The Green Sheet Online Edition
January 12, 2009 • Issue 09:01:01
Weathering the coming payment storms
Once upon a time, weather forecasting was an art. The weatherperson would check wind directions, see storms over the horizon and predict rain. But, more often than not, their predictions were wrong. Weather was fickle. Whatever the forecast, it was always wise to take an umbrella just in case.
Today, weather forecasting is a science. Computer models, pressure patterns, satellite imagery and advanced radar provide fairly accurate forecasts.
For professionals in the payments industry, predicting the future used to be similar to the early weathercaster - it was an art, and often wrong. The industry was in a constant state of evolution and moving too quickly for anyone to predict what would happen next.
Although this evolution continues, using industry experience, history and current market conditions, it is possible for experts to forecast several "storm clouds" for 2009. You may have heard of these coming storms, but are you aware of the significant impact they could have on your career?
The Payment Card Industry (PCI) Data Security Standard (DSS) is an often discussed industry topic; for merchant level salespeople (MLSs) it may also be the most misunderstood. Confusion frequently centers on ISOs adding fees to merchants or to MLSs, calling them "PCI compliance" fees.
In 2009, expect PCI conversations to grow louder as ISOs begin realizing the size and scope of potential losses due to cardholder data theft. Greater emphasis will be placed by card networks on prevention and accountability. This will put strains on many ISOs, strains they aren't prepared to handle.
This goes beyond just the potential of losing merchants. Although ISOs may not hold merchant liability, they face monetary risk. If ISOs do not have plans for managing PCI (beyond small actions like buying insurance), and a data compromise occurs, the fines may be too great for ISOs to handle.
MLSs should question their ISOs about their PCI plans. MLSs must insist that ISOs have education plans designed to inform and educate merchants and sales forces.
If they don't, MLSs should find other partners because ISOs who devise and execute the best plans for managing PCI issues will be best positioned to weather the PCI storm.
Attrition happens all the time. In 2009, however, attrition pressure will come from different sources than in past years.
Merchants of all sizes will be affected by current economic pressures. Many may shut their doors for good. A small percentage of desperate merchants may look for other means to keep in business, including perpetrating card fraud themselves.
Back-end processors recognize that the potential for fraud increases in a tough economy. Therefore, merchant transactions are analyzed more carefully - resulting in more transactions being held for further research. In most cases, these transactions are released, but merchant funds are subsequently delayed.
These delays may not have been noticed during good times. But when money is tight, merchants are more sensitive to having deposits delayed. When merchants aren't prepared for it, or don't understand the reasons behind it, acrimony may ensue, which could result in merchants switching to the competition.
However, ISOs can help prevent this attrition with ongoing merchant education programs that emphasize what is being done to protect merchants from risk and fraud. ISOs should also ask their processors to inform them when transactions are being held so ISOs can communicate more effectively with merchants about delayed deposits.
The important thing is to be proactive and reach out to impacted merchants before they reach out to the competition.
Many MLSs participate in bonus programs that pay percentages of merchants' past three month's average volume. At a specifically designated time (usually 12 months after merchant account activation), the volume processed over the past year is averaged.
If volume decreases more then a small percentage, ISOs have the right to "claw back" the difference between what was originally paid to MLSs and what the bonus amount should have been based on the true volume average.
In previous years, that volume normally didn't drop precipitously over that 12 month period. In fact, the processing volume increased in many cases.
However, in 2009 there is a strong likelihood that the average volume will be much lower than at a similar time in 2008. This will result in bonus adjustments, and either direct debits from MLSs' accounts or the withholding of residuals to cover the difference.
Don't look to ISOs to forego their option to pull back the money. With the increasing revenue pressures many ISOs are now feeling, this is one contractual element they won't be waiving or ignoring.
If you received bonuses for "conversions" or for "existing merchant applications," you are at risk. Like the tornado that suddenly appears, the damage to MLSs caused by clawbacks can be significant. They may find their accounts depleted, suffer overdraft expenses or lose residuals completely.
Nothing can be done to prevent clawbacks. However, MLSs can reconsider their revenue strategies to avoid these situations completely. It may be necessary to find new ISOs that are structured to pay more over longer terms (through residuals or with different bonus structures) and not through bonuses that can be here today and taken back tomorrow.
Dress for the weather
With these storms on the horizon, it's prudent for MLSs to take stock of current contracts with ISO partners. Are you and they truly partners or are you being exploited as sales sources? Is the revenue pressure too great for your ISOs to survive?
It will take true partnerships to survive the first two storms and a change in mindset to recover from the last one. Even if ISOs seem strong, there will be failures in 2009. Size will not matter. Just because certain ISOs are large doesn't mean they are immune to financial turmoil.
Ask existing and potential partners questions. Review what they offer you; find out whether they use future income to pay current residuals. This will alert you to areas of potential concern.
Don't get caught in bad weather unprepared. A little preparation - and a good umbrella -may prove the difference in making it successfully to 2010.
Jeff Fortney is Director of Business Development with Clearent LLC. He has more than 12 years' experience in the payments industry. Contact him at email@example.com or 972-618-7340.
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