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The Green Sheet Online Edition

March 26, 2012 • Issue 12:03:02

New developments in payments (and winemaking)

By Brandes Elitch
CrossCheck Inc.

We have a few hundred wineries in Sonoma County, where I live, and even more in neighboring Napa County. It's a big business. Not too long ago, making wine was pretty simple: you planted the vines and waited. Waiting could last five years - if you were lucky.

Then, you picked the grapes and crushed them (that's why it's called "The Crush"). You let nature do its thing (fermenting); then you bottled and sold the wine. But technology changed everything.

Salespeople in the wine business sold the wineries new devices that altered the way wine was made: grape crushers and pumps, stainless steel tanks, chillers for the tanks, new types of fertilization, soil additions, cloning stock, different strains of yeast, French oak barrels and additives such as wood chips.

These changes affected the price wineries needed to charge and the type of customers they attracted.

Help merchants grow their businesses

Similar changes are occurring in the payments industry. ISOs and merchant level salespeople (MLSs), like all other businesspeople, must ask from time to time, "What business are we in?" Are we in the payment processing business? The technology business? The transaction facilitation business?

Sometimes the answer is counterintuitive. And some of us are a bit overwhelmed by all the potential changes swirling around the payments space.

But let's be accurate about the environment most of our merchants live in: there's not a lot of technology there. It consists of a few laptops and possibly desktop computers, a fax machine, a telephone system, a POS system and some terminals.

Accounting or, more accurately, bookkeeping is done with QuickBooks. A vendor, if there even is one, handles computer support to network the computers and support a website.

For small businesses, technology is only a major concern when it doesn't work. Business owners are too busy "doin' it, doin' it, doin' it" (as The E-Myth Revisited author Michael Gerber said) to even think about how to grow their companies with technology. They probably don't have small-business consultants, unless you count bankers who supply their lines of credit for working capital.

Essentially, the biggest problem small-business owners face is isolation and lack of knowledgeable people to consult with on how to grow their businesses. How current events in the payment processing realm will affect them is not their primary concern.

Keep merchants informed

This presents ISOs and MLSs with a challenge. To add value in the ongoing calling process, you need to explain just enough of the near-term changes in the payments industry - like why merchants need to buy terminals that can handle Europay/MasterCard/Visa (EMV) and mobile transactions - so merchants don't feel that they're out of the loop. Here are a few merchant concerns to address:

  • What are the new fees from Visa Inc., and are my rates going down? Merchants have recently had to pay for Payment Card Industry (PCI) Data Security Standard (DSS) compliance fees and Internal Revenue Service 1099-K reporting fees. Now Visa has stated that they intend to establish a "network participation fee."

  • As more than one analyst has mentioned, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 changed the ground rules for fee structure, and one might conclude the card brands are looking for alternative sources of revenue. As an ISO or MLS, you get to explain to merchants why they need to pay another fee. Good luck with that.

  • Why do Google Inc. and PayPal Inc. want to process merchant payments, and will it affect me? Let's be honest: Google and PayPal want to process all payments, not just person-to-person payments. Remember that PayPal started back in 1999 as a way to transfer money from one Palm Pilot to another.

    Then it became a payment platform for eBay Inc. But the card brands see "transactions" as things that happen in brick-and-mortar stores. The merchant incentive to adopt EMV is that if they process 75 percent of their transactions through EMV terminals, they qualify for lower rates.

    Meanwhile, on Jan. 19, 2012, PayPal stated all its users could participate in its Home Depot U.S.A. Inc. in-store payments trial. The trial eliminates a physical authentication device - you press "Pay With PayPal" on the terminal, enter your mobile phone number and a PIN, and the receipt is emailed and texted to you - that's it.

    And, get this: since there is no payment card, it's out of PCI scope, too. But there is no phone, no card and no chip. Score one for PayPal (the jury is still out on Google Wallet).

  • How will EMV affect e-commerce sales? Last year, e-commerce revenue was $200 billion. The whole business is really less than 20 years old. But today there is no way to support the chip part of an EMV transaction in an e-commerce transaction. ISOs and MLSs should be thinking about this, and not just in the current configuration.

    What's stopping Amazon Inc. from buying a big-box retailer, just to have the stores and use them as outlets for a "drive-through" pick-up service for online order fulfillment?

  • Why does my credit card processor need all this information about my business? Recently, the Federal Trade Commission settled with an ISO called Landmark Clearing Inc., which had signed some fraudulent marketers.

    The FTC said that going forward, ISOs and processors need a thorough, continuous, ongoing program of underwriting, transaction monitoring and risk management. But let's be real: right now, ISOs and merchants are underwritten when they are brought on board, and there is very little underwriting done after that.

    In the past, processors judged compliance by the chargeback rate, but that isn't going to work anymore, particularly for card-not-present merchants. Card processors now have a much larger and more expensive compliance burden.

    The FTC is even telling processors they might claim the reserves acquirers use to protect themselves against chargebacks - and hold the owners of processing companies personally liable for lax underwriting. The bar has been raised, and all ISOs, MLSs and processors, and yes, your merchants, will be affected in a very real way.

  • How do I know I am not overpaying for my processing? MLSs typically walk into a merchant location saying, "I can get you a better rate on your credit card processing," but they often do not follow with a detailed analysis.

    Sometimes, particularly with larger merchants, you need professional help from a knowledgeable certified public accountant or someone who is familiar with the merchant card industry.

    Generally, it is best to have the audit done by someone who is not benefiting from residuals tied to the current processor. There are so many ways to manipulate pricing that often it takes an expert to figure it out. (I find this type of analysis difficult to do. The subject is worth an article by itself. I suppose I should write it.)

    If you can provide an impartial auditor who will identify savings of hundreds of dollars a month, you will be adding real value to your merchants, and they will not forget this when other ISOs and MLSs promise them cheaper rates.

    If you'd like me to recommend someone who can perform a comprehensive, completely impartial audit for you, please get in touch with me.

Adapt like winemakers

And this brings me back to the wine business. Today's winemaker has to be knowledgeable about so many things: chemistry, biology, even botany.

(If you want to learn more about this, check out this wine expert's blog: www.vintageexperiences.com. The author, Dan Berger, is about as knowledgeable as you can be about this subject.) Old-time winemakers, like ISOs 20 years ago, would be astonished at how complex things have become.

But there is no going back, and just as wine-drinking consumers benefit from the higher quality finished product, merchants will benefit from a more robust payment system that includes more competitors and more products.

One thing hasn't changed though. The industry will still need the feet on the street to explain, sell and set up the evolving array of products and services available to merchants - and that is good news for the ISO and MLS community. The Green Sheet, Inc.

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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