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The Green Sheet Online Edition

June 23, 2008 • Issue 08:06:02

Redemption in recession

There has been a lot of gloom and doom about the current recession in the press - and with good reason. Unemployment, lowered profits and a Dow Jones dive aren't fun. There is no getting around the fact that a recession is painful, and some people are hurt worse than others.

And the payments industry - which is dependent on retail spending - is usually one of the first hit in a downturn.

But like inoculations that sting but prevent fatal disease and forest fires that clear out the deadwood to make room for new growth, the long-term benefits of a recession may outweigh the short-term pain.

We're all aware of the negative ramifications a recession can have: businesses resorting to layoffs, hiring freezes and service cuts in an effort to keep their doors open, for example. And we've seen the far-reaching effects such measures often have on entire communities.

When our neighbors are having trouble paying the mortgage or a colleague loses a job, it's difficult to remember the upside. But remember it we must.

Finding balance

For the economy overall, downturns act as reminders that bubbles burst. They temper what Alan Greenspan, former Federal Reserve Board Chairman, coined "irrational exuberance" in a 1996 speech discussing the stock market boom of that era.

Interestingly, while the high-tech bubble of the late 1990s did indeed burst, the high-tech sector has seen fairly steady growth through the beginning of this century. Many analysts point to the tech industry's painful market correction of 2001 as a reason for its current relative stability.

The recent housing market crash may result in a more stable and realistic housing market. In the midst of a tsunami of foreclosures, it's easy to forget that in the bigger picture, most industries - including housing - aren't losing ground; they're simply not gaining ground at the pace they once were.

The current downturn serves as a reminder that giddy growth can be celebrated while it lasts, but it should never be written into a company's business plan.

"One should always run their business as if there is a recession or bad times, so when the cycle does turn down, as it will eventually, you are prepared with ample cash on hand to take advantage of the inevitable opportunities," said Biff Matthews, President of Thirteen Inc., the parent company of CardWare International.

"Cash during the depression was how the titans of industry amassed fortunes during the last recession," he added. "Be tenacious with receivables and fair on payables. Cash is king, and the king is wise."

Just as the housing bubble caused some mortgage lenders (and borrowers) to underestimate risk, within the payments and affiliated industries, the strong economy preceding this downturn led some to rely on unsustainable growth.

Portfolios were purchased at inflated rates to buy market share; ISOs offered loss-leader type pricing structures; merchant cash advance companies rushed or omitted risk assessment procedures. Even some well-managed companies were spanked by the sudden downturn.

But the downturn may just provide you, as ISOs and merchant level salespeople (MLSs), the breathing room to create a more stable and secure business model through two distinct but important paths:

  • Belt-tightening paired with analysis
  • Investment

Seizing opportunity

Handled correctly, a downturn can be a good thing for your company. It provides the incentive to look carefully at all aspects of your business, make improvements that will last beyond the downturn and prepare best practices to help weather future downturns. With finesse and a little luck, a recession can also give your business the opportunity to innovate and take the lead in a less competitive environment.

"When fears of recession loom large, companies historically batten down the hatches and wait for the storm to pass," said Lara Lee, a member of Jump Associate's management team who was named a Master of Innovation by BusinessWeek magazine in 2006. "Challenging times, however, can actually bring new growth opportunities for companies that make it their mission to thrive, not merely survive.

"Instead of fixating on risk and uncertainty, it is critical to focus on uncovering hidden opportunities, navigating unknown territory and being responsive to changing environments."

Lee suggested that hard times call for courageous leadership. "When times are tough, people can get scared," she said. "Companies react instinctively and abruptly, trying to eliminate risk and variability from their operations. A leader with vision counters these tendencies by using uncertain conditions to drive big change. Now is the perfect time to task the best minds in your organization with solving the most intractable problems."


In times of fast growth, it is easy to let inefficiencies creep into your business practices. A downturn can put finding and fixing those defects at the top of your to-do list.

The challenge is to not let the urgency of the situation lead to knee-jerk cuts. Strategic belt-tightening can have long-lasting benefits; hasty and poorly planned belt-tightening can cripple a company to the point that it doesn't emerge from the downturn at all.

For every line item you cut, ask yourself: When the economy picks up again, will the cost I'm cutting or the price I'm reducing put me in a worse situation than I am in right now? Remember that since 1980, the longest recession lasted only 16 months, but the effects - including those that are self-induced - can last much longer.

"This is your opportunity to align channels, refine (or eliminate) processes, and retrofit your infrastructure with minimal resistance," said Debra Ellis, President of Wilson & Ellis Consulting, which serves direct and interactive multichannel marketing organizations. "The 'but, we've always done it that way' argument against change fails when 'that way' stops working.

"You may even find the people in your company that have been the most resistant to change leading the way. A rising unemployment rate provides a lot of motivation."

Sam Chanin, Chief Executive Officer and founder of Tribul Merchant Services, established a new Tribul work group, Agent Advocacy, earlier this year partially in response to the downturn. "This round-the-clock department is far more than traditional customer service or agent support; it does exactly what the name implies: advocate for our sales agents," Chanin said.

"This can be particularly important because, although the trouble mode of a recession represents a powerful growth market, a high percentage of the workforce has never experienced economic downturns during their careers, let alone conditions like these," he added. "Having the assembled competencies to help sales professionals and merchants is a good start, but without helping people put these to good use, they can be meaningless. "It's just one example, but Tribul Merchant Services' Agent Advocacy is critical component for assuring that our stakeholders do more than survive a recession. It's a means to assuring they thrive during these uncertain economic times."


