The Green Sheet Online Edition
June 13, 2011 • Issue 11:06:01
A slice of ETA 2011
I attended my first Electronic Transactions Association meeting at the Palmer House in Chicago in the early 1990s. The vendor space was a few folding tables set up in the hallway outside the meeting room. The major card brands were conspicuous by their absence.
How things have changed! The 2011 ETA Annual Meeting & Expo had over 3,000 attendees, and the vendor area had so many exhibitors that, if you attended the sessions and had some meetings, it was overwhelming.
A show this size takes a whole year to plan, and the logistics are formidable - just ask anyone who had to put up and take down a booth. Following are highlights from what I observed at the event this year.
Views from an industry stalwart
First, here are excerpts from a presentation by Robert O. Carr, Heartland Payment Systems Inc.'s Chief Executive Officer:
- "There are many billions of dollars looking to be placed in the payments industry. There have never been so many opportunities for entrepreneurs, with the plethora of money and the difficulty of platforms that have to be developed. All those big, kludgy touch screen terminals are going to be replaced sometime soon.
- "There are plenty of people who are developing companies, and when they reach EBITA [earnings before interest, tax and amortization expenses are deducted], they will be able to sell their company for a multiple of 8 or 9 times.
- "Front-end processing is a commodity. If you have your own front-end, you have control of your products.
- "Equipment manufacturers are becoming processors.
- "Expanded product suites include mobile apps, web apps, loyalty, form factors, and enterprise integration.
- "Gateways provide functions that merchants want at reasonable cost.
- "Merchants hate getting multiple statements - they just want 'one throat to choke.' The big merchants (particularly petroleum) have funds coming in from all over the place, and back in the 1970s they built systems to handle the posting. And now they have floors of accounting people trying to perform reconciliation. Small merchants hate this, too. We have four brands and all the alternative systems (PayPal is leading the pack by a mile), and they will have to cave to a consolidated statement. Merchants want a daily deposit; they want to know that it gets there and that it is correct. All the disparate loyalty programs will crash together, and someone will have to handle it.
- "Data security themes include end-to-end encryption, tokenization, EMV [EuroPay/MasterCard/Visa] and dynamic authentication. If any data is in the clear, it will be exploited. The cycle has five zones, and certain solutions ignore some of them. Tokenization has its place, but is not a protection for merchants who are passing transactions in the clear. EMV is coming, and the contactless chip will happen before the end of the year. PCI standards do not protect the merchant or processor."
In addition, Bob compared 1994's top processors with today's reigning processors: of the former top 36, only 7 are left. He named 14 that are now owned by First Data Corp. and said this kind of consolidation will continue. I found this sobering.
An insider's take on the financial crisis's evolution
Second, former Sen. Chris Dodd (sponsor of the Dodd-Frank Reform and Consumer Protection Act of 2010) told the back story to the legislation's Durbin Amendment. I went into the talk prepared to dislike what I heard, and I was wrong. You would expect him to be a good speaker, and he is.
He brought the reality of what happened into the room. Back on Jan. 7, 2008, the large financial institutions were saying, "If you don't deregulate, we're going elsewhere," and that mentality was pervasive.
While a financial services reform bill had been talked about for decades, there were 75 hearings on the mortgage crisis, but little or no appreciation of the growing systemic problem. March 2008 brought the Bear Stearns crisis; if this had not been solved, the next day (Monday) would have become a bank holiday, Dodd said.
He described Sept. 18, 2008, as the most incredible evening in his more than 30 years in the Congress: the Federal Reserve Chairman told the 14 people in the room that unless they acted immediately, the entire financial system would melt down. Two days later, $700 billion was allocated to bail out the financial institutions (FIs) that had created the mess in the first place.
Dodd said this was the right action, and I think most economists agree. His point was that in our society, major issues have a shelf life of about one week and are then forgotten. Certain factors needed to be addressed: the idea that large FIs were too big to fail; the need for transparency on exotic instruments (derivatives became a $600 trillion market); and oversight so problems can be fixed before, not after, the fact. Historically, the Fed had a supervisory role in monetary policy but never exercised it.
Another piece to address was consumer financial protection, and the opposition to that was "stunning," Dodd said. The goal was to craft a legislative framework for a fair regulatory environment that fosters freedom and innovation. As Dodd said, "You don't have the luxury of dreaming; you have to fashion something that would move us off the dime to stabilize the financial markets."
Regarding the Durbin Amendment's cap on debit fees, Dodd predicted the Fed will raise the number from 12 cents to 40 cents; he predicted the Debit Interchange Fee Study Act introduced by a bipartisan group of senators in March 2011 will not be adopted, but that modifications to Durbin are likely.
He said most members of Congress don't understand financial services. "This is an obscure subject matter for Congress, compared with other issues," he said.
He pointed out that partisanship built this country and it is critical, but in the end, you have to negotiate to settle the issues and not believe in "my way or the highway" governing, which, unfortunately, seems all too common today. He also noted that in the 1990s, the debate was over the Community Reinvestment Act, not Glass-Steagall reform, which nobody was interested in at the time.
There has been much noise about the Durbin Amendment in our industry, but my opinion is that the real "affected parties" are the large debit issuers (such as Bank of America Corp., which could take an annual hit of $2 billion on interchange revenues) and the card brands, which will lose switch revenues.
Lost in all the hoopla is that merchants, particularly large merchants, will reap significant benefits, as will merchant-funded rewards networks and alternative payment networks.
Innovation around every corner
Third, here are other ideas gleaned from presentations I attended.
- By 2015, mobile POS and interchange reform will lead to expanded options for plastic cards and will boost acceptance by utilities, telecoms and other verticals that don't accept plastic now.
- There will be a convergence of offline, mobile and online commerce; for example, Red Laser, a phone app that lets you scan a bar code and do comparison price shopping with other stores.
- PayPal Inc. and Amazon Inc. are not controlled by the card companies. U.S. brands spend $300 billion a year on advertising - acquirers could be part of that value chain. Think about it.
- Card networks are expanding across the value chain to compete with acquirers; for example, Visa Inc. bought Cybersource Corp.
- Mobile payments hinge on applications, not cell phones. The technology is a dongle, sleeve, all-in-one unit, card-not-present virtual terminal - with Bluetooth, not near field communication capability (and contactless is coming). Mobile apps could replace physical wallets (if we solve dead battery and bad cell reception problems).
- There are 31 million small businesses, and only an estimated 8 million take credit cards now. Square Inc. makes boarding simple for small merchants, as well as for the underserved person-to-person (P2P) market.
- The P2P sphere has two revenue keys: loyalty and offer redemption. A land grab for who owns the e-wallet is going on now. Remember: he who enrolls controls. The two types of wallets are server side and stored credentials. I also want to mention the ETA certification program. I sat through certification programs for the National Corporate Cash Management Association (now the AFP) and for NACHA - The Electronic Payments Association, and it's a lot of work. I never thought it would happen with ISOs, which are a different breed than bankers.
But certification is here, and I predict the large processors will eventually mandate that their salespeople take the exam, just as the banks did. I also predict this will be good for the industry.
Like all good conferences, the ETA was so packed with interesting presentations, vendor booths and new products that you could absorb only a small portion of what was offered.
Given the speed of change in the industry, maybe the ETA should return to more than one expo per year.
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 email@example.com.
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