By Brandes Elitch
To my knowledge, nobody has written a comprehensive history of the credit card acquiring industry, also called the payments industry, the bankcard industry and the merchant processing industry. Material abounds about the issuing side of the business: getting plastic cards in the hands of consumers; very little recounts the merchant side of things: getting merchants to accept credit cards, buy terminals and be willing to take a discount on card purchases to cover interchange and other fees. The Green Sheet has been around since 1983 and undoubtedly covered a lot of this as events unfolded.
I cannot think of anyone who has individually had more of an impact on the acquiring industry than Bill Melton. I met Melton at the Money20/20 show in October 2016, and it struck me that I'd never seen anything in writing that chronicles his contributions to this industry. I asked him if he would describe his career, and this article is the result.
Melton grew up in Nebraska in a community that was politically and religiously conservative like much of America's heartland. His father was a preacher. In 1964, after college, Bill went to Vietnam as an American civilian. He worked for a tug and barge company, and this was considered sufficiently important to the war effort that his draft board agreed not to call him. He was there for 5-1/2 years during the height of the Vietnam War. I can scarcely imagine what that was like, and I was in the Army during the same period.
While growing up, Bill had an intense curiosity about how the rest of the world lived. After his experience in Vietnam, he had a strong desire to experience China first hand. He received a U.S. State Department Grant at the East-West Center at the University of Hawaii, and he was sent to Taiwan to finish his degree, since China was blocked at the time. He expected to stay for six months but remained for five years, getting his master's degree in Asian studies and Chinese philosophy. In the process, he learned to speak the language and interact with the locals. His experiences in China and Vietnam would play a big part in what was to unfold shortly thereafter.
Bill went to Hawaii after that, where in 1971, he founded a company called Real-Share. This company did check authorization and guarantee. Payment guarantee is a tricky business, because if you guess wrong, you eat the check. Bill pioneered the use of computers and database management, as well as a telecommunications system to provide quick authorizations.
In 1980, he sold Real-Share to TeleCheck Services, which was later part of First Financial Management Corp. It sold for $3 million, big money at the time. He used the money to start what became Verifone, in Honolulu. At first, he provided check verification from a bad check database he maintained. Bill was focused on providing good customer service, so he decentralized the salespeople and customer service groups by co-locating them where the customers were located. Since the employees were geographically spread out, he was a pioneer in the use of an early form of e-mail messaging with access to an online database.
One of the biggest problems for the credit card industry in the 1970s was developing an effective and cost-efficient nationwide authorization system. After early unsolicited credit card mailings, the need for almost real-time authorization became painfully obvious. Back then, the card associations (now card companies) mailed out a telephone book sized "hot list" every week. Fraud was a big problem: in 1973 alone, credit card losses were estimated to be almost $300 million, or 1.15 percent of sales.
The low credit standards used back then for issuing bank cards required tight monitoring. Another use for the authorization system was the transfer of sales information to speed the billing process, since most banks at that time were still losing money on their credit card operations.
Remember, in 1973, all credit card charges were processed by "country club billing," meaning copies of original sales drafts were issued with monthly statements; "descriptive billing" had not yet been instituted. Yet without descriptive billing, the entire concept of electronic funds transfer would fail. At that time, First Data Corp. in Omaha was the only processor capable of handling more than 200 million transactions annually.
During the 1970s there was no widespread agreement in the banking industry about the use of the magnetic strip on the credit card; in fact, there was controversy about different possible solutions, including optical character recognition and smart cards. The controversy was re-activated by former Visa Chief Executive Officer Dee Hock's announcement in the summer of 1979 that all Visa cards issued after April 1980 would have to have the magstripe on the back.
This all came to a head when, in 1981, the card associations (now card companies) offered discounts to merchants if they would use the newly developed automated transaction technology for all credit card purchases greater than $50. The only problem was that early POS terminals cost around $900. Just for perspective, $100 in 1980 is equal to about $308 today. This was not going to work for most merchants, to say nothing of the telecommunications costs for multilane merchants.
