By Patti Murphy
The Takoma Group
These are unsettling times. Equity markets have been gyrating like Elvis at a beach party. An entire sector of the U.S. economy, housing, is on the skids. And another sector, retailing, faces declining sales - even as the December holidays approach.
Meanwhile, at home and abroad, governments are taking unprecedented actions to spur lending and shore up faltering financial institutions.
As individuals and as a nation, there's probably no escaping some difficulties. But the merchant acquiring sector, nascent in the context of financial services, has seen its share of economic shocks, and each time it has rebounded, often stronger than before.
One reason is obvious: This is a transactions-based business; the more payment cards are used at the POS, the greater the potential revenues. But it's also a relationship business. And building good relationships is going to be more important going forward than ever before.
The good news is Americans are boosting their use of electronic payment methods, such as credit and debit cards, to the detriment of cash and checks. According to a new survey from the Bank Administration Institute and Hitachi Consulting Corp., electronic payments now dominate the three most common commercial venues: in-store, the Internet and bill payment.
Bill payment was the last holdout, Ajay Nagarkatte, BAI Research Director, said in discussing the survey, entitled 2008 Study of Consumer Payment Preferences. While cash and checks had dominated bill payment as recently as 2005, this year just 38 percent of bill payments were made using checks or cash, he added.
The fifth such study since 1999, it was sponsored by several big-name firms, including First Data Corp., MasterCard Worldwide, Metavante Corp. and Pulse (the EFT network owned by Discover Financial Services).
"I expect the shift from paper to electronic payments to continue as consumers increase their use of cards and new forms of electronic payments gain traction," said Chris Allen, Director of Financial Services Consulting at Hitachi. "Although the proliferation of payment methods increases the complexity of managing payments, it also creates opportunities for financial institutions and payment service providers."
Retail store purchases continue to account for the majority of consumer payments, BAI and Hitachi found. PIN and signature debit now represent 37 percent of consumer in-store purchases, up from 21 percent just a decade ago. The share of in-store payments made by check shrank from 18 percent in 1999 to 8 percent today.
"Looking forward, electronic payments will continue to erode the share of payments made using paper-based methods. As one young consumer observed when answering the survey, 'paper is so old school'," Hitachi wrote.
While there is ample room for growth in the acquiring sector (albeit less than in past years), revenues and overall profitability will continue to vary by firm, vertical markets and other factors, such as customer service and investment strategies.
Even in the face of economic turmoil, ours is a growing business. Witness Visa Inc.'s initial public offering (IPO) in March 2008 - the largest such offering in U.S. history - just days following the near collapse of international investment bank Bear Stearns. The IPO went off at $44 a share. On Oct. 15, when the rest of the market was on a rollercoaster ride, Visa's share price was hovering around the $50 mark.
Among acquirers, First Data reported $1 billion in second quarter 2008 revenues, on an 11 percent increase in transactions. But much of that growth was offset by increases in card usage at nationwide discounters (which typically can negotiate lower discount fees) and huge increases in debit card payments vis-à-vis credit cards, the firm said.
Global Payments Inc. reported its first quarter 2008 revenues were up 30 percent over the same quarter last year. And fiscal year 2009 revenues are on track to grow at least 29 percent over fiscal year 2008, Paul Garcia, Global's President and Chief Executive Officer, said in a statement. For the fiscal year ending Aug. 31, 2008, Global, the fifth largest acquirer in the country, reported revenues in excess of $1.27 billion.
The acquiring sector is host to several large companies. And with the latest round of government-assisted financial institution bailouts, some are poised to grow larger yet.
Mega-combinations like Wells Fargo & Co. and Wachovia, JPMorgan Chase & Co. and Washington Mutual Inc., and Bank of America Corp. and Merrill Lynch & Co. Inc., could, over time, shift acquiring preferences. More immediately, opportunities may arise to win over small businesses that want to keep their banking business closer to home.
Keeping up with the mergers and acquisitions in financial services these days is enough to make one's head spin. If folks like me who have spent their professional lives in financial services feel this way, imagine what it must be like for that local florist or restaurant owner you're trying to sign.
The market today presents an ideal opportunity for ISOs and merchant level salespeople (MLSs) to redouble efforts in helping merchants shift more transactions to electronic form. It doesn't matter if you're a multibillion-dollar acquirer or an MLS working from a home office, your customers and prospects are looking for the same thing: consistent, quality service that helps grow their bottom lines.
For example, in the face of tightening credit, some merchants might be well-served by prepaid card programs. These can be a boon to cash flow, since there's always a time lag between the purchase and redemption of cards.
Michael Berman, Chief Operating Officer at Outside Ventures LLC, which owns and operates Tribul Merchant Services LLC, told me he's been able to show merchants cash flow improvements on the order of 75 percent within a year, using well-managed and effectively promoted gift card programs.
So, these may be unsettling times, but they need not be the worst of times. There are still opportunities to make cents on shifting consumer payment patterns. As industry consultant Paul Martaus noted during a presentation at the recent Western States Acquirers Association conference: "Smaller ISOs are finding they have to work harder to stay ahead, but most continue to do OK.
"Extremely large, publicly held companies are having a bit of a tougher time," which is difficult to hide "when your performance is a matter of the public record."
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at patti@greensheet.com.
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