Transaction Trends by Content Communicators, LLC

Transaction trends | October 2010

The Official Publication of the Electronic Transactions Association

At long last, electronic payments business stabilizes and re-enters a growth mode

State of the INDUSTRY

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Transaction trends The Official Publication of the Electronic Transactions Association

Vol. 15 | No. 10

cov er s tory

12 State of the Industry By Richard H. Gamble

The hard fact of life for the electronic payments business is slow growth due to business maturation and regulatory reform. But at the same time, emerging markets and new technologies promise opportunities.

F EATUR ES

18 Vámanos a Latin America

By Glenn Goldman Astute, independent, and processor-affiliated ISOs can take advantage of economic opportunities in Latin America. Economic growth, telecommunications and technology investment, increasing bank support, and the growth of the middle class make this a prime market.

SP EC IAL SE RIES

Startup Stories: Becoming the Alpha Dog

By Julie Ritzer Ross Our three ISOs are launching initiatives to differentiate themselves from the pack and taking a stand against the status quo.

24 Infused With

28 PCI Teamwork

By Julie Ritzer Ross

Creating a partnership with respect, trust, and agreement on tactics decreases the time it takes to get merchants on board with a PCI compliance program. Without this cooperation, the wallets and livelihoods of acquirers, ISOs, and merchants alike are in jeopardy.

Promise

By Brad Caldwell

Many of the factors that challenged borrowers last year have improved. Analysts predict an influx of capital infusion for small and mid-size ISOs as the economy recovers and as venture capital and private equity firms recognize the promise of the acquiring sector.

de partmentS

President’s Message

Industry News

ISO Corner

Insights from ETA’s elected leader Trends, strategies, and news in the payments business M&A market’s emergence from deep freeze

Risk in Review

35 36

Ad Index

The importance of third-party registration with the card brands

Industry Insider Spartan Payment Solutions leverages ISO affiliations to offer customers multiple options

22 Transaction trends | October 2010 3

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Electronic Transactions Association 1101 16th Street NW, Suite 402 Washington, DC 20036 202/828-2635 www.electran.org

President’s Message

ETA Chief Executive Officer Carla Balakgie

Volunteer Appreciation

ETA Director, Communications & PR Thomas Goldsmith Transaction Trends Publishing office: Stratton Publishing & Marketing Inc. 5285 Shawnee Road, Suite 510 Alexandria, VA 22312 703/914-9200 Publisher Debra Stratton Features Editor Angela Hickman Brady Managing Editor Josephine Rossi Editorial/Production Assistant Teresa Tobat Art Director Janelle Welch Contributing Writers Brad Caldwell, Richard H. Gamble, Glenn Goldman, Susan Matt, Bryan Ochalla, Julie Ritzer Ross Advertising Sales Steve Schwanz or Fox Associates (800/440-0232; adinfo.eta@foxrep.com) Fox Associates Offices Chicago 312/644.3888 Atlanta 800/699.5475 Los Angeles 213/228.1250

New York 212/725.2106 Detroit 248/626.0511 Phoenix 480/538.5021

Editorial Policy: The Electronic Transactions Association, founded in 1990, is a not-for-profit organization representing entities who provide transaction services between merchants and settlement banks and others involved in the electronic transactions industry. Our purpose is to provide leadership in the industry through education, advocacy, and the exchange of information. The magazine acts as a moderator without approving, disapproving, or guaranteeing the validity or accuracy of any data, claim, or opinion appearing under a byline or obtained or quoted from an acknowledged source. The opinions expressed do not necessarily reflect the official view of the Electronic Transactions Association. Also, appearance of advertisements and new product or service information does not constitute an endorsement of products or services featured by the Association. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided and disseminated with the understanding that the publisher is not engaged in rendering legal or other professional services. If legal advice and other expert assistance are required, the services of a competent professional should be sought. Transaction Trends (ISSN 1939-1595) is the official publication, published monthly, of the Electronic Transactions Association, 1101 16th St. N.W., Suite 402, Washington, DC 20036; 800/695-5509 or 202/828-2635; 202/828-2639 fax. Postage paid at New Richmond, Wisconsin and additional mailing offices. POSTMASTER: Send address changes to the address noted above. Copyright © 2010 The Electronic Transactions Association. All Rights Reserved, including World Rights and Electronic Rights. No part of this publication may be reproduced without permission from the publisher, nor may any part of this publication be reproduced, stored in a retrieval system, or copied by mechanical photocopying, recording, or other means, now or hereafter invented, without permission of the publisher. Nonmembers, government agencies, $150 per year; single copy, $20. Subscriptions are available for 12-month periods only, at the quoted rates.

Volunteers are not paid—not because they are worthless, but because they are priceless. —Author Unknown

ometime later this month, more than 150 people will receive a letter from ETA confirming their appointments to one of the dozen or so ETA 2011 standing committees or special task forces created for next year. Those who take up new committee assignments in January, and those who have served in 2010, have the unqualified gratitude and admiration of ETA’s board, officers, and staff. The 2010 committees have set a high bar and built a solid foundation.The new volunteers will be the core of ETA’s community for next year, driving ETA’s success in 2011. For new and returning committee members, the task is simple, but not easy: Keep the momentum alive, be ever more ambitious, and continue building on the work before us, making it possible for ETA to thrive and grow. We have a lot on our plate for next year: Advocate for the industry. Educate our members. Provide networking opportunities and relevant information to enable members to prosper. ETA will lean on the commitment of those individuals, and the companies who support their volunteer activities, to bring our vision to reality. Committees—and the volunteers who serve on them—are a vital part of ETA. They freely lend their time and their expertise to the association, without the prospect of special perks or any other kind of compensation. Committee members advise and guide the association, generate new ideas, and provide valuable services to ETA’s membership. They’re responsible for the content at ETA’s Annual Meeting and Strategic Leadership Forum. They provide the analysis and insight that serves as the foundation for our advocacy efforts. They keep members informed—through a variety of products— about the trends afoot in areas like technology and risk management. They look for and spotlight the industry’s best and make sure we all know what those companies and individuals are doing. To call them a remarkable group is an understatement.They’re exceptional in their desire to contribute to their industry, ETA, and their fellow ETA members. Committee members are among the most accomplished and knowledgeable professionals our business offers. It is a testament to the amazing people in this industry that year in and year out there are more volunteers than committee spots to fill. As my term as ETA’s president draws to a close, I want to personally thank each and every one of them.Their accomplishments have helped to make ETA, and my tenure as president, both enjoyable and successful. If you’ve never thought about being a part of ETA’s volunteer community, please consider it. It’s critical that your association has a constant flow of “new blood” to keep it healthy, relevant, and growing. We’re part of a dynamic industry that is constantly challenging us to keep up. We can’t hope to do that without regular infusions of fresh ideas and perspectives—especially yours. I look forward to seeing all of you at the Strategic Leadership Forum in Florida later this month. Warm regards, Holli Targan Holli Targan is president of ETA and a partner at Jaffe, Raitt, Heuer & Weiss, P.C. Transaction trends | October 2010 5

INDuSTRYnews China to Surpass U.S. as Largest Credit Card Market

China is poised to become the largest credit card market in the world over the next 10 years, according to MasterCard Inc., which estimates the country will have approximately 900 million cards in circulation by 2020. MasterCard also estimates that Chinese credit cards will increase by 11

percent in number and 14 percent in transaction value until 2025. In addition, issuers’ profit may increase about 20 times by 2025. At the end of June, China had 2.3 billion credit and debit cards—a 14.5 percent increase from last year, according to Bloomberg. Payment companies are competing for business in the Chinese market as domestic transactions via cards have skyrocketed 84-fold since 2001 to $1.1 trillion as of 2009. Chen Bin, vice president of MasterCard’s China branch, told Bloomberg that by 2015, China will have 1.1 billion credit cards—a drastic increase from the 230 million currently in circulation. Chen also says that transaction value would most likely surpass the United States to $2.5 trillion by 2025. Foreign banks are required to cobrand with Chinese operators and carry out payments via the China UnionPay Data Co.—the country’s most widely used electronic payment network.

Fast Fact The Dutch are preparing for the possibility of a cashless society by 2015. The European Commission estimates that the costs associated with cash payments in each European country account for two thirds of the cost of all payment methods, including checks and payments cards. Source: Accuity Inc.

Mobile Payment Users More Likely to Buy Pricier Goods Consumers are showing increased interest in purchasing higher-priced items on their mobile phones, according to a study conducted by Netsize, a mobile communications organization that is part of Gemalto, based in Amsterdam. Fifty-one percent of the respondents who participated in the study say they would use their mobile phones to buy goods that cost as much as $127. Nearly all of the participants—about 94 percent—say they are “very or somewhat likely” to purchase goods equaling $31.50, and 83 percent would be willing to buy items such as concert tickets that cost as much as $63.50. Payment method also influences buyers’ decisions to purchase goods with their mobile devices. More than half of the respondents, 60 percent, say freedom to choose a payment method is important to them. 6 October 2010 | Transaction trends

Prepaid Debit and Payroll Cards in United States (Gross Dollar Volume Loaded in US $Billions) $164

