As the 800-pound gorilla of the payments industry, First Data Corp. is a magnet for rumors and unsubstantiated opinion. One persistent belief is that First Data is not friendly to ISOs or is, in fact, working to eliminate ISOs from the payment value chain altogether. But neither view has any basis in reality, according to Brian Goudie, Senior Vice President, Partner Sales, at First Data.
"Contrary to what a lot of ISOs out there think, we - the last three to three-and-a-half years - have really embraced the ISO model," he said.
What happened three-and-a-half years ago was the acquisition of First Data by private equity firm Kohlberg Kravis Roberts & Co. The September 2007 purchase coincided with Ed Labry being named to run First Data's U.S. operations. The significance to ISOs is that Labry has an ISO background, having been President of Concord EFS Inc. before joining First Data.
Goudie and his boss, Kim Fitzsimmons, President of U.S. Merchant Sales at First Data Merchant Services, also come out of the ISO world. "All of us have an ISO pedigree," Goudie said. "So it just was a natural progression for us to embrace the ISO industry."
To grow its outreach to the third-party ISO reseller channel, First Data more than doubled its internal sales force from three to seven representatives and took a greater role in the regional acquirer association meetings. The final change First Data made was to its image.
In the past, "my way or the highway" could characterize First Data's approach. "If you were an ISO and you were going to do business at First Data, First Data was going to lay out how it was, and you were going to conform or not," Goudie said.
But now First Data shows more flexibility. Goudie explained, "We needed to adapt to them as opposed to telling every new client, 'You have to adapt to First Data.' I think we've done that."
Since 2007, First Data has charted substantial growth in its ISO channel. Goudie didn't cite specifically how many ISOs have joined the acquirer during the post-KKR acquisition period, but he categorized it as in the hundreds. And one aspect of First Data that draws ISOs in, paradoxically, is the exit strategy First Data affords them.
A common goal of ISOs is to grow their merchant portfolios over time and then sell them for windfall profits. What better way to achieve that goal than by having a large pool of prospective buyers to choose from? "If an ISO comes on today and 10 years from now they decide they want to sell, you've got a lot more people to sell to that are on their platform," Goudie said.
As the potential selling price of First Data portfolios is enhanced simply by the number of prospective buyers that also process through First Data, buyers that already work with First Data are more likely to buy a First Data portfolio than one tied to another processor.
"The key to it being on your platform is you don't have to do a conversion of your portfolio from one platform to the other which, at all costs, people want to avoid," Goudie said. "There's just no way to do that without it being expensive and painful, frankly."
Converting merchants in a given portfolio from Processor A to Processor B is a dreaded activity because of the financial, staffing and time resources put into changing or modifying POS equipment at merchant locations so that it conforms to the new processing platform. Goudie said this "equipment challenge" is required of 10 to 20 percent of merchants in any one portfolio.
The other major downside to the conversion process is merchant attrition, Goudie said. Informing merchants of a change in processors becomes an opportunity for them to take their business elsewhere. The general thought is that ISOs lose somewhere between 20 to 35 percent of their portfolios in a conversion due to attrition, according to Goudie.
Because First Data ISOs prefer to buy and sell under the First Data umbrella, Goudie believes the acquirer is becoming "the eBay of ISO portfolios."
Goudie considers First Data's ISO channel a complement to its direct sales channel. Its direct channel consists of alliances with banks and referral sources like associations and chambers of commerce. Goudie said agents in the two channels are largely selling in different markets; therefore, the amount of competition between the two channels is negligible.
According to Goudie, First Data's ISOs are more entrepreneurial than its direct channel counterparts. "If you have somebody who works for a bank alliance, they tend to be a very reactive salesperson, whether the bank is giving them the leads or the bank is mandating [how] they run the business," he said. But that is not the case with ISOs.
"You could look at 30 different ISOs that have 30 completely different strategies," he noted. "It's a good thing." First Data offers a variety of revenue sharing programs for ISOs at different levels of development.
Beginning ISOs can enter First Data's Agent Program, which requires from them minimal financial commitments. The next level is the Retail ISO Program, in which First Data takes on the risk and underwriting responsibilities. In the Wholesale ISO Program, ISOs shoulder the risk and do their own underwriting.
Finally, the FSP Program is First Data's full-service processing business model, which is like the wholesale model except that ISOs can bring their own sponsor banks into the relationship. "So every single client that we talk to, we actually have a bucket that probably would fit that strategy," Goudie said. In the case of startup ISOs, Goudie would probably steer them into the Agent Program, then reassess in a year's time.
"Maybe you want to take it to the next step to becoming a retail ISO," he said. "A few years from now, maybe you want to entertain taking on the risk and doing the underwriting. We don't really care. It's the beauty of the program."
First Data also allows its ISOs to do business basically as they see fit. "They really have the freedom to go out and price accounts the way they want, sell whatever equipment they want," Goudie said. "As long as it's in compliance and they are complying to the association rules, they have a lot of freedom."
As the world's largest acquirer, First Data offers its ISOs a vast array of POS equipment and proprietary services to sell to merchants: TeleCheck for check services, TASQ Technology for equipment needs and remote deposit capture, and First Data Global Leasing for POS equipment leasing needs. Additionally, First Data runs its own global gateway and provides a full range of prepaid card processing services.
Goudie noted that all First Data-owned companies, products and services, which means First Data ISOs, never need to go outside the company to contract with third-party service providers. But that is not to say ISOs cannot utilize other vendors.
"If an ISO wishes to use a third-party gateway, gift card vendor, POS equipment device, et cetera, they are free to do so, which gives them the best of all worlds," he said. One soon-to-market First Data product is called Trans-Armor - a service that uses data encryption technology to secure cardholder data at the POS before removing it from the merchant environment and then uses tokenization to allow merchants safe access to it when necessary.
According to Craig Tieken, Vice President of Product at First Data, TransArmor encrypts payment card data at the point of capture. The card number is then tokenized - replaced with a different number while retaining the last four digits the same as the original. That "token" is then stored at the merchant site without the need to protect that data because it is useless to hackers if stolen.
First Data stores the actual number securely. If an issue arises with a particular transaction, such as a chargeback scenario, First Data can retrieve the card number using the last four digits combined with the merchant ID, Tieken said.
He called the technology "hardware agnostic," meaning it is meant to be used on all types of POS systems, both old and new. TransArmor is therefore designed to work with older swipe devices that mom-and-pops might use as well as with the large, integrated POS systems run by big-box retailers, Tieken said.
The overarching goal of TransArmor is to relieve merchants of the burdens of Payment Card Industry (PCI) Data Security Standard (DSS) compliance - something that competing solutions do not do, Tieken said.
Some large merchants already employ tokenization and encryption technology, he noted, but they have the responsibility of housing the token servers and the subsequent data security compliance requirements. "What we're doing is we're pulling that back and taking that burden away from [the merchant]," Tieken said. A product like TransArmor, scheduled for availability to ISOs starting in the summer of 2010, seems to affirm First Data's commitment to ISOs.
"Looking into the crystal ball, I think we will continue to grow this channel," Goudie said. "We don't see it stopping anytime soon."
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