In last month's cover story, Transaction World reported on ISO trends that hit the 2002 runways of America's retail marketplace from the "buyers" point of view. Leading ISOs weighed in on the latest styles and strategies they sported as well as what they anticipated for 2003. Now let's hear from the "designers," namely those companies that develop the technologies.
Among the leading designers of the payment processing industry is Hypercom. Since the late '70s, this mega-manufacturer has been setting standards for transaction terminals, point-of-sale networks and software applications. For example, over 1 million terminals were shipped worldwide in 2001. In 2002, Hypercom witnessed equally strong sales.
"Regarding ISO trends the past year, we're seeing price as the differentiator," says Lisa Shipley, Senior Vice President of ISO Sales at Hypercom. "Especially for the smaller ISOs, price is the determining factor to selling hardware. Cheaper is better seems to be the line in the sand for them. The larger, super ISOs are looking at value adds and that is refreshing. It's not always that cheapest is better. It's how you retain merchants and give them value so they don't flip from one processor to another. The larger ones are getting this."
Recognizing that price is of major concern to so many ISOs in the current marketplace, Hypercom is tailoring its designs accordingly.
"Our costs are stable through last year," says Shipley. "We have done creative things to attract ISO markets, such as making it attractive to contact Hypercom directly to receive benefits of support. We are listening to what they need in regards to changes in software. We're also creative in how we do deals. Each deal is uniquely designed to what ISOs need. We are totally dedicated in 2003 to do that."
Hypercom is seeing more ISOs entering the market, perhaps because they are focusing more specifically on that channel. They are also noticing which ones are making it and which ones are not.
"A lot of ISOs are just brokering equipment and if that is all you're doing, you're not going to win," says Shipley. "Merchants have gotten smarter. They're looking at applications like electronic receipt capture, loyalty and gift programs. That makes the difference. The old guys who strictly do hardware sales aren't making it. It's now about building a portfolio to retain merchants."
Shipley sees a trend towards a change in sales. Hypercom encourages its buyers to simplify on the front end and understand the value on the back end. They want their clients to consider putting in terminals that can add value at a later time.
"Some are reluctant to sell what they are not comfortable with," says Shipley. "We help them by putting in the hardware now. Our most valuable asset is the current customer. We grow them. We train them. We offer onsite free training with direct signing with Hypercom. We've developed a high insight website with product information modules a well as trouble shooting training. We even video tape training sessions on terminal set up and make them available on our website and on CD. We spent months listening and there is very little we haven't heard that we are not moving on."
Hypercom is also listening when it comes to the growing trend towards fraud. Like so many others, it recognizes a real threat and acts accordingly.
"We do our due diligence," says Shipley. "We are also flexible. The super ISOs are so successful because when they started, someone lent them a helping hand. From a credit standpoint, we are flexible and supportive but we do run detailed reports and run limits within reason.
What trend does Hypercom predict will shape 2003? "ISOs are going to own this business if they don't already," says Shipley. "That's why it is so critical to listen. There will be more consolidation in the industry so making sure those ISOs get what they need to be successful is very important. Processors will concentrate on what they do best and the ISOs will be more in tune to sell value rather than just boxes."
Sharing the spotlight with Hypercom is fellow designer Verifone. This super-manufacturer has been supplying POS hardware, software and related solutions to the industry for over 21 years. It, too, reported over 1 million terminals sold worldwide in 2001. It, too, saw strong sales in 2002. In fact, Verifone is reporting an increase in last year's sales, due in part to its renewed focus on designing for the special needs of the ISO buyers.
"We had not focused directly on ISOs for a number of years," says Rob Connelly, General Manager, ISO Channel Sales Group for VeriFone. "We've set up a special dedicated group which I'm managing that is for ISOs exclusively. In the past, we touched ISOs but hadn't really touched them in a way with the right people and the right focus to really sell directly to them. We are going after them now. Our strength had always been in larger institutions like Nova, NPC, Paymentech, etc. As the ISO market moved, we weren't dealing directly with them. Problem is that as the market grows, if you are not there with the right people you can't know their business and put together solutions for them. Lipman had, we hadn't. We have put together a concerted effort calling on ISOs with quality, knowledgeable, industry people. We feel that allows us to be a big player in this particular area. We're seeing a lot of growth now in that market."