Prepaid debit

$131

Payroll cards

$103

Total

$104 $78

$43 $8 $2

2005

$14

$23

$5 $9

$11 $11

2006

2007

Source: Aite Group

$32 $18 $14

2008

$24 $19

$82 $64

$58 $46 $33 $25

$31

$40

$49

$60

2009 e2010 e2011 e2012 e2013 e2014

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ISO Corner

Slow Thaw for M&A

Sellers seek strategies to improve their chances at a deal, while buyers look for solid operations By Richard H. Gamble

he deep freeze that shut down the merger and acquisition (M&A) market for ISOs and merchant portfolios in 2008 is slowly defrosting, but it’s from the top down.“The debt market is still difficult so it’s hard for a buyer to borrow what he needs to do a deal, but buyers with cash are finding sellers,” reports Chris Phillips, an M&A attorney at Waller Lansden Dortch & Davis in Nashville. Rather than a surge of activity based on an improving economy, it’s more a matter of sellers that had postponed sales are now making a move they had delayed for a year or two, he says. The freeze ended in the fourth quarter of last year, and now is something of a seller’s market.“We’re seeing a lot of buyers—many of them new buyers,” says Kurt Strawhecker, managing partner of The Strawhecker Group in Omaha, Nebraska. “There are more would-be buyers than there are sellers, so the market has really shifted.” The Strawhecker Group, an active third party in portfolio valuations and sales, currently has four active assignments working. “Four at once is pretty busy for us,” he notes. But others see a different environment. The situation for ISOs trying to sell small portfolios “is not improving, and multiples are still way down from where they were two-and-a-half years ago,” says Mark Dunn, president of Hartland,Wisconsin-based Field Guide Enterprises, who works mostly on sales of small ISOs and portfolios.Would-be buyers are still hard to find, and sometimes they lack the wherewithal to consummate a deal if they find a seller, he says. But while buyers may be scarce, there’s no shortage of would-be sellers in the small ISO market, according to Dunn. “People want a cash event for a variety of reasons.” They may be sending children to college, paying for a wedding, paying for care for an aging parent, trying to start a new business, or paying off an adjustable-rate mortgage, he notes.“Many entrepreneurial small business owners who started in the ’80s and ’90s are now in their late 40s to mid 60s and going through transitions.They’d like to cash out 8 October 2010 | Transaction trends

their investment, but the buyers are few and the prices are disappointing.” A few larger ISOs are building their portfolios by acquiring smaller ISOs, and some financial investors are shopping for bargains, Dunn says.What he doesn’t see are individual entrepreneurs wanting to enter the ISO business by acquiring an existing portfolio or starting a new one.“The startup rate has been low,” he notes.“It’s a crowded market. Margins are tight. Money to invest is hard to come by. Not many people have the appetite to try it.”

Heat at the High End That appetite is there, however, among large ISOs, acquirers, and processors, and especially among well-heeled outside investors. Activity is up from last year, especially for high-end deals among larger players, reports Omid Tofigh, principal at First Annapolis Consulting in Baltimore and head of the firm’s M&A practice. “We’ve seen a few sizable transactions completed, and many more are still in the negotiations stage and could happen this year,” he says. Some established players are buying each other as industry consolidation continues, but what’s really driving the market is the entry of more private equity and venture capital

firms with cash to invest. “Financial investors like the ISO business model because it requires relatively little capital investment to succeed and grow and because it produces steady, predictable cash flow,” says Ray Sobczyk, senior associate at the Strawhecker Group. “Some of the venture capital and private equity guys are strictly financial investors.They want to buy good management and back-room operations with the portfolios, hold ownership of the portfolio while the economy recovers, and sell at a profit at some future date.” But other financial investors are looking to add value by providing strong management and bringing human resources and information technology sophistication to the acquisition, Sobczyk explains.They look for bootstrapped companies and create value by providing the missing infrastructure. ISO owners looking to turn equity into cash but keep their jobs can find buyers to accommodate them. ISO owners looking to get out of the business can also find buyers looking for just such deals, he says. ISO owners who want to sell the business but keep their jobs will make that one of the first points they negotiate, says Phillips. That’s easy if the buyer is a financial investor who wants to keep the old hands

Ties That Bind A surprise deal-killer may lie in the fine print of the agreement an ISO has with its processor or acquirer, so pull out those contracts and review them before approaching a potential acquirer, says Field Guide Enterprises’ Mark Dunn. “The ISO may want to sell its interest in a portfolio, but there may be other interests. Typically, an agreement with a processor contains covenants that apply to the processor or even the bank acquirer. It may have been years since an ISO owner wanting to sell has read those agreements.” Dunn recalls that he worked with one ISO that found that its agreement stipulated that the processor had to approve the buyer and that processor would only approve one buyer, which happened to be its largest ISO. Clauses in processor and merchant acquirer agreements may require notice before a sale or even restrict what you can sell and how a sale has to be structured, says the Strawhecker Group’s Jamie Savant. You need to know the fine points in your agreements and be able to explain them to a prospective buyer, he says.

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ISO Corner there to run the business. Even in a merger of two operating companies, the seller may negotiate a role in the surviving company. While the new money is welcome and is helping to support “reasonably good prices” for company or portfolio sales, Tofigh says these financial investors slow down the deal flow because they’re less familiar with the business dynamics and are taking their time with due diligence.

Cold Facts In this difficult but not hopeless market, what can an ISO do to make the company or a merchant portfolio sell for top dollar? Certain characteristics generally make a portfolio more or less valuable, explains Harold Montgomery, CEO of Calpian Inc., an active buyer of small ISOs and portfolios based in Dallas. Low attrition rates obviously are good for value. Ties to a major, high-quality processor usually add value, while ties to a small super ISO that does its own processing can take value away. More buyers want a geographically dispersed portfolio than a concentrated one, Montgomery says. When it comes to merchant pricing, moderate margins in line with industry norms are best. Too thin margins mean too thin profits. T oo fat margins mean the

portfolio is vulnerable to having merchants picked off by competitors offering lower prices, Montgomery says. “A high concentration of merchant owners makes a portfolio more vulnerable and less valuable. Merchants that require a high service level make a portfolio more expensive to support and therefore worth less up front,” he says. Buyers are particularly sensitive to risk in today’s market, so the greater the risk, the lower the perceived value of a portfolio. If you have a niche portfolio based on specialized technology or a targeted industry, the portfolio will be more valuable to some buyers and less valuable to others, he adds. People wanting to sell can make their portfolios more attractive and get a better price, but not by making quick, cosmetic changes, Strawhecker says.“Even if your ISO is a small, private company, you need to start running it like it was a public company, especially if you’re hoping to sell,” he observes. “You need to know your business in a very granular way.You need to know your numbers,where your profits come from,your cost of getting and retaining new merchants, your attrition, and your contractual agreements. Are you just taking in money and spending it as you go, or are you operating the company by established budgets and targets?” he asks.

A portfolio that specializes in the right industry verticals (health care, education, green business, etc.) has an advantage over a diversified portfolio, adds Jamie Savant, a Strawhecker partner.“If an ISO develops specialized expertise, they create a portfolio that is easier to defend. We’re seeing more ISOs specializing in industry verticals or in business styles, and that’s a plus.” Current valuations are still low by historical standards because the economy is still struggling, Montgomery reports. Merchant attrition is higher than it was two years ago. Retail spending is weak. Issuers are still adjusting to the financial crisis and new regulations that are causing them to reduce credit available to cardholders. Financing is hard to come by and expensive. All these factors make would-be buyers cautious. Ultimately, value is hard to pin down because there is just not enough information to find comparable sales, Montgomery cautions. “The market is stagnant enough that the data are just not there.” You can’t be confident about what your asking price should be. TT Richard H. Gamble is a contributing writer to Transaction Trends. Reach him at gamble10@earthlink.net.

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KEY NOTES 8

I SOs, processors, and acquirers must deal with today’s atmosphere of slower growth of their core business. The growth rate is falling due to maturation and regulatory reform.

E merging markets offer big opportunities for growth and penetration for those who know how to fill the void. For the 12 months ending June 30, 2010, Visa total volume (payments and cash) was up 9.8 percent worldwide vs. 6.1 percent in the U.S.

Statistics indicate that by next year more than 50 percent of the telephones sold in the U.S. will be smartphones, a trend that ISOs and merchant acquirers should not ignore.

While both the 2009 CARD Act and the Durbin amendment contained within the 2010 Dodd-Frank financial reform bill would most directly affect issuers and dampen issuing growth for the foreseeable future, the indirect result will be slower growth for the acquiring side.

12 October 2010 | Transaction trends

[ COVER STORY ]

State of the

Industry

WHILE THE FOUNDERING ECONOMY DOMINATES, THE GOOD NEWS INCLUDES MOBILE PAYMENTS, NICHE MARKETS, AND COLLABORATION WITH APPLICATION DEVELOPERS AND PREPAID CARDS By Richard H. Gamble

he biggest questions hanging over the electronic payments industry are the same questions hanging over the state of the United States and global economies:When will jobs come back? When will consumers start spending again? What kinds of economic activity will return to normal, and what kinds have been changed forever? Uncertainty dominates. Clear industry trends were trumped by the economic crisis, which has knocked almost everything financial off track for the past two years, says payments consultant Les Riedl, president of Speer & Associates in Atlanta.“We’ve seen loss rates by issuers approach 10 percent, which is unheard of in the U.S.” The issuers have switched from pursuing growth to managing down their risk exposure. On the merchant side, same store sales and average transaction size have dropped; business bankruptcies have risen; and startups practically disappeared, he reports. “Consumers put their cards away in drawers. Issuers cancelled cards and

reduced lines. Everyone sat on their hands, not knowing where the bottom would be,” he says. Bright spots are few, notes consultant Paul Martaus, president of Martaus & Associates in Mountain Home, Arkansas.“The industry is still in pretty bad shape.There is no business formation whatsoever. Merchants are just holding on,” he says. Gross chargeoffs in 2009 shot up 43.9 percent for Visa, 38.6 percent for MasterCard, 29 percent for American Express, and 47.8 percent for Discover, according to data published in The Nilson Report in 2010. (Nilson is based in Carpinteria, California.) The dominant fact of life that ISOs, processors, and acquirers must now deal with is the slower growth of their core business, explains Marc Abbey, managing partner at First Annapolis Consulting in Linthicum, Maryland. The growth rate is falling, mostly due to maturation, but also due to regulatory reform, he says.“This is having a broad impact on acquirers.” First Annapolis is collecting data that Abbey susTransaction trends | October 2010 13

[ COVER STORY ] pects will confirm a downward trend in sales productivity, something on the order of a 30-40 percent decline over the past decade in the number of new accounts opened per sales rep per month, he says. The prospects for slower organic growth are spurring attempts to gain scale and grow through acquisitions, Abbey says. What we’ve seen so far is just the tip of the iceberg, he suggests. “A whole series of transactions is taking shape outside the public view, and they will change the league tables and who owns what parts of the business,” he says.“It will be a leap forward in consolidation.” While mergers will create bigger players who will be stronger competitors in the long run, in the short run they will be distracted by the demands of implementing their mergers, which will create opportunities for their competitors,Abbey suggests. Still, the economic news remains modestly positive and gloom is breaking up.We are experiencing a recovery of sorts, and traditional appetites are returning. Now most business leaders think the worst has passed so issuers are getting back into the game, which means better times ahead for merchant acquirers.“Banks are refocusing on growing their credit card portfolios, which may encourage a revival in consumer spending,” Martaus says. Of course, data security remains one of the industry’s biggest challenges, notes Steve Elefant, chief information officer at Heartland Payment Systems in Princeton, New Jersey. And the solution is becoming clear—end-to-end encryption. “The bad guys will always find ways to break into our systems.We have to make sure that the data they find there is useless to them.”

