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Merchant Sales Insight

How To Profit From Micro Merchants and Compete with Square

Merchant Sales Podcast · How to Profit from Micro Merchants […]

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ISOs and Agents made a huge mistake by giving Micro-Merchant accounts to Square, either directly or by not boarding them.  In this edition of the merchant sales insight, learn why Micro-Merchants (Processing less than $3,000 per month) are valuable, profitable and can lead to significant portfolio growth.

This episode is sponsored by PayBright and I would like to personally thank Dustin Magaziner (Tag him on the LinkedIn post) for his help with this publication.  Paybright created a unique solution that works for Micro-Merchants and for Agents.  You can check them out by visiting https://www.gopaybright.com

Don’t forget to follow us on SoundCloud! See you for our next episode.

Micro-merchants typically get overlooked by merchant services providers. Truth be told, they don’t generate a lot of transactions, typically less than $5,000 a month in processing volume. What these businesses lack in processing volumes, however, they make up for with sheer numbers. 
There are about 20 million micro-merchants operating in the U.S. today. That number remains unabated, even in the face of the Covid-19 pandemic. In fact, in the past two years there has been a surge in what some have called pandemic-related entrepreneurship.  This has led to the largest increase in business startups since the government began keeping tabs on such things. Many millions of these businesses, no doubt, are micro-merchants. 
If micro-merchants are successful, they don’t remain micro-merchants forever!  They often grow to become very large merchants. 
Amazon started as a micro-merchant. In 1994, it was just an online bookseller, operating out of a garage. The legendary ice cream brand Ben & Jerry’s began in 1978 as a single ice cream parlor in Burlington, Vermont. 
Not every micro-business is a potential Amazon or Ben & Jerry’s. But neither are they destined to remain always small.  
“No multi-million-dollar-a-month account opened their doors as multi-million-dollar accounts,” says Dustin Magaziner, Managing Partner at PayBright and sponsor of this Merchant Sales Insight .
Jack Dorsey saw the opportunity presented by micro-merchants back in 2009. He and a partner started Square.  They gave micro-merchants dongles to plug into their mobile phones and use to accept card payments. 
Some folks in our industry scoffed at Square in the early years. The company was obviously losing money on micro-merchant accounts. But Square kept building relationships and building out its product suite. Today, Square (which has been renamed Block) has a market capitalization of about $55 billion and much more public recognition than most other payment services providers.
In this edition of the Merchant Sales Podcast , a solution is presented for ISOs and individual sales reps to compete with Square. This solution is achieved by offering micro-merchants a simple processing solution that leverages cash discounting and generates good margins.
“It’s about giving these merchants an easy solution that won’t break the bank,” says Dustin. “We find that although we go negative on a few accounts, the program as a whole is overwhelmingly positive.”
Competing with Square
Let’s face it: Square identified and successfully pursued a niche, micro-merchants, that our industry had ignored for years. 
Square offered these merchants a solution that eliminated all the mystery, complexity, and expense of being card-accepting businesses. 
  • Never mind that its dongles (the only equipment Square actually makes available for free) often need to be replaced. 
  • Forget about the lagging customer service. 
  • Forget that pricing isn’t better than an ISO/agent might offer. 
It’s all about perception. When no one else offers an alternative, Square is perceived as the best option.
Square has built a portfolio on tens of millions of micro-merchants. Many have grown into larger companies. And Square now offers a suite of services:
  • business loans, 
  • buy now / pay later, 
  • gift cards, 
  • payroll, 
  • even its own line of countertop and virtual terminals – rivaling that of many traditional payment services providers.
The irony is that many ISOs and agents have played a role in Square’s success. I know of numerous merchants who were turned away by ISOs/agents. They were told to try Square, instead, and come back when they start processing $3,000, or $5,000 a month. How many of those businesses do you think DID go back to the ISOs/agents when they hit that magic number? I’d be willing to bet very few.
PayBright is one ISO bucking this trend. It has created a micro-merchant program that competes with Square and helps sales reps build relationships with budding micro-merchants. 
The program offers micro-merchants 
  • simplicity, 