Somebody had to figure out how to make an affordable terminal and provide an affordable telecommunications link so that the card industry could grow to what it is today: 8 million merchant location-points. It is not an exaggeration to say that one person made that happen: that person was Bill Melton and his company, Verifone.
Using his connections in the Far East, Melton figured out how to engineer and produce a terminal and get it to market in 1982 for $500, by lowering manufacturing and operating costs. Melton got help from William Gorog, founder of LexisNexis, who financed Verifone with letters of credit and introduced him to a venture capital firm for additional financing.
In 1984, Melton introduced the ZON credit card authorization system with a $125 price point, built on the miraculous Z80 chip. By 1988, Verifone had more than half of the POS systems market, and then bought Icot Corp., the second in the market with a 20 percent market share. By 1989, when Melton retired from the firm, it had shipped the first million ZON systems.
Melton was a founding investor in Transaction Network Services Inc. and remained a director until it was sold to PSINet Inc. in 1999. Back in the 1970s it cost 60 cents and took 60 seconds to authorize transactions in the check business. Telecommunications was one of the biggest cost factors, and most were dial-up on dial-up lines. Melton saw that he needed to cut the cost to 10 cents per transaction. Jack McDonnell Jr., founder of TNS, came to Verifone to meet with Melton and told him he should invest in TNS, which he did, creating another success story.
In 1995, Melton started CyberCash Inc., which created the back-end technology for commerce over the Internet, and later sold it to VeriSign Inc. Melton said that CyberCash was 10 years ahead of its time. He wanted to give merchants access to using the Internet the same way he provided POS terminals at Verifone.
He envisioned a PayPal-Blackberry-P2P model, but it never took off. In 1995, there was only one method for monetizing small-dollar purchases on the Internet, a subscription model. Merchants could not get their heads around the Internet, and the cost of new customer acquisition was around $60 to $70. eBay Inc. solved the problem of small non-traditional merchants selling on the web, and their customer acquisition cost came down to $5.
In 2000, CyberCash ran out of money, but meanwhile PayPal Inc. took off. Bill said that he made $20 million on PayPal and lost $20 million on CyberCash; the only difference was that he was actively involved in the management of the latter.
CyberCash pioneered the idea of an electronic wallet. Back then, it was difficult to get direct access to a consumer's bank account for automated clearing house debiting to pay for a transaction, so he had to preload it to have money in the wallet. He used AOL for a subscription model to do this prefunding. What killed it was he didn't have good methods to do buyer authentication. He would have had to go to the banks, but the banks knew the value of this and were not willing to share anything. Today, you can use Facebook to authenticate an identity online and don't need authentication from the banks, Melton said.
Now Melton is involved with OmnyPay Inc. (www.omnypay.com). It was formed by two people he brought into Verifone 30 years ago. The concept is to look at things from the merchant's point of view. Now, merchants are going to do things that they couldn't do when the card associations were owned by the member banks. Now, banks will be going their own route. This is no longer about just payments, but about the entire relationship with customers and their community.
OmnyPay is building a set of technologies that will forge an ongoing deep relationship with the consumer, creating a complete microenvironment where you are always connected with the consumer. The merchant cloud and the consumer smartphone will build an entire world.
Finally, a big part of Melton's contribution to society is his charity, The Melton Foundation, founded in 1991 (www.meltonfoundation.org). Five universities, in the United States, China, Chile, India and Germany select new fellows each year. Today, about 20 to 25 students communicate year round and have an annual week-long symposium.
To date, nearly 500 people have gone through the program. Melton got the idea for it when he was driving in East Germany right after the wall came down and he had an inspiration: while political systems and even institutions fail from time to time, it is an "old boy's network" that pulls things together when everything else falls apart.
In the old days, membership in this network was the result of privilege. It was not a meritocracy. He wanted to create a global "new person's network" that is less sexist, is more multicultural and includes a bonding college experience. The fellows would provide continuity when institutions cannot.
While it would be difficult to top the contribution to society that Melton made with Verifone, in the long run, I suspect the foundation will have an even more positive and lasting effect on society, and for that we can all be grateful.
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 firstname.lastname@example.org.
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