ISOs and merchant level salespeople (MLSs) doing business in both brick-and-mortar and e-commerce retail environments report that anywhere from 30 to 70 percent of a merchant's annual income is made during the holiday shopping season between early November and late January each year.
Thus, each holiday season tends to be a "hands-off" period in terms of signing new merchants or up-selling existing accounts and a time to focus instead on customer service - including troubleshooting for merchants during a hectic time when any glitch in transaction processing can be especially costly - and planning ahead.
Research and consulting firms Deloitte Development LLC and Retail Forward report that sales volumes for the fourth quarter of 2009 are expected to reach approximately $810 billion, the second worst total since 1967 (when the U.S. government began tracking retail data) and only a couple percentage points higher than 2008's record low.
According to industry experts, these sales projections, coupled with the dearth of new business formations as a result of the recession, mean that ISOs and MLSs will need to become well versed in alternative payment forms and value-added products and services to augment traditional core credit and debit card offerings.
"Every processor is gearing up for wall-to-wall madness," said Paul Martaus, President of payment consultancy Martaus & Associates. "It's the highest volume time of the year, and their numbers for 2010 are going to come out of the next couple of months. There's no new business to be had during the holidays.
"However, that being said, the leading-edge guys, if they're smart, are going to be analyzing the Christmas season to determine what their next year is going to look like with regard to selling - and then boarding - new merchants. ISOs won't want to bother their processor trying to open new relationships during Q4, but they should be laying foundational groundwork with these merchants for the next phase."
Michael Pratt, Chief Marketing Officer for remote deposit capture (RDC) specialist Panini North America Inc., believes ISOs and MLSs should use the holiday season as an opportunity to think beyond traditional payment forms.
"We know that ISOs have options to sell a variety of different products to occupy their time," Pratt said. "Payment alternatives like RDC and automated clearing house are two of these. And as a company that targets the small-business market, we see opportunities through our reseller channel to plant the seed with merchants for payment factors outside of basic credit and debit.
"And if merchants are not ready to do that now because of the holiday crush, we have to at least make sure - from a budgeting and finance standpoint - that they are well positioned to have those technologies in place for next year."
The Federal Reserve's 2007 Payments Study (containing the most recent figures available) reported that Americans wrote 30.6 billion checks for a value of $41.7 trillion in 2006, accounting for 31 percent of the total U.S. payment volume. And though check volume is expected to continue declining, the average dollar value of checks is increasing.
According to the Fed, verticals with the greatest check usage consist of companies that use recurring payments (utility, insurance, telecommunications, home financing and property management companies) and business-to-business (B2B) payments.
The study found that 49 percent of recurring payments are still made with checks. Additionally, B2B payments generated 60 percent of U.S. check dollar value.
Martaus pointed out that the biggest problem in deploying RDC with the same economy of scale as credit and debit processing is the absence of a definable busi-ness model.
ISOs and MLSs that sell traditional bankcard services know exactly what revenue is generated on terminal sales and transaction volumes. And although a variety of cost-effective and efficient check capture and processing products exist, the lack of a tangible return on investment for the feet on the street is preventing widespread RDC adoption in the ISO reseller community.
"Two sales agents are talking, and one guy is driving a brand new Mercedes," Martaus said. "When asked how he could afford a new Mercedes, the guy says he sells electronic check processing. 'You sell what?' the second guy asks.
"The point is that salespeople are closers, not businesspeople. They say, 'Don't confuse me with facts; I've got my close nailed down.' So the idea of penetrating a market that lacks a proven long-term cash flow is anathema to these guys. Every sales guy I know in the world can tell you every penny they'll make when they close the deal. But RDC has yet to establish a definable revenue stream.
"Some companies do have sales models to help these guys. The problem is you've got to get them to take their eye off the ball they are currently playing with - and the only way to do that is through profit motive. Unfortunately, RDC's profit margin isn't significant enough yet to get their undivided attention."
To promote greater interest within the ISO reseller channel, companies like Panini are taking a proactive role in outreach to supplement their efforts in developing the market. Pratt believes the optimal model for RDC adoption employs education and demand generation.
"We work very hard to meet with and educate not just our reseller channels but the end user as well," Pratt said. "We have to address the question of, what can RDC do for me? So we built a return on investment model that businesses could use to enter the variables for their own business and determine the payback for RDC."
Pratt added that Panini also works to help stimulate demand through direct e-mail campaigns, opt-in Web sites (sign-up programs for individuals interested in a Web site's products and services) or landing pages (the page that appears when a potential customer clicks on an advertisement or a search-engine result link) to assist its ISOs in cultivating and widening the demand for check processing solutions.
"Our marketing programs are designed not only to benefit our channel partners, but to help accelerate the adoption of the RDC market," he said. "More importantly, I wouldn't assign a great degree of seasonality to our products. If a business can get their checks cleared faster and cheaper, they're going to be interested in that regardless of the time of year. And in this recession, I think any merchant would be more receptive to products that enhance deposits. "So this is the time when ISOs and banks and people like us need to be in front of these merchants and explain that those checks sitting in drawers could easily be on their balance sheets. Additionally, there is a great opportunity, particularly on the merchant side, to look at multifunction value-adds, like adding a mag stripe reader, so that a merchant can do more than just capture checks."
