By Brandes Elitch
CrossCheck Inc.
Online and paperless" seems a safe bet when talking about the future of the payments industry. Replacing paper checks with cards that enable electronic transactions is another predictable plus. Economy of scale can be a good thing. But sometimes, product development is driven by factors you wouldn't suspect. Here are three examples of consolidation in the payments industry that will affect all ISOs.
One development involves buying tickets for music or sports events. A few weeks ago I attended a National Association for Stock Car Auto Racing event at Infineon Raceway in Sonoma, Calif.
When I got to the gate, the ticket-taker had a portable electronic scanner that read the bar code on my ticket. Wow, I thought, this is a clever way to spot fraudulent tickets. (I'm not saying NASCAR fans are any more dishonest than the general population, although last year a police raid on the handicapped parking lot revealed that the majority of the cars had fake handicapped parking placards).
But recent developments by Ticketmaster and Veritix go beyond this. Now the ticket-taker will scan not just the ticket, but also the credit card used to buy it plus a photo ID. This reflects the reality that just about the only way to buy something online for immediate delivery is to use a credit card.
But what if you wanted to buy a ticket for someone else? Ticketmaster's paperless tickets cannot be transferred by the buyer to another party.
The company's suggestion is for the gift giver to buy paperless tickets "on the credit card of the person attending the event, and then reimburse them later." (You can't make this stuff up.) For a fee, Ticketmaster will allow you to resell the ticket on its own reselling site, where it will take a cut of about 20 percent.
I wonder how this will affect the huge secondary market in tickets. Nobody really knows how big this market is, but an estimate by the New York Secretary of State ranges from $2 billion to $10 billion annually. Aside from the presumably thousands of people (sometimes called "scalpers") who make a living reselling tickets, websites like Razorgator.com and StubHub.com (owned by eBay Inc.) are also in this market.
Ticketmaster says its policy gives consumers peace of mind about lost or stolen tickets (how do you steal someone's paperless ticket?), prevents speculation and "ensures that the price point carefully chosen by the artist or performer will be maintained."
Remember the phrase "vertical integration" from Marketing 101? Well, things get curiouser and curiouser because Ticketmaster recently merged with Live Nation Worldwide Inc. It probably wouldn't surprise you to know Live Nation is the biggest concert promoter in the world. It also manages the careers of many artists who will be giving these concerts. Now that's vertical integration.
It isn't farfetched to say the vast secondary market of ticket resellers is a payment network. The people who buy tickets and resell them perform a valuable market function, bringing together buyers and sellers.
Their job is to clear the transactions, just like an ISO would do for a merchant. As an ISO, you may even have some of these merchants as your clients, and you might want to pay attention to further developments in this space.
Another payment development is leading prepaid card company Green Dot Corp.'s initial public offering, which took place July 22, 2010, and raised $164 million, a significant portion of which came from Wal-Mart Stores Inc.
Green Dot is a phenomenal success story. In a relatively short time, it constructed a payment network for the unbanked. Many people are often surprised to learn that between 20 and 25 percent of the population is unbanked. This demographic has traditionally been served by check cashers and the payday loan industry.
Green Dot hit on the idea of mass prepaid card distribution: its cards are sold just about everywhere, including Wal-Mart, where over half of Green Dot's operating revenue in the first quarter 2010 was generated.
You may remember that back in 2005, Wal-Mart filed an application with the Federal Deposit Insurance Corp. to open its own Industrial Loan Corporation (ILC) so it could reduce costs on the millions of payments it processes (if you are a bank, you can be both an issuer and acquirer - think about that).
Predictably, this ignited a firestorm of protest by banks and retailers, which ultimately caused the application to be withdrawn. A moratorium on new ILCs by nonfinancial companies was also instituted.
At the time, the Chairman of the FDIC, Sheila Blair, made a prescient comment. She said, "Wal-Mart doesn't need an ILC to play an important role in expanding access to financial services; they can do so by partnering with banks and others." Press reports at the time spoke of lease terms that Wal-Mart had with the banks that rent space for branches within the stores. These terms provide that Wal-Mart can offer future services, including mortgages, consumer loans, home equity loans, investment and insurance products, and "any other type of service or product that the company might develop."
Many Wal-Mart customers need cheap banking services and are excluded from mainstream banking. But Wal-Mart, representing 10 percent of the U.S. retail business, can change the rules of the game for retail banking. Wal-Mart chose an alternative route, making an investment in Green Dot. This investment presumably took care of whatever cash needs Green Dot has for the near term, as the sale will only cover secondary shares (those held by existing investors, enabling them to cash out).
Green Dot has a strong balance sheet, no long-term debt and doesn't need new working capital right now. But this investment allows the company to establish a market for its stock and have an independent third-party valuation and liquidity.
Meanwhile, Green Dot is attempting to buy Bonneville Bank in Provo, Utah. This would allow Green Dot to be an issuer, so it could issue prepaid cards directly to consumers without going through other banks (right now Green Dot uses General Electric Co.'s GE Money). If Green Dot owned its own bank, why would Wal-Mart need one of its own?
The acquiring industry is another example of consolidation. A study published in July 2010 by Mercator Advisory Group shows that the top five acquirers processed 74 percent of general-purpose payment card charge volume in 2009, and the top 10 acquirers processed 87 percent.
The top five are First Data Corp., Chase Paymentech Solutions LLC, Elavon Inc., Fifth Third Bancorp and Global Payments Inc. Mercator noted that growth for these companies is coming via mergers and acquisitions and that smaller ISOs are also part of this trend.
For example, North American Bancard LLC bought Vesta Corp.'s Point and Pay (a payment processor for public-sector merchants) and FrontStream Payments Inc. bought Fast Transact Inc. (which specializes in payments for online merchants and nonprofits).
Mercator also noted that this year "the bank alliance acquiring model is back in a big way, with a number of the largest players executing new business with this approach."
The study indicated that new players, such as alternative payment systems or social networks, and new technologies, such as mobile payments and chip cards, could also change the mix, as might regulatory threats, "which could impact the sustainability of acquirers' current business models."
It appears that new products are not just about features and functionality. They are also about a strategic approach to a market, which involves laying out a defensible position that will provide an important sustainable competitive advantage over time. That is what we see in these three instances.
Watch these developments carefully. While consolidation is always a reality, so is the fact that, as Mercator wrote, "Even as the merchant services market continues to mature and consolidate, there will always be an entrepreneurial upstart with an innovative product or business model eager to carve out a piece of the pie."
That upstart could be you.
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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