hese were the most recent questions we posed to The Green Sheet Advisory Board. Several members of the Advisory Board took time to address our inquiry. The responses represent a cross-section of our industry including an equipment manufacturer, several sales organizations and transaction processors.

Each response came from the board members' unique perspectives within the industry. The overall view expressed indicates that there are so many developing technologies, trends and markets, there is no real consensus on which will prevail or is most important.

In our view, ISOs/MLSs must make it their business to educate themselves on all of the products and services available in the marketplace.

Since the retail merchant market is as varied as the numerous payments products and services there are today, the one-size-fits-all approach to merchant services is no longer a viable option.

Historically, conventional wisdom said the "most popular" terminal is the one in the sales agent's trunk; the same could be said of transaction processing services in general. But as merchants become better informed on the choices there are available, and considering the constant evolution of these choices, this rule-of-thumb no longer holds true.

Through The Green Sheet's print publications and online resources, and the various regional industry events happening across the country, MLSs have many opportunities to arm themselves with information. Being able to talk about and sell Internet Protocol (IP)-enabled equipment, multi-app, gift/loyalty cards, and other value-added services will separate successful sales professionals from the other "feet on the street."

Following are the comments our Advisory Board members shared with us regarding the evolving retail payments marketplace.

"Retailers are increasingly requesting the availability for their company to provide 'Gift Cards' to their customers. With the increased demand, these programs are becoming more flexible and affordable for retailers. Gift card programs are bringing retailers and customers together like no other payment program has before.

"Retailers and their customers benefit from gift card programs. Retailers enjoy increased foot traffic, which in turn increases revenue. The ability to control activation of gift cards helps eliminate losses from fraud. Customer loyalty is enhanced, as is the retailer's ability to attract new customers.

"Customers benefit from using gift cards with greater purchasing power and the freedom to purchase what they want when they want. Gift cards can also serve as an introduction to retailers these consumers might not have previously known about.

"From my personal experience, an additional benefit for retailers is an increase in the size of their average ticket. I know that every time I've used a gift card, I spend more than the value of the card. It's funny how that works."

"I believe the most important technical development in the retail space is the migration of transaction traffic from dial-up to IP. This migration will be swift and decisive, and will have profound implications for merchants, communications and POS equipment and software companies.

"An additional technical change is the coming integration of backend settlement and downgrade functions into robust modern systems, which tie settlement of transaction processing to the general ledger and cash reconciliation systems of merchants of all sizes."

"There are numerous so-called, value-added offerings being pushed by the major terminal manufacturers that, if met with open arms by merchants, will finally help displace older generation hardware. These include a multitude of pre-paid products centering on telecom as well as age verification, access to Medicare and Medicaid eligibility databases, and a variety of stored-value offerings, just to mention a few. This allows the potential for additional income streams at the merchant level as well as additional functionality for particular verticals. The success of this strategy, in my opinion, has yet to be determined.

"Many of us are challenged to effectively train our troops on our mainstream products. I do believe that the trend towards stationary wireless and IP-compatible terminals will be widely accepted by mid- and upper-tier merchants, where the speed of the authorization and eliminating the need for a separate phone line have true value.

"Except for some specific closed loop environments smart card technology continues to be a solution looking for a problem in the U.S. marketplace. The Target pullback [discontinuing its smart card program] is the latest example accentuating this fact. Given the continuing strength of signature-based debit growth, I envision we will see many more acquirers start pricing signature debit separately, which will benefit many merchants, especially those with lower average ticket sizes.

"There is great demand, in my humble opinion, for consumer-based ACH payment options, especially for recurring billing applications. For the most part, this will be software-driven in a PC environment, due to the need to store name and address information.

"I'm also not sure imaging and check conversion add a lot of value to the majority of merchants. My gut tells me that most MLSs do not clearly understand the product and sell it mostly to generate healthy equipment commissions.