Emerging Markets Against a generally dark background, ISOs, acquirers, merchant processors, and value-added resellers are looking for bright spots—and finding them. Many opportunities appear in sectors where payment is still predominantly made by check and where card-based adoption is growing steadily, notes Greg Cohen, president of Moneris USA in Chicago. “Health care, mortgages, property management, education, public utilities, charity—all those areas that see mostly check payments are getting increased attention from acquirers 14 October 2010 | Transaction trends

ISO Model Still Viable? Whether the traditional feet-on-the-street ISO business model, so successful for so long, is well suited to the future remains unclear, reports consultant Paul Martaus. “We just don’t know. There is a school of thought that says the traditional ISO that relies on face-to-face contact has lost effectiveness and that there are more efficient ways for acquiring banks to reach merchants. Why pay residuals to merchantlevel sales reps who can contact 60 merchants a month when you can pay a telemarketer minimum wage to contact 200 merchants a day? But telemarketers are not closers, and you need closers, so the debate goes on.” The traditional ISO model featuring feet on the street is still relevant and effective, says Steve Carnevale, senior vice president for commerce development at MasterCard, but ISOs also recognize that with the growth of e-commerce, a lot of business is no longer done face to face. And they need to be agile to adapt to new business opportunities, he says. For many ISOs, that is an accomplished fact, he points out. “Many ISOs have grown well beyond feet-on-the-street sales organizations and have become sophisticated operational support organizations. The only real difference between the largest ISOs and acquirers is the technical definition of their operations,” he notes. The more complex business environment will make it harder for a sales-oriented ISO to simply pick a processor and then go out and sell the products and services on that processor’s menu. “ISOs are already dealing with multiple partners,” consultant Todd Ablowitz says. “There aren’t many one-stop-shop players now. They look beyond their processor or super ISO for other partners who can help them differentiate their offerings.”

and ISOs,” he says. Steve Carnevale, senior vice president for commerce development at MasterCard International, comes up with a similar list: insurance, utilities, telecommunication (including cable and satellite TV service providers), education, charities, government (especially state and local governments), and property management companies. He singles out using cards to pay rent to property management companies as particularly promising. Winning some of these niches requires tinkering with the product.“We try to tailor the rules to make them fit each sector and to give ISOs and acquirers their best shot,” Carnevale says. “I can go in to see a utility company and make the case that they should start accepting card payments. From there, they need to engage an acquirer or ISO to make the physical connections to the card payments infrastructure.We work as a team to ensure the process is easy and efficient.”

While education makes the lists of bright spots, it carries its own burdens, Martaus notes. “State colleges and universities that depend on government funding are hurting. States have lost tax revenue and are being forced to make painful spending cuts that are hitting higher education hard. Whole departments are being closed and faculty laid off.They can’t raise tuition fast enough to offset the loss of tax-based revenue,” he says. Private education, including preschool, is more promising, he suggests. Global expansion is one area that intrigues Mike Pasilla, president and CEO of Atlanta-based Elavon. Emerging markets offer big opportunities for growth and penetration for those who know how to fill the void, he says. “The market is huge and very attractive.” For Elavon, that means India and Mexico, where the company has a joint venture already in place, and South America, where it has ambitions. The numbers support what Pasilla says. For the 12 months ending June 30, 2010,

Visa total volume (payments and cash) was up 9.8 percent worldwide but grew only 6.1 percent in the United States, measured in constant U.S. dollars. Growth has been particularly strong in Asia Pacific (up 13.6 percent) and Latin America (up 14.2 percent). For credit, total U.S. volume was down 5.4 percent, while the rest of the world grew 8.5 percent, according to Visa reports. Visa’s strategic acquisition of CyberSource last April signals a deeper move into e-commerce, where CyberSource has 25 percent of the U.S. market, says Jim McCarthy, global head of product. Besides gaining market share, there are definite operational advantages, he notes.“It will allow us to better tune our advance authorization system for card-not-present transactions and help merchants better prevent fraud.” Prepaid cards are enjoying “tremendous growth,” Cohen reports, partly due to the withdrawal of issuers from offering credit cards to consumers with subprime credit scores. The explosive growth of prepaid cards is coming from full-service program managers/issuers like GreenDot and NetSpend, which offer some ISO opportunities but derive the majority of their business from other channels, he notes.

Mobile Hot Spot What simply sizzles is “everything connected to mobile devices,” says consultant Todd Ablowitz, president of the Double Diamond Group in Centennial, Colorado. Consumers are moving more and more of their social and business activity to their mobile devices, and that includes shopping and paying for purchases, he notes. “Apriva has a phone-based payment application. Verifone and Square both have mobile phone payments applications.Verizon, AT&T, and T-Mobile have reportedly started a venture that will jointly market a new payments application. It’s a very hot market now.” Statistics indicate that by next year more than 50 percent of the telephones sold in the U.S. will be smartphones, a trend that ISOs and merchant acquirers should not ignore,Ablowitz says. Mobile devices are a social phenomenon that is becoming a business phenomenon, partly because they can do so many things, including make payments, Riedl notes. “I don’t need to print out a boarding pass at

the airport anymore,” he points out.“I can download one onto my smartphone, and hand the phone to the TSA agent when I go through security. He or she scans the barcode on my screen just as he or she would a paper boarding pass.” That combination of popularity and flexibility has large banks scrambling to enable the smartphone as a payment device, often to embed a functional credit card and/or debit card in the phone, Riedl explains.“We’re seeing a lot of applications coming out in 2010 that let you use your smartphone or PDA to make payments.” Merchant acceptance—installing the right equipment to communicate with the smartphones—will be slow at first but gain momentum quickly over the next several years, he predicts. Merchant interest in taking electronic payments made using smartphones will grow, Carnevale predicts.“As with any new technology, larger merchants will likely pick up on it first and then drive it down to smaller merchants. Merchants don’t want to miss a sale. And while they understand that they need to accommodate customer payment preference, most are waiting to see where critical mass will occur.” Acquirers and ISOs need to step in and educate merchants about the POS equipment needed to handle a payment initiated by a mobile device, Carnevale says.“If the customer prefers to tap a phone instead of hand over a card, the merchant needs to be ready to support that or risk losing the sale.” Some solutions require a computer chip with payment information in the smartphone. Other solutions would collect the payment through the smartphone billing system. “The market generally prefers a solution that works smoothly with what is already there,” Riedl observes, which probably means something that can ride on the card brand rails. If transactions are charged to the telecom provider, the merchant would need more elaborate terminal enhancements, he adds. If key cardholder information can be displayed in a barcode on a smartphone screen, a merchant simply needs a barcode reader attached to a traditional card terminal to lift the data, get authorization, and complete the transaction, Riedl explains. This simple approach may prove the most popular, although for now most merchants

are waiting to see which way the market will move. While a growing number of transactions in the virtual world are now settled by having a charge posted to the buyer’s mobile phone bill, payments in the real world still settle through the traditional credit and debit card networks, and that is not likely to change, Ablowitz says. “It would take a massive change in the revenue model of the telecom carriers” to bring real-world settlement to telecom billing and payments, he notes. The mobile revolution is not just about the device in the shopper’s hands; it’s also about the device in the merchant’s.“Many merchants today use iPhones, BlackBerry, Windows Mobile, and Android devices,” notes Bill Clark, executive vice president and general manager for Apriva’s point of sale division. “The ease of conducting transactions over these phones enables merchants to accept payments faster and more securely than previous methods. It’s a trend that we believe will continue to escalate over the next few years.”

Apps for That One trend that is transforming the card payments industry is the “land grab” for connectivity to application developers, Cohen reports. Increasingly, merchants are buying business applications that embed payment connectivity as one component in an application that features other activity, he explains. “The race is on to get the application developers to code to the payment platforms offered by merchant acquirers, processors, ISOs, and even networks,” Cohen notes.The application developers and value-added resellers are playing a more dominant role in the payments world. Now everybody in the merchant card payments world is trying to move closer to the merchant and add more value by partnering with these developers, who have real power to steer payments to whatever platform they embed in their application, he says. Visa is definitely onboard. “We’re starting to publish our application interfaces so that third-party developers can write their codes to integrate with VisaNet,” McCarthy says.“To keep up with innovation, we can’t do it all within Visa, so we put our specs out there for other innovators to work Transaction trends | October 2010 15

B2B Sector Gains Momentum One of the fertile areas for growth is the B2B card payment sector, says Aaron Bills, COO of 3Delta Systems Inc. in Chantilly, Virginia. Consumer card spending is demographically driven, and the demographics are bad: Households are deleveraging and spending less, stores are going out of business, and merchant startups are rare. “The outlook is pretty bleak. It’s a tough place to make money,” he says. B2B card payments, on the other hand, are driven by business process improvements. And here, the momentum is positive, he argues. The percentage of total Visa and MasterCard purchase volume has risen from about 7 percent to 14 percent, according to numbers published in a 2009 Nilson Report, he points out. “Businesses have been trying to bring automation efficiencies and cost reductions to their processes since the 1970s, starting with manufacturing. Now the greatest inefficiency is in the settlement process,” Bills notes. Corporate accounts payable, accounts receivable, and treasury managers are pushing to make that activity electronic and are finding purchasing cards to be a good way to do it, he reports. “There is a lot of motivation and resources behind this push to move from paper invoices and checks to card payments,” Bills observes. “Corporations are sitting on piles of cash. They’re determined to fine-tune their financial processes and move payments concurrently with rich data that will let them reconcile and apply cash quickly and efficiently. It’s a vibrant market, far different from the demographically declining retail business.”

with.That lets everybody integrate faster.” The future will be dictated more and more by software integration, Ablowitz agrees. Free-standing card terminals with simple payment application programming are giving way to more comprehensive POS and even inventorymanagement applications in which payment connectivity is one small part, he explains. “Merchants are going for bundled solutions, so that’s where merchant acquirers and ISOs are going. That’s why you see companies like NPC and DataCap working together.” “The ballgame has become more complex,” Cohen summarizes.“There are more stakeholders to deal with. The successful ISO needs to be able to connect to more providers in today’s world.”

