The Green Sheet Online Edition
October 22, 2018 • Issue 18:10:02
Strategizing for strength in all economic conditions - Part 1
According to key indicators, the U.S. economic outlook is healthy. The GDP growth rate is expected to remain between the ideal target of 2 and 3 percent, unemployment is low, and neither inflation nor deflation are showing signs of excess. With that in mind, we asked our advisory board to answer the following questions:
- How optimistic are you that prosperity will continue through the rest of this year and beyond? Please explain.
- Are the payments industry and your business experiencing the same kind of positive economic gains as the overall economy? Why or why not?
- What are you doing to ensure your company is taking full advantage of our current Goldilocks economy?
- Do you see any cautionary signs emerging now? If so, what are they, and how are you addressing them?
- What one piece of advice can you offer ISOs and MLSs who are making strategic decisions in today's business climate?
We appreciate all the payments leaders who shared their insights with us. This article contains the first portion of their responses; the remaining answers will appear in the second installment of this series.
Mark Dunn, Field Guide Enterprises LLC
- I believe that the overall U.S. economic prosperity has been building slowly for the past four to five years and expect that it will continue. However, the current trade tariffs on China and instability in trade negotiations with other countries don't bode well for the long term.
- I have seen an increase in the number of ISO accounts wanting to invest in moving their businesses to the next level. I believe this is because they are earning more residual money as the overall credit and debit spend increases. Also, I think that there are many young entrepreneurs in our industry who believe the ISO and agent model still works.
- Field Guide Enterprises LLC is continuing to be present at regional trade shows and building our visibility with new website and social media presence.
- I don't believe raising tariffs helps us either as a negotiating tactic or as policy for working with trade partners.
- Get qualified help in determining how to spend your investment dollars. There are many good payments industry consultants. Choose one that has been consulting full time for at least 10 years. Also, if you are looking for outside investors for your ISO, plan to spend at least six to nine months to find an investor with the money you need and who will be a good partner.
Brandes Elitch, CrossCheck Inc.
- Optimism. As you point out, this is the longest bull run ever for the stock market, including the S&P, DJIA, and NASDAQ. The economy has been expanding for 112 months. At some point we will have a market correction, defined as a drop of 10 percent. We just don't know when it will happen, or what will cause it, but it will happen. There have been 36 corrections in the S&P 500 since 1950, or about one every two years.
Currently, leading economic indicators such as inventory and manufacturing are strong – exciting news for the 10 percent of Americans who own 90 percent of the publicly traded securities, but not much news for many other consumers. A 2017 Gallup poll showed that only 54 percent of U.S. adults owned stock, and most of that was in a 401k or IRA. A third of Americans have no retirement accounts or pensions.
Less than half of consumers benefit from any increase in the market, so this is not going to affect you or your merchants except to the extent that the top 10 percent spend their money in your store.
- Positive economic environment. The stock market is not the economy. GDP growth is over 4 percent, which is generally considered the sign of an "overheated" economy. This is probably due to the badly timed combination of a healthy economy, a trillion-dollar tax cut, and a ramp-up of federal spending.
It is not good economic policy to provide a fiscal stimulus and tax cuts during a strong economy. Large tax cuts will at some point trigger vastly larger deficits. The global payments industry is a $100 trillion-plus market. Today the major banks are better capitalized and are less susceptible to the shocks that caused the last recession (excessive debt, asset pricing bubbles, imprudent shadow banking, Ponzi finance, and weak oversight and regulation).
- Company actions. At CrossCheck, we have two businesses that require strict attention to daily and weekly trends, and absolute understanding of regulatory and compliance demands for consumer protection. They are payment guarantee and debt collection. From a demographic standpoint, the need for our solutions is growing. More and more Americans need someone to stand in at point of sale in real time and approve a high dollar check for a payment that absolutely positively must be made today, or the sale is lost.
