Acquiring Time Machine: Revisiting Price Elasticity in Merchant Acquiring
Ten years ago, we published a short piece in our newsletter describing the price sensitivity of small merchants (April 2003, “Price Elasticity in Acquiring” by David Woynerowski). Much has changed in the acquiring industry in the past ten years, and we were interested to see whether the price sensitivity of small merchants appears to have shifted in a material way. Using our merchant-level database, we ran a regression analysis in 2003 relating ranges of merchant pricing to attrition for merchants with < $30,000 in annual V/MC volume. Our analysis at that time suggested that the price-independent attrition rate for merchants of this size was 23%, and that attrition increased at a rate of 1.6 basis points (0.016%) for every 1 basis point increase in pricing. We reproduced the 2003 analysis in late 2013 using our current merchant-level database, increasing the merchant size threshold to $37,000 to adjust for inflation.
There are several key observations about the relationship between 2003 and today. First, the price-independent attrition rate (e.g. the y-intercept in Figure 1 or the constant in the equations in Figure 1) has not changed very much over this time span, remaining just above 20%. The price-independent attrition rate is essentially the attrition rate even if the merchant was priced at interchange – in essence, it is the minimum attrition from all sources other than pricing-level. Of course, business failure will be a significant source of attrition, though both 2003 and 2013 fall in similar stages of the business cycle, the couple of years following a recession.
Figure 1: Price Elasticity in Merchant Acquiring
Source: First Annapolis Consulting merchant-level database.
Second, merchants appear to have become more price sensitive over this time period. Whereas in 2003 a 1bp increase in pricing suggested a 1.6bp increase in attrition, that rate has grown to 2bps today. Furthermore, we are seeing a tighter spread in the data points (e.g. a higher R2, which is a measure of the strength of the relationships in the regression analysis).
What do these relationships reflect? One hypothesis is that Square and similar mobile players have triggered greater price sensitivity for such small merchants. We have also observed an increase in the prevalence of interchange-plus pricing, even in the small merchant space, which is also associated with a higher level of price sensitivity among merchants. Or probably most likely, the increasing price sensitivity reflects the general intensification in competition across the industry.
For more information, please contact Chris Sanson, Associate, specializing in Merchant Acquiring, firstname.lastname@example.org.
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