Last Mile Redesign (Processor-Merchant)

21 Jan 2016

My favorite blog of the year was written by famed UK computer scientist Paul Graham – The Refragmentation. Paul’s blog aligns very well to the work of 2 Nobel prize winners in economics: Oliver Williamson (2009) and his mentor Ronald Coase (1991). Both were focused on the factors governing the “nature of a firm”. (particularly Transaction Cost Economics).  I covered how TCE relates to the sharing economy and the future of collaboration in my August blog Collaboration and the “Sharing Economy”.

If I were to pick the proof point for ‘refragmentation’ and TCE within the payments industry it would be processing. If payments is a network business.. processing is undergoing open access (think MCI/ATT), nodal redesign (think iPhone vs rotary), big data (democratized access), enterprise software (ERP/CRM), and direct sales (amazon) … ALL AT ONCE.

Shifting terminal landscape

As I’ve said many times, the long tail (SMBs) represent the margin in payments… particularly in acquiring where ISOs have been great at selling high fee hardware and payment services. Take a look at this example merchant invoice below (a friend’s business). I’m a payments expert.. and there is no way for me to decipher 7 pages of fees for a business that has one location.

Example Processor Invoice – Single Business

Square was the first to tackle this at scale with a 275bps all you can eat (credit and debit), and simplified acceptance driving a 100bps margin and a massive (obvious) value to merchant paying 500bps.

I love Poynt’s model.. where Square is dependent on Apple’s long and arduous QA/testing process.. Poynt is taking an android approach.. with a hardware design that wins in usability… and enabling apps in data in new ways. In the old model an ISO sold hardware that is wired to a single processor. In the new model you pick your processor like you pick your carrier and then also pick your POS. No area in payments is more ripe for disruption than the last mile.

In the year 2005.. would you buy android for $50M..!!? (and they didn’t have a hardware business). Everything is changing here.. fragmentation and open innovation is breaking the old integrated model and allowing specialization. This in turn will redesign the “last mile” economy with merchants giving them power to choose just as Consumers can choose an Uber.  Having their data in a cloud means that they are also not locked into a POS (Micros/Aloha/NCR).. and can change every day to the app that best meets their needs. A NEW ENVIRONMENT for ERP, CRM, Advertising, Accounting, Customer Engagement…  for millions of SMBs.. It is HUGE.

This SMB space will evolve differently as SMBs themselves are loosely integrated and highly responsive to their local market. Giving them the tools to reach customers at scale of the big retailers (data democratization).

How can existing companies compete? Well one problem is that invoice above. Your customers will not buy more from you if they don’t trust what you do for them today.  Major players in payments like to keep the lock in effect.. very few are willing to break the mold. Guess how long it would take a top 50 merchant to accept Venmo?… 18mo? 2 yr?  Poynt could enable a merchant in 2 days..

6 thoughts on “Last Mile Redesign (Processor-Merchant)”

  1. Great article!

    “Square is dependent on Apple’s 6-9 month QA/testing for each App”.

    ? Typical Apple review for app updates is below 1 week. Which duration are you referring to? Maybe MFI review (Hardware accessories) is longer but definitely app updates is not 6-9 months long.


  2. What you would peg your friend’s actual acceptance costs at, all-in? If I am looking at the pending interchange, the only place it lists gross sales, the average interchange is 184bps. That is significantly better than Square or any of these simple shrink-wrapped solutions, but of course doesn’t account for the other fees. Still, those don’t appear to be that great compared to the other interchange costs listed on the invoice.

    Square is nice because a merchant knows exactly how much a swipe will cost them, but the opportunity cost/benefit of going with a competitor is a much more murky calculation.

    1. Excellent question.. its so hard to calculate.. too many line items.. I haven’t had the time to do the analysis (nor will I). You have just given the basis of Square’s 100+bps margin.. Odd that more payment processors don’t take this kind of approach.

  3. Premise great; metrics suspect.

    I have just been working with some clients in the space and processor cut you cite, Tom, is too high. Your “merchant-owned” scenario is much closer to today’s reality than “processor-owned”.

    Dynamics are correct; number off. Pressure is currently on acquirer/processors/ISOs with 2nd level pressure on interchange, with is a model that is unsustainable in med to long term.

Leave a Reply to David True Cancel reply

Your email address will not be published.