On July 21, 2010, President Obama signed the financial reform bill into law. Nine months hence the Federal Reserve will begin implementing some form of debit card interchange regulation. While this does not come as good news to most constituents in the payments industry, it is at the least a bracing wake-up call, if not a slap in the face, for payment professionals to get more involved in the political process.
Industry insiders agree the Durbin Amendment to The Restoring American Financial Stability Act of 2010, coming on the heels of the Credit Card Accountability Responsibility and Disclosure Act of 2009, is not the end of regulatory action on the payments sector.
To moderate the negative effects of further legislation potentially lurking ahead, as well as to help shape the interchange regulations stemming from the new law - given the nine-month window until its implementation - ISOs and merchant level salespeople (MLSs) need to take action today.
Mary Bennett, Director of Government and Industry Relations at the Electronic Transactions Association, said ISOs and MLSs can start by establishing personal relationships with their local representatives in Congress. Several times a year senators and representatives return to home districts specifically to listen to constituents' concerns.
Bennett recommends beginning with a friendly, straightforward introduction: "I'm in business in your district. I employ x number of people or I serve x number of companies, and I want to tell you about my business and what I do."
If the visit is prompted by a piece of legislation, explain how it will affect your business, she said. "So that's the kind of thing that everybody can and should do," she added. "It doesn't even need to be a meeting. It can be an email to their particular representative and say, 'Hey, here I am. Here's what I do. You have questions about the issue, call me. I'm happy to help you out on any kind of information you need.'"
Like any good ISO or MLS, that introduction should be nurtured over time. "And then when something bad comes down the pike, or conversely good, you would then have a preexisting relationship where you can go in, and they know you as a credible person," Bennett said, indicating this is a more productive strategy than being "somebody who walks in for the first time and says, 'I hate this bill, vote against it.'"
However, the very nature of the ISO community complicates political activism ISO by ISO, or MLS by MLS. Conrad Sheehan, founder and Chief Executive Officer at alternative payment firm mPayy Inc., said ISOs are a fragmented lot, with many different viewpoints. On the one hand, fragmentation leads to competitiveness, which leads to innovation, he said.
When it comes to political activism, however, Sheehan believes ISOs should deliver their message collectively, but he realizes organizing ISOs to send a unified message would be impossible. "Message matters," he said. "And who's delivering that message?
That's kind of Lobbying 101." He pointed to the Washington, D.C.-based ETA as the obvious choice. He favors a well-worded letter drafted by the ETA that explains to Congress the industry's argument concerning government regulation.
Henry Helgeson, President and co-CEO of Merchant Warehouse, favors an ETA white paper in which the industry argument is elucidated. The document could also disseminate talking points ISOs and MLSs could use when contacting their representatives individually.
As an ETA member, Merchant Warehouse has received ETA notices that have provided industry opinions on subjects like interchange regulation, Helgeson said. "I think that needs to be circulated a bit more," he added. "And we have to get in front of the ISOs out there and really make it a grass roots effort with one common goal and one unified voice."
Kurt Strawhecker, President of payment consultancy The Strawhecker Group, believes talking points should be distributed to ISOs and MLSs on index cards with an accompanying message like, "Here's an index card of things to bring up when you're talking to retailers about the potential effect of this legislation."
Mike Strawhecker, Director of Marketing & Strategic Research at TSG, said, "That's the yin-yang balance between the member companies and the ETA. The ETA is very high level and they are communicating with Congress. At the same time they are communicating with the members working in conjunction with [the feet on the street] to have consistent messaging to the retailers."
While some may consider ISOs and MLSs to be low on the payment food chain, ISOs and MLSs are uniquely qualified to influence merchants because they are the face of the industry for retailers. The feet on the street can therefore play an important role in educating merchants about the potential fallout of debit card interchange regulation on their bottom lines.
Kurt Strawhecker offered a scenario of a sales rep approaching a merchant and saying, "What's going to happen to your business? There's 20 percent less debit card usage in your business. At what point does a consumer turn to cash or not come in because, 'I don't have that money in my pocket to spend in your store right now.'"
If agents were able to deliver a consistent message to merchants, the political effect could be substantial. As an example, Mike Strawhecker mentioned the September 2009 7-Eleven Inc. petition drive, in which the convenience store chain delivered to Congress 1.66 million signatures from 7-Eleven customers who agreed with 7-Eleven's position that payment card transaction fees were unfairly high.
"It's a very simple message to an everyday consumer," Strawhecker said. "Well, of course, they [agree]. And so when 15,000 7-Eleven franchise owners show up in D.C. with 1.66 million signatures, it's a very simple message to get to Congress."
