In my last column I talked about the coming decade in terms of the changes which will be wrought by truly mobile payment platforms and the big players entering the payments arena. The stakes are enormously high and have life-changing implications for the small to medium-sized ISO. In this column I’m taking on those implications and I’ll venture an opinion about what the strategies small to medium-sized ISOs should take in light of the changes.
Last time I referenced an outstanding article by Fahrad Manjo called “The Tech War of 2012,” which appeared in FastCompany in October 2011 (http://www.fastcompany.com/magazine/160/tech-wars-2012-amazon-apple-google-facebook.)
Manjo describes how four major companies are changing the business landscape for all of us. The four players are Apple, Google, Facebook and Amazon. The central idea of the column is that these four companies, having made major changes in IT, cell phones, social networking and e-commerce, will begin to fight it out in 2012 over three additional markets, which they will change forever. The three markets are television, cable services and electronic payments.
At the ETA SLNF meeting in October I was standing at the back of the presentation room listening to a speaker talk in glowing terms about how the smartphone was going to forever change electronic payments. A long-time colleague leaned over and said quietly, “Sounds like 1991 all over again.” By that he meant the presenter was talking about smartphones the way many of us used to talk about chip-based smartcards. Twenty years ago a lot of us were convinced smartcards were going to revolutionize payments in the U.S., as they were starting to do in France and throughout Europe. As you probably know, that didn’t happen.
So why didn’t smartcards happen at the turn of the millenium? Several factors were at work here: The risk of the existing swipe-based system wasn’t sufficient to require making a wholesale change. Smartcards were too expensive. Smartcard readers weren’t needed until a smartcard program got off the ground. There wasn’t enough value added by a smartcard program to outweigh the increased costs. Also, no large player with significant resources was committed to upgrading conventional cards to become smartcards. Even American Express’ smartcard turned out to be something of a trial run. And without the card brands fully on board with the change, smartcards were confined to a relatively small number of closed-loop applications in the U.S.
So how are smartphones in 2012 different from smartcards in 1991?
First, smartphones are now the infrastructure—more than 35% of all adults had a smartphone according to the Pew Internet & American Life Project in May, 2011, while Nielsen put the percentage at 43 in October, 2011. Smartcards never had anywhere near this level of distribution or acceptance. Second, smartcards never had processors, card brands and banks focused on implementation programs at this level of intensity. Third, smartcard programs in the ‘90’s never involved four very rich and influential companies staking out their places in the mobile payments land grab. Fourth, the smartphone is so much more capable than the limited functionality of the smartcard that there’s just no comparison. Finally, the smartphone is immediately capable of integrating electronic payment with virtually every other aspect of a person’s life. The smartcard was another island of unconnected data that would have to be independently synched through additional actions.
Many of the ISOs I work with are asking: “Is the ISO’s role becoming obsolete?” Will the big players who are out to reshape electronic payment eliminate the functions of the ISO? One thing is certain: The ISO’s role is changing and how the ISO generates profit is already moving from core processing to other services. This trend will continue.
In the changed world of 2012 and beyond, what will stay the same? These functions and activities of the ISO seem to be requirements for any age:
 The need to attract merchants by superior marketing, submit proposals with value-based pricing and handle merchant contacts with personalized service.
The need for banks and ISOs (or aggregators) to know their merchants, commonly called “KYC.”
The need to underwrite each merchant carefully and constantly monitor e-commerce and high volume merchants closely for adverse risk and fraud.
The need to maintain a fast, glitch free processing system.
The need to fix problems and resolve discrepancies in payments quickly and accurately.
The need for payments processors, banks, ISOs and aggregators to profit from the services they provide, whether directly or indirectly.
The need for merchants and businesses of all types to make good decisions about payment systems/processors and to be able to rely on their payments partners for a reasonable length of time, ie., more than two years.
The need to innovate more secure, faster and more risk-free improvements in electronic payments.
At the risk of totally looking foolish, let’s haul out the crystal ball and consider: How can the Tech War of 2012 threaten the role of the ISO?
Some parts of nearly everything could change. However, it seems to me that the fundamentals above will mostly stay the same
Merchant services could become a low profit service or “loss leader” to serve a greater profit potential for another part of a provider’s service. When you’re looking at players like Apple and Google, this would seem to be financially possible for them. However, the infrastructure and headcount required to service millions of small merchants would seriously dilute their “revenue per employee” goals. Servicing merchant accounts has always been a messy, unattractive kind of business. Would the big players really want to do this?
Aggregators could move up market from the small merchant niches in a giant leap to become “super ISOs” by passing much of the heavy investment required of most super ISOs. They could disintermediate the role of the ISO between the bank and the merchant. They might then be in a position to dominate merchant services at price points that would drive out all but the largest and most-profitable ISOs.
The large players could integrate payments functionality into the smartphone that would eliminate much of the need for conventional POS systems on the part of the merchant. Thus, the buyer formats the purchase interactively with the merchant system and changes the dynamic of processing. If the merchant doesn’t need a sophisticated solution, where’s the value in having a sophisticated salesforce?
The higher security capacity of the smartphone might eliminate much of the risk associated with electronic payments. This could force the card brands to justify their fee structure (more than they already do) and put even more downward pressure on fees. How many ISOs can survive with a profitability of 20BP or less on processing?
Until the picture comes into focus, we won’t be certain whether ISOs will sustain the role they have played during the last thirty years. In any case, 2012 will be the year when everything started to change quickly.  |
