Tech from the back-end up

The payments industry is built on technology. Merchants are continually presented with newer, faster, more secure ways of accepting noncash payments. Like the industry as a whole, Sterling Payment Technologies is also built on a foundation of technology.

"Our mission is to bring advances in payment technology to the small and regular-sized merchant," said Paul Hunter, President of Sterling. "We believe in making technology a leading reason for sales partners to use our company and merchants to process with Sterling."

John Miglino, Sterling's Executive Vice President, Marketing and Product, said the company was unique when it was started back in 2001. "Prior to processing for the first merchant, an entire merchant accounting system was developed," Miglino said.

"All of the points of contact, the customer service reps, as well as what the merchant saw on the statement or on the Web, was developed primarily by Sterling."

Although it outsources the back-end clearing and authentication processes, every aspect of supporting the merchant or ISO is handled with a proprietary service on Sterling hardware or technology, Miglino said.

Tech-based relationships

Hunter's introduction to the industry was through technology. He invested in a California-based company that was building a payment gateway. That particular investment may not have paid off, but it was enough of a taste to get him excited about the payments industry.

"I could see the ability of a businessperson to leverage technology and scale to build a big business, and that's what was exciting to me about it," Hunter said. "I've always been a believer in technology."

Hunter learned basic computer programming in school and came to understand the opportunities that existed in making technological advancements available to merchants after the costs of new technology came down. Historically, large merchants with greater financial resources had access to much better payment technology than small to mid-sized businesses, he said.

"Yet, as the cost of computing power was coming down, as different software languages were being developed, that gave more power to process large amounts of data," Hunter added. "That was basically lowering the cost of providing high-end technology. So it was going to make it available to a smaller sized merchant.

"I could see growth opportunities continuing at a time when a lot of people thought that advanced payment technology had sort of petered out."

According to Hunter, technology should be a leading selling point when ISOs pitch to merchants.

"The transaction relationship that is based on technology is providing a solution, and the merchant is far less likely to switch or move to the competition," he said.

Sterling claims attrition is reduced by 75 percent when technology is the leading reason why merchants choose processors.

Open book

Hunter professed his company's commitment to honest business practices. "Our business decisions should look OK on the front page of the newspaper," he said. "We've always operated with a high degree of integrity." He added that Sterling has always paid its sales agents "faster than any other company in the industry."

Because it owns its own settlement platform, Sterling controls the monetary flow and merchant risk. "If you have a salesperson who has a merchant, and the merchant has performed some questionable transaction either by mistake or on purpose, the funds have to be held to be verified," Hunter said.

"We control the money, so you have a lot better chance of keeping the merchant happy when you're dealing directly with the entity that controls the money."

As an example, Hunter offered a restaurant that does a one-time catering job for a relative. The restaurant runs a $1,000 ticket, and the processor may decide to hold that money. Sterling can release the money right then.

If the merchant level salesperson has to contact someone who then has to contact another entity, it could take days for the funds to be released, resulting in an unhappy merchant, Hunter said.

"Sterling can also hold the transaction before it goes to interchange if it's a transaction that was in error," he noted. "If we hold that transaction and delete it because it was a mistake, we're making things much easier for the merchant. Now, the agent's not having to take irate phone calls from the merchant because he had to pay interchange on a mistake."

Gift card settlement

In addition to offering all card types and automated clearing house (ACH) services to merchants, Sterling has a gift and loyalty program that piggybacks on Chase Paymentech LLC solutions that are suitable for all types of merchants – from mom-and-pop stores to nationwide chains. The program allows for central settlement and cross-settling between franchises.

"A corporation could hold all of the prepaid gift card monies for central settlement, or it can inter-store settle between franchisees," Miglino said.

Sterling focuses on business-to-business, restaurant, fleet, professional groups, hospitality and hospitality-related merchants. According to Sterling, the restaurant industry is the vertical experiencing the most growth.

"Through our relationship with [data capture software provider] Datacap, we have the ability to connect most small- to mid-sized sales systems to a proprietary gateway for transaction processing," Hunter said. He added that the only other payment provider that enjoys the same full range of access to Datacap Inc. is a company that doesn't use the MLS channel.

