Challenges in Bank Merchant Services - and How To Solve Them

“The loss of merchant deposits and associated relationships would significantly threaten the traditional banking model, undermining banks’ access to cheap capital and ability to generate revenue from lending and credit products.” - The Payments Association

Merchant services through traditional banks have long been offered to small and medium-sized businesses. However, the payment processing world is changing faster than other facets of financial services, putting pressure on banks to adjust their merchant services operations to retain business banking customers that fuel deposits and bottom-line growth.  

To stay competitive in a highly competitive merchant services world where fintechs, ISOs and other providers are encroaching on banking customers, financial institutions have to modernize and provide an experience that makes it easy to use their offerings.  

In this article, we’ll share research into the current state of merchant services and what’s next for banks. 

What is merchant services in banking?

Merchant services are a package of financial services products that facilitate the acceptance and settlement of payments to merchants from their customers. Banks has traditionally provided them to merchants, but increasingly, they are delivered by fintechs and other technology providers. 

These payments can include the use of credit and debit cards, mobile payments, Buy Now Pay Later and digital wallets, to name a few. Digital payments are growing quickly and are expected to be 70% of all payment transactions worldwide by 2027.

Merchant services impact on banks

Although supplying merchants with payment products and services is not the main driver of a bank’s profit, the merchant services line of business is an important contributor to non-interest income and deposit growth, both of which are priorities for banks in the coming year.  

Providing merchant services to SMEs provides another entry for banks to cross-sell additional products, including those on the consumer side of the business. 

The impact on a bank’s bottom line can be impressive. Merchant services accounts for just 17% of SMB revenue.  However, merchant service customers stick around longer, are more open to cross-sell efforts, and hold higher balances than non-merchant services business banking customers. Merchant services customers have:

• 11% higher monthly deposit balances
• 13% increase in product adoption
• 10% longer relationship
• Accept cross-sold products 8x faster and generate 2.6x more revenue (community bank merchant services)  
• Are 57% more likely to open a deposit account at the bank that provides merchant services. (community bank merchant services)

Curating a merchant services portfolio is obviously smart business. However, because the payments landscape is changing faster than other areas of financial services, winning and keeping merchant customers is a challenging task. 

A merchant services program increases a customer’s total lifetime revenue by up to 40%

Payments industry trend: convenience above all else

Consumer demands for easier and instantaneous payments across devices and channels is pushing technological boundaries. Banks face mounting obstacles to retain commercial customers by fending off stiff competition from fintechs, independent sales organizations (ISOs), and other financial services providers who innovate quickly. 

Banks are on their way to modernizing their merchant service offerings and streamlining operations to provide payment processing experiences that feel seamless and easy to navigate. Getting it right is imperative because a large number of corporate decision-makers are prioritizing convenience over everything else when it comes to banking. 

In a survey of corporate treasurers from West Monroe, they confirmed that ease of use is more important to them than anything else, even price. 

“Respondents said they value processes that are easy and avoid ones that are difficult, so much so that they will expand business with easy banks and pay a premium for their services.” 

Merchant services challenges

Streamlined merchant services delivery is inherently difficult because the payment ecosystem is fragmented. From acquiring banks, processors, ISOs, and payment gateways to card associations and POS providers, there are many partners involved in the complex process of getting a merchant up and running with a payment solution. That leads to disjointed customer journeys, inefficient processes, missed handoffs and communication gaps or misunderstandings. 

Banks may think these complicated back-office processes are hidden from their customers, but a 2024 JD Power study notes that 43% of merchants said one of their biggest frustrations is poor coordination among service providers.

If banks know what it takes to become “easy” to work with, what is stopping them from doing it? Digital transformation is hindered by several factors, none of which are new.

Fragmented ecosystems

1. Little to no integration exists between multiple legacy systems. Legacy systems are difficult and costly to update and it can take months to be completed. Downstream effects on other interwoven systems can lead to further problems or delays.
2. Existing legacy workflows can be clunky and slow how quickly banks can get a merchant boarded and live. 
3. Ecosystem fragmentation increases operational costs as a general rule.

