he Retail Financial Services Market, the home turf of the Independent Sales Organization (ISO), is likely to see a lot of new changes in 2003, and the signs are everywhere.

By most accounts 2002 was a "bad" year for the U.S. economy: bad financial results, bad stock market performance, bad ethical and moral behavior, and a bad job market. But it is likely that only the slowness of retail sales, and the fact that business bankruptcies are on the rise, were the only general economic problems felt by ISOs.

New sales were slowing at year-end (see GSQ vol. 6, no. 1, "Billion Dollar Acquirers" forecast) after 18 months because of slow retail growth, stunting equipment upgrades and organic sales growth. As if that were not enough, pricing has never been more competitive, and the marketplace has been under careful review by the Securities and Exchange Commission.

Off-the-record discussions with industry notables reflect that some are quietly worried while others seem to believe that all is well and that the ISO opportunity has never been better. In fairness, many see that there are many good things to say about the condition of the marketplace but that a good deal is dependent on improvement in the U.S. economy as a whole. While this all sounds a bit scary, we know that sales continue and some organizations are prospering as usual.

This said, a number of senior people in our marketplace seem to be holding their breath now and hoping for the best. However, what no one is really doing much of is talking, at least not on the record. What some acknowledge off the record is their fear that new sales may be flat for some time and that only the best run acquirers will be able to grow substantially under these market conditions. So the GS has been out making inquiries at the grass roots of the industry to see what might be shared on the record.

Some general themes that have appeared both on and off the record:

• Business is good in many areas even though merchants are much more aware of what things should cost and how they work. Everyone is talking service; some are just talking, but some have really begun to reshape their approach. Overall margins are down, and equipment is not always the focus of the sale. Check service sales are strong; so are a number of other value-added features. Discount rate competition is very strong for bankcard sales. Gifts cards remain a HOT topic in the market along with check conversion.

• The ETA drew a lot of interest with its two-pronged announcement that it will (1) end its agreement with the professional group that has managed the association for many years and (2) establish an office in Washington, D.C., with a staff of full-time employees.

• Concurrent with changes at the ETA, a grass-roots effort has emerged to create an association that serves only the interest of the independent sales representative.

• After months of SEC review of ISO Certified Merchant Services, the government and the company reached a settlement that appears to leave CMS intact. It came as a relief to many litigation watchers that the SEC might not continue the industry review with other organizations or, more important, create operating rules that would make working as a sales organization even more difficult.

  The fact that CMS is sending a letter to its customers regarding a restitution fund to which each merchant might be entitled leaves many questions about what the fallout will be from this SEC incursion. Here is a small selection of responses we received to two of our questions:

What Is Going on in Your Market?

• "Merchants are beginning to look for ways to cut costs."

• "Rookies on the street with no training, [abusing] merchants on equipment, promising 'savings' without doing a proper analysis, allowing merchants to get stuck with cancellation and termination fees from existing processors."

• "In my market, the price of equipment is coming down. I see it as awareness of equipment costs by merchants because of media exposure (i.e., the Internet); the competition in 'rates' is getting closer, everyone seems to be about the same, there seem to be very few merchants (as opposed to three or four years ago) who are still in the 'high rate' category; everybody wants debit, and now everyone is asking about smart cards. SERVICE is paramount; check conversion is growing rapidly, gift cards are not going anywhere yet; lots of Internet merchants sign up and then wind up not really selling anything (much more often than merchants who open up and never really get off the ground)."

• "My market is thriving. With the holiday season behind us, I find myself busier than ever."

• "Merchants are looking for a change ... in saving processing costs and in earning revenue in different ways."

• "I find the market to be very unstable. I do not feel secure with my current processor. There is a lot of competition, a lot of dishonest sales reps."

• "The market has changed because of processors selling out; no one seems to be in it for the long haul."

• "Companies are catering to large sales groups, and service is a thing of the past - it's numbers."

• "I am a salesperson who sells local service. Nothing can beat that no matter what new programs come along."

• "The business is there and there's plenty of it. More and more merchants are getting online every day."

• "The market in south Alabama is booming every day - just get out there. Our market is getting hotter and hotter as new developments and awareness in e-commerce are being presented to and made available to merchants."

• "A lot of competition; merchants are focused on rates. Merchants are smarter and getting smarter about asking the right questions. Some ISOs still screw merchants to the wall with overpriced equipment, 'club' fees or other small fees for services that previously were free."

• "Small customers are furious about 'compliance fees' that many processors hit them with at the end of 2002."

• "We are an Internet payment gateway. Business is slow for us."

• "Our market is strong. There is no shortage of bad checks out there."

• "Customers are looking for more reasons to do business than just price. They're looking for long-term relationships."

• "Saturation of mailers is increasing turnovers; reduced customer service."

• "Las Vegas is flooded with a plethora of greasy ISOs [inflating] rate, not disclosing price and providing lousy follow-up service. (Sorry to be crass and cynical.) Banks don't seem to have as strong a foothold as they do in Arizona, where I started. Seems every ISO in the nation decided to set up shop in Clark County because of the growth. High turnover, low integrity."

• "Older merchants are cautious. Still lots of new merchants, and people are giving equipment away at cost to make sales, so it seems. Business is still perking along if you provide service."
• "I've personally been active in the market since 1989, and here is what I am seeing: If you're selling Visa and MasterCard merchant accounts, the market is saturated with low margins. Most reps are still going around lowballing merchants, selling outdated or soon to be outdated equipment, and we know the rest of the story. They are in and out of the industry, totally clueless, but leave the damages. Merchants want to accept all forms of payment by various methods, and we provide that. We have no particular manufacturer or vendor we believe is better. We understand that all have unique features that we use to ultimately benefit our merchant clients."

