By Brandes Elitch
CrossCheck Inc.
Through the Fires: An American Business Story of Turbulence, Triumph, and Giving Back Robert Owen Carr, with Dirk Johnson ISBN: 978-0-9909386-0-6.
Bob Carr is no stranger to controversy. When he started Heartland Payment Systems Inc., now the sixth-largest payment processing company in the United States, he created a new and controversial model for nonbank credit card acquirers. His goal was to have a salesperson cover every ZIP code in the country, all of whom would be W-2 employees who would work only for Heartland, which would control the merchant pricing.
Merchants would have complete transparency regarding the rates they paid and be able to buy their hardware at minimal markup. He created a Merchant Bill of Rights to codify his philosophy. It specifies transparency regarding the fee for every transaction and who's charging it, the annual fee increases from the card brands, the identity of the middlemen, and all surcharges, billbacks, and fee reductions – in other words, full disclosure. This may not seem controversial to you, but it rocked the "traditional" ISO community when it was introduced.
Over the years, many people have told him to write the story of how he created the company, particularly after he deftly managed a massive data breach of 2008, at that time the largest security breach in history, so devastating that many industry observers predicted the company could not survive after the stock price dropped from $33 to $3.57. The book took a few years to write, was recently released, and is available at Amazon.com and http://robertocarr.com. A large part of the book is about Carr's personal philosophy and the resulting charitable and philanthropic work. I will get to this shortly, but first I want to describe the ISO landscape back in 1980 to give you an idea of the challenges he faced at that time.
In 1963, Carr started at the University of Illinois, majoring in math. He chose math because he observed that the math textbooks were the thinnest, and he wanted to finish in three years. At that point, he decided to spend the fourth year getting his master's degree in computer science, a new discipline back then. In 1980, he wrote software for a fuel distributor that would electronically transport fueling transaction data to a PC, to be processed by a microcomputer.
Before that, the user would insert a punched card into a reader at the fueling facility, which would identify the user and keep track of the transaction on site. This is possibly the first example of a fully electronic transaction at the point of sale.
But just to put things in perspective, in 1980, the large retailers, such as Sears, J.C. Penny, and Montgomery Ward still issued far more cards than all of the third-party companies combined. In 1981, Sears alone issued more cards than either Visa Inc. or MasterCard Worldwide. Also in 1981, less than half of the major retailers accepted third-party cards. Not until 1976 were credit card companies able to abandon the inefficient "country club billing" system, which required them to return every charge slip to the customer.
Bankcard issuers either lost money or were only marginally profitable for most of the sixties and seventies; they only started to produce significant profits in the 1980s. In 1981, Verifone started to deploy terminals to capture card data electronically from the magnetic stripe and forward the data to the processor. Before that, the merchant had to run a multipart form through a "knucklebuster," check a printed directory for bad cards and make a phone call to get an authorization. Did I mention that in the early days, merchants paid a discount rate of anywhere from 4 to 6 percent?
Visa and MasterCard have always been run for the benefit of the card issuing banks, but in 1980, this was a chicken-and-the egg sort of problem, because somebody had to sign up merchants to take cards with these two brands. The bankcard business is really two businesses: the business of issuing cards, and the business of acquiring the merchant transactions and clearing them and paying the merchant.
At the outset, banks tried to do both, but only a handful of banks could run their own backrooms. The rest needed to use third parties, such as Citicorp Credit Service, GECC, Total Systems and NDC. Even the largest banks found that they could not rely on the branch staff to convince merchants to take credit cards. Somehow, an army of salespeople was required to walk the streets and knock on doors and sell merchants terminals to process credit card transactions. Visa and MasterCard incented the merchants to buy terminals because the swiped transactions would be charged a lower rate.
Fate decreed that these new bankcard salespeople would not be bank employees. They were called independent sales organizations, also known as ISOs. In the beginning, the card Associations (now card companies) didn't have any registration requirements. A salesperson could work for multiple banks at the same time and sell all sorts of ancillary services, too. They were in many cases the "tin men" of the payments industry. The reps typically made money from putting the merchant on a lease for the equipment and selling the lease paper to a leasing company.
