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Industry Leader: Ken Musante:
Meeting the Challenges of Merchant Acquiring

When Ken Musante was in college, he was not sure what type of career he wanted to pursue. He did, however, know what he did not want to do. Musante spent his college summers working at his father's grocery stores in the Bay Area. One day, he began his shift at noon, and "after what seemed like hours of labor, I glanced over at the clock and noticed that it was only 12:15!" he said.

This experience cemented his desire to do something more rewarding and diverse. He did not want a job with repetitive tasks; he wanted a challenge, at a place where the minute hand on the clock moved in real time.

His first step was education. Musante earned a bachelor's in managerial economics from the University of California at Davis. Through night school, he went on to receive a master's in business administration from Golden Gate University, and then attended the graduate school of banking at Pacific Coast Banking School. By gaining knowledge and experience from these institutions, he hoped to ensure an opportunity for a challenging career.

Musante currently serves as President of Eureka, Calif.-based Humboldt Merchant Services, a wholly owned subsidiary of First National Bank of Nevada and its affiliate bank, First National Bank of Arizona. He has more than 16 years of experience in financial services; however, he became involved in the payments industry by chance.

He said like most people right out of college, he thought he wanted to do something related to his undergraduate degree, but did not know exactly what that was. Upon completion of his schooling, Wells Fargo & Co. hired him to work in the bank's card-issuing division. "I was truly lucky to have such a great job right out of college," he said. "The job I got ... was somewhat luck. ... I did not know that I wanted to be in the payments industry."

At Wells Fargo, he learned about all facets of the business in different divisions of the bank. His experiences encompassed bankcards and the card Associations, risk management, collections, customer service and acquiring.

"I enjoyed my time at Wells Fargo, but I was a mid-level manager at a very large organization," Musante said. "My efforts had little impact on the entire organization."

After Musante left Wells Fargo, his next venture put Eureka, a quiet, Northern California coastal town, on the acquiring map. He took a job with Humboldt Bank in 1993 just as it started its acquiring operation.

At Humboldt Bank, Musante was responsible for developing the bank's acquiring business, now known as Humboldt Merchant Services (HMS). He has continued to grow HMS, even through an acquisition (in 2003,Humboldt Bank sold HMS to First National Bank of Nevada and First National Bank of Arizona for $32 million).

HMS, with only 80 employees, now ranks among the top 35 billion dollar bankcard acquirers. According to the 2004 GSQ acquiring report ("2004 Payments Grand Prix," December 2004, Vol. 7, No. 4), HMS processed an estimated $1.3 billion in credit and offline (signature-based) debit card transactions in 2004.

However, compared to the top five card acquirers, which process hundreds of billions of dollars worth of transactions every year, HMS is still a "small" business.

Musante thrives on the challenge of competing with the big organizations for merchant accounts. "Going up against someone like Bank of America or Wells Fargo, they had the name recognition and we had to outwork them," he said. "We relish the role of the small upstart organization, and it plays out in our favor. There were some extremely formidable obstacles that we came up against, such as the culture of the bank when we first started, it being a small community bank," he said.

Musante and his team have taken the acquiring program nationwide; at the time of the sale in 2003, HMS accounted for 50% of Humboldt's Bank's total income. "I look back at some of the things we've done, extremely large conversions, rapid growth rates, and I think wow, if we had known how difficult that was, we might not have been able to tackle it."

He said perseverance has allowed his company to succeed. "It's the perseverance that carries you through. The perseverance that hopefully I am demonstrating [to] the workforce here on a daily basis," he said.

The acquiring business is very complex, with many intricate concepts and formulas to explain to customers in such a way so they don't walk away scratching their heads.

"My background ... and having the opportunity to start Humboldt Bank's acquiring operations have provided me with a broad understanding of the business [and the ability to] convey that information to the staff and business partners with which we work," Musante said.

The Secret of Success

Musante's experience has also enabled him to develop an understanding of what it means to be successful. Sales is the backbone of the business, and "a good salesperson can sell anything once; however, you need to have a good product and service to sell it more than once," he said.

The merchant services business, filled with entrepreneurs, is highly competitive. With so many people competing for the same merchants, it can be difficult to pull ahead of the pack. While the entrepreneurial spirit is great for getting started, Musante said, much more is required to continue.

"We have the combination that allows us to sell, but then we have the support that enables us to sell again," he said. HMS believes in supporting its sales agents well. "If we can take the salesperson's issue and make it our issue so they can focus on selling, then we're doing our job so that they can do their job better." Focused sales agents ultimately produce satisfied merchants. Having a solid grasp of this ethos has been instrumental in Musante's success.