People still need to buy a car, fix a car, pay the vet, pay the funeral home or pay for emergency home repairs. They do not need to get trapped in a "debt trap" where they will be revolving their loan at 26 percent from now to the end of time. We provide an alternative that does not charge the consumer. We have been doing this for 35 years, so we have some understanding of what we need to pay attention to with our merchants.
It would be almost impossible to start up a business like ours today. Our biggest challenge is communicating to merchants how and why our products will increase sales for them, and for this, we historically rely on ISO and MSP salespeople.
- Cautionary signs. Most consumer-based economic indicators are flat. Consumer spending numbers were driven by the cost of healthcare. There are plenty of cautionary signs: tariffs, trade wars, oil price stability, the value of the dollar, issues with emerging nation economies, and others. A sustainable growth rate for the economy is around 2 percent, not the 3 percent number you hear from Washington.
- Advice. There are some developments in the payments space that you might want to consider. For example, today less than a dozen large banks control both the issuing and acquiring business in the United States and have the vast majority of the DDA accounts. These banks tell their customers that they can serve all of their financial wants and needs. However, we see a wave of fintech upstarts beginning to compete with these banks using technology to deliver products in a more decentralized manner.
The upstarts are seeing initial success in providing services for the unbanked, cross-border, P2P, ecommerce, and online lending. There are many new players trying to revamp the B2B purchase order and invoicing process. It is not a bold prediction to say that traditional credit card processors are going to be disrupted by the likes of Alipay, Stripe, Apple, Google, Samsung and dozens of emerging fintechs, or techfins as some people call them.
Consumers will use these new payment applications at the point of sale, on the web and at brick-and-mortar locations, and they may or may not originate from their checking account or with a credit card. We know that Visa will expend vast sums of money to maintain its tollbooth model, but ultimately lower-cost solutions will prevail because merchants do not want to spend 3 percent or more just to receive an electronic credit.
Perhaps the most important development is that these large banks will lose their monopoly on the customer relationship and the data and payments associated with it. We know that it can take years for these disruptors to scale, but it will happen. If you are an ISO, your future profitability depends on two things: lowering merchant attrition and increasing your throughput.
Today, the average merchant changes processors every three years. If consumers buy from Amazon or pay with apps on their mobile device that do not run on the card brand rails, your income is at risk. The obvious thing to do is to call on your merchants regularly and ask them what they want that they do not have now. Be sure to communicate the value that you add and look for ways to add new value. If your merchants really understand the work you do to process their payments, and they feel that they have a personal relationship with you, they will be less likely to leave in three years.
Maurice Griefer, Maverick Bankcard Inc.
- I am certainly excited about the current economic state and optimistic about the future, considering how busy of a year we had, at least through the remainder of 2018. However, I like to take everything with a grain of salt and prepare for possible downturns in the economy, which is critical in getting through the tougher times. The economy is forecast to slow in 2019, and with speculation of an upcoming recession in the next few years, it is critical to focus on the present and make things happen now. It's also important to note that many merchant acquirers have different portfolios and target different industries, so changes in the economy can impact acquirers very differently.
- This year has been one of the busiest for us, so I would say that we are seeing the same kind of positive economic gains as the overall economy. However, that is not to say that we haven't had some clients close shop or see a decrease in sales year-over-year. Furthermore, some of our success cannot be attributed to the current state of the economy, just our hard work paying off at a coincidental time. What's great about the payments industry is that business owners need us, and we are a critical part of their growth (unless maybe they are a cash-only business). When our customers win, so do we. With the influx of new payments technologies as well, I think this is a very exciting time for our industry, as there is a lot of opportunity out there.
- Right now is a great time for ISOs and MLSs to take advantage of the current economic state. My mindset is centered on how we can keep new business coming in and prevent attrition when the economy dips or we enter the next recession. With that in mind, we are growing our sales channels, seeking new partnerships and referral sources, and exploring new markets to serve. When the economy eventually dips, business owners' priorities usually change, so it's best to start building those new relationships now, so you aren't frantically scrambling for new business opportunities when the economy slows. As the old saying goes, you should never put all your eggs in one basket.
