The Green Sheet Online Edition
November 12, 2018 • Issue 18:11:01
Strategizing for strength in all economic conditions - Part 2
Editor's Note: This article is the second in a two-part series in which members of The Green Sheet Advisory Board share perspectives on the current economic outlook and what lies ahead for payments. Part 1 appeared in The Green Sheet, Oct. 22, 2018, issue 18:10:02
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?
- Are the payments industry and your business experiencing the same kind of positive economic gains as the overall economy?
- 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?
- What one piece of advice can you offer ISOs and MLSs who are making strategic decisions in today's business climate?
Thank you to the industry leaders who took the time from their packed schedules to respond to these questions.
Jared Isaacman, Shift 4 Payments
- We remain very optimistic in the overall health of the economy and our merchant base. Our primary basis for this view comes from two main factors: consumer sentiment and the industry verticals we support. While we don't like to rely on third-party data alone, consumer sentiment remains at a historic high across the U.S., and that economic measure is consistent with what we see in our portfolio, which is increased spending and a high level of new business filings.
Said in simplistic terms, our merchant base is experiencing volume growth that is greater than GDP/inflation and, therefore, is feeling good. While we are cautious to predict the length of these phenomena, we don't see any regulatory or geopolitical factors on the horizon that could impact us in the short term.
- As mentioned above, we are experiencing gains in excess of the overall economy. Our average customer is seeing 8 to 10 percent same store volume growth which is actually a small portion of the overall 60 percent + YOY volume growth we are seeing in our integrated payments portfolio.
We think this has a lot to do with our highly differentiated value proposition with vertical specialization and the fact that our merchant base, largely comprised of hospitality and food & beverage companies, has several tailwinds benefiting them: they are not easily upended by ecommerce, and the conversion rate, from cash spending to credit spending, remains high. There is also a millennial preference to "dine out" or "order in," which always helps.
- Our approach to merchant acquisition and servicing hasn't changed dramatically in the 19 years we've been in business. We believe strongly in empowering both our sales partners and merchants with all the tools necessary to compete as a business and win market share. This inevitably means eliminating as many obstacles to account setup as possible, whether that be free software and hardware or training, and always providing a high level of support.
A great example is our ever evolving and market leading POS-as-a-service and integrated payment offerings that remain in extraordinarily high demand. If anything has changed, it's that we are dedicating far more resources to these efforts than we ever have in our history – and this is a direct response to the merchant acquisition opportunity we see in front of us.
- We don't see many cautionary signs at the macro level. We're always focused on operational, regulatory and geopolitical risks but don't anticipate any impacting our merchants at the moment. It's important to note that we've always grounded ourselves in a low-risk merchant base and have been vigilant in maintaining those standards, regardless of the current economic cycle. It can be easy to let your guard down and believe that trees will grow to the sky – but that complacency usually creates problems down the road.
- Taking full advantage of the current environment is a delicate balancing act. You need to commit the resources necessary to win business but also not over-invest and, most importantly, constantly grow your service standards. With a growing economy comes a lot of demanding merchants; meeting the expectations of those merchants involves staying on top of the latest trends. To truly be successful in this environment, ISOs/MLSs need to anticipate the needs of emerging merchants and exceed those expectations.
Allen Koppelman, Nationwide Payment Systems Inc.
- There are record number of businesses opening and we expect that to continue.
- We are signing up more clients; growth is always up and down as you have people going in and out of business, along with margin compression and a lot of pressure from Square and Stripe both signing up card-present merchants at slim margins. There are a lot of new ecommerce businesses as well, and that sector is a lot more stable and more profitable.
- Hiring more sales reps to increase revenue along with buying leads and advertising.
- All the signs are looking up ‒ the only thing that is constant is the race to the bottom.
- Sell technology first!
Justin Milmeister, Elite Merchant Solutions
- I believe prosperity will continue through the end of this year and through 2019. After that I don't see the prosperity like we are experiencing today. Since the 2008 financial crisis we have seen enormous prosperity; however, it is not sustainable due to many factors such as very low interest rates and almost no unemployment, to name a couple. I can only hope when rates and unemployment normalize prosperity doesn't fall off a cliff.
