By Brandes Elitch
As we start 2018, I thought it appropriate to comment on ongoing developments in the payments system. To that end, here are several topics I expect we'll be reading and talking about in the next 12 months. As you reflect on these, ask yourself in each case what roles can ISOs and merchant level salespeople (MLSs) play to add value and earn residuals.
Let's face it: in-store proximity mobile payments are nowhere. A year ago, experts said smartphones would replace plastic cards at the POS, but this isn't happening anytime soon. Study after study shows that millennials are aware they can use Apple Pay, but it isn't important to them. Nobody has built a compelling value proposition for its use.
Mobile payments have worked in some cases, for example, Venmo and Starbucks. But if you have a pouch stuck to the back of your phone that holds a payment card and an ID, it's probably easiest to take out a card and insert it.
Amazon has been experimenting with transforming the brick-and-mortar shopping experience and, at the same time, making sure that the payment is charged to your Amazon account. Amazon Go scans your phone when you enter the store and keeps track of your purchases via cameras and shelf sensors. An algorithm figures out the bill.
Amazon has created its own payments ecosystem, which it intends to roll out in Whole Foods first and at other locations later. How does an ISO add value to the merchant here?
General Motors partnered with Mastercard to enable in-car payments in conjunction with GM's OnStar network, using credit or debit cards stored in Mastercard's Masterpass wallet. While you're driving you can call your nearest McDonald's and order breakfast, using coupons and prompts on your dashboard screen, and pay in advance. You can also order up a parking space or a special radio program.
I suspect the way this is supposed to work is that you do all this reading and scanning and decision-making while parked in your driveway, not while going down the freeway changing lanes at 75 miles per hour, but I'm pretty sure this also is not going to happen. In California, where I live, people routinely say they will call you back when they get in the car. Driving on the freeway is scary already; it demands absolute concentration and unwavering use of all five senses and all three mirrors.
The only real value-add I see here is paying for your fuel in advance when you go to the gas station, but even so, you still have to get out of the car, open the fuel door, and insert the pump and replace it, so what's the big deal? Gas stations have been given a three-year extension for compliance with chip cards, and the last thing they want is another new technology that requires a hardware and software upgrade. Where is the traditional feet-on-the-street ISO in this discussion?
The idea here is that consumers prefer to subscribe to ongoing services rather than buy products, for example, hiring rides over buying a car or music streaming over buying a CD.
In this vein, Amazon offers ongoing services in addition to the products people buy, which is why people keep coming back. Thus, Amazon really knows you as a customer: what you bought, when you bought it, how much you paid, what you are reading about. What other merchants can say they know their customers that well? To compete, other retailers need to create similar consumer experiences to get their customers to keep coming back.
Hand in hand with this is the sharing/on demand economy, where consumers go online to research a product, and then log in, buy, or reserve the item, track the status, get updates, and facilitate pickup. How does the ISO get paid when the merchant is selling through Amazon or PayPal?
For at least the last six or seven years, analysts have hinted that value-added resellers (VARs) and independent software vendors (ISVs) will take on the role traditionally played by ISOs in signing up small merchants, and that ISOs will just want to become the default merchant acquirer or software solution used by the ISVs. I don't see this happening anytime soon, at least not for small and midsize enterprises (SMEs).
I was present when Chuck Smith started Payment Processing Inc., and I saw firsthand the value-add he brought to his software developer clients in terms of sales, customer service and support, set-up, hardware, training, etc. It was a lot of work. Software developers and systems integrators don't have the expertise to do these things themselves; it isn't their core competency, and they have too many other priorities. This might be different for very large enterprises, but for most SMEs, an ISO's availability, knowledge and professionalism are still important, and there is plenty of opportunity for the traditional ISO rep.
For the last 50 years the card brands have functioned as de facto tollbooths for merchants. It doesn't make sense not to take these cards since you would lose sales, and there is no real alternative to the five major card brands for the 70 percent of consumers who use them.
But if banks can offer the consumer an alternative that is as quick and easy to use; provides rewards and loyalty points and other tangible, worthwhile benefits; and doesn't charge the merchant 250 basis points to use (or more for card-not-present transactions) then merchants will flock to it.
Now there are alternatives with compelling value propositions, such as PayWithMyBank. Here, consumers can pay directly from their banks' online bill-pay service. This has two benefits: it eliminates interchange and it virtually eliminates fraud. Remember, all payments begin and end in the checking account, not on a statement from the card-issuing bank.
This is the 50th anniversary of the first ATM installation, and there are 3.5 million of them worldwide. ATMs are becoming contactless, offering video conferencing capabilities, changing shape and functionality, offering more than half of the personal banking services provided by a branch teller. Undoubtedly, banks will enhance ATM capabilities as branches are downsized or eliminated.
Accenture determined there is untapped potential for cost optimization and revenue generation from the ATM. Of course, ATM's are ancillary to a debit card portfolio. And while debit cards have reduced the use of cash at the POS (the average debit card purchase is less than $40, and a third are for less than $10) people are using debit cards now to get cash back, which has become a huge service by itself.
Meanwhile, cash in circulation has grown dramatically, from $1.2 trillion in July 2013 to $1.59 trillion in November 2017. A 2016 Fed study shows that over 89 percent of consumers hold some cash. It is clear that cash is not going away, as some industry pundits have said.
Predictions that checks are dead are similarly incorrect. Check volume has stabilized, and innovations such as the Deluxe e-check product can now retain the advantages of checks without the paper. A Fed study shows that checks represent the lowest percentage of third-party fraud in the form of unauthorized transactions. They are still the preferred method of payment for some consumers.
Of course, a merchant does not pay interchange to process checks, and for high-dollar payments this can be very important. Check 21 doesn't have an opt-out provision and provides availability of funds quicker than automated clearing house conversion.
As for banks, when was the last time you changed your primary bank account? If you are like most Americans, it's been over a decade. Consumers are loyal to their banks. There really is no alternative when it comes to storing your money safely and cheaply, knowing that payments will go through on time and correctly, and if a mistake is made, it will be quickly corrected. I don't see this changing anytime soon, do you?
There you have it, a reality check on the state of payments at the start of 2018. ISOs and MLSs will continue to have excellent potential for signing new and retaining current merchant customers and adding value in the sales process.
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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