The Green Sheet Online Edition
May 28, 2018 • Issue 18:05:02
Sorting reality from hype in payments' new era
Energy and excitement abound in the payments space today. It's difficult for even a seasoned participant to keep track of developments or separate hype from reality. Some particularly hot topics include artificial intelligence/augmented intelligence (AI), machine learning/deep learning, shared ledgers such as blockchain, cryptocurrencies/digital currencies/virtual currencies, real-time payments, and open banking.
Other compelling issues are addressed in these questions:
- Can Amazon deliver the next generation of financial services?,/li>
- How will QR codes change e-commerce?
- How will connected cars create connected payments?
- When will consumers finally embrace mobile payments?
- Is the fintech revolution dead?
- How will connected screens revolutionize payments?
- What impact will biometrics and wearables have on payments?
- Is there a case for tokenization beyond payments?
- When will banks figure out how to sell and monetize real-time payments?
These, and many other subjects, were discussed at Transact, the ETA's annual conference held in Las Vegas in April 2018. This is a premier conference and tradeshow for the merchant acquiring industry. There were about 4,000 attendees, 200 exhibitors in the tradeshow area, plus about 120 speakers in the educational sessions.
Here are two striking comments I heard at the show:
- "We are entering the fourth industrial revolution." The two major themes will be AI-enabled personalization of payments and enhanced buyer experiences that leverage improvements in devices.
- "About every 25 years, business and technological infrastructure come together to create an exponential change in the way we work." Over the last 60 years, we saw this with Moore's Law (processing speed doubles every 18 months), which led to a surge in computing power, and then with Metcalfe's Law, which says that the value of the network is the square of all nodes on the network, which led to things like Facebook. Now, the prediction is that AI will lead to "exponential learning." This will enable people and businesses to search more data than ever before and hence increase productivity.
A changing business model
One thing is clear: the old ISO business model is changing. ISOs need to adapt to these changes to survive and prosper. The ground is shifting under their feet. ISOs and processors are making good money right now, portfolios are selling for 24 to 30 times book, and acquirers are being acquired themselves at a rapid pace. The status quo is very good for all of us.
But most of us in the acquiring industry are still doing business the same way we have for the last 20 years. That calls for a reality check. Most merchant level salespeople are still using the same tired approach: Give me three months statements and I will beat your rate. Today, this is the path to failure.
Some of you know I am a car collector and automotive historian. There are some important lessons about change and complacency to be learned from a recent study of General Motors when it was at the height of its powers (in 1972 it was the largest company in the world). Professor James O'Toole at the USC Marshall School of Business conducted the research, and the findings are relevant for all of us.
What not to do
The following examples from the study exemplify how GM executives thought back then:
- GM is in the business of making money, not cars.
- Success does not come from technology; it comes from adopting successful technology developed by other people.
- Energy will always be cheap and abundant.
- The U.S. public is not interested in consumer, environmental and social concerns.
- Styling and looks are more important than quality to consumers.
- Foreign automakers will never have more than 15 percent of the U.S. market.
- The secret to financial success is strict financial controls.
- Government is the enemy and should be constantly repelled.
We know how this ended. Management myopia caused a downhill slide that culminated 36 years later when GM asked Congress for a bailout in 2008. Do you see parallels with your company or the acquiring business overall?
Sometimes I wonder if we are suffering from the same myopia that afflicted GM. We have built a network that has been mainlining on interchange for decades, with the card brands extracting tollbooth like fees and imposing price increases twice a year like clockwork. There is no reason for mainstream merchants to have rate increases twice a year, pay 2.5 percent for a card-present payment or pay over 3 percent for a card-not-present payment.
Notions to question
Digitization should cause costs to go down every year, not up twice a year per the card-brand business model. Our merchants have incurred massive fraud and data breaches, no end is in sight and the industry response has been inadequate. The EMV conversion deadlines were poorly planned and executed – and an embarrassment for all.
Now merchants are dealing with additional security issues they don't understand. Too many ISOs send out complicated statements merchants cannot fathom and pack statements with bogus charges like "Merchant Club" and "Non-PCI certified." The chargeback process has been a nightmare for merchants for many years: highly inefficient, with unrealistic timeframes for dispute resolution and the deck stacked in favor of friendly fraudsters.
We continually hear nonsense that "cash and checks are going away, and pretty quickly too," when the truth is that cash in circulation continues to increase; checks are a trusted, highly efficient form of payment; and check declines have plateaued (there were 17 billion checks written in the United States last year). Checks are far cheaper to use than interchange-based cards, which is why commercial cards (P-cards) have been a failure in the marketplace for the last 20 years despite massive ad expenditures by the card brands.
Then there is the droning about "faster payments." But companies do not want to pay their accounts payable sooner; they want to delay payment for as long as possible, until they get complaints from whomever they are paying. No business wants to pay suppliers sooner unless it is not on credit and is on "cash in advance."
Furthermore, when a buyer surpasses a certain point in volume, the supplier will dictate that going forward, the buyer will use the supplier's portal to pay, and the payments will come from a bank account via check, electronic check or automated clearing house debit, not from a credit card. This is the current reality of business-to-business purchasing.
If I were a company treasurer and my accounts payable manager told me he wanted to pay our suppliers sooner, I would tell him he should look for a new job, or possibly new career. Additionally, today the one-month London Interbank Offered Rate is 1.88 percent, and the prime rate is 3.75 percent, so the time value of money is not all that critical today.
There is continual press about how Zelle and Venmo are revolutionizing payments but, news flash: banks will never make money with Zelle, just like they never made money when they originally issued ATM cards and told consumers they would never be charged for using them as long as they didn't actually come into the branch. Consumers are not going to pay $1.50 to send $15 electronically, and unless businesses can ask consumers to make payments with their phone and pay a fee for it, I don't see how banks will monetize this either.
A new Golden Age
The humble POS system, which was previously used just to authorize and clear credit and debit card transactions, is now becoming the hub for all the business services merchants need. This includes inventory management, time and attendance and payroll, customer retention and loyalty programs, ecommerce gateways, third-party delivery, and just about any other service tracked in the general ledger.
ISOs are now in the software business and have to figure out the data integration and overall configuration in addition to ensuring that everything works together. When they do this, they are working with software developers and independent software vendors who are slowly but inevitably encroaching on their space.
Merchants just want one system that works, not a patchwork of systems that sometimes work together and sometimes don't. ISOs that "get it," will enjoy the second Golden Age, reminiscent of the first one sparked when mag-stripe terminals were introduced. This will come to pass if they heed the advice Frank Sinatra used to give his children: "Be aware."
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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