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The Green Sheet Online Edition

October 22, 2007 • Issue 07:10:02

Coping with the credit crunch

By Biff Matthews
CardWare International

I recently attended a business retreat with a balanced cross section of small-business owners. The economy in the United States was a main topic in our conversation. The consensus was tightening credit, and economic conditions overall, will worsen before they improve, irrespective of what the Federal Reserve does.

One participant, who quoted ideas from the book The Roaring 2000s Investor: Strategies for the Life You Want, shared the author, Harry S. Dent's, prediction that the country will suffer a depression around 2010. Yes, depression.

Remaining optimistic, the participants moved the discussion to how, as small business owners, we can remain profitable and add meaningful value during a significant economic downturn.

Remain calm

The dominant view is cash is king and improved liquidity, along with increased cash reserves, are requisite to weather the storm and take advantage of opportunities created in adversity.

There is nothing unseemly in acquiring assets or a business from a competitor who is highly motivated to sell, for whatever reason.

So what does the current worsening credit crunch, coupled with a predicted downturn in the economy, mean to merchant level salespeople (MLSs) and how can they prosper during tenuous financial times?

Merchant volume is the product of the consumer's willingness to buy. This is diminishing for many due to unemployment, underemployment or overextension of easy credit.

Consumer spending is only predicted to rise by 2% in the fourth quarter in 2007, and since consumer activity is 70% of gross domestic profit, the ripple effect is inescapable. Exacerbating the situation is a negative savings rate that continues to worsen and a cutoff for many families to use home equity as a bottomless piggy bank.

The net is disposable incomes are on the decline and will produce equivalent drops in consumer spending. All except for the top 10% of earners will migrate from consumption to safety mode, curtail spending to essentials and forgo most discretionary spending.

The most serious downside for ISOs and MLSs is that our customers, the merchants, will experience higher failure rates. This is particularly true within sectors, such as restaurants, that are perennial residents of the financial precipice.

Other businesses, particularly those with slim margins or that rely on high volumes of discretionary dollars or are not well-insulated, may fail as well.

There are fewer merchants with lower average sales volume and residual income. As an MLS, you need to anticipate and manage for this scenario.

So how does the MLS prosper during turbulent financial times? I believe the best strategy is an aggressive return to the basics of the business - those core competencies that made you successful in the first place.

Target practice

Use targeted prospecting in areas where growth may be slowing but is unlikely to stop. Also focus on business categories that are less vulnerable to the economic pendulum such as utilities, grocery, medical care and pharmacies, and petroleum.

Be more methodical in sales efforts, increasing the number of cold (or "warm") calls. New business will continue to open and surviving businesses will, even more, seek to reduce expenses and improve sales opportunities.

Identify businesses with volumes that didn't fit your original target model. This is not the time for model-gazing. Resell current merchants who would benefit from an upgrade.

Sell additional products to help merchants manage more efficiently. Service your customers more creatively, and actively explore additional services or functionalities that can help them reduce costs or be more productive.

Help merchants manage the inevitable tightening of lease terms or rate increases that will occur as vendors seek to offset losses from lower-than-normal equipment sales.

While not appropriate for every merchant category, products such as electronic benefits transfer, gift cards and prepaid cards, telephone cards and top-up, and prepaid cell phones, create additional store visits, thus encouraging shopping and sales.

Of course, if you are already considering the sale of a merchant portfolio or residual flow, move quickly before the value in terms of multiples falls with the corresponding drop in volume and residuals.

None of this is rocket science, just a simple return to the techniques that helped us succeed in the first place.

Eye on the prize

Focus on being a true partner by offering products or services such as acceptance of health savings account or flexible savings account cards, or benefit reimbursement that will support the business during a downturn. Keep in mind the adage "Do no harm," which will become most important in the near term.

Bad economic times increase the incidence of bad checks. Offer check authorization or guarantee to reduce these losses, along with check truncation to reduce internal processing and banking costs.

Propose remanufactured equipment, which generally costs less than new devices. Suggest earlier generation devices that meet the core processing needs of modern business.

This will get you in the door so you can return another day, when you will have the opportunity to up-sell when the economy and the merchant are on sounder footing.

Only offer services that will truly save your merchants money or increase their sales.

Seek out those few remaining paper-based merchants, and give them an inexpensive remanufactured or used terminal. A Tranz 330 or 380, Nurit 2085 or a Hypercom T7P will help them protect their card transactions.

Assess a different rate if needed to offset free equipment, but persuade those last holdouts to convert to electronic processing.

A surprisingly large percentage of merchants have stand-alone terminals without additional equipment. Printers speed the receipting process in addition to streamlining the settlement process, reducing the merchant's labor expense.

A reduction in the settlement process of just five minutes - yes, I said five minutes - per night will recover the investment in the printer in less than a year.

Now is also a key time to service your merchant. Use these questions as a guideline:

  • Is signage current, clean and likely to encourage card usage?
  • Is the POS equipment clean and able to convey a positive appearance for both your company and the merchant?
  • Are support and authorization stickers current?
  • Are quick reference guides available?
  • Does the merchant have a backup method for when, not if, electronic processing fails?

If a merchant does not have an alternate option for failed electronics, this is the time to educate and up-sell a reserve imprinter and forms. It isn't sexy, but it is practical, and that is what is called for now.

While not appropriate for every merchant category, products such as gift cards and prepaid cards produce store visits and encourage sales that would otherwise not have occurred.

Routine checkup

Ask your merchants how business is doing and what plans have been made for weathering the economic storm. Inquire about future expectations, actively listening for add-on sales opportunities. Identify what you can do now to help your merchants' businesses survive and grow.

Ask how competitors are doing, which are expected to survive, and what is known about their future plans. Active listening is a powerful tool that yields sales opportunities, not always immediately, but eventually.

This is the environment for partnerships, not quick hits. And, as one business fails, another replaces it, so be ever vigilant. As a wise friend once counseled, be in the present.

With fewer startups, now is a good time to focus on ensuring that merchants in your portfolio stay there by remaining viable to your merchants, and by recognizing your value to their success.

In my view, the merchant cash advance business is the retail equivalent of the subprime mortgage business - a train wreck when the economy is unsteady.

In turbulent economic times, businesses with cash or liquidity survive and ultimately prosper if they are not burdened with excessive debt. But regardless of economic conditions, it's prudent to manage your business as if a recession were imminent.

The basics never go out of style; they are not trendy. Careful, qualified prospecting and cold/warm-calling to sign new merchants; working with current merchants to help them succeed through new or additional services and products; and excellent service teamed with active listening for opportunity will all sustain you and your business.

Go out and do it now. end of article

Biff Matthews is President of Thirteen Inc., the parent company of CardWare International, based in Heath, Ohio. He is one of 12 founding members of the Electronic Transactions Association, serving on its board, advisory board and committees. Call him at 740-522-2150 or e-mail him at biff@13-inc.com.

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