Have you ever heard the expression ”Trying to fit 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 trying it 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.
That whole process reminds me a little bit of the current Credit Card offering in the B2B payments space. The gap 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. From the chart below, it is easy to see the general cost differentials, and as I have said in past blogs, is part of the issue with credit cards not being universally accepted for payment in B2B.
If we dive a little further to try to 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. For any business, even one with a large gross margin, that is a stretch.
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. Card payments can be a collection tool for a business. Right now, they are perceived as an expensive line-item cost by many. In other words, an overhead. Businesses are good at cutting overhead, making Credit often an endangered species.
It is clear to me that the competitive forces of Check, ACH, and Wire payments do not have a pricing perception issue, where Credit acceptance does. On the other hand, Credit has a value structure that the other payment methods could only hope for and will never have. Sellers in the Credit acceptance space have been largely left on an island as to value creation and the game-changing benefits Credit can deliver a business when implemented correctly.
Commercial Card issuers are hard at work issuing plastic for spend as fast as they can. After all, those buyers do love those points, miles, and free hotel stays. We just need more sellers who can capture that spending and process it.
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 $300 Billion worth of Card processing and became an expert in Bankcard Interchange and Discount Rates, how they are calculated and what merchants 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 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 roger@guide2interchange.com.