Furthermore, merchants are much more price sensitive when times are tough as they look to cut expenses, and in addition to seeing lower residuals as your merchant's sales drop, this dreaded scenario is something to prepare for now by adding more tools and resources to help your merchants drive sales.
Moving the conversation from lower fees to revenue producing topics, like new marketing strategies or implementing a loyalty program, can make a huge difference in retaining clients as well as your portfolios residual. Selling on value, and not on price, should always be the goal.
- The only cautionary signs we currently see are not related to the economy. The first thing is the cash discount program being more scrutinized by some acquirers. One of our restaurant clients advised us that their franchise is going to force all their franchisees to eliminate cash discount programs very soon (if they are using one).
We are hoping this is not a sign of the downfall of the cash discount program, but it is certainly something we are keeping an eye on. We are taking this as an opportunity to further educate our merchants and MLSs on the proper disclosures needed, and to make sure merchants aren't marketing this as a surcharge.
Another area of concern is how our SMB merchants will compete against Amazon, which is an increasingly important topic. Regardless of how well the economy is doing, Amazon is putting small mom-and-pop shops out of business, so it's important to pay attention to even your smallest merchants and ensure they are getting all the tools they need to compete in their respective industry.
- I would advise any ISO and MLS to focus on building a diverse sales channel. You can never have enough lead or referral sources, and if you do, you can always hire more staff as you scale. That's a good problem to have. The payments industry has been inundated with new technologies and software providers, many of which are seeking strategic partnerships with payment processors to add another line of income. Developing these partnerships now will be extremely valuable when the economy dips, and other lead sources may slow.
Although the economy is strong, it will not stay like this forever. It is best to prepare yourself now for the eventual downturn, so you can prevail through the tougher times ahead. It's very easy to get carried away in the day-to-day grind, but the end of the year is a great time to do a self-assessment and set new goals for the upcoming year when business slows during the holidays.
Kirk Haggarty, North American Bancard
- With all the key indicators continuing to point towards a healthy U.S. economy, we're optimistic about the remainder of 2018 and the first quarter of 2019. What remains an unknown factor is the impact the trade tariffs could have in the short term. Consumer confidence also plays a large role in the health of the U.S. economy. When people feel good about their jobs and their income, they spend money. With the unemployment rate at 5 percent or below for nearly two years now, consumers seem to be pretty confident. This has allowed businesses to move forward with growth and expansion, so it all points toward this window of prosperity continuing.
- The payments industry, overall, continues to experience consolidation as we work to provide streamlined solutions to the ever-evolving merchant economy. We believe there is an incredible opportunity for success, so we strive to position ourselves to capitalize on opportunities when they present themselves. Keeping our fingers on the pulse of small and middle-market business owners and being able to deliver timely products/services to help them keep pace, remains a crucial component to any success we experience.
- To ensure we can take full advantage of our current economy, or even when the economy signals a change, we try to remain nimble and adjust quickly. We continue to invest in creating the best and easiest solutions and services for merchants – and that mission will never change. We feel if we continue to work with the community, align with strategic organizations, and equip our people with the tools they need then that is a great recipe for success. We strive to achieve this with our talent, vision, desire and drive.
- In general, businesses should continue to move forward with expansion into new markets, possible business diversification opportunities, and the addition of staff. There's some nice economic momentum going on right now; however, that's not to say that businesses should be careless. Continue to explore growth opportunities for your business while monitoring some key indicators, like GDP growth, housing starts, and the unemployment rate. These are good guides, and fluctuations might warrant a business plan adjustment.
- For the merchant level salespeople and ISOs out in the market, the piece of advice we'd offer is to be an educated partner, well-versed in your customer's pain points. Merchants know there are many options out there today, so ensure the solutions you're providing bridge the merchant's unique gaps.
Also, dare to exceed expectations. Superior service remains critical to the process and the single second that your service isn't in line with the customer's expectations, you'll lose the relationship.
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