Over the years, many of us have witnessed economic ups and downs, new regulations and technological changes in the payments industry. However, it sometimes seems that no matter how many changes we witness, many things seem to remain the same.
On Feb. 25, 2013, The Green Sheet reprinted "According to the street" in issue 13:02:02. It was originally published Feb. 24, 2003. The article discusses the economy at the time and technology issues. Paul H. Green had this to say, "It is interesting that the article sounds so much like the marketplace now, which suggests that we are repeating a 10-year cycle."
This article contains perspectives from The Green Sheet Advisory Board on the topic. We got the ball rolling by asking them the following questions:
There's no doubt that dips in the economy are cyclical and we're dealing with the same issues today that we were in 2003. From our perspective as a funding provider, the difference is that 10 years later, the small business financing landscape has changed dramatically.
With the explosion of merchant cash advance companies and the emergence of other loan alternatives, ISOs and merchants are much more equipped today than they were in 2003 to deal with negative forces in the economy.
For example, small business owners can handle a bad job market better today than they could in 2003, when they had few financing options outside of a bank loan. Today, a merchant cash advance can get them up to $500,000 in days to help them afford additions to their payroll.
Merchants can now access money to grow during a recession, creating small business jobs across the country in the midst of a rough job market.
In the '03 article, one ISO stated that merchants were seeking long-term relationships over low price. In 2013, with the emergence of cash advances, ISOs have a sticky product to offer that can lower attrition.
At AmeriMerchant, we have a 70 percent renewal rate for merchant cash advances, letting ISOs keep merchants on for years and develop strong relationships with them over time.
I read the 2003 article by Paul twice to understand it completely. Joining the credit card industry in 1971, the term then, I have seen many cycles.
If The Green Sheet re-interviewed those same people in the earlier article, I believe the comments would be identical. Why? An individual business, an industry life cycle, is a bell curve.
Under a microscope peaks and valleys make up the larger curve, a bell curve nonetheless. While similar, the comments will differ by location, the local economy along with the company's stage along the bell curve.
Furthermore, individual comments will reflect that person's stage within their respective company or the payment industry in general.
Almost 30 years ago, a colleague shared that the only constant in the credit card industry was change. In my experience, while aspects of the electronic payment industry change, it is not surprising how they remain unchanged.
Only the names, the players and the technology change. Why? It is generational. The regular influx of new entrants without industry history is destined to repeat past successes as well as past failures. Long-term success, I believe, comes to those who bridge the generations, leveraging what is new in the context of the past.
However, they too eventually retire, sell or die, leaving the future to the next generation to repeat the cycle yet again. What I do see different from 10 years ago is the number and nature of "co-opetitive" alliances. Yet to be seen is whether some alliances are for survival or to drive paradigm change, that is, disruption.
As things change, they remain the same. My advice for those who are young or new to the industry: learn from industry veterans. Leveraging their experience increases the probability of your success along with reducing your chance of failure.
Elite Merchant Solutions
The payment processing business has evolved tremendously over the past 11 years since I have been involved in the industry. The last three years, alone, I have seen more changes in technology and pricing than the first eight years combined.
I believe Mr. Green's article of February 2003 was very similar to what we are facing today in payment processing. Declining margins, new technology and scrutiny from the government are items mentioned in 2003 that we are certainly seeing in today's markets.
It is interesting that back in 2003 industry veterans were pointing out margin compression. I think those same people, including myself, are now wishing we could be back at those margins rather than the margins we are all facing today. In 2003, the big thing was gift cards, check conversion and the explosion of e-commerce. Today, the big talk is mobile payments, EMV (Europay/MasterCard/Visa) and alternative payment methods.
As an industry evolves, technology within that industry evolves, which is what we are seeing over the last 10 years in the payments space. The technological advances in our industry have been fast and furious the last few years, as money is flocking to our industry.
What I find most interesting are the different outlooks from various colleagues as to where payment processing is headed with respect to the ISO.
I speak to one colleague and they have a doom and gloom outlook, and I turn my head and talk to another colleague and they see nothing but dollar signs in our industry for many years to come.
Nobody has the formidable crystal ball to predict the future, but over the last 10 years, this industry has been great to be part of, and I am hoping the next 10 years will be even better.
