From the Analysts



 Merchant Attrition:
The First Step is Finding the Problem

by Scott Calliham

   With the industry continuing its competitive trend in the foreseeable future, finding ways to increase profitability becomes increasingly critical. Identifying ways to optimize merchant attrition can be a powerful lever in improving a portfolio�s performance.
   The first step for any acquirer who wishes to predict merchant attrition is to identify the attrition�s source. This is easier said than done, although very achievable. Some high level initial steps we recommend include:
   Measure Your Attrition. We define annual attrition as the total number of attrited merchants during the year divided by the total active merchants at the beginning of the year plus any new merchants added throughout the year. We typically look at both merchant outlet attrition and sales volume attrition. For example, a merchant attrition of 30% and a sales volume attrition of 5% indicates that portfolio is experiencing most of its attrition in the smaller merchant segments.
   Determine the Financial Impact. You should consider the immediate and long-term financial impact of attrition to determine the benefits of optimizing attrition. It has been our experience that the upside associated with even marginal improvements in retention are fairly dramatic (although a cost/benefit analysis should be completed so that you don�t spend more to keep a merchant than the revenue associated with that merchant).
   Benchmark Yourself. Merchant attrition rates in the mid to upper teens for a portfolio as a whole are common for bankcard acquirers. Of course, you need to be careful to compare yourself with comparable acquirers (i.e., if your portfolio is made up of mostly small Internet merchants, you will not want to benchmark yourself against a portfolio comprised of national retail merchants). As an example, attrition related to Internet merchants averages 30%-50%, depending on the size of the merchant. Generally, if your attrition is 20%-25% or more, you may have a problem in some or most segments. Likewise, if your attrition is less than 6%-8%, you may also have a problem in that you may not be pricing aggressively.

   Interview Attrited Merchants. This information can be useful in correcting problems or in identifying uncontrollable reasons for attrition (i.e., merchant went out of business). Although it may be difficult to reduce attrition related to uncontrollable factors, there are ways to mitigate the lost revenue, such as higher upfront fees for those merchants that are prone to fail in their first year. In spite of the fact that this research can be labor intensive and probably will not result in the merchant coming back to you for processing services, it can be very helpful in prioritizing segments to target.
   Segment Your Portfolio. Segmenting your merchants by size, pricing level and attrition can provide a quick overview of your portfolio and its performance. Other merchant elements that can help you identify where your attrition is coming from include discount revenue, non-discount revenue, average tenure of merchant, bank customer attrition rate, loss rates and Internet merchant performance, among others.
   These are some quick steps to help any size acquirer on their road to optimizing attrition. There are many more tools and analyses that can be used to identify attrition. Once you understand where your attrition is coming from, you can then begin to complete analyses that will help you predict attrition and to identify strategies to mitigate unwanted attrition.

Scott C. Calliham is a Senior Consultant with First Annapolis Consulting, Inc. Mr. Calliham focuses on the transaction processing and acquiring businesses and mergers and acquisition advisory services.

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