By Brandes Elitch
CrossCheck Inc.
The start of a new decade offers a chance to recap consequential events of the preceding 10 years and forecast what of import will transpire in the next 10. However, it's easy to discuss the past, but it's not easy to determine its significance. This reminds me of Communist Chinese dictator Chou en Lai, who, when asked in the 1960s about the impact of the French Revolution, replied, "It's too soon to tell."
In the Pymnts Voice Blog (www.pymnts.com/commentary), David S. Evans identified 12 "great developments in payments" over the last decade. Following are my comments on what I believe are the four most meaningful topics he listed.
1. Associations become companies
It will be interesting to look back 10 years from now on what Visa Inc. and MasterCard Worldwide will have done with their newfound freedom and capital as publicly traded companies.
The back story is the class action lawsuit in 2003 by Lloyd Constantine, lead attorney for Wal-Mart Stores Inc. and other stores. The former Associations settled on the steps of the courthouse for $3 billion, including $225 million in attorney's fees (according to Constantine's book, Priceless: The case that brought down the Visa/MasterCard Bank Cartel).
This suit mandated the untying of debit card from credit card acceptance and lowered fees for signature debit. (Ironically, Visa then raised the price on PIN debit and passed the increase on to its issuing banks. Here is a famous quote by Ron Congemi, former Chief Executive Officer of the STAR debit network: "The Associations competed on the basis of raising prices. What other industry do you know that gets away with that?")
After the settlement, the major issuing banks wanted to limit potential exposure to lawsuits such as this, which spurred the shift from Associations to public companies. As I write this, Visa's stock is trading at a 52-week high; MasterCard's stock has increased 450 percent since it went public in 2006. Now they have the capital and power to expand into new businesses and grow their franchises. We will see.
2. Consumers favor debit over credit
I doubt if anyone would have predicted in 2000 that debit would surpass credit in transaction volume. Consumers voted with their cards, and the cost of debit processing has declined versus credit. But the card brands still work hard to motivate consumers to use signature debit (fully 60 percent of debit transactions) instead of PIN debit.
3. The mag stripe persists
The main issue here is risk management and fraud. Interestingly, most fraud (over half) comes from card-not-present transactions (only 10 percent of all transactions), where the mag stripe cannot even work.
But card numbers can be stolen (via phishing and keystroke logging) and fake cards created. The mag stripe works well when accompanied by a PIN (PIN debit), but the banks prefer that consumers use signature debit. Logical alternatives would be a chip card or a triple data encryption standard hardware encryption device, but issuers balk at the expense.
4. Financial meltdown affects ISOs and merchants
Deloitte Development LLP published a white paper titled Banking and Securities Outlook 2010. The research firm identified five major trends that will dominate the banking industry in 2010. They include how banks:
I can scarcely think of another time when banks had more daunting challenges. Of particular concern is the sobering reality that 20 percent of commercial real estate loans will come due in the next two years.
Deloitte predicts new regulations will tighten capital, liquidity and risk management issues. Board oversight of risk management is expected to increase, and this could make it even more difficult for businesses to get loans - or even merchant accounts. How can banks get capital and clean up their balance sheets in this environment?
And from an ISO standpoint, how can your merchant customers get the funds they need to start or grow their businesses?
It isn't just banks that are forced to deal with these issues. Take a look at the company that touches almost every ISO: First Data Corp. This firm has $22.6 billion of debt. It will have to raise capital, perhaps with an initial public offering in 2010. As the economy slowed, transaction and volume growth slowed too. The larger issuers demanded, and got, price discounts on the order of 20 percent.
Congress is overwhelmed with consumer complaints about issuers' egregious behavior, and bills are pending that would cap card interest rates and even interchange. From an expense standpoint, First Data still has three processing platforms in the United States and two abroad.
Eric Grover, a Principal at Intrepid Ventures, stated there is a "global processing land grab" under way, between First Data, Global Payments Inc., Total Systems Services Inc., Elavon Inc., and Atos Worldline SAS. Some analysts believe First Data is worth less today than at the time of its leveraged buyout valuation in 2007 - or even its outstanding debt.
The list of major players will be quite different at the end of the next decade; I suspect this will heavily impact the margins and revenues available to pay the ISO community.
Some people call the "aughts" the lost decade due to the most serious economic collapse since the Great Depression. But we have cause to be optimistic. As Pascal-Emmanuel Gobry points out in The Business Insider, most innovation still happens in the United States, and this is the best place to take risks and be innovative.
The effects of new technologies, Moore's law and new manufacturing and supply chains will make technology cheaper and more broadly accessible. Resourceful entrepreneurs will use this to create economic and social benefits that we cannot yet even imagine.
Gobry also stated that the present situation is similar to the railroad boom and bust cycle of the 1830s, which ended up creating the infrastructure for enormous economic growth, including cheaper manufacturing and larger markets.
Yes, we just experienced a tough decade. Mainly, the problems were caused by a collapse in the regulatory system - not people buying homes. The repeal of the Glass-Steagall Act allowed banks to use insured deposits to engage in casino-style gambling activity, aided and abetted by the central figure in the crisis: American International Group Inc.
As Stanley Bing points out in Bing's Blog, "There are still many in Congress, the press, and the public who operate on the notion that there is something called the free market and that it should be allowed to operate unfettered for the good of all. There are also many who still believe that the earth is 11,000 years old. We don't listen to them either."
So whether you are an ISO or a merchant level salesperson, hang on. It should be quite a ride.
Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at brandese@cross-check.com.
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