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The Green Sheet Online Edition

December 23, 2013 • Issue 13:12:02

Focus on your customers, not the Next Big Thing

By Brandes Elitch
CrossCheck Inc.

Readers of The Green Sheet are a sophisticated lot, and while you will occasionally meet a jaded payment professional (JPP), you will seldom meet one of our number who is jaded about wine.

But what if – as an investor or businessperson – you wanted to understand the economics of wine pricing? What if you wanted to do the same for payments? And are there commonalities between the two industries?

In The Journal of Wine Economics, Vol. 7, No. 1, Karl Storchmann shared his conclusions after studying factors that affect wine pricing. Highlights from his conclusions reveal the importance of relying on your own observations more than on common assumptions:

  • Fine wine is expensive, and if stored properly for a long time, it can appreciate in value.
  • Good Bordeaux might need eight to 10 years of proper storage before it is "drinkable."
  • Most "ordinary" wines should not be stored for more than two to three years.
  • Quality and price are sensitive to fluctuations caused by the weather during the growing season.
  • Futures prices reflect current estimates on the quality of the wine when it is released and traded, a minimum of three years after the harvest.
  • Wine is an "experience good," meaning you have to drink it to determine if it is good or bad.
  • Consumers rely a great deal on "expert" observers' and consultants' opinions to know what is good.
  • Expert opinion is of little informational value and can be flawed or just wrong.

Changing landscapes

As with the payments sphere, tremendous changes are occurring in Sonoma County's wine industry. Author Edward Humes explained in the recently released biography of Jess Jackson, A Man and His Mountain; The Everyman Who Created Kendall-Jackson and Became America's Greatest Wine Entrepreneur, that the wine business has a carefully cultivated image of country gentlemen (and ladies) sympathetically creating delicate flavors, but in reality it is a cutthroat industry.

Now, there is more competition, there is a shortage of grapes – and it's a government regulated business, to boot. You need to plan your production six to 10 years in advance, and you are subject to the vagaries of both consumer taste and the weather, two of the last things you would want to bet on.

Wineries are being bought and sold all around us, but the difference is that pre-2008 buyers wanted few hard assets, good revenues and a strong brand. Now they want hard assets, namely dirt. Consumers are now interested in profiling the product: who made it, how they made it and where it was made; they want healthy, locally produced foods. And then there's the export market. Recently U.S. Department of Food and Agriculture Secretary Karen Ross stated, "I don't think there's enough wine for China. I really don't."

Consumer concerns

All most consumers really care about is getting a good product at a reasonable price. Many wine aficionados rely on America's most famous wine critic, Robert Parker, and a small army of wine consultants to guide them. But many of these consultants remind me of the derivation of the term: "con" – meaning "to deceive" – and "insult" – meaning "to demean."

Here's an example of an expert opinion: "Deep ruby color includes purpose nuances. Closed aromatically. Hints of crème de cassis, and black cherries. Cuts broad swath across the palate, with considerable depth and concentration. Tannic as well as broodingly backward."

It sounds like gibberish to me, but the writer is none other than Parker, talking about a Rhone varietal. Would you buy a wine based on these comments? Plenty of people do. It is easier to subscribe to his wine journal that costs $75 a year than to trust your own judgment, apparently.

Now, you don't have to be a JPP to see the parallels in the payments industry. There is an enormous amount of noise out there right now about the Next Big Thing in payments. A lot of it revolves around new products and, of course, the patents associated with them. I would like to make three main points about this, from the perspective of what I'd do if I were an ISO.

Study your merchants

First, focus on the retailer. Get to know your merchant really well and find out what their needs and concerns are. The retailers' primary goal is not to replace all their existing POS equipment. They are concerned about increasing their store traffic and their margins, and in some cases, just surviving. Find a way to help them do this. This is not just about explaining current developments, such as payment processing on mobile devices, prepaid mobile, virtual currencies, social media environments as payment platforms, digital currencies, and loyalty. You will be expected to be knowledgeable about all of these when your customer asks you about them, but you must go beyond them, as well.

Know your acquirer's challenges

Second, get to know your acquirer or acquiring bank. The biggest issue in the payment system right now is not transitioning to next-generation products. It is government regulation, specifically, federal regulatory and enforcement initiatives, compliance obligations, and fraud risks and schemes.

There are new expectations from the large and pervasive regulatory community, including third-party oversight and third-party payment processor considerations. Bank exams now extend all the way to program managers, as does bank liability. Right now, a compelling need for financial institutions is creating best practices for working with regulators to determine how best to meet compliance obligations.

Each regulatory agency – Consumer Financial Protection Bureau, Financial Crimes Enforcement Network, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., etc. – has its own emphasis. Now regulators have extended their scope to include "ethics," "consumer fairness," and even how a bank markets its products.

Then, there are the states' regulations, including their own consumer protection laws and licensing requirements. The bank will even have to determine whether federal laws subsume state laws. The scope of this regulatory oversight goes far beyond the traditional focus on proper disclosures, unsafe and deceptive practices, consumer protection and anti-money laundering. Now, the vast federal and state regulatory apparatus is focused on what constitutes fairness and transparency. My colleagues and I receive calls every week from ISOs looking to place business with a bank or acquirer. Almost all of these involve legitimate businesses, mature clients and large volume. My conclusion, after spending time on a number of these opportunities, is that the regulatory climate is not only oppressive, it is also out of control.

A simple comment by the regulator such as, "we don’t like this business" or "does your board understand the liabilities of this business?" is enough for most banks to abandon a customer, who will have a difficult time finding another bank depository. Now we have a regulatory apparatus that is functioning as a restraint of trade.

Clarify protection incentives

Third, there is a lot of emphasis on the patents behind new products, particularly software patents. But here is what you need to know about this, from an article by Eric Goldman in the Spring 2013 edition of the Santa Clara Law Review.

  • Most software programs have an effective commercial life of only a few years before they become obsolete.
  • Software innovators have significant "first mover advantages" – enough to motivate software research and development without any patent protection.
  • Software life cycles end before the patents issue (usually four or more years).
  • Software vendors can provide substantial lock-in effects without a patent, due to proprietary file formats, valuable apps created by the developer community for the software, and user investments in their own proprietary customizations.
I see a great deal of work and emphasis on the so-called unique, and presumably patentable, advantages of next-generation payment products, but it turns out that copyrights and trade secrets provide adequate protection incentives.

As an ISO, don't focus on the product; focus on providing what your customer needs. And make sure that your financial institution (acquirer, reconverting bank, and automated clearing house originator) has a clear understanding of you, your company and your customers. That way, when their regulators ask them about you and your business, they will be prepared with a clear and authoritative answer about why you are a good client for the bank. end of article

Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500companies, 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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