Current economic conditions raise plenty of questions about the health of credit markets, especially consumer credit. Clearly, ours is a business that benefits from robust spending. If consumers aren't buying, they're not using their credit and debit cards, and that, in turn, has consequences for everyone in the transaction stream.
With so much facing the credit industry, we asked the members of The Green Sheet Inc. Advisory Board to share their thoughts on the following questions:
2. Do you think the fallout will be such that ISOs and merchant level salespeople (MLSs) will need to change the way they do business, or the products and services they offer? What changes are you planning to make to your strategy?
3. As with most changes, new opportunities arise. What opportunities do you see being the strongest in the coming months?
We printed a portion of our board members' responses in Part I of this story in The Green Sheet, Sept. 24, 2007, issue 07:09:02. Following in alphabetical order are the rest of their answers:
1. I think that merchants are very tired of spending money on new credit card equipment, but with PCI the stores who have POS systems are going to have to make an investment in new software to keep up with the PCI standards.
With a tight economy, more people will run up their credit cards and get into more debt. So credit card usage will go up, but banks might lower limits that people get on cards.
One change that has been going on for a while is larger companies like Best Buy, Sears, Circuit City, City Furniture, Rooms To Go and others are offering interest-free financing to consumers and selling that business to GE Money and Citibank. Those cards are not part of Visa/MasterCard, so there is decreased use of Visa/MasterCard/AmEx for larger purchases, and this trend will continue.
2. The way ISOs and MLSs do business changes all the time, and you had better look around and change what you are doing or be left in the dust at some point. Merchants are looking for solutions. Those solutions are going to be computer-based for many merchants.
While there will still be credit card terminals out there, over the next 10 years they will start to disappear, but not altogether, because the cost of software, hardware and high-speed Internet access still needs to come down to make that more affordable for the mom-and-pop business.
But the business is shifting to more computer-based solutions for merchants. It is only a matter of time.
3. Learning about computer-based options _ we are already offering one, and it has been a great success. We are looking at other computer options as well.
I love the credit card processing business. It is a great business, and there are changes all the time. You have to keep your eyes and ears open, read The Green Sheet, go to at least one tradeshow a year, talk to other people in the business and get a feel for what is going on.
This business has changed a lot since I got into it eight or nine years ago, and we keep changing with it.
Going from terminals to computers is not going to be easy for everyone as the computer companies, POS companies and software companies are now all entering our business and creating more competition for the ISO and the MLS: QuickBooks buying an ISO, Sage buying an ISO, Mercury, Sterling, Paymentech and RBS Lynk all going after POS companies to integrate.
1. Yes and no. Those merchants on the profitability cusp will delay purchasing new or upgraded technology across the board.
Those that planned for and anticipated this will actually increase their spending on new and improved technology due to cost reductions as well as deal making.
2. I believe industry maturation has been and is changing the way we do business, and the economic downturn is a motivator for that evolution to occur even faster.
There's a philosophical change from merchant churn from the fanatical drive for new business and a focus on equipment sales to attention on retention, value-added services that must be proven and valid, service improvement, plus a focus on residuals coupled with longer term perspectives.
CardWare's focus has always been service. The company is adding service offerings and improving service delivery, thus lowering their price plus increasing our support of PC and virtual terminal systems.
3. Short term as well as long term (10 years out) - darned near anything to do with health care. You name it; HSA/FSA, medical billing, adjudication of benefits, anything that makes it easier for the patient/customer, medical service provider and benefit/payment provider.
Short and medium term _ the continued proliferation of what I call PC-based retail systems, especially those running virtual software.
Secure, virtual makes so much sense from a compliance stance, teamed with the ability to keep current without the disruption of loading new software.
Lastly, sales of emerging payment systems, Bill Me Later, Tempo and similar products that may or may not run on the traditional card Association platforms.
Credit curtailment may prompt a philosophical shift in payment to debit and nontraditional debit; payments totally founded on convenience, i.e. much less cash, far fewer checks.
Sell to the merchant their customer's choices and convenience of various payment options. The public shops where it is convenient and easy, and payment is likewise.
Opportunities _ health care, robust, integrated technological solutions, customer choices and convenience.
1. I really see this as a two-part question.
A. First, consumer card spending _ traditionally during times when the economy slows, especially in the early stages, consumers continue to use plastic as a means to purchase goods or services.
Additionally, there may actually be an increase in some areas that are considered emergency purchases where the consumer may have used cash or a check in the past. Automotive, appliances, medical and other nonspontaneous purchases are just a few examples.
A report that was recently published showing the failure in some subprime mortgage portfolios showed that consumers chose to pay their credit card bill over their mortgage _ an indication that they felt it is more important to protect their ability to charge for goods and services than keep their house.
I don't necessarily agree with that. However, it's an interesting priority of the subprime market.
