Have you ever heard the expression……?” Trying to bang a square peg into a round hole?” The thought of it conjures up several images. First, it is probably not the most effective strategy. If the peg does not fit, then why are you banging it into the hole in the first place. Secondly, if you have a big enough hammer and use enough strength, chances are you can get some of the peg through the hole. The latter method unlike the former will be a little messy, probably with bits of the peg scattered everywhere and leaving the person doing all the work a little sweaty and tired.
This whole process that I described reminds me a little bit of the current Credit Card offering in the B2B Payments space. The hole is very clear, it is only so big and only so much can fit through it meaning there is only so much cost a business will tolerate. Right now, the round pegs that are fitting better in the hole are Check, ACH and Wire and the square pegs are Credit and Debit. It is clear to me that the competitive forces are Check, ACH and Wire payments versus Plastic of all sorts. From the Chart Below it is easy to see the general cost differentials and that is as I have said in past blogs, part of the issue with credit cards not being universally accepted for payment in B2B.
If we dive a little further to try and depict total cost by payment type, we will have to add a scenario around some sort of Average Transaction/Invoice type. It would be the same for all payment types as there is no evidence to suggest that one payment type over another drives a difference in the transaction size. In the same way as the Average transaction size rises or falls the pricing will stay relative to the cost. A buyer will buy the same amount of supplies needed for a job they are doing regardless of the payment type they use to settle their invoice.
Given a $1,000 Transaction size we can see that ACH with its estimated cost of .30 cents a transaction runs about .03bp of cost on the transaction on the low end versus Credit with its cost on the same transaction of 250bp. On the face of it that is a massive 247bp premium for a supplier to absorb on straight payment cost comparisons.
ACH, Check and to some extent Wire are more popular because of cost. That is obvious but does it mean that Credit and Debit have no place at the payments table. Absolutely not! If a business can realize a combination of value and cost reduction in the payment, then credit can become part of the payment’s solution and a large customer satisfaction tool for any business. After all those Cardmembers do love those points, miles and free hotel stays.
Roger McNamara Bio:
Roger is a 25+-year veteran of the Payments Industry, most recently as the Director of Business Development with American Express in the US. He has worked on the largest Acquisition targets for acceptance across multiple Industries and across the globe that include : Airlines, Communications, Technology, Cruise Lines, Entertainment, Fractional Jet, Freight, Government, Healthcare, Insurance, Oil & Gas, Residential Rent, Restaurants, QSR’s, Retail, Services, Supermarkets, Travel, Vehicle Sales, B2B and Wholesale. Over that time, he has sold more than $200 Billion worth of Card processing and became an expert in Bankcard Interchange and Discount Rates, how they are calculated and what merchant pay to accept Credit and how this is dramatically different from what they believe they pay. He is an expert in Merchant Statement analysis and payment processing and the rules and regulations associated with payments and the associations. Roger has also developed the insight for Merchant Services Salesforces and salesforces in general to be able to better position their products and gain share particularly in B2B. Let him show you how you can too. He can be reached at Guide2Interchange@gmail.com