Don Apgar, Senior Vice President at Payment Alliance International believes PAI is unique because the company's total revenue "is equally split between the bankcard division and the ATM division." In an interview with The Green Sheet, Apgar, who was formerly a Vice President at both Citigroup Inc. and First Data Corp., discussed the boon of selling credit card terminals and ATMs together.
He also explained the importance of good underwriting, why he thinks lowering interchange rates would be disastrous for the payments industry and why the card brands might begin fining smaller retailers as part of enforcing the Payment Card Industry (PCI) Data Security Standard (DSS).
The following is excerpted from the conversation:
The Green Sheet: What distinguishes an ISO that a merchant level salesperson (MLS) would want to work for?
Don Apgar: You want to have an ISO that's well-suited to the kind of business you like to do. If you're talking about a sales agent looking for an ISO, if you're a sales agent and you have a buddy that does Web sites and you have a lot of leads on e-commerce, you need to work for a guy that's willing to underwrite, that has good gateway products and knows how to service them.
If you're into larger accounts, let's say high-end retail, a lot of restaurants, you need to have an ISO that's connected to a network that's got a lot of [value added resellers] certified on it. Specifically you need to look at a good business fit, but in general you want to work with a guy that's honest.
GS: Do all MLSs who work for PAI receive the same residual split?
DA: There's a three-tier revenue schedule that says if you're a low producer - maybe you're part time - we'll start you off at a base revenue share; if you're kind of a one-man office and you're doing an OK number of deals, we'll give you a higher revenue share; if you're a high-producing office, which indicates you probably have more than one rep, we'll give you an even higher revenue share to be able to pass that down to your reps.
GS: Has the recession made finding MLSs easier or harder?
DA: It's getting tougher to find direct reps. I don't know if it's gotten any tougher because of the recession, but I think one of the things that's really stirred the marketplace up is this whole situation with [ISOs reportedly struggling to make residual payments].
Everyone's sitting around going, well, gee, if it happened to those guys, could I be next? Everyone's looking at who they're working with, and asking, do I have to pull my contract back out and see what kind of terms I have?
GS: Are salespeople more reluctant to enter into contractual agreements?
DA: I wouldn't say that, just that people are more willing to consider other options than what they already have - more willing to talk to another partner than the ISO that they're working with today.
GS: Has that development benefited your company?
DA: Absolutely. I think we've seen a significant uptick as a result of that. It's because we run a very transparent organization. We have no problem giving people tours around the back office, we show you all the details and financial reporting. There's no man behind the curtain.
GS: Do you think interchange rates for merchants are at the level they should be?
DA: I think the recent calls by the [National Retail Federation] and others for legislation that regulates interchange fees and limits issuers' income are not healthy for the industry and will actually backfire for the retailers. If you go back 20 years when credit cards were first getting out there, one of the huge benefits to accepting a Visa or MasterCard was you'd capture a wider share of the shopping audience.
What's happened over the years now is Visa and MasterCard have become such utility brands that a large majority of shoppers are paying with a credit card, and the merchant says, well, I'm paying all these fees, I need to have lower fees. It's easy to say that, but those interchange fees go back to the issuers - who then write off fraud losses, who write off bad debt losses, who fund rewards points and who have to reissue cards.
When you cut back the income to an issuer, what's an issuer going to do? Reduction in credit lines: I tighten up my credit standard so few people get cards, and I'm more aggressive in charging stuff back for fraud. The issuers are going to contract. I think at the end of the day it's going to have a negative impact on the merchants' business because there won't be a bunch of people running around with credit cards with big credit lines on them. If I save $1 in interchange, I think somewhere down the road it's going to end up costing me a $1.50 in sales. There was this misguided thing in congress that fortunately got defeated. They were going to allow merchants to negotiate their own interchange fees with a three judge panel of arbiters; imagine the chaos at the acquirer level if you have to be able to drive interchange fees by merchant. Who's got a database big enough to hold that?
GS: What about adjusting interchange for small purchases, providing a reduction or a percentage interchange fee rather than a flat fee?
DA: There's already some of that out there today ... parking lots, movie theaters, fast food. I think it's a good idea but, again, you have to balance that with whether it's in the issuers' best interest to accept lower income.
GS: Do most ISOs have a direct stake in merchants' PCI compliance?
DA: Fortunately, we've been pretty insulated because most ISOs deal with level 4 guys, the mom-and-pop shops. But I think we're getting ready to see Visa or MasterCard make an example of one of these small merchants. Joe's bike shop gets his terminal stolen or has a rogue clerk ... and PCI comes down through the card brand and says we're going to fine this guy $10,000.