• "In my particular market I'm finding that people are more interested in customer service. They want what you are telling them they can have. It appears that my clients want someone who is committed to solving the problems as they arrive. The latest technology seems to be appreciated, especially when it comes to time spent at the point-of-sale and user-friendly equipment. We are working on ways to change the value equation."

• "Traditional bankcard is so competitive, each player has to differentiate what is being offered by adding value beyond traditional processing. Innovative products rule."

• "Groundswell of moving to ACH vs. paper."

• "Our market is strong with new businesses opening and people eager to look at the technology that is out there. For example, merchants are becoming more open to gift/loyalty cards, check processing and terminals that make less noise."

• "Nothing new. Still have growth of new business and still getting old merchants to switch to us, mostly because of poor customer service or pricing. Sort of status quo."

• "Steady growth but nothing out of the ordinary."

• "I've been in the business five years selling. It has become a back-end business much more than the front-end business of the past. Front-end money is still there, but not in the volume of the past. Back-end money is wonderful, and I've never seen it better. I'll give a terminal away for free if the merchant is processing enough. If a merchant is not processing enough or is just a start-up, he has to pay for front end and back end."

• "We're seeing a lot of ISOs coming to us from other processors because they are interested in more than just a low rate. They understand that customer service, ongoing training and a complete suite of value-added products and services are what are truly needed to be successful in today's market. Sure, we have a very competitive rate as well, but we don't lead with price - we lead with quality of service."

• "The credit card processing market continues to be a very competitive industry, and it has become increasingly important for ISOs to diversify into new payment services that complement their current offerings. This is the trend that we see in our marketplace, and we think that the standard ISOs who don't change and expand their product offerings will have a tougher time staying in the market over the long haul. However, the challenge is educating the sales rep to sell multiple products."

• "It's become increasingly more competitive, and the products and services are more complex. There are a lot of organizations out there that sell on price alone, and while that might have worked in the past, in today's economic environment that's just not the way to attract and retain quality merchants. We have evolved into more of a strategic-partner relationship with our ISOs. We train them to be merchant-processing consultants and to help grow their merchants' businesses. These days, we rely on our ongoing training programs to ensure that all of our sales agents are knowledgeable on the many ways that merchants can grow their businesses."

• "Knowledgeable and competent people still get the business!"

What Is Hot and What Is Not?

• "Bottom-line savings is hot. Internet processing is not."

• "Gift cards are hot. Tranz 330s are boat anchors."

• "Electronic check conversion, CALIENTE! Talking about discount rates, NOT!"

• "What's hot is check conversion, what isn't hot are merchants paying a fee to access their account on the Internet. Nobody seems interested."

• "Customer service where a LIVE person answers the phone and actually knows what they are talking about is HOT. Leave a message and maybe I'll call back is not."

• "Hard work is still hot to me; talking about it isn't."

• "Hot: Web checks, RCK, ARC. Not: pushy representative trying to force-feed clients with proprietary equipment or service."

• "Low rates are hot. High rates aren't."

• " 'Dial Pay' for micro customers is HOT."

• "HOT: B2B services, XML."

• "e-commerce is hot. New businesses are hot."

• "What is hot is the argument that a check is not a debit. Protecting the rights of criminal bad check writers is definitely not hot."

• "Newer touch-screen terminals and loyalty/gift cards (HOT). Leasing (NOT)."

• "Hot: Check conversion with guarantee. Not: Traditional check verification or guarantee."

• "Hot: Customized gift cards. Not: Gift certificates."

• "Hot: ATM/debit acceptance with PIN entry. Not: Debit acceptance with signature."

• "Hot: Smart cards. Savvy merchants are asking all the time: When? Not: VeriFone Tranz and Hypercom T7 terminals."

• "Hot: Pay at the pump, multilane systems, e-commerce, wireless, recurring billing, QSRs. Not: Traditional retail storefront merchants."

• "Debit is hot now. Not hot: slow printers, lost host capture."

• "Gift cards seem to hold more interest."

• "POS conversion (HOT). ACH phone checks (NOT)."

• "Nothing is hot; there is not a product that anyone has to have. A big HOT BUTTON is service; merchants want to have service. They want a person to talk to, and that is something that keeps them with us. We make ourselves available by cell phone or pager. We return calls and assist, guide and counsel the merchant when needed."

• "Wireless is still not too hot. Too pricey for most merchants. Might catch on later, but for now wireless represents 2% max of our equipment sales."

• "Gift card is hot."

• "ECC is hot but not as hot with prospects as I expected."

• "Over the last several years, merchants converting from a paper gift certificate to a plastic card format have become a hot product. The national merchants set the pace that has moved down to the regional merchant."

• "Hot is the buzz about signature capture and check conversion."

• "Hot: Honesty and integrity.

• "Debit used to be the hot lead-in. Now check services and gift cards seem to be the hot lead-in 'du jour.' "

In the years that I have worked, I have been lucky enough to be a principal mover in the creation and nurturing of four companies. One of the things that those who have worked with me have heard me say again and again is, "Beginning a business is a sheer act of willing it into existence."

In truth, every business is a result of the people at the top, shaping an idea into a business reality. While not all ideas succeed, of course, all of the ones that do are the result of the fortitude of the founders and senior managers in continually believing in what they are doing and making others believe.

Business conversation is the fuel of new ideas, new force and new directions. So I, for one, would like to start 2003 with the positive rather than the negative and believe that the next five years for ISOs may be the best ever because we collectively are going to make it so.

We have to remember that when the negative begins to dominate conversation, it begins to overwhelm the ideas people have and makes it hard to change the negative trends.

Good Selling!^SM

Paul H. Green

Watch for more answers from the street in a future article, and share your thoughts with us by dropping me a line at paul@greensheet.com.