Margin compression will always be a factor and will only get worse. However, those companies that find alternative revenue sources for their respective merchants will survive and, in fact, thrive in the years to come.
Additionally, companies that stay ahead of the technology curve will also see big rewards and a very bright future in the payment processing business.
Acquiring Solutions International Inc.
Same: Merchants are still looking for ways to cut costs and are still not satisfied with the lowest rates that I have ever seen. It is amazing to me that merchants think that the acceptance of credit/debit cards in their store should be free - like they're doing us a favor.
Different: Today a merchant service consultant has more to offer a potential client than we had 10 years ago, thus making it more difficult for a merchant to change processors so easily.
Same: Margin compression then - even more margin compression now. Often I find myself quoting interchange plus 5 + 5, which I would never have done in 2003, but today it's what you sometimes have to do to just get the business, and just when you think that you got that big account, you get that call from your prospective client who says, "I just spoke to NFW Merchant Services, and they just offered me interchange plus 3 + 3; can you match it?"
Different: Merchants still purchased or leased equipment in 2003 - In 2013, a merchant can have the equipment for free. Next we'll be paying the merchant to process. In a nutshell: I feel like I am working harder to make less money than ever before.
Charge Card Systems Inc.
It is both refreshing and alarming at the same time to read this article printed February 2003 and see the similarities in the merchant processing industry today in 2013 versus a decade ago in 2003.
This type of reflection reminds me of my dinner table conversation with my two grandfathers many years ago (both were entrepreneurs and ran small businesses selling commodity products in different industries).
One grandfather would say, "It's so much easier now in 1997 to make money," and the other grandfather would say, "I wish I could turn the clock back to when I was 40 when making money was done on a handshake between men - there was tons of opportunity based on my service, and my customers stayed with me for decades."
Fast forward to 2013: no need to go in depth again on all the issues (technology, payment gateways, margin compression, etc.) that have been discussed in The Green Sheet for years, but, at Charge Card Systems, we have one philosophy that overshadows everything else: customer service. Customer service to the merchant, the agent, our employees, our contractors, etc.
As the world shrinks and services like credit card processing become more commoditized, how else can we differentiate ourselves if not for the high levels of service? It is hard and becoming more and more difficult, which is why attrition is growing exponentially in our industry.
The typical merchant is converting from one processor to another ISO because of the monetary savings (whether it's real or fake, depending on the integrity of the MLS [merchant level salesperson] who conveys the monthly savings to the merchant).
When was the last time you called a prospective merchant with a real value-added solution that provides a reason why that merchant should consider switching to your company (in addition to just the "rate game")?
One area where I believe significant opportunities exist is the bundling of the other ancillary services to a specific merchant. Of course, this is nothing new in terms of a strategy, but it's the execution of this strategy that must be refined to make this model work.
Once you have the ear of the business owner and the confidence of the CFO (and have already paid the lead cost to acquire that merchant), why not offer a second service and increase your profitability?
In my opinion, the same overriding business principles apply to all companies (whether in 2013 or 2003) and within our industry, the vision and mission statements of many ISOs are similar.
Some are made of trite words that sound good on a piece of paper, while other ISOs really differentiate their companies' values and their merchant relationships through hard work and dedication to a positive partnership experience.
J. David Siembieda
Paul's comments about the state of the economy in 2002 have some parallels to the 2012 national economy.
However, in retrospect, the downturn in the economy in 2002 was significantly less than the subsequent downturn, which was the biggest negative hit to the economy since the Great Depression.
What has changed is the slowdown in growth of domestic gross national product. The Congressional Budget Office is now estimating long-term U.S. growth to have declined from 3 percent to 1.9 percent.
Some analysts project that ISOs can only physically replace perhaps 2 million terminals a year, and the total number of terminals to be replaced is perhaps five times that. So, the opportunities for ISOs still exist.
I think it is a more difficult sell today, though, with explaining why the merchant has to pay for PCI (Payment Card Industry Data Security Standard) compliance, why underwriting is so complicated, what new types of payments are emerging, etc. It is a more complicated sale than just saying, "I can get you a better rate on your credit card processing."
