Cover Story
Creating Value for Merchants

by Cathy Corby-Parker

   As everyone reading this magazine knows, merchants are notoriously price sensitive. So why in this tough economy are merchants continuing to accept electronic payments that take a slice out of their revenues at the point-of-sale? Why are we seeing fewer, not more, "Cash Only" signs at neighborhood stores? Why are merchants willingly paying acquirers for the opportunity to accept even more alternatives to cash payments?
   Why? Because merchants understand that they are in the business of selling merchandise. Accepting a broad range of payment forms helps merchants sell more merchandise. The acquirer focused on helping merchants achieve their merchandising goals can create a partnership strong enough to transcend the merchant's innate sensitivity to price. So how does an acquirer help a merchant sell more? There are a variety of ways through which a focused acquirer can become a merchandising partner to merchants in its portfolio. Let's look at them.
   To begin with, electronic payments supercharge a consumer's wallet, making the consumer less concerned about the total amount of his purchase in the store. Those of us old enough to remember the days when electronic payments were not so prevalent, may recall the angst of mentally totaling your purchases before reaching the cashier, hoping to avoid the embarrassment of having to ask the cashier to reverse items until the cash in your hand or balance in your checkbook was greater than the total of the purchase. This "supercharging" of consumers' wallets probably had more to do with the expansion of credit card acceptance by merchants than any other factor, because, it helped them sell more.
   Speeding customers through checkout lines is another merchandising goal for merchants, but it's not just because this translates into fewer checkout clerks and expense. The primary reason merchants want faster checkout is to improve customer service, draw more shoppers into the store as a result of the high service levels, and prevent a customer from ever abandoning her basket at the checkout lane because of the length of the line. Credit and offline and online debit are all faster transactions than manually processed paper checks especially today with all the identification information merchants require clerks to write on the check because of the high incidence of check losses.
   Accepting a broad range of payment options gives consumers a choice at the point-of-sale that can translate into freedom to make larger purchases. Consumers with debit cards have more purchasing power at the POS than those with just cash. Consumers with a credit card have even more purchasing power. In some consumer segments where individuals carry several cards, consumers have become quite sophisticated in their card usage, pulling out a "pay now" online or offline debit card for small routine purchases, a "pay at month-end" card for larger but routine purchases, and a "finance" card for large non-recurring purchases. Private label credit continues to grow and is now accepted by over one-third of merchants, in part because it is perfectly positioned as an alternative for consumers making large purchases who do not want to mix "pay-at-month-end" and "finance" purchases on the same card, as that would result in paying finance charges on routine purchases.
   The advent of stored value cards moved electronic payments from the expense line of a retailer income statement to the revenue line. Gift cards have become merchandise in and of themselves for retailers, and about 10 percent of all merchants and the majority of the top 100 merchants, now offer gift cards to their customers. The merchant value proposition for gift cards is strong: get paid today for sales that will take place in the future. And, with over ten percent of the value of gift cards going unused, the merchant not only benefits from a cash flow perspective, but sees margin improvement from selling gift cards, as well.
   Electronic payment vehicles can play a unique role as foundation products for merchant loyalty programs. Consumers can participate in third-party loyalty programs simply by enrolling their existing credit cards issued by loyalty providers such as U-Promise. Merchants who participate in the loyalty program attract enrolled consumers into their physical or virtual stores, diverting sales from merchants who do not participate in the loyalty program. And, the information generated by the payment transaction has all the information the loyalty processor requires to process the loyalty transaction. If you will, third-party loyalty processors are riding the highways of the electronic payment processing business to make it easy for merchants to participate.
   Chip card technology is opening new avenues for merchant-based loyalty programs. Chips embedded in cards can track consumer participation in loyalty programs. They can also create a bridge between a merchant's virtual site and physical store locations, to provide fulfillment for delivery of promotional incentives and coupons. Such chip cards can be incorporated into a merchant branded loyalty card or even a merchant co-branded bankcard, such as the approach Target Stores is taking. The US model that is evolving uses the chip for loyalty and incentive programs, while keeping the payment transaction running through the established payment networks. Acquirers are well positioned to introduce merchants to the merchandising opportunities associated with chip cards. Those who do so will reinforce their positioning as a merchandising partner, even if the retailer decides to pass on the chip card opportunity for now.