Achieving greater adoption of RDC - or any alternative payment offerings - requires more awareness among the end-user community and a higher focus on cultivating partnerships. "We have to seek out these end users, raise their expectations of what we can offer and let them know what tools are in the market to help them solve their problems," said Pete Hamel, Vice President, Platform Delivery for card-not-present payment solutions provider 3Delta Systems Inc.
"Interacting and networking with treasurers and cash managers at shows like the AFP [Association for Financial Professionals] is the way this market is moving. You just don't go to sign deals anymore at trade events - those days are gone," he added.
Martaus believes community banks offer potential for ISOs and MLSs to expand their product and service offerings during the holiday season. He added that the more innovative ISOs are partnering with some of these small community banks and credit unions and using their capabilities as closers to make the case for alternative payment products and solutions.
"Banks are, for lack of a better phrase, a lesser developed species," Martaus said.
"And I worked as a bank executive for years, so I mean no disrespect. But they don't get selling, don't like it, don't understand it and quite frankly don't want to do it. They'd rather have someone else come in and get those products and services implemented."
Market trends shape sales models
The holiday shopping season traditionally generates strong revenue streams for ISOs, processors and MLSs.
And for most payment professionals and retail merchants, holiday sales constitute a significant portion of their annual income.
Some industry research firms project sales volumes for the upcoming holidays will be the second worst in over four decades, just percentage points above the record low consumer spending in 2008; consequently, ISOs and MLSs might want to adapt by pursuing new avenues to remain afloat as the recession persists.
Knowledge of overall industry trends as well as sales volumes in specific markets may help payment experts determine the most practical and profitable course of action moving forward.
For companies like international payment processor and merchant acquirer Merchant e-Solutions Inc., the holiday season is a time to focus on nonretail merchants as well as assist U.S.-based merchants in expanding their geographic footprints.
"From an Internet perspective, we work diligently from Q1 to Q3 to get our merchants signed and set up with alternative payments as well as training them on those services, so that when Q4 comes around, everything is in place to handle the larger payment volume," said Kevin Gallagher, Merchant e-Solution's General Manager, E-commerce.
"In many cases more than half of their annual volume occurs during this period; consequently, we start shifting our focus to B2B in Q4 because they aren't impacted by the holiday rush. There's so many opportunities in B2B and person-to-business (P2B) verticals like education, government and recurring billing. I think it's a huge potential for the ISO reseller channel as a value-add to offset the retail processing and product and service addition freeze."
Gallagher added that the payments industry is also seeing tremendous growth in international payments and multicurrency conversion transaction products.
Many e-commerce merchants in the United States are looking overseas to expand their portfolios to generate additional revenue.
"We've opened up a whole new market for these merchants since the last holiday," Gallagher said.
"And we can also include offerings that enable our merchants to accept payment in local currencies. Currency conversion has been a very hot area recently, especially so in the past year as merchants are looking to expand sales volumes in a somewhat depressed economy. And I think that will continue to grow as more and more consumers worldwide shop and buy online."
Aaron Bills, co-founder and Chief Operating Officer for 3Delta Systems, has found tremendous opportunities for purchase cards (p-cards) in the B2B space.
Bills noted that the p-card, now in its third decade of existence, has become one of the biggest revenue generators for his company in the current recession.
In July 2008, the Congressional Research Service to the U.S. Congress reported that government purchase, travel and fleet card volume grew from $527 million in 1993 to $18.7 billion in 2007.
In the same period, the number of cardholders tripled to 300,000. Additionally, p-card transactions went from 1.5 million to almost 24.7 million.
"The B2B space is stronger now than I've seen it in quite some time," Bills said.
"And it's been more relevant lately for the ISO as a value-added product. Our card volume in the B2B p-card space is one of the few areas we've actually seen consistently increasing sales volume. This segment is climbing nicely, and there are all kinds of potential in a market that is still relatively - and remarkably - untapped. By no means is this market saturated, not by a long shot.
"And the beauty of p-cards is that it really allows the merchant to control their spending. For B2B accounts, p-card users have spending limits. Additionally, that purchasing agent is restricted on where the card can be used, it passes all the line item detail back to the merchant, and the merchants are getting a lower interchange rate from Visa and MasterCard for those transactions. For us, p-cards remain the prevalent growth opportunity."
Many payment professionals agree that introducing new payment technologies and solutions and then selling them to merchants is akin to swimming upstream against a strong current - stop moving and you're swept away.
Theodore Svoronos, Vice President, Business Development & Strategic Partnerships with Group ISO Inc., said the best way to overcome such obstacles is to consistently bring valueto merchants.
"Merchants truly don't know most of the ISOs, MLSs or merchant service providers out there," Svoronos said. "We're not a household name. We have to constantly prove ourselves as the best athlete for the competition, so we can't afford to get slow or soft.
"That merchant will make the best business decision for them - and for us, hopefully, but we have to offer the best possible service, knowledge, professionalism, price, expertise and quick response time - every time. This is our foundation - and really, when you look at it fundamentally, our only value-add."
This is true for the holiday season and throughout the year.
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