By Brandes Elitch
I've mentioned before that CrossCheck is located in Sonoma County, Calif. We get about 6 million tourists here every year, and over 4 million come for the wine and the beer. You may have read that climate change is a reality for winemakers everywhere and is affecting the terroir of the vineyard. This has made for better wine in cool regions that previously experienced slow ripening. But there are negatives: warmer, shorter growing seasons that result in higher sugar levels and thus higher alcohol levels, but lower development of aromas and flavors.
You could say that for winemakers, the world is changing beneath their feet. And you could say the same thing for the people who sell credit card processing: the ISOs and merchant level salespeople (MLSs) who call on merchants and provide a valuable service that is part sales, part technical advisor and part business consultant. Indeed, ISOs and MLSs are the heart of sales for the payments industry.
Here are three "climate change" events in the payments world that will have a profound effect on the sales process for small and midsize businesses (SMBs):
Let's assume the most profitable accounts for an ISO aren't very large enterprises, but rather SMBs. There are millions of SMBs operating today. Now, I'm going to make some broad assumptions based on my time working at a money center bank, a super-regional bank and a community bank, which I hope will clarify things.
SMBs typically bank with local banks (often called "community banks") with less than $1 billion in assets. SMBs have found they receive a better reception from a community bank, particularly if their business is new, and better customer service.
When I worked at a money center bank, lenders were often heard to say, "We don't know how we can make money on a $1 million loan," which I found shocking at the time. But a community bank with, say, $200 million in assets will be very happy to make a $1 million loan to a local merchant. Issues arise when merchants grow to the point where their credit needs exceed the legal lending limit of their banks. Then the banks either need to get other banks to participate in bigger loans, or the clients need to find new banks.
It might be instructive to note that half of all SMBs hold a cash buffer of less than one month (per a 2016 study by JPMorganChase). Moreover, 25 percent of SMBs hold fewer than 13 cash buffer days in reserve. A large bank will not be sympathetic to this situation, but a community bank is focused on helping local SMBs survive and thrive. A local bank is willing to spend time understanding an SMB's leverage position, working capital position, vendor relationships, cash flow, and employer/employee relations. A big bank: not so much.
Community banks have small staffs and don't typically have dedicated salespeople to sell what used to be called cash management services, or Treasury products. Moreover, local banks will not have dedicated merchant bankcard sales departments to underwrite merchants and board them on their own platforms.
Community banks might have referral relationships with ISOs or even processors through which they receive small referral fees, but the merchant relationships belong to the processors, at least as far as merchant processing is concerned. Nobody in the local branches answers specific questions about merchant processing, boards merchants, or provides training and equipment setup.
To put things in perspective, the St. Louis branch of the Federal Reserve publishes statistics on the industry under the rubric "FRED," and the current listing shows that there are 4,652 commercial banks in the country (a fairly steep drop from 10 years ago). When you look at the listing by asset size (in descending order, largest at the top) you get down to a $2 billion total asset size by bank number 340, which by inference, means there are 4,312 community banks with less than $2 billion in assets.
These banks are too small to have their own IT/data processing departments and their own product management staffs. Over time, three large "core processors" have come to dominate the business of providing the entire spectrum of general ledger processing and products, including loans, deposits, savings, investments, etc. Local banks make a fairly permanent decision as to which of these three core processors to use, and it would not be much of an exaggeration to say that from that point on, they are joined at the hip.
My favorite comment about this is from Scott Hanson, who said that changing your core processor is akin to having open heart surgery with your eyes open and no anesthesia.
The three large core processors are Fiserv, FIS and Jack Henry. The core processor software handles all deposits, payments, loans, banking transactions, customer data and reporting. It has been stated that the core processor knows the business of banking better than the banks, and they have a tool bag of technology products to make everything happen seamlessly. While Global Payments is not a core processor, I deemed its purchase of TSYS a "climate change" force because of its size.
You can probably see where I am going with this. A large number of community banks have SMB clients who need and use merchant bankcard services. Currently, these banks are involved in just about every aspect of their clients' businesses except merchant bankcard processing. They leave it to local ISOs to call on their clients and deliver these services.
But what if the core processors offered bankcard services to merchants in a seamless, easy-to-use fashion much like they do with Treasury products? The core processors would have access to all the balance and transaction detail of every merchant client and would be able to quickly profile which merchants to call on to discuss bankcard processing, and even make it easy to generate a proposal and statement.
This would routinize and automate the sale of bankcard services to the banks' merchant clients and, equally important, would generate a reporting capability to bank management that would enable them to see progress being made. A bank with $200 million in assets might then need only one or two salespeople to handle merchant bankcard relationships because the core would handle everything else.
You may be thinking that the three cores don't do merchant processing, and you would be right, that is, up until a couple of months ago. Now, they have acquired the major card processors outright. You could say they bought their way into the merchant bankcard business. This means, for example, that if you are using Fiserv now, Fiserv will soon be integrating First Data into its platform.
Small banks will now be able to enter the merchant transaction processing business in an arrangement similar to the First Data affiliate program that existed for large banks. But not so fast. It is not certain the Fiserv/First Data integration will be fully realized anytime soon. A report from The Strawhecker Group states it could take a decade to integrate these two firms. Even before this event, First Data had struggled to consolidate all its existing platforms, according to Jim Daly, senior director of business intelligence at Strawhecker.
Regarding the Fiserv side, he stated, "[M]any community banks that use Fiserv's core systems already complain that they are held back and don't receive the service/functionality they desire. The lack of timely response and support from Fiserv has hindered financial institutions from adopting emerging technology."
Remember, to make a merger like this work, you are not just integrating different computer systems and technology; you are also combining executive, sales, marketing and administrative systems.
In the end, there is one important point the processors know: bank-sourced merchant accounts tend to last longer than merchant accounts generated by nonbank processors, so in the long-run, the bank sales channel is more profitable. These three huge acquisitions of merchant acquirers by core processors are the very definition of climate change in the payment processing world. ISOs and MLSs should pay close attention to this space.
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 firstname.lastname@example.org.
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