In the payments industry, one thing is certain: if you don't like the way things are, wait five minutes; everything will change. Whether influenced by global economies, legislation or advancing technologies, a sea change always seems to be taking place in our beloved industry.
To gain insight about industry changes most likely to influence the coming year, we asked our advisory board: What do you see as some of the biggest game-changers for 2011? How do you see them affecting the industry? How can merchant level salespeople (MLSs) work these factors into their game plans and keep ahead of the curve?
This article contains the second, and final, portion of their responses. The first segment was published in The Green Sheet, Feb. 14, 2011, issue 11:02:01. Many thanks to all who contributed to this dialogue.
Elite Merchant Solutions
The Durbin Amendment is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The way the act is currently written is very typical of what happens when you put people in charge of something that they don't thoroughly understand. Without getting specific, the amendment allows for a board to essentially come up with reasonable costs associated with a debit card transaction. This leaves quite a bit of ambiguity. And then factor in what the board thinks is reasonable, and you have a recipe for disaster.
I spoke with my company's long-time bankcard attorney, Paul Rianda, about this amendment. He told me that the interesting part about this bill is the fact that it addresses the issuers but does not directly impact the retail price charged to merchants. If this is the case, then essentially acquirers would get the lower wholesale pricing from the issuers, and, as the law is written, would not have to pass these savings on to their respective clients. What a nice pay increase to the acquirers, wouldn't you say?
What seems to be a good thing to protect the end user (consumer) by lower prices will, in my opinion, only hurt in the long run. It is only a matter of time until these issuers will find ways to make up for that lost revenue, and if the past dictates the future, they will always come up with something that was better (that is to say more profitable) than the last, which will of course hurt the consumer.
My concern, and the reason I consider this amendment a game-changer, is due to the fact that once they get one foot in our industry, how long until they get their whole body in bankcard processing?
Another game-changer is the IRS reporting requirement stemming from the Housing and Economic Recovery Act of 2008, which begins for transactions on Jan 1, 2011, and will require merchant acquirers to report the gross processing volumes from their respective merchants. Now, if the tax identification number (TIN) and business legal name does not match what the IRS has, or if it is nonexistent, the merchant will be subject to IRS withholdings.
The kicker here is that even when you do cure this problem, it can take a fair amount of time to get your funds released. These two requirements alone will have many payment processors scrambling to ensure they are in compliance with the new rules and regulations.
The Durbin Amendment affects the industry by regulating an industry that has not been regulated thus far. You can bet that soon to come is the threat to the credit side of regulating its interchange. It is important that payment processing companies band together and voice their word and put up a fight.
I have heard on several occasions that not much of a fight against the debit interchange regulation was initiated considering what was at stake, but when the credit side is attacked, it will be a much different story, and the issuers and card associations will bring everything they have to protect this tremendous revenue source.
It is best all payment professionals stand behind each other on these regulation issues because the government will be soon digging into your pockets as well. So write your elected government officials, and let them know what a knowledgeable payment professional thinks of further regulation of the industry and how it will only end up hurting the consumer in the long run.
As for the IRS reporting requirement, the best thing to do to stay ahead of the game and avoid major problems down the road is to ensure you are getting accurate information from the merchant such as the TIN and business legal name. A bit of short-term pain (validating TIN and legal name of businesses) for long-term gain (avoiding those horrendous customer service calls for funds being held).
I generally like to list positive things when asked these types of questions; however, in my opinion these are the most pressing and important issues to us as payment professionals at this point in time.
The Durbin Amendment will play a primary role. As debit card transaction volume has passed credit card volume, the Federal Reserve has declared a "market failure" in debit card pricing and is setting caps on what can be charged. The caps are 80 percent below current pricing, and this will make processing debit card transactions uneconomical. The MLS will be tasked with finding an alternative that will be acceptable to the Fed, merchants and consumers.
Check volume will increase, as consumers are more likely to pay from their checking accounts, and business-to-business payments remain check-based for the most part. Consumers want to pay by check but do not want to write a physical check in many cases. Up to now, this has meant check conversion to automated clearing house or remote deposit capture, but what is really needed is a way for the consumer to pay with a debit to their demand deposit account without having to physically write a check.
A solution to this, originally proposed by the Fed in 2009, is the Electronic Payment Order. This will allow a check to be written digitally (for example, on a mobile device) without an original paper check in the first place. The MLS will need to choose a processing partner who can offer this service.
Also significant will be fraud management. Criminals are focusing on stealing identities and accounts, and this will call into question the identity management and authentication processes used by issuers and merchants. A focus on fraud will push regulators to concentrate on privacy and security issues, particularly given the increase in mobile and social network transactions. The MLS should look for opportunities to provide device authentication and transaction monitoring.
Mobile commerce demand will spike. Consumers increasingly want to view coupons, scan them and make purchases using their mobile devices. However, neither consumers nor merchants want to pay for any hardware to do this, so the solution may be a free downloadable app. The MLS will need to keep abreast of these developments and be ready to offer a solution to the merchants who are asking for this capability.
Biometrics will become more mainstream. Banks are turning to biometric authentication for mobile and online clients. Fingerprint, voice and face recognition systems will become more commonplace. The MLS will need to be aware as new services become available to meet these needs.
Due to new regulations, new technology or new consumer habits, there are both opportunities and challenges facing the MLS in the new year. I think that now, more than ever before, it's crucial that our industry work to be at the forefront of these opportunities.
The traditional methodology of a terminal and a competitive rate is no longer enough to grow your business as an ISO, MLS or other payments industry professional. Adding more value to an organization through additional cutting-edge products and services, education, training and exceptional customer service is what has become the cornerstone of stability and growth, and even the new foundation of an organization.
This is also what has been added to the customer's list of "here is what I'm looking for" in an organization. As we see this year unfold, not only should we see new products and services that parallel merchant services but, additionally, we should see new methods of marketing, cross promoting and business development.
Once again in this industry, we have evolved. As vast as a space this seems to be, it really is not, and certain questions must be asked in order to gauge where an organization is within the industry.
Additionally, mobile commerce and micropayments have gained some ground and are being looked at heavily as a main artery of revenue generation through market segmentation. I think that by bringing these paradigm shifts into our industry and evolving from traditional methodologies, we will see an expansion or a reach into adjacent markets. I also believe that even though "price" will never go way, it will just be bundled as part of the basket of offerings from an organization. ISOs, MLSs and other service providers must clearly adapt and evolve with our industry.
Learning about new technologies, new marketing strategies and value-added business solutions will not only assist in solidifying one's position on this ball field, but it also can be beneficial in giving an edge regarding what is to be (where we are headed) in the very near future. Out-of-the-box thinking and vision are critical, and in the end, those that can see the unseen and can prepare for the future will carve a niche for themselves and reap the benefits.
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