- We as a company have reaped economic gains as the overall economy has experienced. The principal reason is people are spending more as unemployment is at an all-time low, which of course infuses more money into purchasing goods and services. Additionally, with the stock market at all-time highs people feel rich as their portfolios show gains on paper, so they spend more. These components mentioned above are ideal for the payments industry as all the spending is infused into businesses creating more volume and transactions.
- As a company, we are increasing our marketing efforts to insure we ride this wave of prosperity. Alternatively, we are also acting responsibly with the understanding how the economy works and preparing for a rainy day scenario. We are not taking on debt and putting too much risk out there just because we have experienced a tremendous number of sunny days the last several years.
- There are several cautionary signs of concern. The economy simply cannot continue on its current course forever, so something has to give. The Fed announced rate hikes which affect everything across the board. Credit card average APRs have increased to just over 17 percent up from 16.15 percent one year earlier and 15.22 percent two years ago. Total credit card debt has reached its highest level ever, surpassing one $1 trillion in 2017.
I am no economist, but these statistics alone appear to be a recipe for disaster, and there are several other cautionary signs. The main thing we are doing as a company to address these concerns is keep debt to a bare minimum. Nobody knows when the music is going to stop, but that doesn't mean you can't prepare for it to stop without losing out on opportunities to thrive.
- I would advise to proceed with caution and not make decisions based on today's or yesterday's economy. I would tell them to examine their business and potential weaknesses and prepare for economic decline. Most important, I would advise to limit debt as much as possible.
Darren Schulman, 6th Avenue Capital
- While there is no way of predicting the behavior of the economy, 6th Avenue Capital observes that small business confidence remains strong. We believe that history supports the trend of small business growth, which in turn will continue to fuel the economy. Since 1995, small businesses have created two out of every three net new jobs for the U.S. economy.
- 6th Avenue Capital has grown substantially in even the past year in terms of the volume of small businesses we have supported and the amounts we have funded, though we largely attribute this to the deepening of our relationships with strategic referral partners. We find that overall, there is consistent demand and steady performance for our short-term bridge financing product (ACH advances) in both bull and bear economies, though for different reasons.
- The Goldilocks economy and regulatory constraints on traditional lenders have contributed to small businesses' demand for alternative credit. Small businesses are eager to consider additional alternative financing choices to help them capitalize on opportunities and to invest in their businesses. As a leading provider in alternative funding, 6th Avenue Capital is able to provide fast, short-term bridge financing solution to SMBs.
- to capitalize on the growth of small businesses in an unregulated industry. Some players' undisciplined underwriting and irresponsible funding policies may jeopardize SMBs' ability to repay in the future and may be detrimental to the reputation of the industry as a whole. To address these issues, 6th Avenue Capital has recently become a member of ILPA (Innovative Lending Platform Association) and SBFA (Small Business Finance Association). Both organizations are nonprofits committed to industry best practices and providing access to capital for America's small businesses.
- Evaluate opportunities to fund small business based on strengths of the total business and industry, not on the state of the economy.
Steve Sotis, eProcessing Network LLC
- Recent surveys show that the 2018 holiday season is shaping up to be one of the strongest since 2005, with over 84 percent of consumers expecting to spend more on gifts than last year. With digital payments expected to increase to $726 billion within the next two years, we're optimistic that gateway providers will play an important role in making those numbers a reality.
- Even with the exponential growth of the number of transactions processed year over year, our merchants are still challenged to adopt new innovations that can help attract and retain customers, both in-store and online.
- At eProcessing Network our primary goal continues to be to provide our ISOs/MSPs with the solutions best designed to meet the needs of their small to mid-sized merchants. Our longevity within the industry puts us in a unique position to stay ahead of, or in-step with industry trends, and our partners can feel confident that we can deliver quality and affordable solutions in a timely manner.
- With retail stores at the crossroads of digital and in-store, our objective will remain to provide secure and affordable integrated solutions and tailored, business management development tools to easily integrate payment solutions into their business in order to gain a competitive advantage, cut costs and improve operational efficiencies.
- Know and anticipate the needs of your customers in each market you serve. For example, even though noncash payments have increased, the average USD per transaction has slightly decreased, making it vital that merchants look to ways to integrate competitive programs like cash discounts into their payments strategy. This type of innovation is what you can expect from experienced gateway providers like ePN.
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