Many Challenges Ahead

The current industry climate includes security concerns and industry consolidation. As is often the case, these two issues coexist. Addressing security issues such as compliance and technology are not small, nor inexpensive, tasks. It is becoming increasingly difficult, Musante said, for smaller, independent companies to gain a strong foothold.

This is a major challenge the industry faces. "The barriers to entry have been increasing over recent years, specifically the recent example with CardSystems," Musante said. "It's going to be extremely difficult for merchant organizations not affiliated with a bank to get sponsorship.

"There will always be room for entrepreneurial companies within the payment services industry, but because of the sensitivity of data and the penalties of non-compliance, combined with the additional scrutiny brought in by private investors and class action lawsuits, this industry will substantially need to increase its level of professionalism," he said. "These changes will increase the barriers to entry as fewer start-up organizations will be able to withstand the scrutiny and obtain the sponsorship."

In using the word "professionalism," Musante is not referring to an individual's work ethic and abilities. Rather, he means keeping up with the rapid pace that this industry, and business in general, is moving, "The folks that don't plan for the long-term aren't going to be able to adhere to some of the additional rules that are going to have to be passed by the [card] Associations to maintain cardholder security," he said.

Other industry issues, Musante believes, also necessitate quick and forceful action. These include the threat of other card brands such as American Express Co. (AmEx) and Discover Financial Services, or alternative payment systems such as PayPal, infringing on what he called "the industry status quo" of Visa and MasterCard transactions.

As an acquirer, Musante said, HMS makes much more money from Visa and MasterCard than from other card brands. A system such as Discover is a closed-loop system, and a great deal of the money goes back to Discover rather than to the acquirer.

"If Discover is actually spun off and picked up by someone like TSYS, then that is done at our peril," Musante said. "If [TSYS] has a closed-loop system, it would disintermediate Visa and MasterCard transactions, and that's a threat to our way of life."

However, the status quo is slowly changing, he said, because closed-loop systems are starting to embrace acquirers. They are "working with us to sell more merchants." The profit margins though, still are not the same. Musante said he welcomes the competition because "the burden of [card] Association rules can be extremely difficult. However, it would be worse for acquirers if more power were given to AmEx and Discover where we make less money."

He said other challenges for acquirers are determining what regulations are necessary and who should implement and enforce them. "An outside regulatory force would be the least preferred option because they are the folks with the least amount of information about our industry," he said.

Musante acknowledges that the industry needs to do more. "The industry as a whole has not moved fast enough," he said. "There have been pockets that have moved rapidly, but there have been a number of parts ... that haven't been educated or haven't embraced some of the data security protection that is necessary."

A Fearless Leader

Musante has certainly been granted the wish he made that day in the grocery store many years ago, and he approaches both the big challenges and day-to-day issues of this business in a detailed, hands-on fashion. "I consider myself a participatory manager. My staff may call it something else," he said, chuckling, "but the truth is we are a small company of 80 individuals."

Musante thinks it is important to be "involved with projects in which I am a resident expert. We are fortunate in that we have all of our operations in one place, and I have the luxury of speaking to any of the folks who work here, both formally and informally."

Linda Grimm, HMS Senior Vice President, Director of Operations has worked with Musante for the past eight years. She said the entire staff enjoys working with him. "He has a very good rapport with everyone," she said.

"He is very personable and treats everyone, from the newest temp scanning documents, to the top managers, with the same respect."

A good business leader understands the difference between participatory management and micromanagement. Musante said that sometimes there is a precarious balance. "I must admit that I have gone through different periods where I have erred too far one way or the other," he said.

He is honest and humble about the ups and downs of the business, and he expects the same from his employees. "Staff here understand that if they made a mistake, the best thing to do is share it with their supervisor," he said. "We certainly are not in the business of rewarding errors, but mistakes never get better by hiding them."

Perhaps most important, he is quick to rectify any situation that did not go according to plan. Again, he expects the same from his employees. At one point, HMS discovered that it had overpaid a merchant by a million dollars.

Yet within 24 hours, the company assembled a team, which located the problem, contacted the merchant and worked out a repayment plan with the merchant.

Diffusing a situation of that magnitude, in such a short amount of time is no small task. "The result is we have better procedures, a merchant that will never utilize another acquirer and a more trained staff," he said.

"I would not want to go through this problem again, but I am pleased that we have the type of organization that is able to pull together in a crisis and continue forward in a level-headed fashion.

"It has been a growing experience from being a company of one, to where we are right now. I've made many mistakes along the way, but hopefully I've learned my way through the process."

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