A Consultant's View

Prairie Trail Software, Inc. ............................................................. July 2010

A New Wave for Payments?

When electronic credit card processing first started, the equipment was marketed by the card issuers. It wasn't until the independent sales organizations got the word out that many merchants adopted them. These sales organizations (commonly referred to as "ISO's") have had a very interesting path with several of them winding up on the Inc. 500 list. Without them, I doubt that so many merchants would be using electronic payments.

The last few years have seen a big change in the profitability and number of ISO's. There are newer regulations which have added costs while the percentage they get from each transaction is less. The result is a loss of people in that business.

According to Warren Buffett, there are three "I"'s in any business cycle; Innovators, Imitators, and Idiots. One way to tell when the "Idiots" have taken over is when price is the only differentiator. When we see that, it is time to start watching for new innovation to happen in that business. The human dynamic is that the "Idiots" do so much harm to the customers that new innovators see how to take those customers away.

In most markets, the innovation starts at the low end, in the business that the established companies are not willing to deal with. Payment innovations are starting with the small merchants who don't really qualify for a standard merchant account.

So, who are the innovators? The focus of the May June issue of Payments Cards & Mobile was on how the web payment firms are going around the current payment structure. While the card processors have pushed NFC (and not gotten very far), PayPal had a million people download their iPhone application in first three weeks after it was launched.

Merchants are starting to accept PayPal more and more. An art gallery in Dallas decided to not get a merchant account. If they sold a painting, they would sit the buyer down with a PC and open up PayPal to make the payment. Likewise, some street vendors are asking people to simply use their smart phone to make the payment via the PayPal web site.

Other companies such as Google, Facebook, and Apple are looking at ways to facilitate online and other payments. Outside of the US, mobile banking has taken off in a huge way with many people having their first non-cash interactions happening through their cell phones - and most of that not with a bank.

The challenge to the ISO community is that of relevance. If the merchants can be served either by a low cost "commodity" provider or they can go to PayPal and not bother with a merchant service provider, why deal with an ISO? There are many different answers to this question and we will let other people answer this for their business.

If you want to offer other services, we can help you set those up. Give us a call.