Government Intervention The overwhelming issue facing the industry today is what the government will do with the laws and regulations around interchange and fees, says Donna Embry, senior vice president for strategic product development at Payment Alliance International 16 October 2010 | Transaction trends

many unintended consequences once the rules are written and the programs implemented. T his is an experiment, and the free enterprise marketplace doesn’t thrive on experiments.” “It’s a closed-loop economic system,” Visa’s McCarthy points out. “There is only so much money going around. Squeeze the revenue in one place—reduce costs to merchants—and it will balloon out somewhere else—higher fees for cardholders.” While both the 2009 CARD Act and the Durbin amendment contained within the 2010 Dodd-Frank financial reform bill would most directly affect issuers and dampen issuing growth for the foreseeable future, the indirect result will be slower growth for the acquiring side, Abbey predicts. The impact on debit transactions is particularly murky. The Durbin amendment would give merchants more control over what debit transactions they accept and therefore what price they pay. “Debit was a hot growth area, but that’s now under a cloud,” Ablowitz reports. “We don’t know what effect the Durbin amendment will have, but it could retard debit growth.” Until now, debit has been on a roll. For the 12 months ending June 30, 2010, total global volume for Visa debit grew 16 percent, compared to 2.4 percent for total global credit volume, measured in constant U.S. dollars, according to Visa reports. In the past decade, Visa credit transactions dropped from 39 percent of all spending at U.S. merchants to 26 percent, while MasterCard credit transactions fell from 22 percent to 15 percent. Visa debit transactions leapt from 13 percent to 30 percent, while MasterCard debits rose from 4 percent to 11 percent. American Express credit transactions dipped from 17 percent to 15 percent, while Discover credit transactions fell from 5 percent to 4 percent, according to numbers published in the February 2010 Nilson Report. All in all, one might say the state of the industry is relatively stable. Opportunities are available for ISOs with the expertise and capital to invest in them, but the regulatory environment leaves a lot up in the air. TT

in Louisville, Kentucky.“That is generating a lot of churn around how we redefine ourselves. Every ISO depends on the openness of interchange. If the government ‘fixes’ interchange, they will have to reinvent their business model.” While the CARD Act and Dodd-Frank financial reform bill are now legislative history, don’t think that efforts to control interchange are over, Embry warns. The Harkin amendment that would dictate ATM surcharges was narrowly defeated in the Senate after intense lobbying and is waiting to be attached to any promising piece of consumer protection legislation, she warns. Visa and MasterCard becoming public corporations “opened Pandora’s box by showing the size and source of their profits,” Embry says. “Now, every legislator out to make a name for himself or herself as a consumer advocate is gunning for them.” The mostly unwanted interest on the part of Congress has made it harder than ever to forecast what strategies might work Richard H. Gamble is a contributing best, Martaus says. “It’s all open to specu- writer to Transaction Trends. Reach him lation. There’s a good chance we’ll see at gamble10@earthlink.net.

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877.453.5933 www.npc.net

[ FEATURE]

Vámanos a With economic growth and growing acceptance of non-cash payment options, this market offers promise for astute ISOs By Glenn Goldman

KEY NOTES 8

riven by sustained economic growth D since 2004, decreasing unemployment, and relatively low inflation in recent years, Latin America’s middle class has grown significantly, fueling discretionary income and consumer spending.

ajor card issuers already are reporting M strong numbers this year for Latin America as card usage increases throughout the region. The POS network is increasing as well.

Because the Latin American culture is highly relationship oriented, introductions to the right contacts, by the right business leaders, are critical. Consider hiring someone versed in the business practices of Latin America or a specific country in the region in order to determine penetration potential and timelines.

18 October 2010 | Transaction trends

Latin America I

n the wake of the global financial crisis, the U.S. economy has been challenged by the worst financial situation since the Great Depression. Recovery is expected to be sluggish by historical standards despite massive government response. These travails will affect the ISO community in a multitude of ways, forcing members to seek new strategies, products, and markets in order to maintain their businesses. But there are some bright spots—among them, Latin America. Astute, independent, and processor-affiliated ISOs capable of establishing a foreign presence can take

advantage of

advantage of several economic opportunities, according to research by several entities, including Capital Access Network Inc.’s Data Services Division. Latin America is one market worthy of a cross-border investigation and strategy for a variety of reasons, including current and projected economic growth, recent and planned telecommunications and technology investment, increasing bank support, the growth of the middle class, and the acceptance of non-cash payment options by more consumers.

Identifying Growth Areas Latin America is an amalgamation of geography, language, and culture. The region includes a multitude of countries and has a combined population of more than 500 million, speaking three main languages: Spanish, Portuguese, and English. Each country is nuanced by colorful and distinctive histories, governments, and cultures.A uniform market does not exist; rules, regulations, buying habits, partnership practices, and centers of influence vary from region to region and from country to country, complicating market entry. However, the growth prospects of the Latin American economy will make the complications worthwhile to the savvy acquirer. The Latin American economy is expected to grow 5.2 percent this year, resulting in a 3.7 percent rise in per capita gross domestic product (GDP), according to the most recent report released by the Economic Commission for Latin America and the Caribbean. The highest 2010 growth rates are expected in South America, led by the biggest economy in the region; Brazil, which is projected to grow 7.6 percent, followed by Uruguay (7 percent); Paraguay (7 percent);Argentina (6.8 percent); and Peru (6.7 percent). Driven by sustained economic growth since 2004, decreasing unemployment,

and relatively low inflation in recent years, Latin America’s middle class has grown significantly, fueling discretionary income and consumer spending. Improvements to the telecommunications infrastructure have facilitated the expansion and sophistication of the region’s payment infrastructure, supporting the emergence of credit as a payment option within a traditionally cashbased societies. Small businesses, which are a large consumer of processing services in the United States, also have become a fertile segment within many Latin American

The growth prospects of the Latin American economy will make the complications worthwhile to the savvy acquirer. countries. For example, according to the 2008 Brazilian Census, there are approximately 4.6 million businesses in Brazil, only 17,000 of which have 250 or more employees. Major card issuers already are reporting strong numbers this year for Latin America as card usage increases throughout the region. Total processing volume generated by 490 million credit, debit, and prepaid cards in Latin America carrying the American Express, Diners Club, MasterCard, and Visa brands was $840.5 billion in 2009, up 12.2 percent from 2008, according to a July 2010 issue of The Nilson Report. Cards in circulation in Latin America were also up 5.8 percent over 2008. Transaction trends | October 2010 19

[ FEATURE]

Due Diligence Tools Many governments now collect data that can be used for targeting and forecasting purposes and can be found through the finance ministries of each country or jurisdiction. Check out these organizations: n The

International Monetary Fund (www.IMF.org)

n The

Inter-American Development Bank (www.IADB.org)

n The

International Economic Development Council (www.iedconline.org)

n The

CIA (www.cia.gov/library/publications/the-world-factbook)

Individual banks, such as the Central Bank of Brazil (www.bcb.gov.br)

In addition to government resources and research agencies, many books offer tips on implementing business strategies in Latin America. Here are a few good ones: n

n n

oing Business in the New Latin America: A Guide to Cultures, Practices, and OpD portunities by Thomas H. Becker ow to Say It: Doing Business in Latin America: A Pocket Guide to the Culture, H Customs, and Etiquette by Kevin Michael Diran Culture Quest: Doing Business in Latin America by Atma Global n American’s Guide to Doing Business in Latin America: Negotiating Contracts A and Agreements. Understanding Culture and Customs. Marketing Products and Services by Lawrence Tuller

Concurrent with increasing non-cash forms of payment is an increase in the POS network. For example, in Brazil, credit card terminals have steadily increased, jumping from 583,794 in 2002 to 2,424,646 in 2007, a 315 percent increase in total terminals and a 290 percent increase in total terminals per inhabitant (3,343 per million inhabitants in 2002 versus 13,054 per

Follow the Money | Latin America Overall

5.2%

Brazil

7.6%

million in 2007) according to CI, Central Bank of Brazil. And the value of an average credit card transaction has increased, from $183.20 in 2007 to $223.50 in 2008, according to CI, Brazilian Association of Credit Card Companies (ABECS).

Gaining Market Entry In addition to establishing a presence as

Projected Economic Growth Uruguay

Source: Economic Commission for Latin America and the Caribbean

20 October 2010 | Transaction trends

a trusted POS terminal provider, ISOs also can consider other ways to expand business into the region. One way is to offer small businesses access to the working capital that all merchants need at one time or another. This can both solidify the relationship between acquirer and merchant, as well as positively impact merchant attrition levels. Most processing-related working capital providers use Daily Payment as a way to ease the cash flow impact to the merchant and as a risk management tool in their portfolios. Outside the United States, Daily Payment infrastructure is relatively undeveloped, but is expected to grow rapidly as larger institutions begin to create or acquire the integrated underwriting, scoring, accounts receivable management, asset management, and other system components necessary to scale Daily Payment operations. In the United States, Daily Payment working capital has been offered both in a loan format and also as a merchant cash advance (MCA) and is continuing to gain wider acceptance in the acquiring community. In considering whether to begin a Latin American acquiring business, the potential impact working capital access will have on prospect merchants should be part of any sound business plan. ISOs considering entry into the Latin American market should undertake significant due diligence, including asking themselves a series of questions, such as the following: • Can my organization conduct business in another language? • Can we adapt to the norms, practices, and cultures of the country and region? Each country is different.What may well work in one country may not work in another, and nuances must be understood and addressed. • Can we form and foster long-term relationships? Acquirers are concentrated

Paraguay

Argentina

6.8%

Peru

6.7%

within a few banks in each country. ISOs will benefit from aligning with the “right” business leaders, financial institutions, and organizations within each country. The number of banks in Latin America versus the United States is drastically less; therefore, ISOs cannot “shop” their deals or get competing bids as easily as in the United States. • Have we registered properly with card issuers? • Do we understand all of the rules and regulations associated with doing business in each country? For example, privacy issues, data security, and disclosures are just a few of the issues to be addressed. • Do we have the resources needed for the due diligence necessary to ensure success? • Do we know how merchants want to be marketed to and handled post sale? How will their banking relationship factor into the process?

