Tuesday, September 30, 2008
What a week it's been for the nation's financial system. Federal regulators seized the assets of Washington Mutual Inc., the nation's largest savings and loan, and sold them to JPMorgan Chase & Co. for $1.9 billion. Citigroup Inc. plans to acquire Wachovia Corp.'s retail franchise and banking operations for $2.16 billion.
And on Monday, Sept. 29, 2008, lawmakers on Capitol Hill defeated the $700 billion financial institution rescue package by a vote of 228 – 205. The same day, the Dow Jones Industrial Average finished the day down 777.68 points – or 7 percent of its total market value that day – making it the largest point drop in the history of the stock market.
The news has been ominous. But how will it affect the payments industry?
"Wow, that's a big, big question, but for right now I'll take the middle ground and say it all depends," said Paul Martaus, President of consulting firm Martaus & Associates. "We all know the markets are mostly psychological, which means irrational decisions are being made by the parties involved.
"The bailout plan was hoping to inject enough capital into the marketplace. The problem at the other end is that it's tightening up the credit because everyone is hoarding their cash. It's not a mortgage issue at all."
The rescue package is designed in part to get financial institutions lending again by ridding the market of what is known as toxic mortgage-backed securities – mortgages that exceed 30 percent of homeowners' gross annual income – that lenders fear could cause borrowers to default on their loans.
As a result, access to loans could be reduced, and this could ultimately prompt a significant interest rate cut by the Federal Reserve. However, it could possibly benefit the payments industry. "I think credit is going to be a lot tougher to get than it used to be, and I think as a result debit card [usage] will increase at the same time," said Dee Karawadra, founder, President and Chief Executive Officer of Impact PaySystem.
"If and when credit is no longer available, then [consumers] will start jumping into the debit card sector," he added. Karawadra believes merchant cash advance services could benefit from the credit crunch. "Cash advance is readily available. It's a lot easier to access than a loan, plus it's an additional revenue stream for our side," he said.
A sense of panic hasn't swept the payments industry. Adam Elliot, President of ID Insight Inc., said U.S. Bancorp is taking a unique approach. "Everybody's cutting back on credit, but USB is actually doing the opposite. They're out pushing it even harder on home equity and mortgage and credit cards, because they see this big vacuum, and they're kind of swooping in to fill it up," he said.
Martaus doesn't believe things are going to get as bad as the scenario the mainstream media depicts. "If you're involved in the volume side of things, part of the discount package, you might see a little downturn," he said. "Per-location sales are down a little, but ISOs are in the 'click' business [number of transactions], so acquirers who keep those click numbers up are going to be OK.
"I'm just getting ready to publish a research project on this, but the typical ISO that I talk to said 'Don't bother me with this stuff; I'm too busy closing business.' The ISOs themselves aren't even looking up. When you see the wild fluctuations in the market, ISOs are having swings in their values, but they are less volatile than the market as a whole," Martaus added.
Martaus feels this is less about money and credit than it is about confidence. "All we are looking for is some decision maker to say, 'Here's your confidence back.' The problem is we are in an election cycle, and these guys are more worried about re-election than they are about doing the right thing for their constituents and the rest of the country," Martaus said. "The people [on Capitol Hill] just need to start doing their job."
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