Becoming A Merchandising Partner With YourMerchants

   First, it is important to understand that the merchandising benefits an acquirer can deliver will not matter unless the merchant's core needs are being met by an acquirer. Similar to the concept of Maslow's "Hierarchy of Needs", a merchant struggling with an acquirer delivering unreliable service will not be receptive to building a merchandising partnership with the poor quality acquirer.
   Thus, the first step in establishing merchandising partnerships within your merchant base is to assure your core offerings are delivering solid value to your merchants. Top on the merchant's list of expectations from a provider is a competitive price. But, reliability and speed also are high on the list, as is customer service that is available whenever the merchant requires assistance.
   Once you have your core offering solid, the next step in developing merchandising partnerships with your merchants is to determine what merchant segments you will target. Supporting the merchandising goals of a national discount retailer or supermarket chain is quite different from establishing a partnership with a local restaurant or specialty store. There are opportunities to establish merchandising relationships across the entire merchant base, but the nature of the offer will vary from merchant to merchant based on the industry segment in which the merchant participates as well as the aggregate size of the merchant. Developing a segmentation focus is essential, as in the merchant business; one size definitely does not fit all.
   Once you have picked the target segment, the next step is to determine which types of merchandising support deliver the most value to merchants in that segment. It could be something as simple as expanding the range of payment options beyond what is typical in the segment, helping merchants keep up with changes in consumer card preferences to build customer loyalty by accepting the payment forms consumers most prefer. Here it is important to understand the behaviors and sensitivities of merchants within the segment to make sure the selected program fits. Some merchant segments are highly resistant to incremental investments in equipment. A program requiring chain-wide terminal upgrades may not be easy to sell in these segments even if on paper the expenses can be justified. Some merchant segments will be early-adopters of new programs and others will generally be laggards. Selling chip card loyalty today to a segment that is typically a "follower" rather than a "leader," is going to be an uphill climb.
   Once you know what segment you are targeting and what program or programs you want to take to the merchant to assist it in meeting its merchandising goals, the next step is to present the business case for doing so to the merchant. Importantly, this business case must be in the language of merchandising, not in the terminology of merchant acquiring. Merchandisers think sales sales per square foot, sales growth, and sales efficiency. An acquirer positioning itself as a merchandising partner must demonstrate a business case with top line revenue impact in order to get merchants excited. Cost savings are good, but sales growth is better! And, as important as sales growth, is prevention of future sales declines. Is the merchant going to lose customers, or see lower average sales per customer, if it does not adopt a new payment program and its competitors do? A great example of this is with taxi services, where consumers will call and wait for a cab or limo that accepts electronic payments even if a cash-only cab is available at the curb.
   Finally, once you've introduced a new program to your merchant, it's important to recognize that the partnership has only just begun. You now have a channel of communication with your merchants in the language of merchandising not discount rates. Acquirers that successfully reposition themselves as merchandising partners will take advantage of this new channel of communications. They will use it to report back to merchants on the success of existing programs and opportunities for fine-tuning to improve their effectiveness. They will bring new ideas and opportunities to the merchant; targeted ideas appropriate to the segment in which the merchant competes, not the program de jure.


   Becoming a merchandising partner to your merchants provides acquirers an opportunity to achieve differentiation and rise above the extreme price sensitivity that is characteristic of the merchant market. There are many different programs that acquirers can deliver to assist merchants in achieving their merchandising goals. However, acquirers must be careful that the selected approach fits the needs and behaviors of the merchant segment at which it is targeted, and that the benefits are communicated in the language of retailing with an emphasis on how the program will help the retailer sell more goods or services. Finally, acquirers repositioning themselves as merchandising partners must understand that this is not a one-shot event. To be a successful merchandising partner to see the benefits in your acquirer margins -- requires a long-term commitment to the proactive education of your merchant base.