beginning of a hard push to moving consumers and merchants to accepting payments from smartphones using Near Field Communication (NFC) technology. However, it will likely take several more years to gain widespread acceptance due to merchant resistance, device limitations, and slow consumer adoption. In particular, most services that currently allow merchants to accept digital wallet payments either require buying new hardware or signing up for additional accounts with other service providers. Therefore, the value proposition is not resonating well with many small merchants because of the extra costs and hassles associated with new technology.
More Options for Retailers
This year is going to bring retailers more options for accepting credit cards. Traditionally, small retail merchants such as coffee shops, boutique gift stores, and other single register-type stores have had very limited options in processing hardware. In most cases, the only option was a phone line credit card terminal.
Last year saw explosive growth in touch screen tablet sales as well as technologies that turn tablets into Point-of-Sale (POS) systems. Like digital wallets technology, tablet POS technology is still in its infancy and usually requires the merchant and customer to have compatible accounts through the same provider. Expect 2012 to bring many more advancements and options in tablet credit card processing.
Another option that has been making its way onto the scene is optical readers that scan bar codes and QR codes from consumers’ telephone screens. Generally these services allow consumers to pay merchants using PayPal or other attached accounts. The most successful implementation to date can be found at Starbucks restaurants using a technology created by mFoundry.
More Data, Rewards and Loyalty Value Propositions
Merchants are becoming more sophisticated and so are payment processing technologies. Many of the new processing services offer more than just the ability to accept credit card payments, and sometimes at lower costs than traditional providers. Several startups are now including data rich sales reports that can help merchants better understand purchase patterns as well as built in rewards and loyalty programs. Merchants will be able to leverage this information for the purposes of understanding the purchasing trends of their regular customers as well as to attract new ones.
Most of the companies that are pitching these types of offerings have yet to make a national splash, but several are seeing positive results in limited markets. It’s still unclear if small merchants see the value in large enough numbers, but 2012 will see much beta testing around this technology.
More Fees from Traditional Credit Card Processors
Unfortunately, not all of the predictions for 2012 are positive. Merchants utilizing the services of traditional processors should expect to see even more fees than in years prior. Many processors will take advantage of disruption caused by new startups, government regulation, and Visa/MC policy changes to raise rates and charge new fees.
For instance, Elavon has been taking a lot of flak from merchants for implementing a new annual fee of $59 for processing and collecting form 1099-K from merchants as now required by the IRS. Heartland Payment Systems has also started charging a similar fee but is not saying if it has to do with the new IRS requirement or not.
Merchants are encouraged to ask for a full written disclosure of fees from processors before they sign any contracts. Keep in mind that many merchant account agreements have language stating that the processor can change or add fees at their own discretion; however, many contracts give the merchant a grace period for cancelling service without a penalty if new fees are added, or existing fees raised. Watch out for new fees on your statements as this industry is notorious for adding them without announcing them. Processors that do not add new fees will likely raise processing rates instead.
Durbin May Get the Boot
The Durbin Amendment was supposed to help merchant by lowering Signature Debit Interchange fees. In reality, the document was drafted by people who apparently had little understanding of this industry and the result was much higher costs for small ticket transactions ($30 and under). Several retail organizations have brought suit against the Federal Reserve in order to repeal/modify the amendment and even the main author, Dick Durbin, has admitted the new law is flawed. With such disastrous results, merchants should expect to see the Durbin Amendment either repealed or greatly modified this year.
At the very least, this year is going bring merchants many more options for accepting electronic payments and credit cards. Merchants will need to exercise caution when choosing new services in order to avoid unscrupulous copycats; however, choosing the right service will mean big savings and greater flexibility. Be sure to follow CardPaymentOptions.com on Facebook, Twitter, and Google+, or by email and RSS to stay up-to-date as these changes happen.