Tuesday, October 21, 2008

When Credit Gets "Waxed", Debit will "Shine"

In the midst of this economic crises, I have shared my belief many times that "debit card" use which has been growing at an impressive rate these past 5 years, will continue to stay on course.  As credit limits get waxed, it is the debit market that will come out shining...

Here's an article from the Green Sheet which touches on that subject:

The Green Sheet 2.0 :: GS Online
Payment ship navigates economic storm

This is the month that was for ISOs, merchant level salespeople (MLS), and acquiring banks. Federal regulators seized the assets of Washington Mutual Inc., the nation's largest savings and loan, and sold them to JPMorgan Chase & Co. for $1.9 billion. Citigroup Inc. planned to acquire Wachovia Corp.'s retail franchise and banking operations for $2.16 billion, but Wells Fargo & Co. made a counter offer of $15.1 billion.

On Sept. 29, the Dow Jones Industrial Average finished the day down 777.68 points, or 7 percent, making it the largest percentage drop in the history of the stock market. Meanwhile, lawmakers haggled over the $700 billion financial institution recue package. It finally passed both houses of the legislature on Oct. 3 and was signed into law by President Bush.

The news has been ominous - but how will this affect the payments industry?

"The bailout plan was hoping to inject enough capital into the marketplace. The problem at the other end is that it's tightening up the credit because everyone is hoarding their cash. It's not a mortgage issue at all." The rescue package is designed in part to get financial institutions lending again by ridding the market of what is known as toxic mortgage-backed securities - mortgages that exceed 30 percent of a homeowner's gross annual income - that lenders fear could cause borrowers to default.

Acquiring side benefits

As a result, access to loans could be reduced, and this could ultimately prompt a significant interest rate cut by the Fed. However, this could possibly create a benefit to the payments industry.  "I think credit is going to be a lot tougher to get than it used to be, and I think as a result debit card will increase at the same time," said Dee Karawadra, founder, President and Chief executive Officer of Impact PaySystem.

"If and when credit is no longer available then [consumers] will start jumping into the debit card sector," he added. Karawadra believes that merchant cash advance services could benefit from the credit crunch. "Cash advance is readily available, it's a lot easier to access than a loan, plus it's an additional revenue stream for our side."

And the sense of panic seems to be lacking in the payments industry. Adam Elliot, President of ID Insight, Inc., said that U.S. Bancorp is taking a unique approach.  "Everybody's cutting back on credit, but USB is actually doing the opposite. They're out pushing it even harder on home equity and mortgage and credit cards, because they see this big vacuum and they're kind of swooping in to fill it up," he said.

Clicks, cliques, and confidence

Martaus doesn't believe things are going to get as bad as the picture mainstream media paints. "If you're involved in the volume side of things, part of the discount package, you might see a little downturn," he said. "Per location sales are down a little, but ISOs are in the "click" business [number of transactions], so acquirers who keep those click numbers up are going to be ok.

"I'm just getting ready to publish a research project on this, but the typical ISO that I talk to said 'Don't bother with this stuff, I'm too busy closing business.' The ISOs themselves aren't even looking up. When you see the wild fluctuations in the market, ISOs are having swings in their values, but they are less volatile than the market as a whole," Martaus added.

He believes that this is less about money and credit than it is about confidence. "All we are looking for is some decision maker to say 'here's your confidence back'. The problem is we are in an election cycle, and these guys are more worried about re-election than they are about doing the right thing for their constituents and the rest of the country," Martaus said. "The people [on Capitol Hill] just need to start doing their job."

Editor's Note: Yeah, maybe the cartoon on the left is not that far off as politicians can start taking debit card payments (under the guise of the IRS) for the increased taxes we're going to pay over the next century..

Fiserv's View on Next Gen Payments

Payments News: Next Generation Payments Viewed as a Competitive Opportunity - October 20, 2008
Next Generation Payments Viewed as a Competitive Opportunity

U.S. financial institutions see moving toward a next generation payments system, including a payments hub (framework of common, reusable services), as important to remaining competitive according to a recent analysis conducted by the Global Payments Solutions division of Fiserv. Larger banks seem to be moving faster than smaller banks on this, as smaller banks wait to see what vendor packages come to the marketplace, say Fiserv payments analysts.

"From our analysis, financial institutions are looking to converge middle office processes through the deployment of a payments hub to achieve operating efficiencies," said Mike Ringuette, general manager, Global Payments Solutions, Fiserv. "Most are expecting that they can compete better in existing commercial markets and expand into new ones with a next generation payments solution."

Fiserv's analysis of customer priorities revealed that larger financial institutions expect to have re-architected payments systems up and running within the next 18 months. This short timetable appears to be driven primarily by corporate bank customers who use multiple payment channels and are demanding faster, more seamless payment streams, as well as a single view of payment activity. While traditionally thought to be the purview of smaller financial institutions; nearly all tiers of banks are researching outsourcing and server-based application options.

The analysis also indicated that next generation payments systems will need to more effectively address both processing efficiency and risk mitigation across payments channels. "Banks continue to feel pressure to reduce costs in their payments operations," said Ringuette. "Yet, there's also a strong demand to better ascertain risk exposure across all payment channels - ideally through a single-monitoring function. At Fiserv, we are looking to extend and enhance our current processing capabilities to financial institutions of all sizes to meet those needs."

"With the payment environment substantially reshaping, the traditional payment silos in banks are slowly giving way to a more pragmatic approach to payment processing," said Susan Feinberg, senior research director of Wholesale Banking, TowerGroup. "To achieve these more holistic client-facing payment services, banks will prioritize service-oriented architecture (SOA) and workflow projects allowing them to offer unified payment services, even when the payments processing and settlement continue to be siloed."

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