One, two punch

Hunter said Sterling has faced two major challenges. The first was the economic aftermath of the Sept. 11 terrorist attacks. The second has been the current recession.

"Both were economic disruptions to the system that [represented] very large and unknown debt," he said. "Fortunately, our country got back going pretty well after 9/11. Sterling was in a startup mode at that point."

In 2008, Sterling's cash advance program was in full swing when the company saw an "avalanche" of merchant bankruptcies and merchants defaulting on payments, Hunter said.

"Our loss rates, like the rest of the industry, doubled," he added. "It was a very difficult time for the cash advance business." To stay in business, Sterling tightened its underwriting standards accordingly.

"Today, Sterling is still a fast-growing entity, and we have been able to weather the downturn last fall better than most," Hunter said. "Our new merchant count actually hit record months the last two months."

Sterling had 14 employees when it boarded its first merchant and now has about 140 employees, approximately 200 active sales channel partners and 20,000 to 25,000 merchant locations.

Technological solutions

Hunter credits the company's growth to the technology it offers. That technology includes a virtual terminal product and a newly released sales agent and merchant access portal.

He said the virtual terminal, called the Sterling Payment Online Terminal, offers a complete selection of card types for processing either in card-present or card-not-present environments. It also processes ACH, including recurring billing, and integrates with existing merchant software.

With the portal, MLSs can board merchants using an online application process that allows merchants to add electronic signatures to documents. Sales agents can also access all of their marketing documents through the portal and send them electronically – tied to an electronic authorization letter – to prospective merchants.

All materials are branded with the Sterling name. MLSs can also search for leads by vertical market or geographic location, obtain merchant account information for the merchants in their portfolios, and even design their own business cards – all in one place. Sterling will add a gift card wizard for merchants in the near future.

Several years ago, Sterling developed a proprietary merchant fraud solution. In certain cases, the fraud prevention program can detect when a cashier at a merchant location attempts to steal money from the merchant. When that occurs, Sterling notifies the merchant without the cashier knowing.

"Our proprietary risk system works off of authorizations and not settled dollars," Hunter said. "There's a lot more information and a lot more trending available on the authorization side of a transaction than the settled dollars side."

Another example Hunter related was in the case of a cashier who may be testing the viability of stolen cards. "The cashier runs five cards in a row that give a lost or stolen response when they try to authorize [them]," he said.

Unfortunate trends

Hunter sees two trends hurting the industry: free terminal programs and card company fee increases.

Regarding free terminal programs, Hunter said, "When the free terminal program got a foothold, it accelerated that decline [in margins], making it more difficult for agents to make a profit in their merchant relationships."

As for card company fee increases, he said, "I fear that merchants will be open to alternative forms of payments.

"And that is a risk to everyone in our industry. … It's a situation that all processors like Sterling have to monitor carefully so we're not left behind if an alternative payment starts to gain steam."

Hunter predicts the payments industry will continue to be challenging in the short term "because the damage that our economy sustained last fall from having the effects of too much debt in our society is going to take a long time to work its way completely out of our system."

He estimates that in one to two years the economy will "come back better and stronger than ever," and "people will continue to use electronic payments more than in the past because of the three principles of speed, security and convenience."

Dialed into his crystal ball

Hunter is keen on the possibilities of mobile payments. "The phone actually has the potential to decrease cardholder fraud and decrease losses for card issuers dramatically through authentication technology," he said.

He expects telecommunications companies like Verizon and AT&T to enter into the payments space; companies like Google Inc. and Microsoft Corp. will likely take a more active roll in delivering information on the wireless platform as well. In anticipation, Sterling has plans to expand its mobile offerings.

Hunter also anticipates a rise in consumer-initiated mobile, person-to-person and contactless payments. He said Sterling was the first company to process a wireless, contactless payment in a pilot program with MasterCard Worldwide at a Professional Golf Association tournament two-and-a-half years ago.

Golfers love gadgetry and the newest technology to help them hit golf balls farther and straighter. Sterling seems equally focused on technology and the next big "hit" to deliver to small and mid-sized merchants.

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