VeriFone is showcasing new styles to support their bigger piece-of-the-ISO-pie strategy.
"We are coming up with solutions that will help ISOs win more business," says Connelly. "There are a couple of trends going on. ISOs are the classic American competitive example. Their competition is fierce and we are figuring out how to provide better service to their merchants. We're providing faster and better reporting, more competitive rates in delivering solutions. Most ISOs are trying to figure out how to differentiate either with loyalty and gift, check conversion and the like. They're looking for ways to go in and talk to a merchant with value that sets them apart. Merchants have become numb. Talking bankcards is like telemarketing to them. The good ISOs can now go in and talk about new issues. Even if it isn't a successful closed sale, at least they get in the door. That's the trend we're seeing."
Connelly sees that trend as affecting new merchant sign ups in a positive way. He sees ISOs either making money from the sale or, even more importantly, establishing themselves apart from the rest with knowledge and understanding of the merchant's present and future needs. In keeping with this shift in selling style, VeriFone is designing its offerings accordingly.
"With our platform, we are doing something different," says Connelly. "It's just not clear what the silver bullet solution will be. Is it gift? Loyalty? Check? Which one will win out? Our platform allows ISOs to offer these value adds without a huge cost to re-certify. Lots of different applications on the shelf can be popped in whether it's through Global, Vital or others. We are allowing different apps to be added, apps without lots of retraining due to our intuitive ATM style interface."
VeriFone believes value-add is the hot look on the retail runway. Think of it as an enhancement to present business attire.
"I'm not sure there is a huge growth in the number of new merchants," says Connelly. "It's more about existing merchants getting value-adds. There is always a flow of new merchants but for the most part, ISOs are competing head to head with the next guy. The prime merchant targets are just sitting there with no one calling on them with new apps. There is great opportunity with value-adds. Better and improved service is the new sale. New equipment is becoming a big part of the sales rep's income. People are realizing it doesn't make sense to refurbish."
Connelly sees a trend in the ISO channel to replace hardware. He sees that trend gaining momentum in 2003...and that's a good thing for VeriFone.
"Where you have sales people more on the traditional bank side and not commission-based, there is a high reprogram rate," says Connelly. "However, the guys on the street want to provide new service, a better product and that translates to new equipment. We love it. It means new business for everyone."
As regards trends in compensation, Connelly sees two factors determining that direction, namely keeping agents happy and keeping merchants happy.
"There are some ISOs out there trying to get more sales agents and are offering all sorts of creative programs," says Connelly. "That's separate and very distinct from what the individual rep is trying to do with the merchant. They're trying to attract merchants and figure out the magic formula. Their lifeblood is keeping the merchant. The ISOs lifeblood is keeping the rep. The ISOs we are talking to are very energized and excited, very pumped up. They see lots of opportunity and are putting together new compensation systems and services. Many are making those investments to grow their businesses."
Challenging that growth is fraud. VeriFone stands right alongside its colleagues when it comes to combating it.
"Fraud is a threat, but I think the industry has grown up and is beyond it," says Connelly. "There was a day when it could have brought the whole house down. We have matured and fraudulent reps won't bring us down or threaten the credibility of the entire marketplace. They will be dealt with and the industry will go on. There are crooks in every business. There is nothing inherently crooked in this industry but the threat should be taken seriously. It won't destroy us, though."
Connelly is just as positive when it comes to future trends. Like other astute designers in this arena, Connelly acknowledges consolidation will continue.
