An upfront and advanced processor

Before founding payment processor Secure Payment Systems Inc. in late 1996, SPS Chief Executive Off-icer Linden Fellerman worked for 20 years at what began as Telecredit Inc. and became Equifax Inc. when it was acquired in 1990. For 10 of those years he was President of Check Services for the credit scoring bureau.

He left the job and his Tampa, Fla., home in 1996 and moved to Southern California where he went to work building a payment services company that would leverage his expertise in the check services business.

Settling in sunny San Diego and focused on the new venture, Fellerman officially launched SPS in April of 1997, when the company processed its first transaction.

That would be the first of many, as what started as a small startup dealing strictly in check guarantee matters continued to grow and "add new wrinkles," as Fellerman put it.

"It originally began as a check guarantee business and we transitioned ourselves over to electronic check conversion, then full-service gifts and reward card processor, and then into ACH origination and check 21 image processing," he said. "Most recently we've introduced a delayed consumer finance option."

High risk

Broadly speaking, SPS specializes in certain forms of high-risk processing, where the company assumes a bit more risk than the average processor. Businesses that process with SPS are afforded a broader range of finance and payment options as a result.

Such risks, Fellerman said, are taken on through a calculated approach that uses formulas learned and developed during the founder's early days in the check services business when he was responsible for running background checks on consumers.

"We've recreated systems here that embody many of those same tenets and principles for managing fraud," he said.

"Examples of that, besides just using the obvious bad check databases, would include tracking where that consumer is shopping, what time of day they're shopping, what day of the week they're shopping, and patterns that don't seem normal for both frequency and dollar amounts.

"In some cases, it could involve also the age of the customer and check numbers.... It's based on the experience I've had at bigger companies and secondarily here, and knowing how to set those parameters so to not impede sales but at the same time maximize the risk management features."

Automated incremental payments

The company's keystone payment offering is a check guarantee program where the consumer typically writes three or four checks and pays, in equal increments, over 30, 60 or 90 days. If the consumer authorizes it, SPS also provides the option of automatically debiting accounts at each 30 day period through the Automated Clearing House (ACH) network.

Regarding the use of ACH debiting, Fellerman said, "Merchants have to have the approval of a customer to do it. Provided the customer authorization to do that, there would be an electronic debit that we would originate on their behalf and then settle those funds back to the merchant.

"It could be recurring billing, it could be one time debit could be at the point of sale where you're making a purchase and signed a receipt acknowledging it's OK and permissible for us to debit that transaction electronically."

Merchants who participate in the deferred funding program are shielded from liability. In the event that a consumer's check bounces and the account is turned over to a collection agency, SPS pays the merchant and the account balance is resolved by third parties, rescuing the merchant from the long-term headache of uncertain funding.

Recently, SPS has taken its payment guarantee program a bit further. As of last year, the company has been offering advanced funding for its deferred payment program to the automotive industry, where long-term payment plans are especially common among consumers unwilling or unable to provide thousands of dollars upfront to buy a much needed car.

That means that a car seller receives the upfront payment for the car from SPS (or the ISO through which SPS is selling the service), which then collects the customer's deferred check payments - or ACH debit payments - as recompense. The dealership is thus not only guaranteed payment for a sold car, but also isn't forced to wait some number of months for the financing to roll through.

"With check guarantee the customer is writing three or four checks and basically deferring his payments over time, but we've automated it and added advanced funding," Fellerman said. "If you're familiar with the check business, many check companies have a 90-day feature in the retail segment, but nobody's done the advanced funding piece until about a year ago [when SPS started that program].

"We've taken the step of doing that, and so we've introduced a new wrinkle. We've gotten quite a few ISOs to sign on board with us, and we've been ironing out the consumer pro rates because the type of consumer we seem to be getting from some of these merchants is poor credit quality, so we've been ironing out some of the approval methodologies."

Other wrinkles

Fellerman mentioned other unique "wrinkles" within the company's package of offerings, most of them relating to novel methods of risk management that serve as protection for boarded merchants. One is a gift card program for franchise stores that offers dual protection.

Commonly, franchisee store gift card revenue goes to a common "trust" account belonging to the franchise collectively, Fellerman said. Then, whenever those cards are redeemed, the stores at which they are used are compensated from that account.

But problems can occur if one of the franchisees goes out of business, Fellerman said. If that store sells gift cards, it is normally liable for paying other franchisees where the cards are used - but that goes out the window when the store goes out of business, leaving the other franchisees to assume the costs associated with a gift card purchased at a different store but redeemed at their stores.

According to Fellerman, SPS allows whatever franchisee is selling the gift card to sit on the proceeds, rather than put them in a separate account for reimbursing other stores where the card is redeemed.

SPS then acts as the broker for payments between stores, debiting the gift card seller whenever its cards are redeemed at other locations. Furthermore, in the event that a seller goes out of business or falls into bankruptcy, SPS assumes liability for all of their sold gift cards. That means that other franchisees aren't ever forced to incur the costs of another store's cards.

"Our premise is that we behave as an intermediary, as a broker, and we pay out the redemptions, and charge a premium to all the participating stores that sell gift cards," Fellerman said. "And if the store [that sold one or more unspent cards] goes out of business, we're liable."

Enhanced kiosks

SPS is also prominently involved in providing remote deposit capture services that allow merchants to electronically submit checks to their banks and thus avoid the hassle of physically delivering them. And the company has two brand new offerings: one is a text message-based loyalty program for merchants, the other a software program for kiosk ATMs that bring a host of new services to the kiosks.

Regarding the kiosk offering, Fellerman said, "Many free-standing ATM machines are now becoming financial supermarkets where there's more than one function that can happen on that machine.

"In some cases you buy stamps or pay a bill - well, now they're adding things to drive more revenue, and those services sometimes include money transfers, and even buying movie tickets and, more recently, cashing payroll checks.

"Given that a large segment of the population is unbanked ... they can use these ATM-kiosks to do banking and a host of other things, which may include sending money to family members in another country."

According to Fellerman, small to mid-sized merchants are the company's "sweet spot." He added that such merchants are also the sweet spot of most ISOs, and that SPS almost always sells its merchant services through third-party providers.

Adapting to shifting tides

As with many ISOs, a smaller processor like SPS is compelled to change constantly, to search for new methods and approaches suitable to a changing payments hemisphere - and, often, to take chances.

"We need to take some risk because otherwise certain products would not be sellable," Fellerman said.

It helps that the company has a knowledgeable and experienced 30-person staff, he noted, adding that the company's four-person executive team has 75 total years of payments industry experience.

New ideas, or "wrinkles," are part of what Fellerman likes best about working in the payments marketplace - an ever-evolving sector that requires businesses to be constantly forward thinking and forever on their toes. Trying to figure out how to adapt in ways that leverage the shifting demands of the marketplace is what makes the work something of a rush to a guy like Fellerman.

"What I like about it is the business is dynamic," he said.

"The marketplace being a little bit tougher now makes us think in different ways and continue to broaden the payment channels that we offer, so that we're not a one product company. Those companies are prone to suffering in the future. As technology causes things to continually change, we have to change with it."

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