By Brandes Elitch
CrossCheck Inc.
For the last eight years I've attended the annual ProfitStars payment conference, and I've shared with our readers what's happening in the world of banking and payments. It's critical for ISOs and payment processors to understand this environment, because if you don't have a bank partner processing your transactions that truly understands your business, particularly if you are a third-party processor, you don't have a business – period. This article explores current trends in banking and payment processing from the ISO's perspective. Jack Henry is a large ($1.5 billion annual revenue) publicly traded company. It is one of three "core processors" for the American banking industry. Its clients are commercial banks, credit unions, savings and loan organizations and corporations.
This is a big constituency: there are about 4,800 commercial banks, and over 5,000 credit unions, and Jack Henry has a 20 percent market share. The company is well managed, as evidenced from its share price. This year's conference attracted 1,700 attendees with a comprehensive offering of seminars, training and lectures over the course of four days.
Banks are different from other businesses. They have a fiduciary responsibility to safeguard their clients' deposits, and a duty to understand their borrowers' businesses and continue to provide funding when certain rules are followed. These rules are codified in banking law and regulation, making banking a highly regulated industry.
Community banks (usually defined as those with less than $1 billion in assets, the overwhelming majority of banks) must follow the same rules as money center banks 100 times their size. However, small banks don't have the resources to run their own data centers or develop software to make and service loans, open new accounts, and process cash deposits and withdrawals.
This is what core processors do: run data centers, either indirectly by providing the software, or directly when operations are outsourced to them, and the bank no longer runs its own IT department internally. This goes for other aspects, too, such as running and supporting call centers, websites, mobile products or ATMs. With Jack Henry as a partner, small banks can compete with much larger banks in terms of technology and avoid the expense of staffing and managing an IT department.
As an entrepreneur or small business owner, would you want to work with a very large bank? Fewer than a dozen megabanks are both the biggest card issuers in addition to being acquirers. The income statement of a megabank looks very different from that of a community bank. Taking one of the five largest banks in the country as an example, which shall remain nameless, here is the breakdown of current profitability:
Where does the local business fit in? About 40 percent of profits comes from "global banking," which includes investment banking, advisory services, and, here we are, commercial and business lending.
Lending to small business and providing payment services is not a priority for megabanks, but it is for community banks. When I worked for a megabank, the senior lenders used to say, "We just can't figure out how we can make money on a million dollar loan." What they meant was they needed a larger loan deal to cover their fixed and incremental expenses of booking the loan and doing ongoing monitoring.
Local banks are interested in entire business relationships, not just banking relationships. They have local decision-making; they make faster decisions than larger banks; and because of their legal lending limit, they can make a loan for a few hundred thousand dollars. There is ongoing communication with customers, and there is an element of trust. I would argue that community banks are also better prepared than megabanks for the inevitable credit quality cycle.
When you see a headline like, "Banks need to find more effective digital strategies," think about the following quote, which I have on my bulletin board (unfortunately, I lost the author's name): "A knowledgeable, enthusiastic, driven banker, who is also supported by original marketing, will attract customers with creative deal structuring, cash management services, business advice, wealth management, and other forms of advisory services, even some that have yet to be developed!"
As an ISO selling card processing and payment services, one of the smartest things you can do is develop a relationship with a local community bank that specializes in small business lending.
These banks differentiate themselves from large banks by better customer service and responsiveness, and a real presence in the community. Their boards are filled by local businesspeople. Small banks do not have specialized sales staff to sell cash management and treasury services, but their loan customers need to take card payments, particularly now that Square has convinced even micro-merchants that they can and should accept cards.
Local banks need to partner with someone who will walk the streets, call on their loan customers in person, and provide merchant services, particularly the necessary and vital degree of handholding that comes with setting up a merchant on a new provider. This should be a reciprocal relationship, where the bank refers their merchants to you and you in turn refer potential loan customers to the bank.
Small banks need to cultivate and help incubate small and midsize businesses (SMBs) so those businesses can survive the first few years, because most new SMBs do not make it to five years. They need trusted advisors to provide guidance and support, on an ongoing basis, which you, as ISOs, can provide.
You see a lot of press about "open banking," where there are no branches. A recent survey by a firm called cg42 showed that only 9 percent of customers said they would be most likely to switch to an online bank with no branches. A well-managed community bank is a lifeline for entrepreneurs starting their own businesses, and they want to be able to go to the bank and talk to someone they know, not talk to an AI-driven call center.
Recently, the banking world was shocked by a quote from David Furlonger at Gartner, stating, "Within 12 years, 80 percent of financial firms will either go out of business, or be rendered irrelevant by new competition, changing customer behavior, and advancements in technology. … Digital transformation is largely a myth, as institutional mindsets, processes and structures stand firm. Established financial services providers will have to move faster on digital business by building digital platforms, or finding niche products and services to sell on other platforms."
Now, much of this talk is nonsense, as pointed out by bank analyst Chris Skinner, but he added, "This marketplace of apps, APIs, and analytics is what banks have to adapt, to interface and integrate with." Banks look to Jack Henry to figure this out for them and build new platforms, because nobody else can do it for them.
There are about 6 million small businesses in the country with more than just one employee. These businesses account for almost half of the entire workforce in the country! Here is a quote from the Jack Henry blog at: https://discover.jackhenry.com/strategicallyspeaking/.
"When a business is expanding and needs access to cash, the owners have several options … These are tough choices for the average small business owner, who likely knows a lot about their industry, but may know little about finance. These owners often look to their banks as an advisory source regarding the financing that would best fit their scenarios. Success in this area can lead to long-term business relationships where you view your financial institution as a trusted partner."
As an ISO, this is exactly where you want to be with your customers, too. These are trusted personal relationships built over a long time. They are not going to be impacted by any new fintech products coming down the pike or by open banking. Working with a local community bank to help their customers succeed is the best way to create an attrition-proof customer base over the long term.
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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