Taking the Next Step All indications point to opportunity for those able to demonstrate value, an ability to work synergistically with the region,

“Any company wishing to be successful in Latin America has to get the legal, accounting, and regulatory compliance pieces right.” —Bob Arnold, The Victoria Law Group

flexibility in realigning the business to local realities, and a systematic and comprehensive approach in dealing with inherent risks. Because the Latin American culture is highly relationship oriented, introductions to the right contacts, by the right business leaders, are critical. Consider hiring someone versed in the business practices of Latin America or a specific country in the region in order to determine penetration potential and timelines. Investing time upfront to en-

sure that your organization’s entry into the marketplace is viable will be time well spent. “Latin America is experiencing significant changes that are supporting the growth of electronic payments in that region,” says Bob Arnold, attorney at The Victoria Law Group. “The importance of due diligence, as well as relationshipbuilding efforts, specific to each country is critical. Balancing the requirements of U.S. laws (the Foreign Corrupt Practices Act and anti-trust laws, for example) with the requirements of local laws, norms, and customs can often be tricky. Any company wishing to be successful in Latin America has to get the legal, accounting, and regulatory compliance pieces right. The ability to engage in business successfully abroad is predicated on these foundational elements.” TT Glenn Goldman is CEO of Capital Access Network Inc., headquartered in Scarsdale, NY. Capital Access Network is the parent company of AdvanceMe and NewLogic Business Loans Inc. Reach him at gg@CapitalAccessNetwork.com.

Transaction trends | October 2010 21

Startup Stories:

A special series following three newly launched ISOs (12th installment)

Becoming the Alpha Dog Startups take big steps to distinguish themselves from the pack By Julie Ritzer Ross

» ACCELERATED Payment Technologies, Pleasant Grove, UT » Leap Payments, Agoura Hills, CA » Paymint Associates, Brooklyn, NY ISOs We’re Following:

22 October 2010 | Transaction trends

ith fierce competition for merchants’ business, increasing numbers of ISOs are launching initiatives to differentiate themselves from the pack. “It’s time to take a stand against the status quo,” says Will Detterman, CEO of Leap Payments. For Leap Payments, this means not only eschewing price-gouging, but also recruiting clients with other, less than traditional incentives. For example, the ISO launched a new program that provides assistance to merchants that wish to join its portfolio but can’t because of cancellation fees charged by their existing provider. Leap Payments now reimburses such new clients for up to

$150 in cancellation fees, subject to account approval and contingent on a minimum credit card transaction processing volume of $10,000 per month.“It’s a very effective carrot,” he says. “When our competition holds a merchant hostage by imposing a steep termination fee, that merchant is going to tell all of its friends how terrible the experience has been with that processing company,” Detterman says. “We regularly hear from clients that they think our industry is composed of salespeople who are worse than used car salesman. So we, at Leap Payments, work very hard to differentiate ourselves. We do this one client at a time, and they tell their friends. In fact, about 30 percent of our new business is coming from referrals, which at this stage Transaction trends | August 2010 22

of our growth is really amazing.” In another move, the ISO is sweetening the gift card pot. Merchants receive their first 50 standard gift cards at no charge upon signing up for Leap Payments’ gift card program. Future plans for setting the organization apart from other contenders in the marketplace include passing along to merchants any reductions in debit interchange rates wrought by the Financial Services Reform Bill, which at press time had just been submitted to President Obama for his signature. “Business owners commonly tell us that they consider accepting credit cards a ‘necessary evil’—‘necessary’ because their customers prefer to pay with credit/debit cards, and ‘evil’ because the business has no say about how much they’re charged to accept credit cards. Clearly, these business owners believe the fees to accept cards are neither reasonable nor proportional to the costs or value provided. It’s sad that the government has identified that financial reform is needed for debit card interchange rates, but we’re happy for our business owners that some relief may soon be coming their way.” Detterman doesn’t believe ISOs are being shortsighted in such an approach, or that it constitutes a true financial sacrifice.“Allowing our merchants to receive the benefit of the lower interchange rates will be good for our business” and a powerful weapon against attrition, he asserts.

Building a Cyber Personality Brooklyn, New York-based Paymint Associates has recently focused on expanding its online presence beyond a rudimentary effort. “We decided that in order for us to stand out and look like we’ve entered the electronic age, we needed to give our Web site a facelift,” says Steven Feldshuh, vice president of business development.“We also wanted to give our agents, who always have so much on their minds, a place to communicate their ideas.” Poised to go live shortly (most likely sometime in the fall of 2010), the site will be “much more interactive and workable” than its predecessor, featuring message boards and informative articles for merchants.The ISO also hopes to incorporate links to several industry blogs as a means of adding yet another dimension to its “cyber personality.”To keep the site as fresh and relevant as possible, Paymint Associates implemented

LET US PROFILE YOUR COMPANY! If you launched a new ISO in the last 12 months and would like to be considered for the second Startup Stories series, contact abrady@strattonpublishing.com.

Joomla!, a free dynamic portal engine and content management system.The software tracks, stores, and facilitates the manipulation of Web content and lets the ISO’s staff administer and alter images, articles, postings, and all files on the site rather than relying on an IT specialist to handle the job. Meanwhile, Feldshuh reports an uptick in Paymint Associates’ merchant cash advance and loan business, attributing the change to a recent decision to advertise for clients through six different ads in various business vehicles.“Initially, we set out to advertise in certain geographic areas close to New York City, but we are realizing that most of the clients who are calling are from out of state, so the scope has been widened,” Feldshuh notes. The ISO is now refining the initial ads because the first round generated too many inquiries from startup companies and individuals seeking capital. Paymint Associates prefers to work primarily with established merchants. “The cost of advertising isn’t cheap, but the return on investment initially appears to be worth it,” Feldshuh observes.“We also sign these merchants up for credit card processing, meaning that our relationships with them remain long term.” In other developments, Paymint Associates has stepped up its efforts to generate new merchant sales leads, recently conducting a test of leads provided by a thirdparty firm. The test entailed assigning one individual to investigate the leads produced. Feldshuh anticipates closing a sufficient number of merchant deals to cover the cost of the trial run. “We just signed an agreement to call on prospects in separate areas, and I am personally going to test the leads that come in,” he says. “Prior to rolling this out to any of our agents, I want to ensure the quality of the leads, as agents will cover the cost of the program. We pay out the vast majority of the residuals we make, so there’s no room for us picking up this tab ourselves. Serious agents will want to invest in their businesses if they know that the probability of return is greater then what they laid out.”

Facilitating PCI ACCELERATED Payment Technologies is focused on differentiation by providing merchants with a solution that “eases the burdens and cost associated with Payment Application Data Security Standards (PA-DSS),” says Richard Davis, director of business development. The ISO has configured X-Charge, its robust middleware product, to operate in tandem with its proprietary card-present payment gateway, eliminating the need for merchants to store cardholder data on their computer networks and effectively outsourcing the PCI compliance burden to ACCELERATED. Merchants benefit from the inherent security in X-Charge’s architecture, which consistently exceeds PCI requirements, Davis claims. They also qualify to answer a streamlined Self-Assessment Questionnaire required for compliance, reducing the number of questions by more than 80 percent, he asserts. Recently, the ISO has been grappling with what Davis calls “false and misleading” claims being made about X-Charge by an unnamed competitor under the guise of a marketing bulletin. Among other allegations, the competitor asserts that XCharge doesn’t remove end-users from the scope of compliance. “The PCI Security Standards Council (SSC) has made it clear to the industry that the only entities authorized to definitively evaluate a particular technology or implementation for compliance with PCI DSS are Qualified Security Assessors (QSAs),” Davis says. “Our competitor is not a QSA and has not reviewed X-Charge or our securely integrated partners. Authorized QSAs have substantiated our compliance with best practices and PCI DSS.” ACCELERATED has posted a detailed bulletin refuting the competitor’s claims on its Web site. Meanwhile, the ISO continues to espouse the advantages of XChange.“This is a very important customer-focused initiative,” Davis says.“We hope it will make things significantly easier for our merchants and further solidify our existing relationships.” TT Julie Ritzer Ross is a contributing writer to Transaction Trends. Reach her at jritzerross@gmail.com. Transaction trends | October 2010 23

[ FEATURE]

Infused With

Promise

ISOs seeking growth capital may find a wider menu of options By Julie Ritzer Ross

fter a few years in business, most ISOs seek to expand their operations—and start shopping around for a cash infusion to support such an endeavor. While market conditions of the past couple of years have made procuring funds a more difficult proposition, some avenues (other than family, friends, and angel investors) are re-opening, while others continue to widen. “None of these solutions is perfect, all have their downside, and most require different degrees of work to navigate, but they are out there,” says David Fish, a senior analyst with Mercator Advisory Group in Boston. The price-competitiveness and volatility of the ISO market, coupled with a reluctance to underwrite loans against intangible assets (e.g., future revenues on merchant processing contracts), have traditionally rendered banks a less viable source of funding for most players in the electronic payments industry. Prospects on this front grew ever bleaker along with the recession.

24 October 2010 | Transaction trends

“Many ISOs have tied up a considerable portion of their performing assets, and the value of these assets at the time of the original loans was probably greater than at current valuation. Therefore, they no longer have the assets needed to securitize a loan” says Ross Federgreen, founder of CSRSI, a payment solutions advisory firm headquartered in Jensen Beach, Florida.“Even for those that have assets, it is still very difficult to obtain money for capital purposes versus acquisition of tangible assets.” Other experts assert that bank debt is now more of an option than it was last year.“Bank debt is more readily available now,” says Steven P. Davis, senior vice president, Middle Market I at Comerica Bank in Detroit. “While the pace of the economic recovery is uncertain, many of the factors that challenged our borrowers last year—for example, flat-to-sluggish sales for retail businesses—have improved this year.”

