By Brandes Elitch
CrossCheck Inc.
I usually start my articles for The Green Sheet with a few introductory paragraphs about the wine industry in Sonoma County, where CrossCheck is located. As we say, Napa is auto parts; Sonoma is wine. This month I'm taking a different tack.
Some of you know I collect and restore old cars, and even write a column at www.velocetoday.com, a webzine about French and Italian cars. Today I'll discuss what's happening in the automobile industry and compare that with the payments industry. Their common denominator is that misinformation, confusion and downright obfuscation abound, which is causing people to focus on unimportant matters that are not central to what is really happening in these industries.
I'll look at the potential effects that artificial intelligence (AI) will have on people who have made a career of selling cars, and contrast this with people selling payment processing. When consumers think about the next generation of automobiles, they think of autonomous cars, the Internet of Things as it pertains to their cars, and possibly how they can pay for purchases without leaving their cars.
I've heard commentary that younger generations are not interested in driving. However, producing and deploying meaningful numbers of fully functional autonomous cars is a huge task that will take many years. Meanwhile, interest in getting behind the wheel and driving somewhere is not going to be diminished.
But something is happening beneath the surface that most consumers are not aware of: the increasingly complex nature of building a car, and this goes to the heart of the matter, which is how many years will your car last, and how long should you keep it? The car is becoming, well, an appliance. People don't get emotionally attached to an appliance.
Leasing used to be a confined business model, suitable for certain business segments, and probably no more than 20 percent of car sales, including fleet and rental business. Today, more than 30 percent of new cars are leased; for certain brands, it is more than half. If you lease your car; reliability, durability and frequency of repair are practically irrelevant because you are going to return it in three years. Manufacturers are shortening the product lifecycle, too. Today, the lifecycle might even be tied to the length of the average lease.
The focus on infotainment, the IoT, dramatic interiors and offbeat styling have made some cars look dated in only a few years. Bob Lutz, perhaps the most knowledgeable observer, said some of these designs look like "angry kitchen appliances." A four-year-old navigation screen looks outdated, and new digitized controls and features introduced every year make the previous model look obsolete – another reason to turn your car in every three years.
If you have had issues with a warning light on the dash from a failed sensor, you might know that only factory franchise dealers have access to the factory software to fully diagnose the problem. Small, independent mechanics do not. In my case, the local shop diagnosed a problem as a crank sensor, but it turned out to be the fuel pump, which meant I spent an extra few hundred dollars unnecessarily.
A class action was filed on behalf of independent mechanics against the manufacturers for withholding repair information. Another recent lawsuit was filed against two of the largest Dealer Management Systems (CDK and Reynolds and Reynolds) for conspiracy to eliminate competition for providing integration with dealer data, an alleged antitrust violation.
Who will repair your car when a sensor goes out? At some point, a 10-year-old, high-tech car will be a liability due to the cost of diagnosis and repair. A new car has 60 to 100 sensors (projected to reach 200 soon) and 25 to 30 CPUs. They can have up to 10 million lines of code, and high-end cars have as much as 100 million lines. Cars have a complex set of as many as 150 subsystems connected via different digital connection interfaces, operating at different speeds, carrying different types of data.
New platforms will support 4G,Wi-Fi, Bluetooth, Dedicated Short Range Communications, and Gigabit Ethernet. These systems can be compromised by accidents, floods, rodents or any number of unforeseen threats. The massive flooding in Houston earlier this year caused as many as 1 million vehicles to be scrapped.
How does this affect the person who makes a living working at a dealership selling cars? We know that AI will be at the core of every sector of technology. AI will replace middlemen jobs such as help desk, gathering data, presenting proposals, preparing loan applications, etc.
AI does not just automate tasks; it changes the nature of the work. Today, consumers research car purchases before visiting the dealership, but they still spend four hours in the grueling process of negotiating, putting together a deal and getting financing. All of this can be easily automated and reduce the process to an hour, or less. Just as cars are changing, so are salespeople's jobs, and auto salespeople will have to change their focus and habits to survive.
Now let's look at the ISO/MLS business model. When electronic ticket capture came around, the card brands needed a small army of salespeople to walk the streets and convince millions of merchants to buy terminals. Merchants could buy terminals only from ISOs. ISOs sold (or leased) terminals, and provided access to processors. The only interface involved plugging the terminal into a dial-up telephone line, because all transactions were at the POS.
Obviously, merchant services is much more complicated than it used to be. I see more need for intensive involvement by the ISO in the sales process than by the salesperson in auto sales. The consumer buys a car perhaps once in three years, but the merchant has to deal with transaction processing issues every day.
ISOs have to go through the PCI certification process. They have to provide multiple solutions, including Internet and mobile, and deal with multiple terminals. They have to work with independent software vendors (ISVs) or systems integrators. Even filling out the application for the processor is a daunting process, and a chatbot is probably not going to add much value there.
Today, we focus on buying things on the Internet, but numerous studies show that online sales still comprise less than 15 percent of overall retail sales volume, which means the other 85 percent of sales are at brick-and-mortar stores. This is where ISOs should be focused.
Merchants want and need to know about anti-fraud services, how to take Apple Pay and Android Pay, why EMV is important, how wearables work, how to handle chargebacks, why PCI is important, why their rates keep going up, and a variety of other questions that are best handled in person. This means that ISOs have to go to the stores, talk to the owners, and review existing statements and provide a better value.
ISOs can also talk with merchants about numerous other payment- and business management-related products besides credit card processing. There is an enormous opportunity here if ISOs can educate themselves about other products merchants will need and craft presentations to discuss them. ISOs who can do this will be able to create a meaningful increase in business revenue, but it requires a new focus.
"People today are more connected, more technologically savvy and more mobile," Mastercard Media Relations stated. "As a result, issuers, merchants and device manufacturers seek to provide them more innovative ways to pay and be paid across all channels and devices. Bringing these solutions to life depends on an ability to find the right service provider who can work behind the scenes to integrate the technology. "
My guess is that most small and midsize merchants don't read their statements or they read them but don't understand how the money is allocated to the issuing bank, card brands, processor and ISO. This is where a face-to-face meeting is essential, because it is the only way this critical information can be brought home to merchants who keep wondering why they have to pay 2 or 3 percent of gross sales to process digital payments when they can process paper checks for a fifth of that.
If you are an ISO or MLS, great opportunity awaits you right now. Go out there and take advantage of all that is happening.
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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