By Brandes Elitch
CrossCheck Inc.
Salespeople (and their managers) become complacent when things are going well. It's human nature to be complacent - even, strangely enough, when things aren't going well. Partly, this is because most of the time we don't recognize when the business landscape is shifting, nor do we see the long-term, influential trends that, in retrospect, always look obvious.
In this article, I will point out a couple of notable developments to jar you out of complacency. Of course, if you don't believe you are complacent, you can turn the page.
First, in mid-September, PayPal Inc., a company heretofore known for providing payment solutions to the card-not-present environment, stated it intends to provide payment processing for brick-and-mortar retailers. Keep in mind that PayPal has 100 million users (there are only 300 million people in the United States).
PayPal's solutions do not require that merchants buy new terminals or change their processing platforms. Nor will consumers have to have a certain type of bank account or buy a new device. On the contrary - a consumer can just enter a phone number and a PIN at an already existing credit card terminal.
PayPal is even getting into the card issuing business, but unlike Visa Inc. or MasterCard Worldwide, its card is not issued by a bank and doesn't sport an embossed account number. Considering that PayPal has the first nonbank payment system with any authority to challenge the card companies (100 million users can't be wrong), the company is surprisingly humble.
For example, PayPal President Scott Thompson, said, "We can't be so bold or arrogant to think that you'll adapt to the standards we've created." Imagine that.
PayPal now offers a variety of possibilities. Consumers must be registered with PayPal, obviously. Then, when they enter stores, they "check in" from their mobile phones. This tells the retailers they are there, and the stores can offer customers specials, discounts, etc., to get shoppers' attention so they don't turn around and leave.
Get this: if you see a high-ticket item and don't have the money to buy it (isn't this why we have credit cards?), you can download PayPal's credit app, so you can apply for instant credit, make the purchase and make payments later. This must be a product of the company's recent acquisition of Bill Me Later Inc.
PayPal has purchased other companies, too, that enable it to provide location-based special offers, accept mobile payments from phones and look up inventory to see if items are in stock. All receipts are stored in consumers' PayPal accounts, another neat feature.
In one scenario, a consumer enters a phone number and PIN in a card terminal, and the consumer's PayPal account is charged (either the associated card or DDA account). Alternatively, the user can swipe a PayPal-issued card and enter a PIN (not a MasterCard or Visa card, however).
Another option (now this is different) is for the consumer to take an item off the store's shelf and scan the bar code with a phone. Then, the consumer can access a checkout menu on the phone, purchase the item and have it shipped to a designated location later.
The consumer doesn't even have to go to the register. Nor does the consumer have to disclose bank details over the phone or on the Internet.
A case could be made that mobile phones offer stronger authentication and reduce the risk of chargebacks, too. This is good for retailers, and it tends to minimize the traditional weaknesses of buying in the store: waiting in line to check out, the difficulty or impossibility of finding a salesperson, and the challenge of actually finding the product you are looking for.
These are important things and constitute the reason why consumers frequent stores in the first place instead of shopping online. Shoppers want to touch the merchandise, try it on to see how it fits or doesn't fit, speak with salespeople to get advice or help, and take purchases home right now (I think this is called "retail therapy," at least that's the way it works in my household).
What is changing here is not just the buying experience; it is the shopping experience.
Let's take a look at another development. Lowe's announced in mid-September that it is deploying 42,000 iPhones in its stores - about 24 phones per store. The phones could have multiple functions: checking inventory, showing instructional videos, setting up home delivery and taking a partial payment, for example.
Paula Rosenblum, Managing Partner at Retail Systems Research, pointed out another important fact: now employees will have enough information on iPhones to respond intelligently to educated customers. She noted that having uninformed, uneducated employees on the sales floor is even more damaging than having nobody there at all. (This was my experience in the old Bob Nardelli days of Home Depot U.S.A. Inc., before he left to work his magic on Chrysler Corp.)
Success in retail is about creating a better customer experience. Consumers want a "my store" connection and experience. A successful retailer has in-depth knowledge of the local market. The more consumers use their iPhones to make purchases (whether in the store, online or in a mobile environment) the more connected they are to the retailer.
A powerful quote from Nikki Baird, Retail Analyst at RSR, is, "Finely tuned supply chains, advanced IT systems, greater buying clout and economies of scale, hmmm, there is nothing there about any understanding of shopping behavior, or how shoppers actually purchase things in their stores. ... As long as retailers continue to limit their expertise to logistics, expect no significant improvements in store performance."
Let's try to look at things the way a customer would. Here is the reality of the retail world, as reported in a September, 2011 study by Simon-Kucher & Partners, Global Pricing Study, 2011.
There are some shockers here:
According to the study, this means "investing in innovations to increase product value, providing more services that deliver value to the customer, training salespeople, [and] improving price monitoring and controlling" - all things that the PayPal product facilitates.
Now we are back to complacency. Some retailers are complacent, and some ISOs are complacent. But consumers are not complacent. They are shopping with a vengeance. Retailers need every advantage to get those sales, and it is getting more and more competitive.
Historically, ISOs have added value by showing merchants how to process their payments in the most cost-effective manner. In return, ISOs got a few basis points and made a mark-up on the equipment. In the aggregate, the cash flow from these two things created the ISO industry. Now look at what PayPal is doing.
Yes, the company is charging a rate comparable to interchange. But there is no issuing or acquiring bank - there is no issuing bank to pay interchange to, and there is no acquiring bank to pay the ISO.
Now consider that the real force behind the Durbin Amendment was the top 200 retailers - the folks in the National Retail Federation who for some time have had an agenda item to reduce what they pay for interchange.
A product like PayPal, or the decoupled debit product offered by Total System Services Inc. (with which the consumer picks up a plastic card at the retailer and swipes that with his or her regular payment card, and what starts out as a credit or debit card transaction is now cleared as an automated clearing house debit) provides no revenue stream to pay the ISO.
This brings me to my conclusion: ISOs need to find a way to add value to their merchants that is new and different from the traditional interchange model.
This discussion used to be more theoretical, but the arrival of PayPal at the door makes it a more immediate concern.
Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at brandese@cross-check.com.
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