"Finally, I see serious pressure on the price end-users are willing to spend on stand-alone terminal solutions. This will force serious players to concentrate on recurring income and will make it much harder for capital-challenged entrepreneurs to survive."

"The payment processing market has always been quite dynamic with new technologies, markets and trends. ISOs/MLSs have always tried to separate themselves from their competition with other value-added products and solutions.

"Electronic check conversion and gift/loyalty cards are here for good. The big box retailers have pushed the product life cycle along, and consumers understand their functionality. Therefore, small- to mid-size merchants are asking for these products. In addition, payroll service, time and attendance, age verification, and Web site construction are a few [services] that have been around for a while and are now gaining traction.

"These products continue to follow behind electronic check conversion and gift/loyalty in popularity across the entire merchant market, but are making some head way. While these products are designed more for niche markets and specific verticals, as they evolve we will end up seeing them in more and more merchant locations.

"New technologies include DSL connections for terminals and improved check imaging devices. It's interesting that the equipment vendors are developing various product lines along the pricing and solution capabilities factor for terminals.

"An example is the creation of credit-only devices. This would be an ideal low-cost solution but considering all the payment products there are, it would be counter-productive for sales organizations to place them with merchants knowing the devices are not capable of supporting other solutions.

"The market is moving toward multi-app terminals that support the variety of products and solutions mentioned above.

"Placing the more robust devices means ISOs/MLSs won't have to tell merchants their technology is outdated. As a result, they'll gain credibility in their merchants' eyes, attrition will decrease and margins will increase.

"Visa and MasterCard have always been able to identify new markets and one that is 'hot' right now is Quick Service Restaurants (QSR). Pick up the Wall Street Journal or watch CNN and you'll see the large QSRs announcing plans to accept credit cards at their corporate-owned sites.

"These corporate offices go with national processing providers; however, this opens doors for all of us at the franchisee level. I have seen reports that show only 30% - 40% of this market has signed with a processor. That is great news for those of us down market with both the relationships and salesmanship ability to secure these franchisee accounts."

"By far the greatest revolution in payment processing for the retail marketplace is the introduction of IP-enabled terminals. Five years ago the average computer-savvy consumer waited in painful anticipation for high-speed Internet connection solutions, such as DSL and cable modems, to grace their communities.

"That same anticipation was felt throughout the payment processing industry and until recently, it was still an ongoing frustration. Now, finally, with the presence of IP-enabled terminals, small businesses can benefit from faster and, of course, less expensive transaction times.

"The high-speed solutions that came before IP terminals were accessible mostly to large chain and multi-lane merchants; the means of delivery was expensive leased-line or frame relay connections, the benefits of which hardly outweighed the expense, even for large retailers. Now the solutions are available for all avenues of commerce, large and small.

"It appears that VeriFone is the first to come to market with both the terminal and network certifications to support it. I imagine throughout 2004 you will see all of the manufacturers introducing their competing IP terminals.

"This is a boat that no one will want to miss. It makes the most sense. Most businesses already have a broadband solution and if they don't, it probably makes more sense to get it than pay for another phone line. The transaction times are faster, which improves efficiency, and the overall cost for an IP transaction is dramatically lower. It is a win-win for all parties.

"That being said, it is impossible for any terminal manufacturer to not embrace this technology. For example, Hypercom is launching a device that will enable legacy dial-up terminals to communicate over IP. This is obviously a creative and industry-leading step in the right direction.

"Of all the future developments for 2004 this is probably the single most exciting revolution I am aware of. It will be a pleasure to participate in the launch of this technology on an industry-wide level."

"The offerings of software products and ancillary services within the retail payments marketplace continue to grow both in the volume of providers and in the nature of the products being offered.