Well, that charge comes down like a chargeback, from the card company to the acquirer to the processor to the ISO, and I have to go now to collect it from the merchant, and it's very likely that I'm not going get $10,000 out of Joe's Bike shop.
GS: Has something like that happened yet?
DA: I'm not aware of anybody affected by a small merchant fine. I don't think any small merchants have been fined, but the potential exists.
GS: What makes you think that might change?
DA: We're seeing more and more of these incidents. If you think about the way PCI's been rolled out, it makes logical sense to say, where's the most data? The companies processing the most transactions are most likely to get hacked, hence the tiering of the merchants one through four. So, of course, you're going to go after TGI Fridays and Home Depots and make sure they're all compliant.
But the hackers have been following that and - as it's getting more and more difficult to hack the big guys - they're going after the little guys, the guys with an IP terminal going into a non-password-protected router. There needs to be a wake-up call from a compliance standpoint. The ISO has been made responsible to make sure all these merchants fill out their self-assessment questionnaires, make sure they're all compliant and all their terminal applications are compliant - and there's no support from the card companies. So the merchants don't really think it's an issue.
GS: I understand your company offers breach insurance.
DA: Yes. We went out and insured every merchant for $50,000 in data breach insurance with zero deductible.
GS: If no small merchants have been fined, what's the insurance money protecting them from?
DA: Well it's protecting them from potential fines, as well as potential losses. There have been some small lawsuits filed. There was a merchant down in Florida, a high-end hair salon, and the receptionist was getting paid on the side to siphon off card numbers, so these are all wealthy clients with very high credit lines, and she's selling credit numbers out the back door.
By definition, you can't be PCI compliant if you were breached, so there's some uncertainty, and we thought it best to be proactive and protect these guys.
GS: How are you working to meet PCI's "sunset dates" for technology upgrades?
DA: We've got a huge initiative right now. We just went through the whole portfolio and identified those guys that have noncompliant applications or terminals and are in the process of calling them all and saying you need to upgrade. For the most part it's a software issue, not a hardware issue. But come next year, it's gonna be the whole PIN pad thing. Everybody that's got a POS system - we're having to call all these guys and get the specific version number. Typically, you may or may not gather that on the application.
GS: Are you going by PCI Council sunset dates or are you imposing your own deadlines?
DA: We're following the council guidelines.
GS: Is there any new or emerging type of payment technology you're particularly excited about?
DA: Probably the most exciting thing out there now is the remote deposit capture. If you look at it objectively, what RDC is going to do for check deposits is what [electronic data capture] did for credit card deposits back in the late '80s. It's a huge potential savings in cash management fees for larger corporations and in time and convenience for smaller businesses that take a lot of checks. We just rolled out a program with RDM Corp. We'll be reselling their Simply Deposit product, and we're expecting a huge market share on this.
GS: Is that something you're selling?
DA: We just rolled out a program with RDM Corp. We'll be reselling their Simply Deposit product and we're expecting a huge, huge market share on this.
GS: Will checks survive long enough for the RDC phenomenon to play out over time?
DA: I think so. The huge majority of checks out there are business-to-business stuff, where the supplier pays the distributor and the distributor pays the manufacture. There's a lot of room in the business to business market in RDC.
GS: PAI has both bankcard and ATM divisions. Why is the company so heavily invested in selling ATMs?
DA: We're very mindful of making ourselves into a payment company, not just a bankcard ISO. About half the company's revenues come from the bank card business and half from ATMs. The fourth quarter of [2008] was the first quarter ever where we saw total Visa and MasterCard volume at the POS decline. But, coincident to that, we saw an uptick in ATM withdrawals, so having a balanced revenue stream was very fortuitous.
From an MLS's or sales agent's standpoint, one of the things that's key to being successful in today's economy is the ability to offer more than one payment option.
The average merchant gets 13 solicitations a month. If you're just one more guy walking in there saying, hey, let's see if I can save you some money, merchants have gotten jaded to that sales pitch. So the answer is don't just pitch bankcards.
You mentioned whether interchange should be reduced for small tickets. Well, here's another solution, Mr. Merchant: Put an ATM in your store, because an ATM makes money, and you participate in the convenience fee that the consumer pays. You've taken a POS credit or debit transaction that's going to cost you money and turned it into an ATM withdrawal that's going to make you money.
MLSs have always downplayed that because the ATM guys were always different from bankcard guys - we don't want you to have an ATM in here because that's going to kill my credit card business. But if you're the guy that owns the ATM and you're also the guy that services the POS terminal, it doesn't matter what the customer does. You still make money.
GS: Is that a selling point you often use to recruit sales partners?
DA: Absolutely. It's huge. Being able to have a full portfolio of products and services is just critical to the success of the MLS in today's market.
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