KEY NOTES 8

While the pace of the economic recovery is uncertain, many of the factors that challenged borrowers last year—for example, flat-to-sluggish sales for retail businesses—have improved this year.

nalysts predict an influx of capital A infusion for small and mid-size ISOs as the economy recovers and as venture capital and private equity firms recognize the “promise” of the acquiring sector. A Mercator report shows the payments industry as a whole received 27 percent more venture capital in 2009 than in 2008.

handful of companies have emerged A that focus on extending loans to ISOs via debt financing, wherein funds are secured using residuals as collateral. But they generally require ISOs have an established residual history.

L enders and investors are impressed by portfolios composed primarily or exclusively of stable merchants that present a low chargeback risk, as well as by limited merchant turnover.

Fish adds that a reluctance among ISOs to apply for funding from financial institutions has been “as much of a factor as anything else” in the minimal amount of bank debt being assumed by ISOs. “There is no denying that ISOs will never be granted loans by certain banks that have an aversion to dealing with this customer segment,” the analyst says. “However, other financial institutions will at least entertain the concept of lending to the ISO community—providing that (applicants) scale the biggest obstacle to success—getting banks to understand the in’s and out’s of a business that sells services, rather than product.” Meanwhile, the venture capital and private equity sector are gradually becoming more of a financial resource for ISOs of various sizes than in the past. Traditionally, larger ISOs have been the recipients of capital from these sources, particularly on Wall Street. However, the tide is beginning to turn, with analysts predicting an influx of capital infusion for small and mid-size ISOs as the economy recovers and as venture capital and private equity firms recognize what one source deems the “promise” of the acquiring sector. As evidence, Fish cites a report from Mercator, which states that the payments industry as a whole received 27 percent more venture capital in 2009 than in 2008. “There has absolutely been an uptick in the number of investors out there with an interest in ISOs, and they have the capital on hand,” agrees consultant Paul Martaus, president of Martaus & Associates. “In fact, some have grown enamored of ISOs.” ISOs that go this route have to take the good with the bad. For example, a majority of venture capitalists expect a return of 30 percent or greater on their money. Many demand a “voice” in how the ISO operates, which can mean anything from board representation to some manner of involvement in day-to-day activities. “A lot of small business owners, in particular, aren’t happy about sharing

profits or giving outsiders a hand in the decision-making process,” Martaus says.

Less Obvious Sources Other avenues for obtaining capital have begun to crop up. A handful of companies have emerged that focus on extending loans to ISOs via debt financing, wherein funds are secured using residuals as collateral. Several factors render debt financing an attractive option. For example, ISOs’ revenues will, in most cases, grow at a much higher rate than the interest rate charged on the loan. Firms that serve ISOs with debt financing also tend to use less stringent lending criteria than do banks and investment entities, increasing the potential for positive loan application results. Perhaps most significantly, because such companies specialize in loans for the ISO community, they understand the processing business and the value of merchant contracts. But debt financing isn’t for everyone. Lenders in this category generally will not entertain financing any ISO without an established residual history. Additionally, “these companies impose a higher interest rate, as there’s still an inherent risk despite the promise of residuals,” says David Koning, senior research analyst with R.W. Baird & Co. in Milwaukee. Arlington, Virginia-based Super G Funding LLC provides loans against ISOs’ residuals at an interest rate of 17 to 19 percent. Loan size ($25,000 to $1 million) and repayment period (12, 24, or 36 months) are contingent on applicants’ recent residual history. Another player in the debt financing arena is Resource Financing Co. of Chevy Chase, Maryland. The company grants loans to ISOs processing through all leading processors and charges interest rates of 13 to 18 percent. Resource Financing Co. typically is willing to lend ISOs up to eight times their monthly residuals, with repayment slated to occur over an 18- to 36-month period and dependent on individual borrower circumstances, according to President David Transaction trends | October 2010 25

[ FEATURE] Putnam. He believes ISOs have not fully tapped into debt financing because they don’t know about it. “With capital less available than it once was, we need to be more selective than in the past, but we are out there,” Putnam asserts. Some “super ISOs” and large processors will lend money to smaller ISOs and processors with which they are affiliated. EVO Merchant Services of Melville, New York, is one. Elavon, the merchant acquiring subsidiary of U.S. Bancorp headquartered in Atlanta, offers growth capital funds to its MSPs, providing they use monthly residuals as collateral. Loan amounts run as high as $2 million, but procuring funds at the upper end of the range requires applicants have a substantially sized merchant portfolio. Century Payments Inc., a Frisco, Texas-based payment processing solutions provider, has jumped on the lending bandwagon as well, as has payment processor Calpian, in nearby Dallas. Calpian’s ISO lending model includes three programs: Wealthbuilder, SWAP, and Northstar. Wealthbuilder is geared toward newer ISOs, which receive a cash infusion each month in exchange for merchant residuals and make payments in accordance with merchant residual dollars sold to the company. More established ISOs with an eye on growth can leverage SWAP to obtain growth capital based on their residual stream, keeping the momentum going for up to 36 months. Northstar yields long-term incentives through large future payments. As is true with debt financing, procuring funds from super ISOs and processors means higher interest rates and fees.“The financial disadvantages are outweighed by the fact that with this kind of loan, there is no need to give up residuals or sell all or part of a merchant portfolio to put one’s hands on necessary funds,” says Mark Dunn, founder and president of bankcard consulting firm Field Guide Enterprises LLC in Hartland, Wisconsin. Of course, for some ISOs with insufficient residuals, credit problems, or other difficulties, selling a portion of the merchant portfolio represents the only path to funding. Many larger ISOs are indeed 26 October 2010 | Transaction trends

“While the pace of the economic recovery is uncertain, many of the factors that challenged our borrowers last year—for example, flat-to-sluggish sales for retail businesses—have improved this year.” —Steven P. Davis, Comerica Bank

looking to acquire new merchants for their own portfolios, and credit-worthiness is not an issue, sources point out. “Still, there are some drawbacks and tradeoffs,” Dunn says.“If the value of the portion of the portfolio that was sold happens to increase, it’s too late for the ISO that sold it to get a cut. In some situations, the (purchaser) will pay for only part of the (portfolio sale) up front and agree to do a final ‘settle up’ at a predetermined time. But if the portfolio has decreased in value since that time, that (entity) may hold back on the payout.”

Good on Paper Just as finding sources of capital infusion is a complex process for ISOs, so, too, is making the business look attractive to potential lenders and investors. “Be able to demonstrate that you have had no contingent liabilities, and no history of bankruptcy, liens, judgments or ‘slow pay,’” Federgreen recommends. “And present a formal, detailed, documented, one-year and three-year business plan.” Lenders and investors also want evidence that an ISO in question is currently operated in a “consistent, efficient” manner, says Fish.“In addressing lenders and investors, most, if not all, ISOs want to talk about sales, but that’s not what these companies want to hear. They want to know that the chief financial officer or whomever is in charge of the finances keeps an eye on the cost

of running the business, and that a professional, well-trained staff is in place. Without these, the chances of successfully procuring an infusion of any size go way down.” Lenders and investors also are impressed by portfolios composed primarily or exclusively of stable merchants that present a low chargeback risk, as well as by limited merchant turnover. “A lot comes down to conservativeness,” Koning notes. “Showing a portfolio with a lot of Internet or otherwise high-chargeback-risk merchants in it—for instance, furniture stores—won’t get ISOs very far. And as far as attrition is concerned, a maximum rate of 20 percent annually is the standard.” Specializing in niche and/or growing payment markets is yet another means of currying lender and investor favor. Examples include mobile payments and such verticals as secondary education and government, sources observe. “If ISOs can develop or further carve out a niche that represents a new market area, and can show how the investment will be used to grow that portion of the business, investors will come screaming at them with money,” says Martaus.“It isn’t necessarily going to be easy, but if you build it, they will come.” TT Julie Ritzer Ross is a contributing writer to Transaction Trends. Reach her at jritzerross@gmail.com.

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[ FEATURE]

PCI By Brad Caldwell

Teamwork

TEN TIPS FOR A SUCCESSFUL COLLABORATION AMONG ACQUIRERS, ISOs, AND PCI VENDORS

KEY NOTES 8

reating a partnership with respect, C trust, and agreement on tactics decreases the time it takes to get merchants on board with the program, secure their networks, and achieve PCI compliance validation.

hen launching a PCI compliance W program, it’s important to immediately designate a responsible individual to manage the project and become the resident PCI authority.

PCI compliance programs are not necessarily one-size-fits-all. Individual acquirers or ISOs may have specific needs, and your vendor should be ready to accommodate those needs.

