By Brandes Elitch
CrossCheck Inc.
At the end of Part 1 of this two-part series, published Oct. 14, 2019, in issue 19:10:01) I mentioned the challenge banks faced in getting merchants set up to accept credit card transactions electronically when the technology became available. They had no sales force capable of such a task, so what happened?
The independent sales organization (ISO) emerged. The salespeople were not bank employees, but the bank authorized them to sell on their behalf. Typically, ISOs worked on 100 percent commission.
Their income was derived from how much they could sell above the "buy rate" banks gave them and – equally important – on other ways to extract money from merchants. One common practice was putting terminals and printers on five-year, non-cancelable leases at $39.95 a month – and selling lease paper. The hardware probably cost less than $500 to purchase.
ISOs deserve credit for getting merchants up and running on POS terminals. It was a massive effort. There was no internet. Imagine setting up a large retail store that had 50 departments with cash registers and POS terminals: every one required a telephone line.
For all but the largest enterprises, it was the ISOs ‒ the third parties selling merchant accounts on behalf of sponsor banks ‒ that provided merchants a view into the world of payments. Banks' cash management specialists called on companies with a few hundred million dollars in revenue. Their products were check based: lockbox, positive pay, account reconciliation, wire transfer, and later, PC-based ACH origination.
For small and midsize enterprises, cash management officers were nowhere in sight, and the branch employees had no real understanding of cash management. The ISOs checked in with merchants regularly.
The Green Sheet was started in those early days to give salespeople the requisite knowledge and understanding to sell card processing. At the time, salespeople were allowed to speak only to their sponsor banks and were prohibited from speaking directly with the card companies, which at the time, were card associations owned by banks.
It still takes a small army of salespeople to knock on doors and solicit merchant accounts. The sales process is different now, of course. Merchants use POS software instead of stand-alone countertop terminals and are savvier about transaction processing. Also, reps used to sell based on price. Today, they compete by adding value.
Processors continue to consolidate. At some point, only a handful will control the majority of merchant accounts. And the major banks will build direct sales channels to their merchants. Everyone is looking to software developers to build new hooks into merchants, particularly the general ledger systems they use to run their businesses.
The smallest merchants who traditionally didn't take credit cards now can use Square, and the card brands have legitimized payment facilitators, which allow micro merchants to accept card payments but settle funds in payfac accounts rather than individual merchant accounts. Independent software vendors resell merchant processing integrated into their product suites, so merchants have one point of contact, and things can work seamlessly.
So many talented people are working in the finech space that new products and services are inevitable. If you wonder how much change one person can make, consider the late Fernando Corbato. He fostered the digital revolution by developing shared computer operating systems, and he introduced computer access control via passwords.
When Corbato began his career, calculations were done with a slide rule or mechanical calculator. Early computer users stood in line for a turn to run a program with batched punch cards. Corbato played a major role in introducing time-sharing, which permitted multiple, simultaneous access to the same device. Could a person working today change the landscape as thoroughly as Corbato did? My hunch is that if people like that exist, you'll find them at Money20/20.
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 brandese@cross-check.com.
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