Q. Share with us your early days at VeriFone.
A. The reason we believed VeriFone was a good acquisition is that VeriFone was profitable prior to HP's ownership, and the industry dynamics had not radically changed. Payments was (and remains) a growing industry. What we had was a Rembrandt on sale in a garage sale; we had to blow the dust off and clean it up.
We purchased the company, changed focus and radically increased the value of the company. When we bought the company, VeriFone had revenues of $297 million and was losing money. In 2012, we'll have revenues of $1.5 to $2 billion.
Q. Tell us about your most difficult time at VeriFone.
A. The most difficult time at VeriFone was during the early days. Most of the funding for the purchase was borrowed money, so we did not have substantial reserves, and there was a point at which we needed to collect receivables in order to make payroll.
The biggest change upon taking the reins was changing the culture to focus on doing fewer things better rather than more things half right.
The 2008 and 2009 recession was also extremely difficult. But because of the defensive work we did during that period, we positioned ourselves well for 2010 and 2011, despite the worldwide economic morass. We remain the "go to" guys in the payments systems industry.
Even when businesses are cutting back, they'll continue to buy from VeriFone while they pull back from smaller competitors.
Q. What was your greatest professional accomplishment?
A. We bought the company for $50 million and borrowed most of that. We have made hundreds of millionaires out of VeriFone employees and done well for the original investors. People are proud to work here. I feel good and take pride that we've brought good fortune to a lot of hard-working people.
We are still midway through a transition to a service- and solutions-based company. Ten years ago we sold a lot of boxes. Today we sell more software and services. Perhaps we could have embarked on this transition sooner, but we needed the industry to consolidate before we could push to a services-based business.
The consolidation, which we largely engineered through our acquisitions of Lipman, Hypercom and others, not only allowed us to buy additional service platforms, it enabled us to direct our energies more economically.
Q. What do you expect for the future distribution of terminals? What role will ISOs and merchant level salespeople (MLSs) play in their distribution?
A. VeriFone will continue to sell directly to big businesses and fleets. These customers are far more concerned about the interface between their own systems and their point of sale than the price of the box. Because of this dynamic, we sell directly to this market, and there is not necessarily an opportunity for the MLS in this transaction.
In the United States, MLSs will continue to play an important role in the small merchant segment. ISOs will continue to play an important part of the distribution channel here because we're trying to reach tens of millions of small merchants.
But, in the future, ISOs will sell more services and perhaps wrap in a payment device as a part of the services offered. The vast majority of our research and development expenditure is on software and, although that technology may exist in a box (or terminal), it is the software that makes it valuable.
In emerging markets [outside the United States], growth for devices remains strong, and we are still selling "boxes." But in more advanced markets, we sell more integration with existing systems, security solutions and PIN pads.
Keep in mind, over two-thirds of our workforce and revenues are non-U.S. based. This gives us tremendous diversity; however, in many emerging markets, ISOs are simply not part of the distribution channel.
Q. How do you expect Square to impact the mobile payments market?
A. The upside to mobile payments will be turning cards into phones for more convenient payments and value-added services. Square is not in that market. To a large extent, Square's customers are merchants that have been rejected by traditional card processors.
According to their own reporting, 60 percent of their customers have been declined by traditional processing services. I think Square is a social experiment and will blow up in the next phase of venture capital.
Q. What do you think of Visa's investment in Square?
A. Visa's investment was tiny and not any substantial amount, but I think there are some anti-competitive issues that may need to be examined. Regardless, I think the bigger market within mobile payments is what is happening with Google and VeriFone and ISIS and VeriFone.
Unlike Square, both use NFC and encryption. VeriFone is running Google and ISIS applications within a point of sale system. The software in that system is written by VeriFone. We are assisting retailers to enable NFC capability at the point of sale.
Q. How do you expect the Durbin Amendment to change our industry? Will it affect VeriFone?
A. [Durbin] will not impact VeriFone. Further, I do not believe this will impact PIN debit. Over time, I think Durbin will move more transactions to debit (both PIN and signature), but not in a meaningful way. So I don't expect a big change.
Although banks will issue fewer signature debit cards because that card is not as secure, fees to consumers will go up. PIN debit will see a rise in transactions because of this.
PIN transactions have lower fraud rates, so the industry will plug that hole because of government-sponsored mispricing. With all this change, however, and given the size of our business from the U.S. market, this will not cause meaningful change to VeriFone.
On the day of my interview with Douglas Bergeron, VeriFone held its third quarter 2011 earnings call. In the accompanying release, he said, "With the acquisition of Hypercom, VeriFone is stronger than at any point in our 30-year history." That's strong words for such a dynamic company, but encouraging news given its role as a bellwether of economic growth.
When further examining VeriFone's financials in North America versus the rest of the world, I see what a small part of the overall earnings the ISO community actually contributes. However, as Bergeron pointed out, we are the best distribution channel for small to midsize merchants.
As a final note, I appreciated Bergeron's perspective on Square. Though I believe the startup to be a more formidable competitor than he does, I was intrigued by his analysis.
So much existing infrastructure exists within the United States, and the fraud ratio has remained acceptable, that converting to near field communication (NFC) has been slow to materialize.
Because of that, and the monthly costs associated with traditional wireless merchant accounts, I see Square as continuing in its niche for some time to come.
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