This statistic, however, contradicts other reports from big issuers that charge-offs are on the rise. In either position people will continue to use plastic.
I think the most affected areas in a really bad economy (and at this time we are not there) will be the T&E [travel and entertainment] market, where people spend a good portion of their disposable income.
B. Yes, I do think for those businesses that may have been contemplating an upgrade in their processing technology they may hold off and see first how the subprime credit problem affects them.
For the nearly 6 million new businesses that start up annually, they will have to make some sort of investment in software or hardware necessary for them to process.
2. It is too early to tell if there will be any significant fallout because of where our economy is. The Chairman of the Federal Reserve lowered rates on Sept. 18, 2007. There is also news daily on other indicators that show the economy is healthy. The one that worries me most is joblessness.
There has been bad news the last two reports on unemployment that has shown these jobless numbers growing. With that said, an ISO or acquirer must constantly survey the landscape for opportunities and ways to improve their position in the industry.
The well-run, well-capitalized companies will benefit from those who are not. It is not a new phenomenon; it is just accelerated in times like this. We at NPC have helped our ISO partners create marketing strategies, review their business plans and, at times, funded them with capital to execute on great new initiatives. Our depth of management and strong capital position enables us to do this.
3. I see it as a time to work closer than ever with our ISO channel to make sure they have all the tools necessary to be successful.
1. No. They realize that it is a necessity and in the long run saves more money than it costs.
2. Yes. They need to be more linear, as well as offer a more value-added product such as POS systems. The days of the $200 plastic box sitting on the counter are starting to dwindle.
3. Cash advance, POS systems.
Although the economic climate for the country is less than positive now, we believe there is still a significant opportunity for ISOs and MLSs in how they approach the "sale of merchant services."
At CCS, we concentrate primarily on merchants who currently accept Visa and MasterCard, and in this regard we are successful in offering a more competitive program that will lessen their fees and ultimately increase their bottom-line profitability. In these difficult times, what business would not want to increase their balance sheet and P & L statements for a $0 outlay?
Furthermore, benefits like 12-hour funding are incredibly powerful when cash is king. Restaurants and other retailers would love to have funds the next day versus waiting two to four days for their money to clear into their bank accounts.
Understanding how to leverage a promotional program using gift and loyalty cards will also help attract new customers to a merchant.
Business, like life, is cyclical, and it is only those companies who can think creatively, provide real value and act honorably that will succeed given any market condition.
1. Yes, we're going to see that happen as sales slow down in a variety of businesses. We'll see less spending by smaller merchants as they wait and see if sales continue to drop. Larger groups may scale down, but if they are working on budgets already in place they'll need to move forward to remain competitive.
2. More than ever before it's important to add services to make the merchant sticky. Merchants are going to be very price sensitive right now and as competition heats up, and it will, they will need a reason to stay with their provider. Services that provide added convenience to the merchant will also be important as merchants try to maximize efficiencies.
3. We still have strong sales with our standard guarantee services, check conversion, and we've seen an increase in merchants using our Internet approval to authorize paper checks through their PC. There has also been a lot of interest in our back-office conversion solution that eliminates the time and money spent on trips to the bank.
We do not anticipate much of a negative impact on our business from the current macroeconomic climate. While the number of consumers who will be impacted by subprime mortgage issues is alarming, it is still small compared to the total volume of U.S. consumers.
As I write this, a story in today's paper describes that job growth has stalled and therefore a recession is more probable. In such a worst-case scenario, there will certainly be a drop in the number of businesses who are willing to invest in payment technology.
That said, there will always be plenty of smart business owners who are looking to technology as a means to survive and improve.
As specialists in ACH [automated clearing house] processing, we are less affected by decreases in consumer spending than credit card ISOs and MLSs. In fact, many of our prominent client bases _ churches, schools, dance studios, martial arts clubs, insurance companies _ will continue to increase their monthly transactions as they migrate their customers away from paper checks.
The transaction fee, not a discount rate, drives our ACH revenue. Our check recovery business may also see some increased activity. Simply put, and sadly, consumers in financial distress will bounce more checks.
So, we do not anticipate major changes in our strategy due to the credit crunch. We will continue to try to work with the best agents and partners to attract the best clients. ACH payments continue to grow strongly, and the opportunity to find and educate new clients is still substantial. The new opportunity arising from the credit crunch is the same as the old opportunity _ to serve as a payments consultant to our clients, understand their issues and help them grow their businesses.
Such consultation in a credit crunch might include helping a nonprofit set up payment plans for willing donors who are unable to make a single large payment; convincing a retailer to resume accepting checks by helping them understand the true costs of checks compared with credit cards (cheaper); or explaining to a traditional ACH client who does not accept cards that in a down-turned economy, credit card acceptance might just keep them afloat.
Thanks to all of our esteemed board members who contributed to this two-part series.
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