By Brandes Elitch
ISOs are generally familiar with the architecture of the card acquiring business. The card brands choose banks to be issuers, acquirers or both. In the beginning, the companies now known as Visa Inc. and MasterCard Worldwide were associations owned by the "principal bank" members and run, pretty much, by the largest issuing banks. This changed about 10 years ago, when MasterCard went public, and then Visa, too, became a publicly traded company.
Explanations differ, but the desire of the former "principal banks" to unload any liability attached to being an owner must have played a big part initially. Issuing is a business of scale; it takes millions, or perhaps tens of millions of cards to be a player.
Acquiring is a completely different business than issuing. However the card brands no longer encourage small bank acquirers. This has had a big impact on the ISO community. Now the top 10 acquirers are composed of banks (JPMorgan Chase & Co., Bank of America Corp., US Bancorp (through its subsidiary Elavon), Wells Fargo & Co. and Citigroup Inc.), and nonbanks (First Data Corp.; Vantiv Inc., a spin-off of Fifth Third Bank; Global Payments Inc.; Heartland Payment Systems Inc.; and Worldpay, which was sold by Royal Bank of Scotland.)
The banks are able to use their branch networks and dedicated, internal sales forces to reach out to their existing merchant clients; they do not have to rely on ISOs to do that for them. However, big changes are in store for banks, particularly in branch operations, which are enormously expensive to maintain (branches and staff make up about 65 percent of the total retail cost base).
Perhaps you have been reading about the new world of "fintech" (financial technology) and how it will impact banks. Investments in fintech have gone from $1.8 billion in 2010 to $19 billion in 2015. A recent report from Citigroup indicated that up to 30 percent of current employees in the banking industry may lose their jobs to new technology in the next 10 years.
Banks are being forced to cut jobs and automate operations by volatile markets and new regulations. To top it off, bankers have never been particularly good at selling. This will be an opportunity for ISOs to partner with local banks to build a client base.
It takes a lot to run a bank: capital, banking licenses, risk management and regulatory expertise, as well as liquidity, a distribution network, customer base and, of course, good reputation. As if this was not enough, three new overwhelming concerns have emerged in the last decade: regulation, compliance and cybersecurity. Banks rely on their "core processor" to help them do all of this. If you are not familiar with the concept of a core processor, my prior article published in The Green Sheet's Feb. 14, 2011, issue and titled "What a bank core processor means to you," will fill you in.
The core processor runs what could be called the bank's general ledger system and processes all deposits, loans, customer data and most transactions. Once you choose a core processor, it is not a trivial task to change processors. A quote by Scott Hanson from D+H Corp. explains it well. "Changing your core is like having open heart surgery with your eyes open and no anesthesia!" he wrote.
Four core processors own over 96 percent of the market. The third largest is Jack Henry & Associates Inc., and in March 2016, I attended my sixth Jack Henry/ProfitStars user conference. I consider Jack Henry to be a best-in-class company, and since the stock is publicly traded, you can look up a research report and see for yourself, rather than take my word for it.
You can also go to the website, www.profitstars.com, and then click on "JHA Payment Solutions" to get an idea of the scope of the company's offerings. ProfitStars is always looking for ISOs to resell its solutions directly to merchants, so you don't have to be a bank to use the company. ProfitStars has been successful in this space because its offerings can be more feature-rich and sometimes less expensive than merchants could get from their local banks.
It is no secret that small and midsize enterprises (SMEs), which is what most merchant businesses are, have traditionally been underserved by their local banks, particularly from a loan standpoint, but also from a cash-management product standpoint. They are viewed as too small to use the treasury management products designed for large enterprises and too big to use consumer banking applications.
From a loan standpoint, SMEs find it very difficult to get credit, and the application process is typically somewhat onerous and time consuming. Here is an area ripe for fintech, and Jack Henry has designed a suite of next-generation products that I believe will revolutionize the way that the bank's commercial loan portfolio will be managed, but that is another story. Right now, let's focus on payments, and specifically on how ISOs are impacted by changes in the financial landscape.
There is yet another trend that impacts ISOs in a big way, and that is the emergence of independent software vendors (ISVs) as a force to be reckoned with when you are calling on SMEs to sell card processing. ISVs develop business management software, which is typically sold, along with associated hardware, by value-added resellers.
Payment processing is sometimes included because merchants want the payment piece integrated into the other business functions. Now merchants can use the integrated payments feature of the software to render operational savings in their daily work. To highlight the importance of this trend, here is a quote from Sid Singh, Senior Vice President of Open Edge, a division of Global Payments Inc.
"Gone are the days when we would have 'feet on the street' selling merchant accounts door-to-door, and recruiting merchants on one or two feature sets, and mostly leading on price," Singh said. This portends a whole new world for the ISO, and redefines how to compete for business versus the bank employees who sell merchant bankcard to their branch clients.
To get to the point, it turns out that ProfitStars has been working on a new product that will allow the ISO and merchant level salesperson (MLS) to do just that. The product has been developed by a company called Transax, www.transaxgateway.com, and ProfitStars is sponsoring the product to its bank clients.
It initially turns on the fact that the dominant software for small merchants is QuickBooks, and out of the roughly 10 million small businesses out there, about 4 million use QuickBooks. Now QuickBooks is a check-based system (nothing wrong with that) and it is somewhat intensive to use, which is why so many small merchants use a bookkeeper for this purpose.
Up to now, ISOs haven't had a lot to offer the 4 million merchants on QuickBooks – just the credit card processing account. But the new product from Transax changes the dynamics, and now you can offer these merchants a feature-rich product that works well with their existing accounting systems. The Transax QB plug-in allows merchants to:
Taken all together, this is an important development for QuickBooks users, and ISOs are just the people to get the word out to that large community, because the banks are not going to do it. To find out more about the Transax product, or the entire suite of ProfitStars offerings, call Jerry Federico at 866-554-2224 (his office is in Texas).
Banking will be undergoing tremendous changes in the next few years. If you are an ISO, I recommend initiating a dialog with one or more of your local community banks, because they can benefit from your sales knowledge and professionalism, and because you can add value to their merchants. Banks aren't historically very good at selling, but ISOs and MLSs are.
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 email@example.com.
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