Complicated onboarding

1. Manual, compliance-heavy onboarding workflows result in delays that slow revenue and frustrate merchants.
2. A Mastercard study determined traditional banks take 3-7 days to onboard a merchant vs. non-bank providers who complete it in five to 15 minutes.
3. Bankers spend 20% of their workweek looking for documentation to ensure compliance to internal policies and government regulations, which drags out customer journeys. 

Regulatory and security pressures

• Regulatory updates around PCI compliance, for example, require rigorous data security measures and compliance workflows, which add burdens to already complex service delivery. 
• A bank’s merchant services offerings are subject to KYC and AML regulations, security and privacy concerns and fraud risks, too. There’s a fine balance between properly protecting the bank from compliance and fraud risk and making it easy for merchants to use their services.
• Fraudsters are always pushing the envelope, so protecting against cybersecurity crime is a constant for all payment processing providers, which complicates merchant onboarding and support.

Inadequate merchant support

• The disjointed customer support platforms and workflows lead to delayed issue resolution, even as teams do their best to respond quickly.  78% of bankers say the process of finding information to help customers is cumbersome. EX affects CX.  
• Merchants are unsure of the status of their accounts or resolutions to problems, which decreases trust and satisfaction.

How banks can modernize their merchant services operations

Despite the hardships, McKinsey states: “Banks that want to maintain ownership of critical client relationships, must navigate developing and packaging their SME and corporate offerings. This will require deciding which services to build in-house, identifying potential partners for specialized solutions, and possibly orchestrating a network of partnerships to stay relevant and competitive.” They make a number of suggestions.

1. Streamline merchant onboarding

1. Use a journey or workflow builder, (preferably no-code) to design, adjust, scale and automate steps in document collection and verification processes to minimize errors and accelerate activation.
2. Share journey flows with merchants in a portal or mobile app so they can track onboarding progress and the tasks assigned to them. With greater visibility, expectations are more clear on what is next and who is responsible, in real-time.

2. Manage the payment ecosystem

1. Connect teams and platforms across the bank’s internal departments (often disconnected and separate!) and third-party partners using APIs so all stakeholders supporting the merchant onboarding and ongoing support have up-to-the-minute views of the shared customer. 
2. Unify merchant interaction data from these fragmented sources into a single central screen, eliminating time wasted toggling between different systems to find updates and information.
   

3. Unlock communication and data silos to work as one team

1. Centralize communication channels, from email to chat to SMS in one place so everyone can see every customer touchpoint. 
2. Provide one place for banks and their providers to communicate and collaborate behind the scenes without long queues or email threads. That is faster and will provide a more holistic customer-facing experience.

4. Look for an orchestration platform specializing in financial services that uses GenAI

• Orchestrate the full merchant services journey but use AI selectively in the platform to help support merchant services teams to work faster and more effectively. 
• Take advantage of valuable customer interaction data and apply GenAI analysis to identify trends, anomalies, risks and opportunities.
• Design and scale better, smoother experiences with guidance from GenAI on ideal workflows based on customer interaction data at each step.

What are the benefits of modernizing merchant services? 

Investing in an orchestration platform to manage merchant services onboarding and support processes offers real-world business benefits: 

• Increased merchant retention: Enhanced onboarding and support foster stronger relationships and reduce churn.
• Operational efficiency: Integrated systems and automated workflows drive cost savings and service improvements.
• Revenue growth: Accelerated onboarding and higher merchant satisfaction enable quicker revenue capture, increased transaction volumes, more loyal customers and greater opportunities to cross-sell.

SMEs want end-to-end cash flow solutions and would ideally like to get them from their primary bank.

OvationCXM's Orchestration Tools Can Help

OvationCXM helps financial institutions manage complex third-party ecosystems and streamline workflows internally so it’s easier and less expensive to deliver support to commercial customers. We work with top U.S. banks to deliver customer journey and internal workflow-building tools, ecosystem connectors, knowledge delivery and management and other CX support services. 

Learn about our CX orchestration platform for onboarding and support

Learn about our in-platform AI tools.

Read how we’ve helped KeyBank overhaul its merchant services business line, changing it from cost center to a profit center in less than one year.