  • free equipment, 
  • straight-up billing, and 
  • a human contact for those rare occasions when a problem is encountered. 
Micro-merchants boarded with PayBright pay no monthly or other surprise fees, just per-transaction fees. “It’s a true pay-as-you-go pricing model. If they don’t process, they don’t pay,” explains Dustin.
Agents receive residuals on processed transactions without incurring Schedule A fixed costs, like merchant monthly, annual, and PCI fees
PayBright’s micro-merchant program can also be used to support existing accounts in need of a device for one-off situations. For example, an online merchant who occasionally sells at street fairs but wants to avoid the expenses of a separate account.
Local businesses like to know they are supporting other local businesses, and Square is a big tech company. If approached by a local business offering a payment processing solution on par or better than Square, micro-merchants choose that as a desirable path.  
“For us, it’s about building relationships,” says Dustin.
Offering Cash Discounting
There may be no more perfect market for cash discounting than micro-merchants. These businesses, often operating on shoestring budgets, are especially price sensitive. That’s why some already pass on the cost of card acceptance. On more than one occasion, I’ve witnessed a merchant using Square who charges higher prices for items when customers pay by card. Although Square does not officially condone the practice, it is done.
Cash discounting is a much cleaner approach for these merchants to eliminate processing fees. It is legal in all fifty states, provided customers are properly notified of the option for a discount when paying with cash. 
With cash discounting supported through PayBright, agents can offer micro-merchants truly fee-free payment processing. 
Some micro-merchants may think the offer is too good to be true. Others may hesitate, fearing customer complaints. To get these micro-merchants to the finish line, PayBright will support cash discounting on a thirty-day trial basis. If the merchant decides against cash discounting after thirty days, (this seldom occurs, according to Dustin) the account gets moved to standard processing. 
“It’s an incredible offering to get these merchants over the hump and on a path of profitability,” Dustin explains.
And the more profitable a micro-merchant, the more residual income a rep potentially earns.
Generating Margins
Offering cash discounting to micro-merchants drives better margins. The per-transaction residual a rep can earn goes from about 60 basis points to 200 basis points on average.
Whereas 200 basis points on $2,500 in processing volume may not be a lot of money, the residuals accrue when ten or twenty of these accounts are added to a portfolio.
Boarding these accounts with PayBright also provides a hassle-free option for merchants and agents. Problems associated with smaller accounts typically start with phone calls from merchants complaining about unexpected costs, such as monthly minimums, PCI compliance, and similar fees. PayBright eats these costs, so agents never go negative on micro-merchant accounts.
As micro-merchants grow, so do processing volumes. And as satisfied customers, they can be a great source of referrals. 
“These accounts are not money makers, but they can become money makers. And micro-merchants that are satisfied clients often lead to referrals that are money makers,” says Dustin. “In fact, one of the first big accounts I signed was a referral from a merchant who was only generating about $10 a month in residuals.”
Dustin said his analysis reveals that every merchant signed by PayBright leads to 2.1 additional merchant accounts, regardless of size. 
Micro-merchants for years have been processing credit and debit card payments with Square. Square appears simple and cheap. But, in reality, Square is not cheap. It’s just been the only game in town for these small accounts, because ISOs and agents have ignored this segment of the market for so long.  
PayBright’s micro-merchant program, coupled with cash discounting, is a simple ISO solution that one-ups Square by providing merchants with free terminals (or software apps) and free payment processing. 
There is no downside for selling agents – only upsides. 
  • Higher residuals on every transaction, 
  • No required minimums,  
  • Opportunities to sell value-added services. 
  • Successful micro-merchants will eventually generate larger processing volumes for the ISOs and agents there for them from the beginning.
“I’m not a believer in passing up opportunities, and micro-merchants are an opportunity,” says Dustin. “By eliminating the pain points typically associated with micro-merchants, we help our ISO and agent partners support these merchants in ways that contribute to ISO and agent profitability.”
To learn more about boarding micro-merchants with PayBright, click here.

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