"The implications of this, from a leasing perspective, are that a lessor might be pressed to take on additional software or service-related costs within the equipment lease. Most lessors, for prudent reasons, are hesitant to do this. Rolling in software increases exposure without a similar increase in overall collateral value. This results in increased risk and, likewise, increased losses. Even with an increase in yield, which might help offset the increased losses, a lessor still needs to be concerned with overall portfolio performance, not just yield."

"One of the most exciting trends is the emergence of the 'personal financial' marketplace. Retailers are starting to understand that their customers are viewing their cards as money management tools, not just plain payment or ATM devices.

"This new breed of consumers wants more than just a purchase when they use their cards at a particular location-they want their loyalty to be rewarded. Many issuers understand that offering rewards for usage ends up increasing the usage, and are urging retailers to offer rewards when consumers use a payment card of some sort.

"One of these 'money management tools' is the new 'multifunctional' cards. These cards bundle many capabilities and opportunities together, and can also be co-branded with a card and retailer brand, so that the consumer earns something extra when using it at a particular merchant location."

"There are a variety of payment types emerging in our industry today. These include new debit and credit card functionalities, direct debit transfer, accumulating balance products, and stored-value applications. The fastest growing application is online bill payment. For the ISO, proprietary payment products, such as prepaid, stored value, loyalty, and gift cards are providing opportunities.

"New payment software applications are more significant for what they have not yet accomplished. For example, Internet Electronic Data Interchange (EDI) has not yet emerged in any meaningful way, and digital certificates have failed to make any headway. The Visa POS Check product clears payments on the Visa tracks only about 10% of the time. Wireless payments, despite success in Europe and Asia, are still not noticeable or even interoperable in the United States.

"Check conversion to ACH has not been successful, and only a few large merchants have adopted it; the overwhelming majority is waiting for Check 21 to take effect. There are competing efforts to build an image exchange by a-half dozen players, but there is no agreement on how to switch the images.

"There remains a lot of consumer reluctance to use credit cards for Web payments, but there has been no deployment of an online debit payment mechanism using triple DES encryption for the PIN. Large merchants complain about the cost of credit card processing, but have not developed any real alternatives, beyond either issuing their own cards to recover Interchange, or getting the best deal possible from one supplier.

"Fraudulent checks cost retailers $10 billion a year, but there is still no way to do an online query into the DDA account to put a hold on the balances except through online debit; 40% of retailers do not have PIN pads to accept PINs. Only a few dozen banks and merchants have adopted the "Verified by Visa" product. We have also not seen the phone bill used as a billing mechanism in any widespread way.

"In short, there are a variety of new payment types, but most have not achieved meaningful adoption.

"There are opportunities for profit. Forty million Americans are unbanked. Fifty million adults don't have credit cards. Forty percent of primary credit cards are within 5% of their limits. We are seeing widespread efforts to process payments for the unbanked market, via loading a prepaid card with ATM access. Recent court cases (for example, the Wal-Mart/Visa/ MasterCard suit, the antitrust suit brought against the Associations by their member banks and the Visa/First Data Corp. suit) are also creating new opportunities for payment processors.

"We will undoubtedly see the emergence of new merchant-driven payment systems as an alternative to paying the discount rate for credit card transactions. The volume of debit- based products is rapidly increasing and to some degree, consumers are using debit to displace credit card usage. Merchants are using stored-value cards to drive revenues and profits (for example, Starbucks).

"The mobile phone may emerge as the payment device of the future, but this will take time. No payment system, once adopted, ever really goes away. The challenge for the providers is to reach a critical mass of market share usage and maintain acceptable margins."

As always, we want to thank the members of the Advisory Board for their responses. This cross-section of the payment processing industry gives back to the sales community by answering questions on a range of issues. By sharing with us the knowledge and experience they've gained across the industry, we're able to give our readers a variety of opinions and significant depth of information.

If you have an idea for discussion that you believe would benefit a broad number of individuals working in the retail payments marketplace, please send it to julie@greensheet.com . We will incorporate your suggestions in upcoming Advisory Board inquiries.