"At some level, there is always excitement with growth and then those organizations look to see who is going to buy them," says Connelly. "Then they know they've made it. The nice thing about this business is you can start out small and do things the big guys can't. That flexibility will help them grow towards consolidation or just internal expansion. There's always going to be big players and smaller ones. Nothing is for sure except that everyone is going out to win business but no one has the key to insure they are going to get the sale. The trend now is towards incredible energy and excitement. Everyone is focusing on the ISO market, not just us. That's where the action is. I don't see anything slowing it down. It is definitely the place to be in the industry today."
Another genre that sets the tone in this industry is processors. These organizations have been the touchstone for transaction architecture and infrastructure for years. Representative of that fact is Global Payments Inc. With nearly forty years under its belt as a subsidiary of National Data Corporation (NDC), Global Payments spun off on its own in February of 2001 and has been making a big splash since then. Processing close to three billion transactions per year, Global Payments services one million merchant locations in North America. It keeps a keen eye on what's happening and what's history.
"We are seeing continued growth with new ISOs but we're also seeing the larger ISOs continuing to consolidate their positions," says Paul Garcia, Chairman, President and CEO of Global Payments. "There's exciting stuff going on. ISOs are having the last laugh because they were persona non grata a few years ago. VISA and MasterCard want to drive new payments, micro payments, non-traditional programs, and ISOs are leading the charge. They are the most innovative because they are the hungriest. They are the quickest to understand, seize upon and implement good ideas or reject bad ones. Equipment manufacturers are now recognizing the importance of the ISO channel. We are big fans of ISOs."
What makes some make it and others not? Garcia sees it in terms of specific style.
"Successful ISOs have a niche," says Garcia. "They have something that makes them different whether it's a certain product set, customer support differentiator or just faster to market. They are the ones that, quite frankly, are going to make it."
And when ISOs make it, processors like Global Payments become that much more successful. Garcia reports that Global Payments has grown dramatically in the past year. They credit that trend to a personal level of service quality and the significant investments made in technology specifically developed for ISOs.
"The bigger ISOs are justifiably demanding better services, more competitively priced services and respect," says Garcia. "And they are receiving it. They also are recognizing the best thing they can do is reduce turnover in their sales force so they are fairly and quickly compensating their sales force. ISOs recognize, just the way we do, that it is people doing business with people. You've got to treat everyone fairly." Global Payments stands behind that philosophy and styles its offerings accordingly. It looks to the ISO model itself for inspiration and design.
"The ISO is a great model," says Garcia. "Without a huge amount of capital, you can build a reasonably successful business in a reasonable amount of time. Once that is accomplished, the focus is on how to continue to build value, offer more products and better training so at the end of the day it revolves around education, product and access to data. To that end, we have invested significantly in our ISO channel." In regard to a trend towards portfolio compilation, Garcia sees neither one direction nor another.
"ISOs have always been interested in monitizing their business, but we are not seeing any more or less activity in portfolio sales," says Garcia. "They continue to demand top dollar when they do sell, but I don't see ISOs wanting to. It is more important they have the ability within their relationship with their processor, should they decide to go that route."
Garcia is also seeing a reduction in fraud. He credits the card associations as well as the shift of the industry towards stronger integrity and credibility.
"We're seeing less and less," says Garcia. "VISA and MasterCard have correctly differentiated between people who are bad and the great overwhelming number of ISOs who are not. There's more awareness, less fraudulent activity and swifter, more targeted punitive action. We've not taken gunshot in that area. It's almost disingenuous to complain about it."
Garcia is highly complimentary about future ISO trends and where the industry is heading.
"The industry is absolutely and positively growing," says Garcia. "ISOs always have to watch out for disintermediation‹being taken out or made redundant. What they have to watch out as we do is that ours is a business that ultimately serves our merchant customers. We all have to constantly bring new innovation and new payment options to the merchant. That is key. And also, be fair with all parties."
There is another area of design that has tremendous effect on the styles of the ISO community. It is leasing. As with manufacturers and processors, competition is stiff and leasing companies are eager to court the ISO channel. One such company is Global Tech Leasing, providing stylish leasing programs since 1998.
This past year, Global Tech has observed an increasing trend in what type of new ISOs are coming to the retail runways.
