The Green Sheet Online Edition
April 23, 2012 • Issue 12:04:02
ISOs and MLSs: How banking changes will affect you
Sometimes we need to hear from industry experts - just to get a proper attitude adjustment. Recently, I got the current take on the world of banking at the annual Jack Henry & Associates' user conference. JHA is a billion dollar public company that provides core processing for financial institutions. Its ProfitStars subsidiary focuses on the payment processing business.
While speakers covered many themes, my key take-away was this: Although ISOs and merchant level salespeople (MLSs) live in the card processing space, we should not forget that the checking account is the locus for all payment activity.
Firms like PayPal Inc. and Green Dot Corp. may perform many banking functions. But at any business that is not a sole proprietorship, all payments begin and end at its checking account. That is not going to change during your career.
Big fish getting bigger
Consolidation is moving with a vengeance in both banking and the card industry. Visa Inc. acquired CyberSource, PlaySpan and Fundamo. Since 2009, the number of Visa cards jumped by about 200 million to 1.9 billion, and total volume increased to $5.9 trillion, from $4.3 trillion. During those two years, Visa's operating revenues increased 33 percent, to $9.19 billion in 2011, and net income grew 67 percent, to $3.53 billion.
Analysts project that by 2020, half of all online payments will originate on mobile devices. Beyond its main competitors MasterCard Worldwide and American Express Co., Visa does not have much serious competition. As big as Visa is, it is still a growth stock that will command the biggest market share in this space.
Consolidation in the payments industry has been spurred by the commoditization of the processing business, according to the recent Capgemini white paper, Global Trends in the Payment Card Industry: Processors. The report finds that merger activity and joint ventures with banks have driven large processors to consolidate their platforms and processing centers. The report identifies three drivers for this:
- Large banks have either outsourced or disposed of their noncore acquiring business to processors.
- Large issuers' and acquirers' increased focus on cost has compressed margins for processors.
- Processors want to improve profit by building scale and lowering operational costs.
Interestingly, even some large players don't have much economy of scale because they have multiple, nonintegrated legacy platforms for different product lines and regions. For example, First Data Corp. has a dozen data centers. When consolidation occurs, this affects you, as an ISO or MLS, by forcing changes to systems already installed at merchant locations.
Proceed with caution
At the conference, Lee Wetherington, ProfitStars Director of Strategic Insight, advised the industry to tread carefully when placing bets on new technology while big players take different, incompatible paths. Pitfalls abound.
For example, Google Wallet was developed by the leader in search technology, but it is now contending with security flaws. PayPal, an eBay Inc. company, is not on board with near field communication. PayPal will use no device; people can just enter their mobile numbers. The payment company has claimed to be a third-party network, and it is exempt from the cap imposed on large banks by the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Visa, MasterCard, Discover Financial Services and AmEx have Isis, a creation of JVL Ventures LLC. But working exclusively with Isis is not the best strategy. And finally, Wal-Mart Stores Inc. and Target Corp. are at work on their own mobile ventures, which will have no interchange, period.
Wetherington sees several opportunities for a diversity of banks. They may:
- Capture the checking account market from big banks that are constrained by Durbin Amendment caps
- Look for co-branding partnerships on general-purpose reloadable prepaid cards
- Serve the growing population of the unbanked, underbanked and generation Y
- Generate new fee revenue with merchant-funded rewards, offered inside online statements and in real time via mobile texts, the latter of which employ geolocation technology.
Wetherington pointed out that small banks have a secret weapon. "Google owns Android and online advertising, and they have all this data to track you," he said. "But the one thing that they do not have is the holy grail: transaction data in the checking account. The banks have this."
He sees the consumer shopping experience changing, too, as merchants deliver push notifications to consumers offering, say, an immediate 10 percent discount. Consumers' GPS-enabled phones will take them to the store where they will click on the bar code, and it's done. See BillShrink (www.truaxis.com/merchants) to see how rewards can be listed on debit card statements. You can leverage merchant-funded rewards to incentivize or even compel migration of offline consumers to online self-service.
Opportunity for ISOs and MLSs
In another presentation, Deborah Matthews spoke about a key service that ISOs and MLSs can sell: remote deposit capture (RDC). Her point: half of all small businesses would change banks for the right technology package.
Celent LLC estimates the 7,100 financial institutions (FIs) in the United States have helped deploy some 754,000 scanners across the country, or about 100 per institution. Adoption at large FIs is expected to rise to 25 percent, from 13 percent. And at midsize banks ($1 billion to $10 billion in assets), adoption will rise over the next few years to 21 percent, from 9 percent now.
It costs a bank $4 to process a branch deposit. Subtracting overhead, the cost is $1.66. Processing an RDC transaction costs about 8 cents. ISOs and MLSs can sell this service for the banks, which have proven somewhat inept at doing it themselves.
Searching for stability
JHA Chief Financial Officer Kevin Williams noted that a small business needs a stable banking relationship with minimal uncertainty. Tools like RDC, online bill pay, Internet banking, treasury services, and a small business account (providing account reconciliation, payroll, card processing, and collection of accounts receivable) will make the relationships sticky for both parties.
Williams sees a shift to consolidation, as long-term customers who used to do in-house data processing are now outsourcing. This is due to the complexity and exposure of compliance and regulatory requirements, human resource issues, disaster recovery, security, hardware upgrades, and availability of offerings. Corporate clients see a good core processor as a way to solve risk exposure.
And to bring perspective to the recent financial meltdown, Williams reminded his audience that from 1989 to1995 the Resolution Trust Corp. closed 747 thrifts with total assets of $394 billion. He cited a 48 percent consolidation of FIs in the last 20 years and predicted it will continue at a pace of 2 to 4 percent a year.
It is an exciting time to be in the payments and financial services industries. You are a part of it, and as Wetherington reminds us, it is important to place your technology bets wisely. Shut out the noise and the hype. When evaluating your options, be deliberate, thoughtful and focused.
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, he 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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