Payments Views


Hostility in Payments

The recent entry of into the small merchant mobile POS card acceptance market may signal the last phase of increasing hostility in the US merchant acquiring segment of the card payments business.

Prior to the launch of Square in 2010, the merchant acquiring business in the US might have been described as having some of the characteristics of an oligopoly. The existing players had reached a rough equilibrium that was based on complex pricing schedules and a lack of pricing transparency. The market could be described as relatively inefficient and having high friction.

Large merchants were sophisticated enough to be able to negotiate more aggressively with their acquirers – while smaller merchants didn’t understand, weren’t interested in understanding the complexities and just settled for being able to get a merchant account.

Square’s launch included a radically simplified approach to pricing merchant services which, due to Square’s high visibility in the marketplace, educated small merchants that there was a much simpler (and, by the way, less expensive) alternative. Square sent a shot across the bow of the acquiring incumbents – it’s market entry represented the first phase of hostility emerging in the US acquiring business.

At the time, a small merchant friend of mine called me asking me to look at what he was paying to his (top 5) acquirer. He had been signed several years earlier by an ISO working on behalf of the acquirer – but hadn’t had any involvement with the ISO since. Looking at a couple of his recent statements, he was paying almost 7 percent all in to his ISO/acquirer. Having heard about Square’s pricing, he was appalled that he was being taken advantage of and was paying so much. With my encouragement, he called his acquirer to threaten termination and was immediately offered a deal which matched Square’s pricing along with providing him with a new POS terminal. My friend was the proverbial squeaky wheel that got greased – but if he hadn’t asked, it’s very likely that nothing would have changed.

Since Square’s launch, acquirers have had to adjust and respond to both the level of Square’s pricing as well as its simplification of merchant fee schedules. Several of Square competitors have actually come in slightly below Square’s pricing – hoping to gain a small bit of differentiation through a tiny pricing advantage.

Meanwhile, Square has looked to expand its role with the merchants it supports – moving beyond traditional payment processing to providing services that address the other commerce-related needs of small merchants.’s recent entry into the small merchant US acquiring market appears to represent the next leg down in terms of the US merchant acquiring business as the market is now entering another period of pricing (and, for incumbents, margin) pressure.

Amazon’s Local Register is offering promotional pricing (for merchants who sign up by the end of October) of 1.75% – a full 1% below Square’s current pricing. That promotional pricing will be in effect for Amazon’s merchants through year end 2015 when it changes on Jan 1, 2016 to 2.5%, 0.25% below Square’s current pricing. With its entry, Amazon has become the price leader in the mobile POS market – and is doing so with a feature rich offering for merchants.

In his recent book “The Everything Store: Jeff Bezos and the Age of Amazon”, author Brad Stone comments on Amazon’s focus on the customer and, perhaps more importantly with respect to this discussion about payments, on Amazon’s “natural advantage in its cost structure and ability to survive in the thin atmosphere of low-margin businesses.” In a 2012 Fortune article titled “Amazon’s Jeff Bezos: The ultimate disrupter”, author Adam Lashinsky notes: A favorite Bezos aphorism is “Your margin is my opportunity.”

Amazon has been providing ecommerce-based payments solutions as part of its Amazon Web Services initiative for several years – but with modest success. Amazon’s Local Register seems to be the new “tip of the spear” – focused on changing yet again the merchant acquiring business and its fundamental value proposition.

Based on prior experience, it seems we should expect Amazon will be relentless in pursuing this opportunity – creating new disruptions for US merchant acquiring incumbents (now including Square, Intuit and PayPal) along the way.

What do you think?

This PaymentsViews post was written by Glenbrook’s Scott Loftesness.

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