Kurt Strawhecker said ISOs and MLSs can impart a powerful counter message to merchants by helping them recognize why they wanted to accept electronic payments in the first place: increased sales. Today, the 7-Eleven franchise owner only sees electronic payments "as an expense, not as a revenue generator," he said. But to persuade merchants of that original benefit, the feet on the street must overcome a significant hurdle: perception. Being the face of the payments industry, ISOs and MLSs are agents of banks in the eyes of many merchants. "The dirtiest four-letter word in today's society is 'bank'," Kurt Strawhecker said.
Adil Moussa, Analyst at Aite Group LLC, believes some ISOs and MLSs have another challenge to overcome: lack of credibility. "There are ISOs out there who are gouging merchants left and right," he said. "And when merchants find out that they are being taken advantage of, they get very angry.
"And, of course, it is very easy to get the merchant to side with anybody who is saying, 'You know what, we're fighting to reduce your fees that you're paying at the end of the month.' Any merchant is going to say, 'Yes, I want to reduce my fees.'"
That viewpoint is shortsighted, given that electronic payments often account for at least 60 percent of merchants' revenues, Moussa said. But it's hard to convince merchants of that when some ISOs are charging them 4 percent per transaction when the going rate is 2 percent, he added.
In Moussa's discussions with small merchants, the pain point of too much interchange never surfaces. "The only thing that a small merchant is going to be angry about is when they find out that they have been taken advantage of," he said. "And they pay an exorbitant amount of money that, if they went with somebody else, they wouldn't have paid that much.
"That is really what makes a merchant angry. It's not the fact that he's paying a fair market price for taking credit cards." Thus, it is difficult to get merchants to adopt the payments industry's viewpoint when some of its most visible representatives are deceitful. According to Moussa, a solution is for the feet on the street to self regulate.
"You can agree to a code of conduct," he said. "That's not very difficult to do. A lot of professions have that already. ... There are a lot of ISOs that are doing an incredibly good job out there, but their names get thrown in just because they have the word ISO attached to them."
Moussa raised the idea of an organization that would license or accredit ISOs that adhere to a code of ethics, and even another level for ISOs that achieve a higher ethical standard. Then ISOs and MLSs could incorporate information about that licensed status into the sales process.
Education occurring during the sales process is the main way the feet on the street can impact merchants' perceptions of the industry. Helgeson said merchants should be enlightened on the basics of the industry, especially how interchange works.
"I do think ISOs take a lot of the brunt for the issuers having higher interchange rates," he said. "I don't think the merchants understand the relationship between the ISOs and the issuing banks and how we pay interchange. I think the typical attitude out there is that the ISO is collecting the full amount of the interchange ... and that's not accurate."
Also, for ISOs and MLSs to truly inform merchants about how legislation will affect both merchants and the overall payments industry, the feet on the street must educate themselves so they understand the implications of laws already passed, as well as legislation on the horizon. Thus, the ETA launched a tool in April 2010 that all payment professionals can access.
It is a free advocacy website called The Voice of Payments (www.voiceofpayments.org) designed to help individuals in the industry communicate with elected officials. Users can also receive alerts on key legislative issues and read background material on such topics as interchange, data security, breach notification and the future consumer protection agency.
There is no dispute that the ETA is the leading advocacy group for the industry. But its membership, somewhere north of 500 companies, pales in comparison to that of the National Retail Federation, which supports a membership base of over 1.6 million businesses.
As the ETA's main opponent in the interchange debate, the NRF wields political clout the ETA doesn't possess, according to Mike Strawhecker. To shrink that margin, he urges ISOs to join the ETA to increase the organization's "firepower" on Capitol Hill. ISOs should also volunteer with the ETA, as well as take part in letter campaigns and sponsorship activities, he said.
Kurt Strawhecker, who serves on the ETA's board of directors, said the association has taken charge as the industry's voice in Washington over the last three years. In that time, it has been gaining political influence and was instrumental in defeating several legislative attempts at regulating the industry, he said.
"The committees that are actually writing this legislation know who the ETA is now," he said. "They actually are asking for our assistance, you know, help us understand what interchange is, what is an ISO. ... At least we have a seat inside, and we've been able to avoid some real disasters."
Bennett said the ETA is in touch with the Federal Reserve regarding the creation of regulations for implementing the new debit card interchange law. She stressed that the ISO's viewpoint must be included as part of educating regulators about "the totality of the electronic payments system."
Helgeson believes the industry can influence the direction of the regulations. He said a "gray area" exists in the Durbin Amendment concerning the calculation of debit card interchange relative to the back-end costs of processing the transactions. With less than a year to hammer out the regulations, Helgeson agreed that the industry must move forward with urgency and a unified voice.
Mike Strawhecker said it's equally important to see the bigger picture. Protests like the National Cash Only Day planned for Labor Day weekend should be combined with sustained, long-term campaigns like messaging delivered to merchants via ISOs. (For information on the National Cash Only Day movement, visit www.causes.com/causes/495235/about?m=cfc9554f.)
"I think it's all those things over a long period of time where, five years from now, when Congress wants to regulate credit card interchange, that's when I think you will see the results," he said.
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