"We are seeing more but it's mostly a retread of the old guys," says Charles Salyer, President/CEO of Global Tech. "There's been a lot of movement in the last few years with people selling off portfolios and creating new offices. We're seeing that non-competes are up and those that were previously in business are opening new offices with new names and starting from scratch, so to speak."
Global Tech is seeing these ISOs taking advantage of new technologies like gift and loyalty, check verification and imaging. The trend is focusing on upgrades.
"It's about multi-functionality," says Salyer. "ISOs can now offer full menus to their agents and merchants instead of having five different vendors. They can lock in with all offerings. In the past, people were walking in and out, door to door, with different products. Now, one person can come in with it all. That's the success of the new ISOs. The name of the game is having merchants locked up so you can't be pushed out."
While Global Tech may be a smaller leasing company, it has fundamental design that can be found industry-wide. Its style focuses on people.
"This is an intriguing business," says Salyer. "It's not easy but the grass roots is dealing with mom and pop, not selling on a massive level. It's about dealing with people in everyday business. We moved to micro ticketing because we enjoy working with smaller businesses to make a big difference." Global Tech sees a big trend towards hardware. It credits that movement towards changing merchant attitudes.
"People are getting back to basics," says Salyer. "People were getting tied into gateways and websites. That has run its course. We're going back to basic terminals, back to brick and mortar storefronts. In any industry, there is always the easy ring to grab. In this instance, it was virtual terminals and the website concept that looked fairly easy and drove business. That low hanging fruit turned out to be a bit tainted. Those people didn't stay in leases and credit cards. I am a neophyte. I've been leasing for 27 years and involved in credit cards for 5 years. I believe ISOs are looking for long term residual income and they're not going to get that from Internet-centric business."
Another trend Global Tech is noticing is the attention to fees, due in part to the competition of the marketplace.
"In the early '90s, just a handful of people were doing business and doing it well," says Salyer. "Now there are a tremendous number of agents. Where there was once one, now there are ten to fifteen people trying to get in a merchant's door. One salesman brings in a deal. Another walks in with a better one. Fees are all important now."
What also is becoming important in this space is the choice of new versus refurbished terminals. While Global Tech's revenue has been consistent year after year, it has witnessed a change in sales this past year.
"Because of improvements in technology, entrenched ISOs with lots of experience are going back and selling value added services," says Salyer. "Sometimes that results in equipment sales. It seems new terminals are in and old terminals are pretty much passé. We rely on both new and existing contracts. With the downtrend in the economy this past year, people got a little afraid of taking the next step. We're seeing equal amounts of upgrading and rolling over. The smaller boutique processors and ISOs that were around a few years ago have gone. Folks are coming to us, looking to get better service as well as better equipment."
As regards to trends in ISO compensation, Global Tech echoes the sentiments of other service providers. There is change afoot.
"When we started in this business years ago, we saw compensation as a percentage of what was sold," says Salyer. "Now we're seeing ISOs going above the buy rate. It's giving them a chance to grow their business. ISOs are looking to residual income as somewhat of a retirement plan in the years to come. That wasn't the way years ago. Compensation has definitely changed."
What hasn't changed for Global Tech is its traditional support style. It is based on solid education and training.
"We offer a full training program," says Salyer. "We teach salespeople how to sell, how to put together a good lease, even how to fill out forms. Ours is a strong training module. We do onsite as well as offsite presentations. We give them a basic history of the credit card industry and leasing. We give them a solid basis to start from. We also talk about ethics, about the trade off between the quick buck versus the long-term relationship. The more successful the training program, the more successful the ISO."
As a leasing company, Global Tech has witnessed first hand the ugly side of the industry, namely fraud. It has witnessed it at an alarming rate.
"It astonishes me how long people have gotten away with it," says Salyer. "In the past, there was always corner cutting, but it was a legitimate deal. In the past two years, we have seen out and out fraud. Agents making up leasing deals, making up merchants accounts, trying to scam leasing companies and processors."
That trend has caused Global Tech to slow down its processing of new ISOs. They are much more careful in how they deal with new organizations.