We are also seeing that regulators are more actively involved in making sure that the ISO has done due diligence on the merchant. Personal guarantees and reserves are not proof of due diligence.
ISO executives can be held personally liable for a failure to properly manage this, and acquiring banks are likewise feeling enhanced regulatory scrutiny.
I think the section from the 2003 article, "What is going on in your market," is all true today, and will likely continue to be true.
The forecast of "What is hot and what is not," though right-on several years ago, is different now because of the many new products and equipment that have emerged in the past few years, especially in regard to mobile and alternative payment providers. These changes have come so quickly.
I anticipate that things will continue to change at an even more frenetic pace. It is just not "business as usual" today as it was a decade ago.
Fortunately, over this 10-year period, the Electronic Transactions Association has become an invaluable resource for ISOs by offering certification programs and education. The association is also committed to providing opportunities for our industry in the mobile space.
The ISO feet-on-the-street salesperson needs to know a lot more today than he or she did 10 years ago. It is harder to make a sale. ISOs need to be more strategic. As Paul noted in the article, "knowledgeable and competent people still get the business." This echoes what is happening in our industry and is even more true today.
The following comments were excerpted from interviews done with payment professionals for GSQ Vol. 5, No. 1, Looking ahead: An industry discussion of the ISO opportunity, which was published more than a decade ago.
Question: Is a livable wage still possible for an individual ISO selling in the United States, given the competitiveness of equipment pricing and the declining margins of bankcard basis points?
Total Merchant Services
It is still possible for ISOs to make a living. In fact, if you're smart, it's actually possible to make a small fortune in this business.What's the key to success? First, selling a wider range of services and products will not solve the problem.And getting what appears to be the highest advertised commission or best buy rate is also not the key to success.
We receive calls from honest, hard-working sales agents every month with stories on how the company they were representing just stopped paying their monthly residual commissions.
Their agreement did not protect them properly. The key to success is getting an agreement with a merchant bankcard program that provides you a large piece of the net revenue generated from your accounts, and an agreement that protects you against losing your monthly residual commissions.
Santa Fe, N.M.
I am certainly earning a livable wage; however, I am aware that the amount that constitutes a livable wage varies geographically. I have been in the business about five years, and it does seem to be getting harder to compete.
However, I have many more things to offer than I did when I began.
James F. Marchese
IRN Payment Systems
The deterioration of discount pricing and the competitiveness in the marketplace in equipment processing have made it harder for the ISO to make a living.
Successful ISOs are not just selling but are offering the prospective clients the value-added products and services that will convince the client to switch to them.
ISOs should be selling service instead of cost savings. Customers will not switch to save a few basis points if they are receiving the service and attention they need.
A livable wage is still possible in this industry, but the ISOs must sell three things in order to obtain these wages: service, service and more service.
The only way to differentiate your office from all others is to give the clients solutions before they even have the question.
Question: Why is there a consistent sense that there are good ISOs and bad ones?
Is it really a failure to keep sales promises, undisclosed contractual issues, bait-and-switch pricing; or is it just really the differences in organizations focused on sales versus those focused on service?
Larry A. Henry
The perception of good or bad is not one of an ISO being sales-oriented versus service-oriented. Errors of omission, unclear explanations and confusing forms continue to be present in the market.
We must continue to educate the merchant to ask for more than discount rate and monthly minimum. If an organization is sales-oriented, they should be able to provide the merchant with all of the facts. If they are service-oriented, they should provide client-retention programs to give service after the sale.
ACH Direct Inc.
We have found that there are definitely many levels of professionalism (or lack thereof) out there in the industry. It really comes down to the moral principals of the leaders of an ISO, which are the defining criteria for good versus bad.
Merchant Bankcard Network
I have heard some horror stories, but none of this has been a problem for me. I think in the beginning some really bad characters messed things up for the rest of us, and that is why we have to either register or hide.
I think that these choices, which are based on having $10,000 a year to spend, are creating a lot of bad deals for salespeople. Given that you have to be a sales rep rather than an ISO on your own, a lot of people have gotten ripped off by more knowledgeable people.
All of the questions and answers in Looking ahead: An industry discussion of the ISO opportunity can be viewed, along with commentary, in our archives at www.greensheet.com/gsq_pdfs/gsqv5n1.pdf.
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