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Our perspective on the fintech world

Don’t Risk Alienating Your Customers With Your Pricing

In the payments world, it is common for an intermediary to charge an “ad velorem” type percentage fee on the value of a transaction that they process.  For example, whenever you use a credit card to make a purchase at your local store, that retailer is paying a percentage-based interchange fee to the various players involved in processing the transaction (which many retailers are not happy with, but that’s a whole other story).  However, as I’ve commented in the past, I don’t believe that this approach is justified in many cases.  And if your pricing as an intermediary is difficult to justify to one side or the other, someone will eventually push back.

A prime example is a company called Candex, which made the news this week for raising a $20m Series A funding round.  Candex acts as a master vendor for all small suppliers, allowing enterprises to pay Candex directly, which then remits payment to the suppliers.  Their value prop is to simplify the payment process for these large buyers and their many small providers.  It’s a fully hosted service that offers buyers and sellers a simple online interface to manage and track these payments.  However, I think their pricing model is misaligned and potentially alienates the small vendors that are critical to one side of their business as an intermediary.

Candex charges just one side of the transaction, the vendors.  And they charge quite a sizable fee of 3% of the value of the transaction.  Do their costs or risks increase as the dollar amount of a transaction increases?  I would say no.  They’re not extending credit or other financing, so there’s no marginal increase in risk as the value of the transaction increases.  And they rely on low cost, flat fee ACH to move the funds, so there’s no marginal increase in their money movement costs.  The underlying costs of processing a $10 transaction is essentially the same as a $10,000 transaction, yet Candex charges 1000x more.

So how are they able to charge this 3% fee on facilitating transactions?  Primarily due to the power imbalance in the trading relationships they intermediate.  (For those MBAs out there, remember Porter’s Five Forces?).

On one side of the transaction are the large buying organizations like 3M and Eaton.  On the other are long-tail small vendors who sell to these organizations.  Guess who has the bargaining power in these relationships – of course it’s the large buyers.

Candex’s approach is to offer their service essentially for free to the buying organization, who then impose the Candex service on their small vendors.  Not much of a choice for the small vendor – either accept getting paid via Candex and swallow the additional 3% fee, or potentially lose business from their largest customers.

It appears that Candex has signed on some large customers and now they have some money in the bank following their recent round of funding, so congrats to them.  However, the nature of their pricing structure risks alienating the small vendors that are critical to their two-sided model.  I wouldn’t be surprised to see Candex modify their pricing in the future to provide more balance, as these small vendors start to push back against a pricing structure that adds a significant layer of cost and is difficult for the buying organization to justify.