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The Green Sheet Online Edition

October 14, 2019 • Issue 19:10:01

The evolution of electronic payments - Part 1

By Brandes Elitch
CrossCheck Inc.

I was fortunate to attend the last two Money 20/20 shows and speak with a variety of people there: product managers, startups, large processors, vendors, fintechs, bankers, corporate executives, venture capitalists – you name it.

It's impossible not to notice that many of the attendees are recent arrivals to the payments ecosystem. By recent, I mean they entered payments in the last decade, just before fintech started to appear, and today they are fintech oriented. They don't think like traditional ISOs, payment processors, or bankers in the issuing or acquiring business.

For those of you who are new to the industry and possibly even reading The Green Sheet for the first time, I thought a little background material would be in order. You may find it useful in understanding how electronic payments began.

My company started in the check guarantee business back in 1983, when almost every merchant took checks at the point of sale (POS). In fact, back then many merchants didn't take credit cards at all. This was partly because of the high cost of interchange and partly because processing a card transaction was much more complicated than taking a check.

Checks ruled in 1983

In the industry's early days, merchants had to put a multipart carbon form and a credit card on a plate and slide an attached imprinter across them to capture payment card data. These devices were typically referred to as "knuckle busters" or a "zip zap" machines. After manually imprinting the card information onto the forms, merchants gave one copy to the customer, kept one for their records and sent one out for processing. There is good reason why these basic machines were called knuckle busters. By comparison, taking a check was easy, comfortable and familiar for merchants, and consumers commonly wrote them for purchases at the POS.

But right about 1983 things started to change. This is because two years earlier, Visa and Mastercard began offering discounts for merchants who, for purchases over $50, swiped mag-stripe data on cards through newly developed automated technology. But there was a problem: the early hardware cost about $900 – way too expensive for the average merchant.

Enter the POS terminal

Thus, numerous developers worked to make this technology affordable for the average merchant, but one company figured out how to deploy affordable technology first: Verifone, which came to market in 1982. By 1984 the company had developed an affordable ($125) piece of hardware with the inexplicable name of ZON, and later the ubiquitous ZON Junior.

This was a brilliant move on the part of Verifone founder Jim Melton, and it gave the company a commanding lead in what became the POS market. Next, the question became how to sell, program, deliver and install literally millions of terminals to the merchant community.

What was missing was the sales infrastructure to call on merchants face to face, sign them up for credit card processing, and sell (or lease) them POS hardware to enable them to accept mag-stripe card payments. Back then, most of the top 10 card processors were nonbanks. Banks were focused on the card issuing business and left the other side, called "acquiring," to the nonbanks.

Also at that time, card brands were associations owned by their respective member banks. To get a merchant account, a merchant had to send an application in and be underwritten by a Visa or Mastercard "principal" bank. There weren't a lot of those. Back then, some smaller banks specialized in sponsoring ISOs. But a concerning issue was always underwriting. Sometimes it took weeks for a new merchant to be approved.

If the principal banks didn't have the salespeople to call on merchants, sign them up for credit card acceptance, and help them through the process, who did? Stay tuned for Part 2 of this article, slated for publication Oct. 28, 2019, in issue 19:10:02. end of article

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.">href="mailto:brandese@cross-check.com">brandese@cross-check.com.

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