The Green Sheet Online Edition
February 22, 2010 • Issue 10:02:02
Could community bank loans help the payments world?
A recent proposal by President Barack Obama to revitalize America's languishing small-business sector through community bank loans could provide a boost to payment institutions, industry observers said.
Obama's plan would allocate $30 billion in federal funds - using money repaid by large banks that received federal money from the $700 billion Troubled Asset Relief Fund (TARP) created in 2009 - to banks nationwide with less than $10 billion in assets, with a built-in incentive for loaning that money to small businesses. Under that criterion, more than 8,000 U.S. banks would be eligible to receive loans.
Rather than dispense the money through TARP, a program associated with last year's controversial bailout of large banks, Obama has proposed creating a new government agency called the Small Business Lending Fund. Under his plan, banks would be able to borrow money at a lowered dividend rate if they use that money to improve their small business lending; if they don't, the dividend rate goes up.
"I think the President's plan is a good one and is headed in the right direction," said Robert Klingler, a lawyer for Bryan Cave LLP who specializes in community banks. "If you need to get employment going, you need to get small business going, and the best way to do that is put money in community banks that can lend to the local hardware store."
The community bank loan proposal awaits deliberation in Congress, however, which could prove a stumbling block. Given heavy congressional opposition to much of Obama's political agenda, the proposal is unlikely to breeze through, Klingler said.
It may get rejected outright or, perhaps more likely, be approved in an altered or attenuated form. Should it be approved, a timetable for the proposal's implementation is anybody's guess.
Boost to economy, boost to payments industry
Industry insiders believe it is hard to predict the effect such a program would have on the payments business. At the very least, sources said, payment institutions would likely benefit from a general lift in economic activity.
Among other things, possible employment gains could boost commerce - including an uptick in payment card transactions - and businesses expansion could necessitate new payment acceptance equipment.
"If small restaurants and small retailers can also gain access to loans and can then expand then, yes, they will have more opportunity to run transactions through the systems or open new locations and all that kind of stuff," said Paul Martaus, President of payments industry consulting firm Martaus & Associates. "It's a whole thing, and that's why they call it macroeconomics.
"We really don't live in a vacuum out here [in the payments sphere]. Everything really does tie into everything else. If we can get those funds flowing again and small businesses generate more jobs, I see all kinds of positive benefits coming from it."
Martaus said there could be other, more direct benefits to payment businesses as well. Should the program widen the availability of bank loans - access to which has grown increasingly restricted during the recession - ISOs in particular would stand to benefit, he said.
"We have a fairly significant number of independent sales organizations that are under stress, because they have a lack of access to loan-able funds," Martaus said. "If that spigot were to open back up ... that would take a lot of stress off the industry. There are a whole bunch of folks out there that could really benefit from something like that."
Martaus, however, noted that community banks - in contrast to many big banks, which became notorious in recent years for reckless lending - have "by their very nature always been incredibly conservative." He said even an injection of government money might not significantly loosen lending standards.
Scott Zdanis, co-founder and co-Chief Executive Officer of the ISO Merchant Warehouse, agreed that community banks would likely be cautious with federal funds. But that's a good thing, he said, adding that an expanded, yet responsible loan market would be the ideal formula for small business growth.
"Community banks don't live by the phrase, 'too big to fail' - which is a very dangerous, ugly phrase," Zdanis said. "So it's nice to know the money will be going into bankers with the attitude that there's no such thing as too big to fail, as opposed to going into the pockets of these guys that might blow millions of dollars and not even lose sleep at night."
Zdanis also downplayed the likelihood that a greased loan market would play favorably with ISOs. Other than the biggest and most prominent ones, he said, ISOs would mostly continue to be shut out from serious lending.
"My experience with our industry is ISOs tend to not borrow money in traditional ways," Zdanis said. "You don't see them getting traditional loans from banks unless they're big and well-established."
Upgrade at the POS?
Martaus suggested another industry sore spot that bank loans could help rectify: old, outdated payment acceptance equipment, which, to the joy of data thieves, remains in widespread use.
While he noted that enhancing their POS systems isn't exactly a top priority for most retailers, a special circumstance may force long indifferent merchants to consider an upgrade: July 1, 2010, is the deadline (set several years ago by the PCI Security Standards Council) for upgrading payment terminals to the newest models. Visa Inc. has said that merchants who fail to upgrade will lose their card acceptance privileges.
On July 1, every payment device must run an application that is Payment Application Data Security Standard-certified, Martaus noted. "What that means is there may be up to 1.2 or 1.3 million merchants that will not be able to accept Visa/MasterCard on July 1," he said. "Sooner or later somebody's going to wake up and say that's not a good thing."
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