During hard times, small financial mistakes can be devastating. To mitigate this, consider your profit and loss statement as a working, living, breathing document, not just a month-end statement.

Review it every week, and think about every cost or lost opportunity it exposes. Review your accounting procedures. Do contingency planning before negative events occur, so that hard decisions can be made based on numbers and plans, not emotions.

Also, ask yourself if you are doing everything you can to cement your business relationships to reduce attrition. Everyone knows current customers are more valuable than potential ones, but it is even more evident in recessionary times, when your customers are counting their pennies and your competitors are making bargain-basement offers in a desperate attempt to stay in the black.

MLS David Hanlin (who goes by Slick Streetman on GS Online's MLS Forum) said the high cost of gas and the recession has him thinking hard about ways to show his customers his appreciation.

"We spend so much time knocking on doors and trying to add new accounts that we don't often enough drop by and thank our customers sincerely for their business," he said. "It's one of my weak spots; I send a Christmas card with a lottery ticket or two, but it is a whole lot less expensive to be proactive and minimize attrition.

"I ordered a half dozen cases of paper and ribbons, and I'm going to set up a 'milk route' and make a personal visit to each of my accounts. I'll give them two or three rolls of paper, a ribbon, clean their card reader, shake their hands and warmly thank them for their business, telling them how grateful I am to be in their family of vendors."

Are there related products or services that you could sell to existing customers? Have you mined your niche thoroughly? Remember those almost-deals? During a slowdown it may be worth taking the time to revisit them; ask what kept them from buying before, and find out if anything has changed since your last visit.

"Not many industries offer the business owner the opportunity - for no cost - to increase their margins and add bottom-line profitability by lessening their excessive credit card fees," said Jeffrey Shavitz, Executive Vice President of Charge Card Systems Holdings Inc.

"We believe that the difficult economy is creating an opening with business owners to identify any cost centers that can be reduced without compromising any quality in their day-to-day operations," he said. "Typically, the small to mid-sized business doing less than $100,000 monthly in Visa/MasterCard transactions is not versed in the language of interchange and, consequently, CCS sales partners have a great prospect."

Keeping abreast

When the news turns almost relentlessly bad, it's natural to want to withdraw from the media, but resist the temptation. During downturns, keeping up is more important than ever.

In industry publications like The Green Sheet, you'll find tips on how to improve your bottom line. You'll see emerging trends before they are commonplace and hear news that could help you avert difficulty; speed-bumps that catch you unaware in a recession can quickly become major obstacles. If competitors cut back their operations or fold altogether, you'll hear about it if you're paying attention, and you may be able to turn such events into opportunities to grow your own business.

If you cater to a niche market, read the trades for that niche as well; if you stay informed about your clients' industry, your value is greater than that of a competitor who doesn't bother to do so. Passing along tips can help your customers see you as a superstar rather than just another expense.

And when your customers are bought by their competitors, or vice versa, your quick actions during their transitions can keep you from losing business and possibly help you build your business significantly.

Spotting assets

"Successful innovators play to their strengths," Lee said. "When the going gets tough, there's no margin for error. You can't afford to waste time, money or talent trying to become some other organization.

"Only Steve Jobs can be Steve Jobs. Instead, now is the time to take a good, hard look at what you've got and deploy it to your best advantage. Consider beginning an innovation capabilities audit, a retrospective portfolio analysis and broad stakeholder interviews to identify unique areas of strength."

David H. Press, President of Integrity Bankcard Consultants Inc., has seen an increase in requests for risk and operational reviews (which evaluate all aspects of underwriting and risk management) for sales organizations as a result of the downturn. "Merchant-base risk factors are changing, and these risk factors are something that you want to pay attention to," he said.

Press has also seen higher demand for portfolio reviews (which analyze an organization's top 500 merchants) to examine profitability and risk factors that were not present when the merchants within the portfolios were signed.

The insecurity that often prompts these analyses is unpleasant, but the outcome - a more stable, secure portfolio or at least a better understanding of potential risk - can benefit the company long after the downturn reverses itself.

Positioning for growth

A recession offers the opportunity to build market share and get a substantial leg up on the competition at a time when costs are lower and your competition is distracted or scaling back.

Harvard Business School professor John A. Quelch recently said, "It is well documented that brands that increase advertising during a recession, when competitors are cutting back, can improve market share and return on investment at lower cost than during good economic times."

Gregg Fraley, an Innovation Consultant to Fortune 500 companies, said managers who "invest in innovation over and above what seems to be called for - particularly when others are cutting back in a recession, are the managers that are positioning their organizations for a strategic long-term competitive advantage. When the going gets tough, the tough invest in innovation."

"It's a good time to re-assess future expansion plans," agreed Dr. Deborah Allen Hewitt, Economics and Finance Professor at the Mason School of Business at The College of William & Mary. "In some industries, costs of expansion are lower during a recession in that properties can be purchased more cheaply, buildings can be constructed more cheaply and so forth."

She added that it is a good time to put new systems into place, such as inventory ordering or tracking and telecommunications, which "are never pleasant but are less disruptive when order flows are reduced."

Matthews said the economy is "based on sales, that is, the purchases of goods and services, so sell, sell, sell. Next spend, spend, spend - actually invest." He advised investing in infrastructure by upgrading hardware, software and telecommunications equipment and improving or expanding facilities. He also encouraged development of existing staff through training, retraining and cross-training, as well as expansion through hiring "highly qualified people who are seeking employment, particularly meaningful employment."

Why do all of this? Because, as Matthews said, "When the economy turns - which is inevitable - and demand increases, those remaining players standing that are most prepared will capture and control the market." And that's right where you want to be. end of article

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

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