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Article published in Issue Number: 070202

NEAA meeting spotlights payments in transition

By Patti Murphy, The Takoma Group

The payments space is in transition. This is probably no surprise to anyone reading this column. But passages don't have to be hardships. Indeed, opportunities aplenty remain to grow payment businesses - from deals made by the feet on the street to new initiatives at the brand level, and points along that continuum.

That's one of the messages I came away with from the Northeast Acquirers' Association (NEAA) recent Winter Seminar in Mt. Snow, Vt.

Sure, it's held at a ski resort, but this NEAA meeting is more than a snow fest. (This year, especially, since winter had not yet set in on New England, and much of the snow on the slopes was manufactured.)

The event is a great opportunity to meet and learn from your peers and others. After a day packed with educational sessions and time with vendors, I could feel the energy and optimism that undergird successful businesses in this space. And I don't believe I was alone.

Strategies for growth and financial success

"The key to this business is planning," said Greg Cohen, President of Moneris Solutions USA, in discussing strategies for growing from a merchant level salesperson (MLS) to a mega-acquirer. And he advised attention to details, especially metrics. "Without systems and up-to-date metrics, you're dead in the water," Cohen said.

Adam Atlas, an attorney representing ISOs and MLSs, had similarly sound advice for those looking to grow and/or migrate merchant portfolios. "I recommend growing one step at a time," Atlas said. He also advised going the extra mile in providing service to merchants. "It's good to get residuals, but they're not going to continue if service slips," he said.

Also on the agenda: a panel of financing executives who discussed a range of financial resources for transaction acquiring businesses.

"This is not a profit and loss business; it's a balance sheet business," said Harold Montgomery, founder and Chief Executive Officer of Calpian, an ISO that has expanded to offering financing options to other ISOs, large and small. "You need to take a longer perspective," he counseled.

This is especially true in a time of transition. Montgomery said he sensed the industry was at "the beginning of a hyper-competitive period, and we're going to see price wars like what happened in telecommunications" back in the 1990s. "Companies are going to need plans for how to scale in this kind of market," he said.

David Putnam, President of Resource Finance Co., also fielded questions about ISO borrowing options. Putnam, a former lawyer and investment banker, has been offering residual-backed debt-financing to ISOs for the past seven years through this company.

Putnam suggested that ISOs are better served borrowing against residuals than with traditional loan vehicles. "You need to compare the cost of money to what you can derive from a loan," he said.

Above all, Montgomery advised ISOs to "find the financial resource that will be the best partner for you when it comes to achieving your goals over time. The price or cost of your financing is secondary at best," he insisted.

"Your ability to work with the resource over time and the resource's knowledge of your business and willingness to back you is much more important than the cost of capital."

A new model for Discover

At the brand level, Discover Financial Services LLC addressed the NEAA Winter Seminar. Talk about transition. Discover epitomizes the capricious nature of payment businesses.

Sears, Roebuck & Co. rolled out Discover cards with a great deal of fanfare about 20 years ago. Sears was one of the larger, more profitable retailing companies at the time and eager to build a financial services brand. It had an investment banking unit (Dean Witter) and a profitable store card portfolio. Back then, many saw Discover as an attempted end run around the bankcard systems.

Sears eventually divested its financial services aspirations. And most recently, Morgan Stanley (the Wall Street firm formed when it merged with the former Sears' unit) announced a spinoff of Discover, which is expected to be completed sometime during the third quarter of 2007.

The Discover spinoff comes at an opportune time: 1) A series of legal challenges have made it possible for nonbank card brands to compete head on with MasterCard Worldwide and Visa U.S.A.; 2) Discover owns Pulse (a large PIN debit network); and 3) changes in Visa's and MasterCard's ownership and board structures signal an end to the days when bankcards were distinguishable from credit cards.

As it ventures out on its own, Discover boasts more than 20 issuers, according to Dan Collins, Discover's Relationship Manager, Indirect Merchant Sales. There are high hopes for international expansion as well: Nearly 1 billion Discover cards have been issued through banks in Asia, which is considered the fastest growing market for retail payment products.

On the other side of the card equation, Collins noted, Discover is working on systems integration strategies with seven of the 10 largest card acquiring companies. And he said Discover is developing a new acquiring model to make it more worthwhile for ISOs and MLSs to sell its brand.

This is a huge departure for Discover, which traditionally relied on in-house merchant acquisition. But then, Discover is a changing company staking a claim in a changing industry.

Like most vibrant things, the payments space is in a constant state of flux. These shifts don't have to be hardships, though, and more often than not they are not. Brands like Discover and American Express Co.(which also has bank issuers) competing directly with MasterCard and Visa should create new opportunities for feet on the street, processing companies, and merchants and consumers.

Regional meetings like the NEAA's (and there are similar events in the Southeast, West) provide valuable resources for professionals in the payments space to learn about existing and emerging opportunities.

Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at

Article published in issue number 070202

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