A typical five-year, non-cancellable lease might charge a few thousand dollars for equipment worth only $500 at signing. In the early days, residuals were problematic, as the merchant service providers often sold their companies, in part to get away from paying residuals. The reps did minimal due diligence on the merchants, and the paperwork bore some resemblance to the mortgage loans made during the 2006 to 2009 credit crisis buildup.
Merchants were given teaser rates, statement fees, and minimum transaction or dollar volume requirements, as well as annual fees couched as "Merchant Club." There was typically an early termination fee, which was just onerous enough to bind the merchant until the end of the term. The salespeople banked on merchants not reading their statements, and if they did, they would often find that the actual rate they were charged was quite different from the one they were promised.
One of the earliest and most pervasive ISOs was Jim Elliott, founder of Peachtree first and Cherry Payment Systems second. In 1984, Elliott was convicted of cheating two federal loan programs and subsequently pleaded guilty to fraud in charges relating to loans at Manning S&L in Buffalo Grove, Ill., and First Security Bank in Glendale Heights, Ill. He was removed from the First Security Board in 1983 on orders of the Federal Deposit Insurance Corp.
Another of the early adopters and very largest ISO principals in the country at the time, also located in the Chicago area, was also a convicted felon. I remember reading the transcript of his trial. When I was in the acquiring business, I worked with an ISO who was a convicted felon. To a bank, his crime was worse than manslaughter: he was convicted of stealing money from client trust accounts. The early days of selling merchant services has been characterized as the "wild west" for this sort of behavior, which was one of the reasons that Carr started HPS.
As Carr wrote on page 48 of Through The Fires: An American Business Story of Turbulence, Triumph, and Giving Back, "Deception, outright lying and intimidation became so rampant in the payment processing business that Visa grew concerned about its own brand being tarnished. In 1988, they came out with rules governing sales organizations that sold card transaction processing." That same year, Carr helped to start the Bankcard Services Association in Chicago, and the following year he was elected the organization's vice president. He made a motion that no convicted felons be allowed membership in the organization. The measure was defeated.
In this respect, Carr's timing was excellent. He started his own company, Credit Card Software Systems, in 1987. In 1996, he sealed a deal with Heartland Bank, and by 2005, HPS was the sixth largest payment processor. After the breach, Carr's vision saved the company, and it has gone from strength to strength since then. Today, HPS has over 300,000 merchants and has diversified into market niches that the company has begun to dominate. Without his guidance it could have easily gone the other way, as has been the case with some of the company's competitors.
As Carr said, this book is about persistence and determination. He faced numerous setbacks. When the breach occurred, he lost his entire net worth, which was $300 million at the time. At age 50, he didn't know if he would ever be financially solvent. In seven years, the stock went from 30 cents a share to $33 a share. After dropping from $33 to $3.57 per share as a result of the breach, it was sold for $3.45 a share to meet a margin call.
For a variety of reasons that you will best get from reading the book, Carr has been focused, not on making money, but on doing the right thing. He has personally funded scholarships that will ultimately send 1,000 high school students from poor families to college – the whole four years and ending up with no debt. Think about this for a moment. I had a hard time just sending my two children to college; imagine sending a thousand of them.
Here in Sonoma County, earlier this year, we lost our chief philanthropist, Henry Trione. Trione changed the entire face of this county. He preserved our largest park and open space district (1,000 acres, which had been slated to become a housing development) by strong arming his wealthy friends to pony up the money. He mobilized his friends, "Henry's Angels," to buy a bankrupt church facility and turn it into the county's major performing arts venue.
He created a mortgage company from scratch and sold it to Wells Fargo, becoming in the process the bank's largest shareholder. He bought a small lumber mill and turned it into Masonite Corp. He owned a piece of the Oakland Raiders at one point for three years. He started our local business college, Empire College, which has graduated 10,000 students, including a third of all local attorneys.
Because his contributions were usually anonymous, nobody can say how many thousands of people Trione helped in his lifetime. When he died, I asked myself, "Imagine what this county would be like if there were two Henry Triones." This is exactly the question I asked after reading Carr's book. Imagine what this country would be like if there were 50 people like Bob Carr.
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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