“Today is the slowest technology will be in our lifetime,” said Xerox President and COO Steve Bandrowczak in a Corporate Board Member article. “The pace of change will accelerate and leadership skills and leading through change are going to create a tremendous amount of winners and losers.”
His observation about speed should hold true in places where electricity and internet connections are commonplace while his insights on leadership sound like a corporate application of natural selection.
Electronic Payments and Their Fees
The U.S. payments business will collect somewhere around ninety billion dollars in fees this year, according to Bloomberg. Think about that number for a minute. A large part of this is the electronic payments fees that merchants pay for their banking and credit card processing.
Merchants typically use a local bank that provides their credit facility for their concentration account and for traditional cash management services. But they will likely use a “merchant acquirer” to handle their card processing.
Recently, there has been a great deal of consolidation in this space, notably from two of the three major core processors, the Fiserv acquisition of First Data and the FIS merger with Worldpay. Two others were the NCR acquisition of JetPay and the TSYS acquisition of Cayan.
In the early years of terminal deployment, most processors were non-banks, but now the largest card issuing banks are becoming the largest acquirers as well, owning both sides of the transaction. The industry trade association for the merchant bankcard industry is called the Electronic Transactions Association (ETA) and every April they hold TRANSACT, a three-day conference at the Mandalay Bay hotel in Las Vegas.
What does TRANSACT offer?
In addition to a large trade show floor, there were various educational tracks, which included the following on electronic payments:
- 22nd Century Payments (covering mobile payments, PCI, blockchain, faster payments, digital smart-data solutions, and a really comprehensive presentation on mergers and acquisitions in the industry).
- Integrated Payments (covering surcharging and cash discounting, open sourcing innovation, ISVs, outsourcing, B2B solutions).
- Risk, Fraud, and Security (covering next generation underwriting, chargeback management, risks in e-commerce, compliance and security challenges, downside legal risks associated with boarding and maintaining merchants, identity verification, and machine learning and artificial intelligence).
- Payment Facilitator (covering routes to consider if you want to be a PayFac, card network rules and regulations, legal and regulatory actions, managing business risk of being a PayFac, and global commerce).
- ETA Law School (maintaining reserves, FTC oversight, class action developments, surcharging laws, and issues regarding classifying and underwriting new accounts).
- SMB Summit (how to provide meaningful consulting to an SMB, how digital payments will affect SMBs, and how to find and provide additional services).
Finally, there was a seven-session track that served as an introductory overview for new participants in the electronic payments industry, including information about the ETA’s continuing education and their Certified Payments Professional accreditation.
TRANSACT Session Highlights
I could not attend every presentation, but here are some things I heard that I thought were interesting.
Matt Parker (KYC SiteScan) talked about the intricacies of underwriting a new merchant: “Why have I been blessed with this account?” “Is this a real business?” “Who are the real owners?” “What are they doing, and how are they treating cardholders?” Today new merchants expect to be set up in a day! This puts great pressure on rapid and thorough underwriting and finding red flags immediately.
Melissa Kirk (Billing Tree) talked about how merchants are getting their merchant accounts through their software now. The merchant focus is on their G/L software, not the merchant account, but that must work seamlessly always. You have to build a rocket ship that will provide a merchant account, a gateway account, and a connection for the customer. In setting up endpoints, be attentive to other people’s APIs, focus on omnichannel, and look for IVRs.
Strawhecker Group (this was my favorite presentation) presented a review of M&A activity, where we have had a run of a seller’s market since 2012, with transaction value per deal increasing and buyers taking on more risk. Private equity groups do 35 percent of transactions, and they have to buy, and then they have to sell again in the next 5 – 6 years to collect on their investment! The “overhang” (amount of cash available to invest) is around trillion dollars and private equity funds must invest it or give it back. Debt is cheap. IPOs are back and fintechs are the hottest sector.
The Electronic Payments Space
Why are payments so hot? Looking at my notes, here are some thoughts on this. The payments business offers:
- Recurring revenue.
- A high degree of predictability.
- Economic resiliency.
- Maintainable margins.
- Relatively low investment required to grow the business.
- Manageable risk profile.
- Attractive growth curve.
- A lot of available talent.
- A mature industry, but still fragmented where a roll-up strategy is possible.
Perhaps the most interesting statistic is that 90 percent of net revenue here comes from merchants with less than $1 million in annual volume, and for merchants with less than $5 million in sales, their volume is increasing at 4 percent a year.
What are PayFacs and why are they important?
There was some excellent discussion of the psychology of buying and selling a business, but perhaps the two most interesting points would be “Why are you selling your business?” “How would you develop your company now?” and “What keeps you up at night?”
Two very timely topics were “calling on SMBs” and “being a Payment Facilitator.” I will discuss the SMB market in a later blog, but let’s take a minute to define a PayFac.
In the past, not having your own merchant account and using someone else’s merchant account used to be called “factoring” by the card associations. Back then, they considered it a high crime and misdemeanor, but I think that Square has caused the card brands to reconsider their position. There are about eight or nine million merchants that have employees and their own tax ID number. There are also 10 million or so (who knows?) entrepreneurs who would like to take credit cards, but would never qualify for a merchant account of their own.
A PayFac provides all the benefits of a merchant account, but the transaction settles in the PayFac’s account and is later disbursed to the merchant. We were told that 50.9 percent of Shopify’s revenue is from PayFacs! Interesting that Lyft is a merchant (not a PayFac) because the drivers are subcontractors (not merchants). But now the space is blurring between an ISO, VAR, and ISV. One panelist predicted that by next year, fully $1.5 trillion will settle via PayFacs, and eventually PayFacs could control half of the payment volume!
The Role of Electronic Checks in the Payments Space
Now you might think that since this show is about electronic transactions, checks would not be included, but this is not the case.
Today, all checks are converted to an electronic image, called an ANSI X9.37, and settled digitally. Most B2B payments are still check based, and about 17 billion checks were written last year. Consumers want to write checks for high ticket items, such as buying a car.
This year, CrossCheck will process over six billion dollars in checks. Our merchants run the checks through scanners to create a digital image file which we extract and sent to our bank. Everything settles the next business day (like an ACH transaction) although we say that it generally takes 48 – 72 hours in more official capacities. Big shock: checks clear as fast as an ACH and are just as cheap to process!
If you are a merchant taking a high dollar transaction, such as selling a car, you want to be protected by the Uniform Commercial Code and bank law, not the NACHA Regs and Reg E, a consumer protection statute, or the card brand rules around chargebacks, which always favor the consumer. The latter, incidentally, cost three times what we charge to process a check electronically. Check out other articles in our CrossCheck blog series for more information.
Yes, there are many changes in payments, but checks are still the safest and most secure payment instrument a merchant can take for a high dollar sale. At CrossCheck, we stand in at point of sale and guarantee a check — or series of checks to be deposited in the future — and this makes for happy consumers as well as merchants.
Download our free guide to learn how CrossCheck’s Electronic Check Processing services can help your business increase sales and mitigate risk while saving time and money.