"It has caused us to look harder at the independents," says Salyer. "We have national programs with national processors. An agent that worked with a processor used to be our bread and butter. It is now harder to make those deals because we don't have as much comfort. We work closer with all processors. We identify and cross check merchants, ID numbers, addresses and credit. We triple check and we still are finding fraud. We cut it off immediately but it still keeps coming. Everyone got hurt pretty badly last year from fraud."
Salyer does see the silver lining of the ISO fraud cloud. He acknowledges it has brought about a renewed cooperative effort among the players.
"The positive end is that the major processors have gotten a lot closer," says Salyer. "They're talking about creating a national registration process. They're also becoming more open to just discussing the problem and putting aside their competitiveness. They're starting to share information. We can't allow these people to take advantage of us. We can't allow these scam artists to milk us. They go from leasing company to leasing company, from processor to processor. We should be able to put these criminals out of business. At Global Tech, we take a hard stand. Everyone needs to do the same."
Despite the continuing threat of fraud, Salyer sees exciting and innovative styles for the future. He also sees growth, in a different way.
"The future for ISOs is an exciting one," says Salyer. "New technology will get out to the merchants, making everyone's business more profitable. I see a great resurgence in the industry, despite our economy. The best thing about the credit card business is that it will always be there. It will always be big business. I don't see it going away. There may be slower growth and the wild days of the past may be gone, but there will be opportunity across borders. Canada, Latin America and Australia are just now getting to that stage. As long as there are new businesses starting up or changing hands, the ISO channel will continue to grow. It will move towards value add and better customer service. Merchants are looking to see not just 'here's your equipment, have a nice day' attitudes. They're looking for relationships after the sale. That will make the difference. That's the trend."
A company that embodies all design aspects of this industry is First Data Corp. Designer and buyer, manufacturer and processor, even ISOs can all be found under the Herculean roof of First Data. Since pioneering the first money transfer back in 1871, First Data has both initiated and embraced style for over a century. This superpower in the payment- processing field has witnessed the rise and fall of countless trends. What has it ascertained this past year?
"As a general rule, we saw a few new guys but more consolidation," says Doug McNary, longtime Senior Exec at First Data and newly appointed CEO of its latest acquisition, Card Services International. "This is the precursor to a trend we'll see over the next couple of years‹the recycling of the same guys with new business opportunities."
McNary offers a number of reasons behind this movement, including the age-old adage that everything changes and nothing stays the same.
"This is a pretty dynamic time for our industry," says McNary. "The old paradigm had to change. Acquiring opportunities and opportunities for expansion translate to new rules. More merchants are needing and finding ways for electronic payment. Some opportunities were created by the dot.coms but that has slowed down considerably.
New businesses are shrinking. Existing small businesses are having a harder time surviving. We're seeing a slowdown in market opportunity for traditional bankcard acquiring businesses. It has forced all of us in the ISO stream to get creative."
For the ISOs themselves, McNary feels their success is keyed into looking beyond the lowest priced offering.
"Over the past few years, it has been a price game," says McNary. "If that continues, opportunities will diminish and this business will no longer be attractive. ISOs are looking beyond traditional products and expanding their services to additional payment, product and services options for their merchants. At First Data, we are working on products and services beyond the traditional offering for a broader portfolio of services. We're focusing on new technologies like gift and loyalty, smart card, electronic check conversion. These services will help ISOs penetrate new markets."
But are there a lot of new markets? McNary admits very few are still untapped for traditional services. One area he sees opening up is quick service restaurant transactions, but he stresses that it will only be a good opportunity if the right products and the right solutions can be effectively implemented.
Talking hardware, First Data is responsible for a leading designer of terminals, namely Tasq. This past year has been one of solid sales for Tasq and First Data.
"We had good growth in business for 2002, as with everything, due to the ISO channel" says McNary. "Some came from continued placement of new equipment in new merchant locations. We're also seeing expansion of debit products. Wireless technology is finding a comfortable place as well. While not the accelerated growth of the past several years, it has been solid and we have every reason to expect that to continue."
