By Brandes Elitch
CrossCheck Inc.
To the eye, the vineyards of Sonoma County can appear much the same year to year. But 25 years ago, the vineyards here changed forever, all because of phylloxera, a microscopic aphid that eats the roots of grapevines.
This vine louse may have been introduced to the region by winemaker "Count" Haraszthy, who started Buena Vista Winery in 1857. He soon imported 350 cuttings from Europe to start a vineyard - bringing phylloxera to the United States, apparently for the first time. This vermin caused widespread blight. Ultimately, a solution was found: grafting the European grapevine onto American root stock.
However, in the late 1980s, a mutation was discovered in a commonly used rootstock previously thought to be resistant to phylloxera. The mutated stock became infested. So about 70 percent of the vineyards in Napa and Sonoma counties had to be replanted - a burdensome challenge in itself, but growers also had to learn what varietals were likely to survive in their vineyards.
Through this they came to understand the concept of terroir (prounounced terr-wahr), which is the idea that each plot of land has unique characteristics to grow a specific varietal, and that you must plant the varietal that is suited to the plot.
As a result, to quote Wine Enthusiast, "today we as consumers benefit from Cabernet being grown in the right places (i.e. Sonoma), and not the wrong places (i.e. Monterey)." The entire industry transformed because it had to, not because it wanted to.
A revolution is brewing in the card processing business, too. I suspect that 10 years from now, the list of leading acquirers and hardware and software providers will be quite different than it is today.
Remember, it wasn't long ago when only AT&T provided telephones; RCA manufactured televisions; NBC, CBS, and ABC provided all television programming; Kodak provided camera film; and computers were synonymous with IBM. Similarly, 10 years ago ISOs provided the acquirer and the hardware to the merchant.
There were only a few major acquirers, mostly nonbank acquirers, and hardware was provided by one of just a handful of equipment manufacturers.
ISOs served a vital role because there was no alternative: except for very large enterprises, merchants couldn't go directly to acquirers, and they could not purchase payment terminals themselves.
To put things in perspective, the U.S. payments business is a $270 billion industry. It's bigger than the hotel, airline and information technology industries. As Lee Wetherington, Director of Strategic Insights at Jack Henry & Associates Inc.'s ProfitStars, said, every 10 years our government provides a "regulatory overhaul" of the business. I heard him speak at the annual Jack Henry Analyst Conference recently, and with his permission, I will share excerpts from his comments.
"The Law of Unintended Consequences means that when government passes a law to fix a problem, things happen in response that nobody anticipated," he said. "For example, the Durbin legislation was put in place because the government found that debit card pricing was broken." Some players were exempt, and Lee added a corollary: "Exemption spawns innovation."
And innovation abounds: the Bluebird card from Wal-Mart Stores Inc. and American Express Co., Green Dot Corp.'s GoBank product, Target Corp.'s REDcard, and the Merchant Customer Exchange, for example.
Back in 2007, non-sufficient funds fees comprised the majority of banks' fee income, but in 2009, regulators added an opt-in requirement for overdraft protection to Reg E, and this changed customer, and bank, behavior.
Banks are scrambling to make up the lost revenue with a host of new products around, as Wetherington calls them, "Durbin, debits and dongles." Banks can deploy mobile cash access on their ATMs to eliminate fees paid to card networks. Merchants can use their own mobile shopping apps to make "over the top" connections directly to banks, bypassing card networks altogether.
One newsworthy area is the prepaid industry. Did you know there are 13,000 check cashers, with 30 million customers, doing 350 million transactions annually? It's a safe bet that you will see more regulatory focus here.
Soon, we will deal with emerging technologies, such as mobile voice authentication, facial recognition, tokens, biometrics and location monitors from mobile phones. Mobile payments are evolving, and we don't know what technologies will prevail. Payment processors will have to deal with who owns the payment and who owns both the transaction and marketing data.
Wetherington pointed out that there are different types of innovation: financial innovation (for example, credit default swaps); entrepreneurial innovation (for example, Apple); criminal innovation (hacking and malware for example); violating innovation (for example, Google and privacy); and then there is our old standby, regulatory innovation, courtesy of a host of government agencies. Innovation is everywhere
Consider Google Inc., an important player because the number of people having Gmail accounts is about four times the number of those with PayPal accounts. Google plans to add a payment capability to Gmail accounts by which people can attach a payment to an email message, just like a photo or a document.
The money will come from the sender's Google Wallet account, and the receiver must also have a Google Wallet, but that should not be a big hurdle for Google, given its previous track record.
Until now, PayPal has owned the online payments business, but soon you will have a "checkout profile" that saves all of your information and syncs it seamlessly between all your devices, so you will never have to type in your billing and shipping address again.
And if Google Wallet is more popular online, it will become more popular at the POS too. Ultimately, all your purchases could be routed through Google, and receipts would arrive via Gmail.
Meanwhile, PayPal introduced the Cash for Registers program, which is designed to replace the old cash register with an iPad and stand, card reader, cash drawer and printer. PayPal will waive its fees for the rest of 2013 if a merchant uses PayPalHere for credit and debit cards, checks and PayPal payments. Merchants can accept payments from iPhones, iPads or Android devices using the software and dongle PayPal provides.
Similarly, Square introduced Stand, a product that turns an iPad into a digital POS system. Not to be left out, Groupon Inc. launched Breadcrumb POS, a free iPad app to replace a cash register. Groupon charges 1.8 percent plus 15 cents per transaction, a pretty aggressive rate.
Successful ISOs learn to ask, What are the retailers thinking? For this, I turn to Nikki Baird, a partner at Retail Systems Research LLC. She said the big question is, What is the future of the store, and how do we make it relevant in an increasingly digital shopping experience? Can the retailer transition from a product driven business to a customer driven company?
How can the retailer better leverage inventory to meet demand that could come from anywhere, at any time? This portends major changes in dealing with the supply chain too; that is the immediate challenge.
Twenty-five years ago, retailers had to change everything to adapt to the bar code. Now there is a new imperative: to bring the shopping place to the consumer. Consumers are using their smartphones to find stores, check prices, research items and read reviews. Retailers didn't choose this - consumers are making it happen.
Nevertheless, cash is still the dominant payment method around the world. Credit cards account for roughly 60 percent of all noncash payments in mature North American and Asian markets, but less than 40 percent in Europe, as well as in Brazil, Russia, India and China.
Perhaps buried in these statistics is one answer to the question about the right terroir for ISOs. If only 60 percent of all noncash payments in the United States are made with a credit card, the ISO payment channel, what about the other 40 percent?
We have seen that the emerging solutions allow merchants to contract directly with the large issuing and acquiring banks (and for the very large enterprises, to contract directly with Visa Inc.), and to buy their processing equipment anywhere.
ISOs should think strategically about where their revenue dollars will come from as these new acquirers and processors begin to make inroads in what was heretofore the ISO dominated franchise.
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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