Current economic conditions raise plenty of questions about the health of credit markets, especially consumer credit. Clearly, ours is a business that benefits from robust spending. If consumers aren't buying they're not using their credit and debit cards, and that, in turn, has consequences for everyone in the transaction stream.
With so much facing the credit industry, we asked the members of The Green Sheet Inc. Advisory Board to share their thoughts on the following questions:
1. Do you anticipate that tightened consumer spending, especially card-based spending, will force merchants being affected to curtail their spending in areas such as payment systems technology?
2. Do you think the fallout will be such that ISOs and merchant level salespeople (MLSs) will need to change the way they do business, or the products and services they offer? What changes are you planning to make to your strategy?
3. As with most changes, new opportunities arise. What opportunities do you see being the strongest in the coming months?
Following are GS Advisory Board members' responses in alphabetical order:
You are making an assumption _ bad economic times equal reduced spending on credit cards _ that may not be true. Ours is a business that benefits from robust spending on credit cards. In good economic times, consumers spend more overall, but may put a smaller percentage of their spending on credit cards. In bad economic times, consumers may spend less, but they probably put a greater percentage of their spending on credit cards. I would guess that in bad economic times, average credit card balances go up. It would be hard to speculate on your questions without knowing for sure what occurs.
1. Quite the opposite, we believe merchants are smarter about how they run their businesses today and recognize that proper investments in technology will make for more efficient operations, which is good under any condition.
Consumer spending is always cyclical to begin with, and even in the worst markets, it doesn't come to a dead stop. Similarly, how consumers will spend is a great subject of debate ... no absolute guarantees about what will happen.
But one constant is merchants who run operationally efficient businesses will always offer value that will attract customers.
Our mission is to ensure our customers create this value, and payment systems technology is a major component of any sound merchant strategy.
2. Any ISO or MLS that does not actively find ways to change the way they do business will struggle, again, in any market. Current conditions may accelerate the rate of and magnitude of problems change-resistant ISOs and MLSs will encounter.
We have been able to build a fast-growth business because leading change is core to our business strategy. Many of these initiatives are proprietary.
But in general, the changes are a function of introducing a range of high-impact services to reflect merchant demands and trends.
3. We view this as neither a product nor a service, but as a strategic opportunity. For the remainder of 2007 and into 2008, we believe the strongest opportunities will come from further aligning our capabilities to merchant needs. It's more a matter of giving them what they need and want to buy rather than coming up with something we want to sell.
1. It has seemed to us that during a recession, when overall consumer spending goes down, people spend proportionately more of their money with credit cards.
Consequently our merchants' cash flow will go down, but the level of credit card use will go up. With the overall spending going down, a decrease in cash-flow for a merchant will begin.
At this point, merchants will not have the luxury of upgrading their payment systems technology with more advanced payment systems.
This will not only hurt in the area of equipment or software revenue, but it will also hurt in value-added services where a new piece of equipment will be required.
I think a lot of merchants will definitely stick with what they have and not go out and buy the sophisticated POS system.
2. ISOs and MLSs who depend heavily on the sale of payment system technology will have a hard time. Merchants will be looking for the bargain or the terminal that will get them by instead of the complicated machine with all the bells and whistles.
It will be important as an ISO to have a good residual stream and not rely on the sale of new payment systems. Equipment sales will get real competitive, and margins will shrink further or go away completely.
3. An immediate opportunity is that of obtaining new prospects. When merchants need to upgrade their system they will contact their provider. If the provider [is] not positioned ... to provide affordable prices, the merchant will begin to shop around.
The last thing an ISO or MLS wants is for their merchant to begin speaking with competitors. Once this happens, the merchant becomes susceptible to switching providers. An ISO/MLS who has the ability to adjust pricing to fit the market demands will be successful in acquiring new prospects as well as retaining existing merchants.
1. In past economic dips, we have not observed any decrease in overall spending volume. The trend we have noticed is that average purchase prices on credit [cards] drops. For example, you see more use of credit cards at lower-ticket fast food locations, convenience stores, etc. People are also more inclined to turn to debt (like credit cards) when the economy slows down.
When the economy is stronger, you see larger-ticket purchases _ more TV's, disposable income spending.
It may be a lot harder to identify those trends in today's environment with all the emphasis on small-ticket pricing, greater penetration of credit cards in quick service restaurants and contactless payments. The smaller-ticket payments have been on the rise anyway.
These factors may make it hard to identify any trend in consumer credit purchasing, at least from our level as an ISO/MSP. I am sure First Data with their hundreds of thousands of merchants and card issuing business could analyze trends in consumer credit spending better.