28 October 2010 | Transaction trends

n any PCI compliance initiative, a smooth working relationship between the acquirer or ISO and the PCI vendor is imperative for success. Even for Level 4 programs targeting millions of smaller merchants who may be reluctant to enter the PCI fold, teamwork can ease the process and remove roadblocks along the way. Creating a partnership with respect, trust, and agreement on tactics decreases the time it takes to get merchants on board with the program, secure their networks, and achieve PCI compliance validation. It also averts difficulties by providing consistent messages, removing confusion related to the PCI compliance process, and ensuring that everyone is working toward a common goal. Without this cooperation, you run the risk of jeopardizing the wallets and livelihoods of acquirers, ISOs, and merchants alike. And there’s the risk of PCI fines of up to $500,000 per incident. For the merchant, add the cost of a post-attack forensics investigation plus customer reimbursements that might be required by card issuers. In addition, everyone in the payment chain faces the possibility of

reputation damage in the event of a data compromise, as well as the real danger of breaking the bank and burying the business in the process. Communication and collaboration help keep these problems at bay. Here are 10 tips to establishing a good working relationship that will maximize your PCI program success. 1. Appoint a PCI compliance manager to coordinate efforts. Every acquiring bank or ISO that launches a PCI compliance program should immediately designate a responsible individual to manage the project within its organization. That person becomes the resident PCI authority, serving as a liaison to the PCI vendor. Duties may include clearly communicating any changes in the merchant portfolio, tracking program progress on a regular basis, interceding with uncooperative merchants, or otherwise serving as a watchdog to keep the program on track. Putting these responsibilities in the hands of a single individual pays off in both knowledge and consistency. 2. Work with your PCI vendor to develop a project roadmap. This process should begin as soon as the contract

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with your PCI vendor is signed. Items on the checklist should range from a timeline for delivering your merchant database to your vendor, to a six-month communication plan that outlines the entire PCI campaign by message type, sequence, and schedule. The roadmap should also cover topics such as campaign goals (80 percent enrollment and 70 percent compliance validation in six months, for example), a schedule for status calls with your PCI vendor, and a strategy for handling unresponsive and/or non-compliant merchants. Input from your vendor can help you decide what to include and how to craft each component of the plan to work best for you and your merchants. 3. Divide the labor. During your roadmap discussions, decide who is responsible for taking merchant calls and distributing communications. Some of these decisions are easy to make. The acquirer typically sends PCI letters, for example, but larger PCI vendors commonly distribute e-mails and faxes because they often have highly automated systems that can handle these tasks quickly and efficiently. Other responsibilities are less clear30 October 2010 | Transaction trends

cut and purely a matter of preference and/or knowledge. Do you want to make follow-up phone calls to merchants who have not responded to enrollment or validation requests, or do you want your PCI vendor to do it? Do you feel comfortable having your own personnel handle initial merchant inquiries? If so, at what point do you want them to turn the merchant over to your vendor? Some acquirers and ISOs want to be more hands-on; others prefer to assign these responsibilities to their PCI vendor. 4. Set up a ‘PCI 101’ training session. In-person or webinar training from your vendor is critical to provide your staff with a basic understanding of your PCI compliance program and ensure message consistency. Attendees should include your call center agents, relationship managers, sales managers, branch managers, retention specialists, and anyone else in your bank or ISO who talks to merchants. Training sessions should cover fundamentals such as why PCI compliance is needed, who requires it, how it protects merchants, who your preferred PCI vendor is, and how your campaign works. Training should occur before the first

PCI mailing is sent to your merchant portfolio to attempt to minimize potential misunderstandings. It is much easier to train your staff in advance than to try to explain to your merchant that they received incorrect information about PCI compliance. 5. Introduce the PCI vendor to your merchants. Work with your vendor to prepare a letter or statement stuffer announcing your PCI program and introducing the vendor as your PCI compliance partner. This communication should be the first step in your campaign, indicating that you have selected a PCI vendor who can simplify the validation process for merchants through education, automation, and technical support. This strategy helps give the vendor credibility and thereby reduces calls to your organization reporting faxes, letters, or phone calls from an “unknown” company. “Some merchants may be reluctant to trust third parties, so we launched our program with a series of letters that introduced both the program and our PCI vendor. We also asked our merchants to call our vendor’s 800 number to get started instead of referring them to a

Web site. We wanted their first point of contact to be a live person,” says Cheryl A. Cain, assistant vice president, merchant card services, at Avidia Bank in Hudson, Massachusetts. “These things helped give our merchants confidence and helped us achieve 99 percent compliance validation in less than four months.” 6. Make it easy to get in touch. It’s to your benefit to make it easy for merchants to contact your PCI vendor. Every PCI-related letter, e-mail, fax, or other communication coming from either you or your PCI vendor should include the vendor name and contact information. Also be sure to post the vendor’s URL, e-mail address, and/or phone number (if your vendor offers live phone or e-mail support) on your Web site. Your PCI vendor, in turn, should list your organization name on a dropdown menu on its own Web site for merchants enrolling online. Again, work with your PCI vendor to be sure that all touch points are covered.The more visible the vendor, the more smoothly your campaign will run. 7. Hold weekly status calls, at least initially. Regularly scheduled calls between you and your PCI vendor’s account manager present an opportunity to review your merchants’ compliance progress, adjust the communications plan if necessary, discuss how to deal with individual merchants who are dragging their feet, and air any concerns. Consider weekly calls, particularly in the early stages of the campaign. You can derive maximum value from these conversations if your PCI vendor offers real-time Web-based reporting that documents program status such as merchant enrollment and compliance levels. Ideally, you should also be able to get merchants on the phone with the appropriate specialist to address their specific issues. “Communication between the acquir-

Compliance

The vendor is a PCI expert; you know your merchant base and internal processes best. Together, you can arrive at common ground. er and the PCI vendor is crucial, whether it’s on status calls or in handling specific merchant problems,” says Mandii Cramer, PCI compliance analyst at FirstMerit Bank in Akron, Ohio. “If a merchant has a question about a scan or a Self-Assessment Questionnaire (SAQ), I can arrange a call with the person in our partner company who is best equipped to help him. That is tremendously helpful.” 8. Collaborate on merchant communications. This is the heart of your PCI compliance campaign, and an area in which your PCI vendor should be able to make valuable recommendations in terms of message content, frequency, and distribution channels. What mix of statement enclosures, snail mail letters, e-mail, faxes, and phone calls should you use? How frequently? If a given message doesn’t generate an increase in compliance efforts, what should be changed? Are you missing the urgency because you’re giving merchants one year to validate compliance? Your PCI vendor has seen it all before and knows what works and what doesn’t. 9. Monitor your PCI vendor’s compliance reports. Your PCI vendor should be supplying regular updates on your merchants’ compliance efforts. Closely monitoring these reports can help you

24/7

Keep up to date on compliance news and information at ETA’s Compliance Portal: www.electran.org/content/blogsection/16/250/.

keep the project on track, intervene with individual merchants when necessary, and strategize with your PCI vendor to keep compliance efforts moving in the right direction. Ideally, you should have access to real-time data on both program enrollment and compliance validation for your whole portfolio as well as for individual merchants.The most robust systems also offer instant access to each merchant’s scan results, SAQ results, and SAQ answers. Having this data at your fingertips gives you actionable information as well as the answers you need when your managers ask how the project is going. 10. If you need customization, ask for it. PCI compliance programs are not necessarily one-size-fits-all. Individual acquirers or ISOs may have specific needs. For example, an ISO with seven different offices, for example, may need customized logins to the online reporting console to enable each office to track its own merchant portfolio but no one else’s. A very large acquirer may need a special data feed on individual merchant participation and compliance status because its database of tens of thousands of merchants is too unwieldy to access online. Your PCI vendor should be willing and able to fulfill reasonable requests like these—just as it should be willing to let you forego automated communications like e-mail and fax if you prefer to contact each of your merchants by phone or in person.The vendor is a PCI expert; you know your merchant base and internal processes best. Together, you can arrive at common ground. That’s what PCI teamwork is all about. Find a partner with the expertise and flexibility to meet your needs, and listen to that partner’s advice. In this way, you should be able to sidestep many of the hurdles that have made the industry skeptical about Level 4 PCI compliance. It’s like playing football: If you remove all of the obstacles, you’re headed for a touchdown. TT Brad Caldwell is CEO of SecurityMetrics, a provider of PCI DSS security solutions. For more information, visit www. securitymetrics.com. Transaction trends | October 2010 31

ISO Corner RISK IN REVIEW

Registration and Compliance 101

Every third-party service provider must take time to register with card brands By Susan Matt

f a customer’s identity was compromised due to poor internal controls at a call center, it could be catastrophic to a merchant.The danger is now more real than ever considering so many companies in the payments space rely on outsourced call centers to provide customer service and payment acceptance. Catalog and e-commerce merchants are a prime example. Customers expect these merchants to protect any personal data provided in the course of business, especially cardholder data. Fortunately, “registration” can protect

you, your customers, and your customers’ customers. The purpose of registration with the card brands is to clearly identify all parties that handle payment transactions and/or cardholder data in any way. Registration is mandatory, and failure to register exposes you to fines of up to $500,000 by the card brands. The card brands require registration of all entities providing the following services to the payment industry, referred to as thirdparty service providers/agents (TPAs): • Solicitation of payment activities • Call center operations

• Chargeback, fraud, and settlement management services • Authorization and/or settlement activities • Encryption management services • Payment program managing, monitoring and/or reporting (such as loyalty programs). A card brand member must register and sponsor each TPA that provides services to the member’s payment portfolio. A member must be a financial institution (bank) that meets the criteria of the card brand to sponsor TPAs. For the purposes

Registration Information Required You Provide

Sponsor Bank Performs

Result

Memo describing your business activities related to payments and a process flow document that outlines incoming and outgoing activity (authorization pass through, settlement points, etc.), third-party service touchpoints. If possible, request a face-to-face meeting with the sponsor bank and/or processor.

Reviews to determine registration category and how to underwrite the risk and identify what third-party companies handle cardholder data

The more clear and concise your business overview and operations description, the less frustration and misclassification you will experience during your registration process.

➋

Application for registration

Supplies information used for underwriting and to prepare the card brand specific forms

In some cases, the TPA may be requested to complete all of the card brand forms rather than a single application. Each sponsor bank may differ on its procedures. Inaccurate and/or incomplete information may be grounds for denying an application.

➌

Registration and application fee(s)

Submits fees to card brand and maintains a small portion for the administrative process

Fees along with submission of the required documents to the card brands yields registration, if approved.

➍

List of all principal owners (for non-public entities only)

Performs background checks (criminal, credit, financial)

This step ensures the results do not violate company policy for items such as federal offenses and related financial crimes.

➎

Financial statements and tax returns (most recent year and 1-2 previous years)

Conducts financial analysis to determine credit and financial risk

The analysis may yield a required reserve and/or principal owner guarantee to cover risks that may exceed credit and financial ability.

➏

W-9 (Tax ID)

Runs a company background check

The company may be denied registration if the company tax ID and business existence cannot be validated.

➐

Business license, declaration of corporation (non-public entities only)

Validates business existence and purpose of conducting business

The company may be denied registration if the company existence and business purpose cannot be validated.

➑

Credit check authorization form (non-public entities only)

Performs a credit check.

