Recently, Ed Labry, a long-time industry veteran, formerly CEO of
Concord EFS and now President of First Data Commercial Services, made
some very interesting remarks about First Datas approach to the
merchant services market. He said that FDC would concentrate on
smaller merchants (defined as those with less than $200,000 per year
in credit card processing volume). First Data is
the leader in large volume merchant processing, but as one consultant
remarked: The bigger merchant business is consolidated, so now you
drop down to the next tier.
That pretty much says it all to me. FDC has run into a thin margin
game at the top end of the market. So far, they have been the masters
of making their costs fall faster than their prices, thereby keeping
their margins intact or expanding. Now, their ability to do that has
all but ended. They believe that greater penetration of the small
merchant market will increase processing volumes, revenues and profits.
They cant get there by themselves. Kim Fitzsimmons, head of First
Datas ISO division said that a major goal for the year will be to
focus on the ISO network. And small wonder since ISOs are
historically the best at penetrating the small volume merchant market.
First Data may find that market has changed a bit in the last few
years. Competition is rougher for one thing. Larger ISOs are
populating the market with so-called free terminal programs. If FDC
is going to attract new ISO talent, they will have to have an answer
to this new development that makes sense to ISOs and their merchants.
Labry and Fitzsimmons went on to say that there were distinct things
that FDC needed to do to be ready for this market:
Reduce merchant attrition.
Specifically, the company intends to look at reasons why merchants
leave. I bet they get some good answers and reduce merchant losses
over time.
Limit product offerings to bestsellers.
Big companies develop product offerings to meet new customer demands.
But market changes often force them to trim offerings of marginal
profitability. Many of the product offerings will not be necessary in
the smaller merchant market. Training sales forces on complicated
esoteric products doesnt make sense.
Speed up activation times.
Labry said that one of his goals was to get a merchant from sale to
activation in the same day. Clearly, he understands that this is a
very competitive market, and a delay of several days is an
opportunity for a competitor to poach a deal.
Increase training and support for ISOs.
Its essential to fully support sales offices and field sales forces
in todays market. Merchants are smarter and more knowledgeable now.
They have often been through several vendors and are looking for
quality. You cant have poorly trained feet-on-the-street and expect
them to be successful in todays market.
All this amounts to recognition by FDC of something that every ISO on
the street knows all too well our market is very competitive. Years
of priced-based competition have trained merchants to look for
reductions constantly, and ISOs to slash price reflexively as the
main sales technique. FDC may discover that margins at this level of
the market are not what their business plan requires.
Still, as goes FDC, so goes the rest of the industry. They have a
long history of being first movers. Theyre smart, aggressive people
who are usually out in front of trends. You can probably expect to
see similar moves from other key industry leaders as well. Changes in
strategy like this one are a response to new developments in market
conditions and are followed by changes in personnel,
and then changes in tactics. Typically, it takes a management shake-
up to execute a new approach to the market. Managers become wedded to
ideas and methods and when market circumstances shift underneath
them, they can adapt or move on. In big companies, moving on is the
usual outcome.
Most likely, FDC wont be the only ones changing a few faces and
refocusing on smaller merchants.
What does this mean for ISOs? The big boys moving in on ISO turf is
not the end of the world. ISOs are smart, scrappy hard-working
business people who know how to take care of their merchant clients.
Match a local ISO against FDC head to head, Ill take the ISO every
time. Margins may thin out more, but face-to-face service will be the
winner. And who is better at delivering that?
But ISOs will need more than scrappiness. Theyll need close
relationships with their own processors. It will take an intimate
collaboration to meet the FDC challenge. ISOs used to negotiating
against their processors over small price concessions may now find
themselves negotiating with their processors for market support,
financing or other assistance. Itll take all that and more to meet
the FDC challenge.
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