By Brandes Elitch
CrossCheck Inc.
Back in the 1980s, the acquiring side of the card business was a mystery. While the larger retail banks immediately grasped the profit potential of issuing unsecured credit cards to their account holders, they were unsure whether to be in the acquiring business.
The founder of the The Green Sheet, Paul H. Green, was an exclusive ISO for one of the largest banks in the United States. Out of the blue, overnight, that bank left the acquiring business. Between 1989 and 2004, about 50 commercial banks abandoned the acquiring business, and five nonbank processors became major players. In 1989, the top 10 acquirers processed about half of total volume; seven years later, about 90 percent of the volume was processed by the top 10, three of whom were nonbanks: First Data Corp., Global Payments Inc. and Heartland Payment Systems Inc.
In the early days, an issuing bank was also an acquirer for the merchants in its local market. Over time, issuing and acquiring functions became separate business units, even if they operated within the same financial institution (FI). Some FIs are self-contained, others are publicly traded nonbank corporations, and some are partnerships between FIs and third-party nonbanks. One such third party is unique to acquiring: the ISO/merchant service provider, the very person for whom the The Green Sheet was designed.
Before electronic ticket capture, merchants put a multipart form in a "knuckle-buster," separated the parts, prepared a bank deposit by physically batching the deposit, and took it to the local bank branch, hopefully the same day. Thus, merchants were joined at the hip to their local banks, because they had to go to the branch daily to make deposits.
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.
Back then, it was difficult for merchants to obtain merchant accounts. Their local banks weren't in the acquiring business, and the Internet did not exist yet as a research tool. You could buy a terminal only from an ISO; you couldn't buy one online, from the manufacturer or at Costco. Even if a merchant could find an acquirer, it was sometimes a grueling process just to get an account approved. It could take a small merchant a couple of months to get a merchant processing agreement in place.
Cardservice International (CSI) figured this out in 1988 and placed ads under Credit Card Processing in every Yellow Pages book in the country. The company searched every new business license application, everywhere, so its reps could approach merchants before anyone else did. In 2003, when the company was profiled by the The Green Sheet, it had 250 sales offices and was booking 7,000 to 8,000 new accounts per month.
In 1997, First Data took a 50 percent ownership stake in CSI; in 2001 it acquired the remaining 50 percent. The Green Sheet profile quotes a CSI ISO who said, "When I started in this business, no one but Cardservice approved merchant accounts. It was like going out on a boat, and you caught all these great fish, but you weren't allowed to eat them."
Back then, CSI treated its reps fairly, but many firms did not. MLSs did not receive their full residuals, or sometimes didn't get any residuals. Unscrupulous ISO owners found numerous pretexts for not paying residuals, including selling their companies. MLSs moved from ISO to ISO, so merchants had a tenuous connection to their salespeople and processors. Once an MLS sold a merchant an account, the merchant often never saw the rep again.
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 are able to price smaller merchants with greater margins. Mark Abbey, Managing Partner at First Annapolis Consulting, suggested the smallest merchants pay an average of 30 times more to acquirers than the largest merchants pay.
Calling on the treasurer of a Fortune 500 corporation is quite different than calling on a Main Street merchant. Typically, the bank providing the credit line for a large enterprise will ask for the merchant card account as part of the credit line accommodation. While this is called "tying" and is an illegal business practice, it is a reality. The margin for a very large retailer might be 10 basis points or even fewer. The "salesperson" will be a well-dressed, buttoned-down banker-MBA from the bank's treasury management department.
In contrast, about 20 percent of small merchants change their acquirers every year. Increasingly, they expect the vendor of their cash register system or accounting software or business management software to include card processing in their suite. They are looking for solutions from value-added resellers or independent software vendors.
Traditional ISOs often get shut out of this conversation, although they shouldn't be. Thus, it is more challenging for ISOs to sign new accounts and stay in business. ISOs and processors are having difficulty finding MLSs who know how to sell and know the complexities of the product. Here is part of a solicitation I received recently from a processor looking for agents:
This demonstrates how competitive the acquiring industry is and how urgent it is for processors to sign new accounts. Meanwhile, another trend in evidence is consolidation (for example, Global acquiring Heartland). Larger players were on an acquisition path in 2016, and this will continue in 2017. It will become more difficult for smaller players to compete. In addition, as more merchants sell more products over the Internet, they will find payment portals that are specialized to their business needs.
Here is what is not going to happen in ISO-land in 2017: all the hoopla touted in the trade press in 2016. Fintechs won't be a threat to the feet on the street ISO. Artificial intelligence, machine learning and voice interactivity won't threaten ISO/merchant relationships. Merchants won't move their businesses to the cloud. Consumers will adopt mobile payments, but adoption will be miniscule. Mobile wallets won't achieve much traction, until a more universal wallet is introduced. Apple Pay will not achieve widespread success because so few consumers have the right device to use it. Big data, data analytics, blockchain, virtual assistants and the IoT will be irrelevant to the small to midsize enterprise.
ISOs and MLSs will be successful to the extent they learn what the merchant's needs and pain points truly are and offer solutions. This will take a few calls, as well as the ability to cut through jargon and explain PCI and EMV in clear, understandable language.
Merchants know their customers don't care about what they are paying for interchange; they care about the quality and service they receive. The same is true when it comes to being an acquirer. Most MLSs will make one or two calls on a merchant and never return. The successful salesperson keeps calling and looking for ways to add value to a long-term relationship for 2017 and beyond. 
Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at brandese@cross-check.com.
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