Derogatory credit information may pend the registration process, requiring more information from the TPA or a higher requested reserve. The TPA may be denied if bankruptcy or poor credit scores were noted.

➒

PCI compliance status/validation

Reviews the list of approved service providers and the PCI status at http://usa.visa.com/merchants/risk_management/cisp.html?ep=v_ sym_cisp. (Global list of PCI DSS validated service providers)

Entities not PCI validated may be denied registration unless they can provide evidence that cardholder data is not “handled” (stored, processed and/or transmitted) in the TPA environment.

➊

If not listed and/or a report on compliance (ROC) has not been provided by the TPA, it will request an action plan to achieve PCI DSS.

➓

Other information/forms specific to the sponsor bank (e.g., business insurance verification)

32 October 2010 | Transaction trends

Varies depending on the information requested; ensures proper liability coverage

Will vary depending on the information requested. If insurance coverage is insufficient to cover the risk

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ISO Corner RISK IN REVIEW Service Provider PCI Levels and Requirements Summary Criteria (varies per card brand)

Requirements

Level 1

All third-party processors, all service providers that store, transmit, or process greater than 300,000 transactions annually (evaluated by individual card brand)

• Annual Onsite Assessment by a Qualified Security Assessor • Quarterly Network Scan by an Approved Scanning Vendor

Level 2

Includes all service providers that store, transmit, or process less than 300,000 transactions annually (evaluated by individual card brand)

• Annual Self-Assessment Questionnaire (SAQ) – Version D • Quarterly Network Scan by an Approved Scanning Vendor

here, we’ll refer to each of these members as a “sponsor bank,” though there are many other types of members not relevant to this article. TPAs can select their sponsor bank or rely upon the payment processor’s sponsor bank to complete the proper registration.

tered with each card brand that you accept as a payment mechanism from customers.

PCI Also Applies

Note that TPAs are not only required by the card brands to be registered. If your business accepts or processes payment cards, TPAs must comply with the PCI Data Security Standards (PCI Information Required While registration program requirements vary by sponsor bank, DSS) as well. The PCI DSS applies to any entity that stores, prothe card brands’ operating rules and bank regulations require all cesses, and/or transmits cardholder data. Here’s a refresher on the six core PCI DSS categories: sponsor banks to follow basic information standards.The table on page 32 highlights the minimum information you must provide to 1. Build and maintain a secure network. a sponsor bank so that it can properly complete your registration. 2. Protect cardholder data. After you have completed your registration, be sure to obtain 3. Maintain a vulnerability management program. written confirmation that your entity has been properly regis- 4. Implement strong access control measures. 5. Regularly monitor and test networks. 6. Maintain an information security policy. PCI validation requirements vary slightly based on the Service Provider PCI level as noted in the table above. Take the time to ensure all your i’s are dotted and t’s are crossed. And if you need help, don’t hesitate to get assistance from a consultant. TT Susan Matt is CEO of ThoughtKey, a payment industry boutique consulting firm focused on PCI, regulatory compliance, risk management, and expert testimony. Reach her at Susan.Matt@ThoughtKeyInc.com.

ask

the Expert

34 October 2010 | Transaction trends

As part of ETA’s continuing efforts to expand information resources, author Susan Matt has agreed to answer readers’ questions on this topic through Oct. 31, 2010. E-mail your questions to experts@ electran.org. Questions and answers will be posted to ETA’s Web site as they arrive and are answered. Please note that questions and answers become the property of Transaction Trends and may be edited prior to posting online.

ETA 2009-2010 BOARD OF DIRECTORS OFFICERS PRESIDENT Holli Targan Partner Jaffe, Raitt, Heuer & Weiss, P.C. PRESIDENT-ELECT Rick Pylant President & Chairman COCARD Marketing Group, LLC

Kim Fitzsimmons Senior Vice President–First Data Services First Data Corporation

Advisory Council Robert Baldwin President & CFO Heartland Payment Systems, Inc.

Heidi Goff President & Managing Director, The Americas Hypercom, Inc.

Joe Cohane CEO Veracity Payment Solutions

Robert McCullen CEO Trustwave

TREASURER Eddie Myers President & COO Payment Processing, Inc. SECRETARY Roy Banks CEO ACCELERATED Payment Technologies™ IMMEDIATE PAST PRESIDENT Nick Baxter Senior Vice President First National Bank of Omaha DIRECTORS Todd Ablowitz President Double Diamond Group

Jeff Rosenblatt President EVO Merchant Services Debra Rossi Executive Vice President Merchant Payment Solutions Wells Fargo Bank Dave Siembieda President & CEO CrossCheck, Inc. Tom Wimsett President & CEO National Processing Company

ex-officio Carla Balakgie CEO Electronic Transactions Association Jan Estep President & CEO NACHA

Dean Leavitt Chairman & CEO Unicorn Partners, LLC

Sameer Govil Head of Acceptance Solutions Global Acceptance Visa

Ed Myers U.S. President Global Payments, Inc.

Matt Johanson Vice President Acquirer Relations Discover Network

Deana Rich President Rich Consulting

Steve Carnevale Senior Vice President/ Group Head Commerce Development MasterCard Worldwide

Kurt Strawhecker Executive Partner The Strawhecker Group Buzz Stryker President & CEO POS Portal, Inc.

Bryan O’Malley Vice President American Express LEGAL COUNSEL Dave Goch Attorney at Law Webster, Chamberlain & Bean

Greg Cohen President Moneris Solutions

Advertisers index Company

Phone

Web

212-779-2100

www.amerimerchant.com

Authorize.Net

866-437-0491

www.authorize.net

Cynergy Data

800-933-0064 x5147

www.cynergydata.net

Discover Network

224-405-0900

www.discovernetwork.com

Elavon

678-731-5000

www.elavon.com

713-880-0326

ssotis@eprocessingnetwork.com

513-534-7678

www.ftpsllc.com

First Data Corporation/Partner Sales ISO

800-735-3362

www.firstdata.com

First Data Corporation/TASQ

800-735-3362

www.firstdata.com

Merchant Warehouse

800-749-2173

www.merchantwarehouse.com

National Processing Company

877-652-4348

www.npc.net

PacNet Services Ltd.

604-689-0399

www.pacnetservices.com

Security Metrics

801-724-9600

www.securitymetrics.com

Total Merchant Services, Inc

888-84-TOTAL x9727

www.totalmerchantservices.com

TransFirst

214-453-7711

www.transfirst.com

USA ePay

866-872-3729

www.usaepay.com

AmeriMerchant

eProcessingNetwork Fifth Third Processing Solutions

Page

Transaction trends | October 2010 35

Industry Insider

From Confused to Content For Spartan Payment Solutions, simplifying a complicated process fuels business growth By Bryan Ochalla

“I

have found over the years that to most merchants, this industry can seem complicated and confusing,” says Leo Daboub, founder of Newport Beach, California-based Spartan Payment Solutions LLC. “I have also met many experienced sales agents who, after years of being in this industry, still have problems figuring out and understanding interchange and all of the different rate structures out there.” Both of those issues have been on Daboub’s mind since the day he opened the doors of Spartan Payment Solutions two years ago. Before taking the entrepreneurial leap, Daboub spent four years at TransFirst Merchant Services and three years at Payment Resources International. “We simplify the process for the merchant and the sales agent so they can make smarter decisions,” “There are numerous he says. How? For starters, they provide their customers with a variety merchant verticals that of options and solutions. “There is are still very profitable a real need for merchants, and also sales agents, to have a place that and, at times, not as comwould provide and research for petitive as in the retail them affordable solutions for any type of merchant account,” he says. space.” —Leo Daboub

Multiple Options

Daboub and his crew are ably assisted by a slew of partners. Spartan Payment Solutions has affiliated itself with a wide range of ISOs, both nationally and internationally, to provide any sales agent or merchant “the best possible options in providing them the right fit for their account, whether the issue is pricing, service, technology, or just getting a merchant approved with the least amount of hurdles possible.” This also enables the company to “deliver competitive, secure merchant services for businesses under any category,” Daboub says. Currently, that includes a number of traditional merchant verticals, such as e-commerce companies, government entities and municipalities, and lodging, restaurant, and retail establishments, as well as nontraditional merchant verticals, such as adult membership Web sites, credit repair companies, online dating and matchmaking services, multilevel marketing firms, and travel companies. Such affiliations “enable us to provide multiple domes36 October 2010 | Transaction trends

tic and offshore payment processing solutions, including for those businesses that find obtaining approval elsewhere difficult,” Daboub says.

Flexible Mindset In addition to providing their customers with a healthy dose of payment processing solutions, Spartan Payment Solutions provides consulting services that are aimed at high-tech companies looking to break into the industry and sales groups that are looking for superior ways to ramp up their sales count or volumes, or that wish to venture into new merchant verticals. Serving such a broad spectrum of businesses isn’t easy, admits Daboub, especially given today’s shrinking profit margins. In the last few years, “merchants have become much more educated on pricing, and the industry has become more competitive. The recession hasn’t helped either.And ISOs that aren’t willing to change with the times are finding it more difficult to stay afloat.” Daboub says he hopes to keep Spartan Payment Solutions afloat by following his own “change with the times” advice. For instance, “there are numerous merchant verticals that are still very profitable and, at times, not as competitive as in the retail space.” Serving said verticals could help the company keep its head above water—and keep up with its competitors—as could “trying new sales strategies.” Education is yet another area of focus—specifically, the education of current and potential customers. “I believe that for some merchants, it’s not all about savings,” he says. “We in this industry know what is out there as far as options in reporting, wireless transactions, etc., but you would be surprised how few merchants are aware of these options.” That particular solution squares nicely with what Daboub says is Spartan Payment Solutions’ No. 1 priority: service.“Unlike an individual ISO, we act as the broker for the merchant, bank, or sales agent. We will provide and prepare, if needed, rate analyses, pricing and connectivity options, and POS solutions. Depending on the account type, history, and volume, we will then find the ISO that best fits that merchant, and knows and is familiar with the needs of that type of merchant.” TT Bryan Ochalla is a contributing writer to Transaction Trends. Reach him at bochalla@yahoo.com.

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