Just about everybody with a stake in merchant acquiring agrees: selling on price alone is no longer a viable business strategy. "The game has changed," said Joe Porco of ImWithCloud.com. "You have to sell more than credit card and you have to sell more credit card."
Porco, a self-described POS specialist, has worked for several merchant services companies; these days he's perfecting an online ordering system that's integrated with payment processing. It is cloud based, supports mobile access and is processor agnostic. Porco said he's testing the concept now with a sandwich shop, and is eyeing prospects in other verticals, like salons. "I'll win them over by proving the concept and then go after the rest of their business," he said. "Ultimately I want to become their trusted advisor."
Greg Hammermaster, President of Sage Payment Solutions, said that to "attract more customers, gain new business and even enter new markets, businesses really need the ability to expand their payment options – from mobile payments and gift cards to virtual checks – and in a best-case scenario, with automated back-office integration."
But don't go overboard with bells and whistles, warned David Leppek, President at Transaction Services LLC (TrxServices). Too often ISOs sell merchants on services and functionalities that sound great but seldom get used, or just aren't practical. Donna Embry, Senior Vice President of Strategic Development at Payment Alliance International, agreed. "It's not about the technology; it's really about execution at the merchant level," she said. "You don't want to overload the merchant. But you should be thinking ahead." For example, with Europay/MasterCard/Visa (EMV) compliance deadlines approaching, you can take time to consider what kind of value adds you can bring up while swapping out equipment.
"We've grown our portfolio by constantly scratching our heads and asking 'where's the value add?'" Leppek said. "We're always looking at what we do well and what we can do to target that."
A long-time veteran of the POS space – his career has included stints with Micros Systems Inc. and merchant portfolio sales management at First National Bank of Omaha – Leppek describes himself as someone who enjoys solving puzzles, and that's also how he describes his business. He launched TrxServices in 2010 to invest in strategies he couldn't convince his former employers to adopt.
Since then, Leppek has invested tens of thousands of dollars in technologies that he and his team are constantly building upon to accommodate the distinct attributes of particular verticals. Cruise ship lines are an example. These businesses have several unique requirements, such as needing ways to protect cardholder data while accommodating incremental authorizations throughout the duration of passenger stays. "We built a special feature" using tokenization to lessen the risk and cost to win the company's first cruise line contract, Leppek said. "It gave us a competitive edge," he added.
TrxServices is taking a similar approach to airport parking garages, investing over $19,000 to integrate to a business platform common to parking garages, which in turn will enable it to undercut the competition. "I'm going to go after them with a price that's 10-cents cheaper than any competitor," Leppek said.
TrxServices is one in a small army of ISOs that has built its own platform and controls just about everything in-house. The company is currently working on a mobile app. "We hadn't been selling mobile for the last two to three years," Leppek said. "Now we've heard from a number of larger merchants that want mobile apps." So work has started on an app that will take a "unique approach, and it will be hosted versus being a native application," Leppek added. This project is doable in house because six of the company's eight full-time employees are technology geeks. "We've outsourced a few things, and over and over again it's just been painful," Leppek noted. He describes his staff as "top notch" in their fields. "We're all workaholics and dedicated to making the best product," he said. Plus each owns a piece of the company, which is good motivation to excel. Developing technology solutions in-house offers several benefits. "It gives us more control," Leppek said. "It's costly upfront, but I'm in this for the long haul."
Impact PaySystem LLC also invests a significant amount of money on technology – Dee Karawadra, Impact's founder, Chief Executive Officer and President, said he keeps a team of programmers on retainer. His mission: to equip small and midsize merchants (those with up to $40,000 in monthly bankcard traffic) with tools and services comparable to those large merchants use. And he typically gives away the tools, provided the merchant processes through Impact. "We're investing in technologies that can secure the future," Karawadra said.
Louisville-based PAI is another ISO with a unique approach to bundling merchant services. "We call it thinking inside the box," Embry said. For example, while many ISOs stay clear of ATMs, PAI has deployed and/or serviced ATMs in over 60,000 locations, including ATMs owned by banks and credit unions. With all the changes in rules and regulations, like EMV and the Americans with Disabilities Act, and limited budgets, some community banks prefer to outsource ATM operations, especially off-premise ATMs, Embry noted. PAI works with about 550 banks.
"This is a perfect match for a company like ours," Embry said. She noted that PAI services an extensive network of off-premise ATMs. Plus, the "relationships with these banks create some great cross-sell opportunities. We work with them to craft new revenue opportunities."
ATMs are a natural fit for certain merchant verticals, such as petroleum retailers and convenience stores, Karawadra noted. However, Embry pointed out that placing and supporting ATMs isn't something many merchant level salespeople (MLSs) are comfortable doing. Likewise, people in the ATM industry don't understand bankcard sales. Yet since ATM professionals make regular visits to service and restock the devices, that gives them a clear line of sight into a merchant's pain points – intelligence they can share with MLS colleagues working that niche.
