Page 22 - GS170101
P. 22
Views
2017 – A look back, a because they had to go to the branch daily to make deposits.
look forward
The Wild West days of acquiring
In the late 1970s and early 1980s, electronic payment
terminals became widely available, even though they cost
initially about $900 (about $2,700 today). Somebody had to
knock on doors and then sell (or lease) and install these
terminals for millions of merchants. It was not the banks;
it was an army of ISOs and merchant level salespeople
(MLSs). The early days truly were like the Wild West; MLSs
sold multiple products and services; sometimes they sold
for two banks and leasing companies at the same time.
Often, acquiring banks had no idea who the reps selling
for them were.
CBryoBssrCahnedceksIEnlcit.ch Back then, it was difficult for merchants to obtain merchant
accounts. Their local banks weren't in the acquiring
B ack in the 1980s, the acquiring side of the card business, and the Internet did not exist yet as a research tool.
business was a mystery. While the larger retail You could buy a terminal only from an ISO; you couldn't
banks immediately grasped the profit poten- buy one online, from the manufacturer or at Costco. Even
tial of issuing unsecured credit cards to their if a merchant could find an acquirer, it was sometimes a
account holders, they were unsure whether to be in the grueling process just to get an account approved. It could
acquiring business. take a small merchant a couple of months to get a merchant
processing agreement in place.
The founder of the The Green Sheet, Paul H. Green,
was an exclusive ISO for one of the largest banks in the Cardservice International (CSI) figured this out in 1988 and
United States. Out of the blue, overnight, that bank left placed ads under Credit Card Processing in every Yellow
the acquiring business. Between 1989 and 2004, about 50 Pages book in the country. The company searched every
commercial banks abandoned the acquiring business, and new business license application, everywhere, so its reps
five nonbank processors became major players. In 1989, the could approach merchants before anyone else did. In 2003,
top 10 acquirers processed about half of total volume; seven when the company was profiled by the The Green Sheet, it
years later, about 90 percent of the volume was processed by had 250 sales offices and was booking 7,000 to 8,000 new
the top 10, three of whom were nonbanks: First Data Corp., accounts per month.
Global Payments Inc. and Heartland Payment Systems Inc.
In 1997, First Data took a 50 percent ownership stake in
In the early days, an issuing bank was also an acquirer CSI; in 2001 it acquired the remaining 50 percent. The Green
for the merchants in its local market. Over time, issuing Sheet profile quotes a CSI ISO who said, "When I started in
and acquiring functions became separate business units, this business, no one but Cardservice approved merchant
even if they operated within the same financial institution accounts. It was like going out on a boat, and you caught all
(FI). Some FIs are self-contained, others are publicly traded these great fish, but you weren't allowed to eat them."
nonbank corporations, and some are partnerships between
FIs and third-party nonbanks. One such third party is Back then, CSI treated its reps fairly, but many firms did
unique to acquiring: the ISO/merchant service provider, not. MLSs did not receive their full residuals, or sometimes
the very person for whom the The Green Sheet was designed. didn't get any residuals. Unscrupulous ISO owners found
numerous pretexts for not paying residuals, including
Before electronic ticket capture, merchants put a multipart selling their companies. MLSs moved from ISO to ISO, so
form in a "knuckle-buster," separated the parts, prepared merchants had a tenuous connection to their salespeople
a bank deposit by physically batching the deposit, and and processors. Once an MLS sold a merchant an account,
took it to the local bank branch, hopefully the same day. the merchant often never saw the rep again.
Thus, merchants were joined at the hip to their local banks,
Large versus small merchant accounts
You might think the processor would profit most from
serving the largest retailers and another few thousand
large enterprises, but it's the small and midsize merchants
who generate most profit for acquirers. Yet they account
for only a sliver of overall sales volume. This is because
large merchants have forced the big processors, who crave
volume, into a race to the bottom for margins. But acquirers
22