McNary sees the trend towards a balance of new and replacement, that is, replacement with technology that supports expanding services. This demand for better technology in areas like smart card, wireless and ecc will set the stage for future financial fashions. And First Data has its designers hard at work to come up with the most attractive lines and textures.
What McNary also predicts is an increasing trend towards ISOs ability to finance those fashions.
"ISOs will continue to have great opportunities with equipment sales, but technological solutions are just one part of the equation," says McNary. "ISOs will find that the model for equipment leasing will be more difficult to support over the long term. Lease funding sources for ISOs are becoming harder to find. This is tough for ISOs. If they're not able to get lease funding on equipment that they've built their business models on, they've got to find alternatives. Those alternatives may not be as attractive as the front-end loaded they're used to. ISOs will need more capital to hold on to sales. They will need to be more patient on the return on their business."
Like so many other "designers" in this space, First Data is focusing great interest on the ISO channel. It is carefully watching and analyzing what strategies are working.
"There are different approaches to this industry," says McNary. "Take CSI for example. It supports a sales agent model that is very different from that at the opposite end, which is First Data, providing processing services. In between there are other alternatives. We are interested in providing a full spectrum of services that meet everyone's needs. Some guys want to take risks, others don't. Depending on your interests, we have the solutions."
All important to the ISO buyer is compensation and First Data is styling their programs to attract and maintain their ISO clientele.
"There are a lot of changes going on right now in that area," says McNary. "We're rolling out new strategies geared around creating a business model with longevity for the ISO, allowing ISOs to share in the overall revenue of the relationship with the merchant. It includes the ability to monetize their revenue stream. It's one thing to build it, but it's another to turn it into a source of capital."
What's McNary's take on the current trend towards upfront money business models?
"Those programs might work, but they might work for the wrong kind of behavior," says McNary. "Wrong behaviors do don't any of us any good. Good business models need to be attractive, but attractive to the right kind of people."
Speaking of behavior, both good and bad, McNary weighs in on how fraud is affecting business models.
"Certainly the reputational risk for the ISO industry is a big concern," says McNary. "I think if we don't self-police and try to mitigate those behaviors, we will get more than we probably want from state and regulatory industries and that is not a good thing. The best thing we can all do to insure that doesn't happen is to approach this business with the highest level of honesty and integrity. At First Data, we do strong due diligence. We enter into relationships with our eyes wide open. Some, historically, have looked the other way in the interest of profit and sales. That's not a good business practice and won't help anyone. We all need to get together and make a concerted effort towards self-policing, but that is further down the road".
First Data designers are also working on products and services to expand training, due in part to a philosophy that believes the more effective a sales force, the more opportunity for growth.
"Our sales training deals with selling something besides price," says McNary. "We provide better technical understanding, better understanding of vertical markets, better understanding of opportunities and the ability for them to go out and have a more targeted approach. Our ISO partners have become experts in those areas."
Another area McNary sees change in is portfolio compilation and sales. He's noticed a shift is towards fewer opportunities.
"The glory days of going out to build a portfolio and sell it off are gone," says McNary. "It is more and more difficult for that quick flip opportunity. While there will still be some consolidation and acquirer buyers of portfolios, it won't be what is used to be. There are just not a lot of interested buyers. I see the trend towards fewer players and those players will become more mature in business with longer-term game plans than just build and sell out. People in our industry will have the opportunity to do their own thing or join up with the larger players and realize the value for their work."
McNary sees future ISO trends taking multiple paths. One that he feels needs to be monitored involves risk.
"ISOs will find their place based on their appetite for risk and their capacity for risk," says McNary. "There are a lot of smaller ISOs in the marketplace that enjoy very good success but are going to find as time goes on, their ability and appetite to manage the risk in this business will becomes overwhelming. Then you'll see more consolidation in the industry where fewer will have the capacity, as well as the resources, to minimize risk. Those will be the guys that will manage the small business market."