ATMs are also a good source of consumer intelligence, which in turn can be used to drive in-store spending, Embry noted. Use of analytics – whether about sales, traffic, customer purchasing patterns or other pertinent details – is an emerging and potentially game-changing trend in merchant acquiring. "Analytics is going to be huge," Karawadra said.
Loyalty programs are potentially lucrative value-adds to the merchant services mix. U.S. companies spent $76.9 billion on incentives and promotions in 2012 and 2013, according to the Incentive Marketing Association. BusinessWeek reported that nearly 90 percent of U.S. consumers participate in some type of rewards program; most belong to multiple programs. In addition, the customer research firm Maritz Research reported that 71 percent of loyalty cardholders have room for more loyalty cards in their wallets.
Loyalty programs aren't for everybody, however. "The problem I see with loyalty programs is that they're hit or miss," Leppek said. That is not the case with gift cards, Karawadra pointed out. "You can do some really creative things with gift cards, because it's a closed-loop system," he said. It's also a very sticky product. "It's really difficult converting them over" when gift cards are involved. "It's a lot of work, so people will think twice about doing it," Karawadra said, adding that he was speaking from experience.
Walk-in bill payments also are potentially lucrative, and sticky, and would seem a natural fit for convenience stores. Mercator Advisory Group estimated that in 2012 U.S. consumers made $28 billion in payments at walk-in bill payment centers. These centers cater to the 34 million households considered by the Federal Deposit Insurance Corp. to either be unbanked (they have no banking relationships) or underbanked (they have bank accounts but also use nonbanks).
These consumers have little to no access to sophisticated online bill payment services, as these require checking accounts. Most use a combination of over-the-counter services, like check cashing and bill payments, and prepaid cards to manage their financial lives. So it isn't surprising that a 2012 survey by banking services company Fiserv Inc. found that one in five consumers prefer to pay bills in cash and in person. But selling walk-in bill payment services is not quick and easy, and it requires different skill sets than selling bankcard services. "It took us three to four years to hit our stride," PAI's Embry said. Much of that time was spent training MLSs on how to sell the service. "It can be difficult getting the scale and experience needed to go out and sell new services," she said.
It's a necessary consideration for ISOs considering any new product or service. "You have to convince your agents to go out and sell it," Karawadra added.
It may seem counterintuitive in an era of electronic payments to consider selling check services. But with over 18 billion checks written in 2012, checks remain an important part of the payment mix, especially for business-to-business transactions. A recent survey by Sage revealed that checks are a preferred payment method for small and midsize businesses (SMBs), representing 45.3 percent of all transactions; 22 percent of payments by SMBs are credit and debit card payments. Further down the preference list are automated clearing house payments (representing 11 percent of payments) and commercial cards at 5.6 percent of payments. Two of the highest priorities for the SMBs surveyed: viewing all payment transactions in real time (73 percent) and processing all types of payments and connecting all payment devices (60 percent).
As new payments emerge and transaction volumes grow, the process of manually re-entering payment information with accounting and other business solutions becomes time-consuming and error prone, said Laurie McCabe, a Partner in SMB Group Inc., which conducted the Sage survey. "By integrating payments with accounting/ERP [enterprise resource planning] systems and deploying a unified payment solution across different payment accounts, devices and applications … businesses can reduce complexity, streamline processing and satisfy customers' purchasing needs and expectations," McCabe said.
Consumer-facing businesses have different needs, and checks are diminishing in importance there. According to the latest Federal Reserve data, 46 percent of all checks in 2012 (9.6 billion checks in all) were written to businesses by consumers, down from 51 percent (17 billion checks) just six years earlier. Business-to-business checks were 28 percent of all checks written in 2012, up from 25 percent in 2006 and unchanged from 2009, the Fed reported.
"I used to make a lot of money on checks," Karawadra said. But volumes have fallen considerably. Also, many merchants who used to offer consumer check cashing – convenience stores and groceries – have been priced out of the market by Wal-Mart Stores Inc. Karawadra said his core business is electronic transactions. The niches Impact goes after are largely consumer facing (for example, petroleum and lodging) and consumers don't typically pay for gas and lodging with checks.
"Not since the 1970s with bankcard and the 1990s with debit card has there been this big a change in industry dynamics," Embry said. But don't fret; it may actually be liberating. "We have an opportunity to redefine and take back this industry" from nonbanks that often get into payment processing as an afterthought, Embry said.
So what does that mean for individual ISOs and MLSs? "The key is to find your niche, and play to that," Karawadra said. "Every market is different." Figure out capabilities and functionality that will help businesses in the niche you're pursuing, and invest the time and money needed to offer that. "It's a challenge, because lots of verticals are already taken," Leppek added. But then, it's the challenges that draw so many to this business.
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