By Ken Musante
Napa Payments and Consulting
Traditionally, banks make money by lending out funds at a rate greater than they pay for deposits. The spread between the interest paid and interest earned from borrowers is the bank's interest income. That spread has to be sufficiently large to cover charge-offs and the operational costs to run the bank.
Banks keep sufficient liquidity to cover withdrawal requests; however, if all depositors were to request their deposits, the bank would face a liquidity event. When a bank runs out of deposits, it fails and is taken over by its regulator.
In 2008, I was running a merchant acquiring operation that was wholly owned by a bank holding company. Humboldt Merchant Services LP was owned by First National Bank of Arizona and First National Bank of Nevada.
Both banks were privately owned and heavily invested within the mortgage market. Consequently, when the mortgage market went south and depositors requested their funds, the banks failed.
Banks fail on Fridays. This gives the Federal Deposit Insurance Corp. time to step in and take possession of the physical premises and be prepared for customers on Monday.
There are exceptions but the orderly bank failures take place on Friday. Ideally, the FDIC has a buyer lined up so, at the time of take-over, there is a simultaneous sale, and the FDIC can minimize their involvement.
In my case, the bank franchises were sold upon takeover, but the buyers did not take over Humboldt Merchant Services. We were retained by the FDIC. I remember the day well. I knew something had to occur, as I was informed Friday morning that the banks had failed, yet there was no official notice as to what would happen with Humboldt Merchant Services. Late in the day, I received a call informing me that the FDIC officer in-charge would be arriving on our site to take possession of the company. It was surreal.
After hours, the managers and I gathered in a conference room to hear from the FDIC examiner. He had obviously done this before. He explained we now worked for the FDIC. We would be paid overtime for the weekend's work (that struck me as really strange). Their immediate concerns were how much cash we needed to run the business. They were surprised to learn that we were a cash provider and, although we required bank sponsorship, no cash was needed to run the organization.
From the FDIC's perspective, although it is in the business of managing failed banks, this was not ordinary. There were four bank failures in the three years prior to 2008. You had to go back to 2002 to find a year with double digit bank failures. FDIC receivership of merchant service operations were even more rare. Rarer still: we accepted higher risk merchants requiring significant reserves.
The officer in charge was a smart, honorable and dedicated executive. He had ample experience at the FDIC. His request was that we continue to run our business, not take on exceptional risk and not have any reimbursement expense for alcohol—try courting ISO's and agents without taking them out for a drink!
He continued to work with suitors to purchase the company. We had several credible suitors, but the priorities for the FDIC were different from a private seller. Surety of closure was tantamount.
It was extremely difficult maintaining staff morale. We had no assurance of our future other than we would be sold. We did make some difficult decisions along the way, including laying off the team members supporting the branches (as the branches no longer existed).
After nearly four months of working for the FDIC, Humboldt Merchant Services was purchased by Moneris Solutions. It was fortunate for all of us working, as Moneris kept the team largely intact as they worked through integrating the business. Most staff did need to find alternative jobs in time, but it allowed for an orderly migration, and Moneris treated folks fairly.
For its part, the FDIC, too, was fair. The FDIC is charged with protecting the value of the assets it takes over. Its representatives did so consistently and with deliberation. They wanted the operations and our transition to go as smoothly as practical. As mentioned, however, bank take-overs were not common, and the FDIC did not have experience managing merchant services.
Being an employee of a company owned by the FDIC was odd. We suddenly and overnight had new health care and payroll processes. The common services such as HR and IT, which were previously provided by the bank holding company, were gone. Approving unique credits was difficult and, overnight, we lost the faith of our sales contractors.
The experience was difficult, trying and unnerving. I can imagine well what other merchant acquirers within our industry might be going through. Godspeed.
As founder of Humboldt Merchant Services, co-founder of Eureka Payments, and a former executive for such payments innovators as WePay, a division of JPMorgan Chase, Ken Musante has experience in all aspects of successful ISO building. He currently provides consulting services and expert witness testimony as founder of Napa Payments and Consulting, www.napapaymentsandconsulting.com. Contact him at firstname.lastname@example.org, 707-601-7656 orwww.linkedin.com/in/ken-musante-us.
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