2. No, not at all. This industry has shown over time to be very recession-proof. I think ISOs and MLSs are constantly evolving their strategy to adjust for market trends and declining profit margins in the payment industry.
This happens as a result of innovation, market saturation and pricing erosion, but not over economic downturns.
3. I know we have many exciting things getting ready to be released at United Bank Card, specifically, our POS Systems division and enhanced gift/loyalty card program. Both programs will present exciting sales and retention benefits for our ISO and MLS partners.
1. I do think consumer spending on traditional credit cards will tighten; however, as PIN debit and check card usage continues to increase, that will help alleviate some of the effects of the reduced spending.
I think smart merchants with the appropriate research and customer market analysis will still be willing to spend money on technologies if the return on the investment can be justified.
2. I think ISOs or MLSs that focus on equipment or software as a primary source of revenue may need to adjust as merchant and consumer spending decrease. Technology costs continue to decrease as well, and the need to augment income derived from equipment or software sales with ancillary products or services and trying to get a bigger piece of the residual stream will become more and more critical. Making money selling equipment or software will not go away, just as leasing hasn't gone away, but the profit margins will be reduced with time.
3. I think the opportunity to offer newer, faster, cheaper technology will be a real area of opportunity in the future.
The ability to offer these products to new and existing merchants and to increase loyalty and business, as well as helping the ISO or MLS reduce their own transaction costs, will be great opportunities.
1. I don't think the merchant is going to cut down on any payment systems technology. Payments services, especially credit card processing, are the necessary evil that merchants of this day and age cannot do without. Depending on the technology, merchants may be looking at new technology to save money and cut costs.
2. We are planning on offering new value-added products that focus on certain niches.
3. If anything, it would be products that can help the merchants, either by providing things such as cash advance, or products that will help in cutting costs.
I think these are all great and very fair questions but do not believe there will be such an affect and, therefore, cannot really answer your questions. Bottom line ... I don't see spending stopping anytime soon.
I'm no economist, but if money gets tight, the U.S. population will lean more toward credit.
In good times, I suspect they would lean more toward debit card use in an attempt to recover from their heavy credit spending. Either way ... it's all plastic. I see it only increasing.
1. While our business is one that benefits from robust spending, it is also one where spending can be done in nontraditional areas.
Those suffering from reduced cash flows will be more likely to extend themselves into debt to buy the day-to-day needs such as food, clothing, utility bills, gas, etc.
They might not be eating out as much, but the amount of spending will not decrease; it will be realigned to those areas that are a necessity rather than a luxury.
2. ISOs and MLSs are always adapting with changes in the economy and industry.
I would think that sales agents might begin to target different businesses _ those that they might not be entirely comfortable with or worked with in the past _ such as fuel and pay-at-the-pump, supermarkets and larger discount retailers.
3. I will look for an increase in interchange-based pricing structures and the reduction of the number of leases and rentals of terminal equipment taking place.
I anticipate more merchant cash advance sales as well as an in-crease in terminal placements from those doing a "free" placement type program.
1. While as an industry we rely on robust spending, we are also sometimes the last vestige of credit availability for many consumers. The easy refinance of homes and acquisition of home equity lines may be all but over.
Banks will necessarily tighten credit requirements for loans seeking as much collateral as possible. This leaves the consumer on a tight budget, low on cash and needing simple necessities with only a few available lines of easy access credit.
Credit cards are one of these lines. Merchants will need to maintain working systems in an environment of many aging machines. The spending may slow down, but the need is still there.
2. ISOs and MLSs are already changing the way they do business in order to meet the demands of a very competitive market. Offering multiple services versus just card processing continues.
Most ISOs I talk with are leading with other, more interesting products, such as gift card, loyalty, check services and even cash advance, then following up to collect the processing business after they have developed a trusted relationship. Relationship selling is the key in an environment where a merchant may hear from two to 10 ISOs the day they open their doors.
3. The opportunity I see is to slow down and take care of the customers you have, extending them new opportunities and business tools that drive different revenue streams. It is extremely expensive today to search out, find and close new merchants.
Many ISOs have a large base that can be groomed to understand the new products now available across the spectrum to help their businesses.
Not only does this cost less then prospecting, but it solidifies the ongoing relationship while bringing in new revenues. A happy customer with better business tools that truly believes you are looking out for them is very hard to move.
Look for more of our advisory board's responses in Part II of this article in an upcoming issue.
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