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This story appears in the January 2009 issue of Cards&Payments.
Much has changed in the financial-services business in the nine months since merchant acquirer and transaction processor Nova Information Systems Inc. changed its name to Elavon Inc. The United States and Europe, where Elavon operates its merchant-acquiring business, have stumbled into the worst economic crisis since the Great Depression, consumer spending is down and charge-offs are up.
But to Stuart C. Harvey Jr., CEO of Elavon's Global Acquiring Solutions division, the economic turmoil presents both opportunities and difficulties for financial-services companies with relative fiscal health, a diverse clientele and careful risk-management practices.
Elavon, which provides processing services to financial institutions and merchants, is a wholly owned subsidiary of U.S. Bancorp. The Minneapolis-based corporation reported overall net income of $576 million in the third quarter ended Sept. 30, down 47.6% from $1.1 billion for the same period last year. But at least U.S. Bancorp reported income, not the net losses logged by many of its peers and larger banks for the quarter. Such relative stability draws increased deposits and investments, which provides Elavon with some extra financial protection, too, Harvey says.
The diversity of the merchants Elavon serves provides a hedge against difficulties in some parts of the merchant market, Harvey notes. Elavon counts some 850,000 merchants in North America and more than 200,000 in Europe. It claims to be the top processor in North America for airlines and second to the hospitality industry based on transaction volume.
Nadia Oehlsen, Cards&Payments senior editor, spoke with Harvey recently about the challenges and opportunities of acquiring under current economic conditions.
Your parent, U.S. Bancorp, reported that its payments-services business, which includes Elavon, earned $269 million in third-quarter net income, down 1.8% from $274 million at the same time last year. How is the economy affecting Elavon?
The economic environment challenges all of us to execute at a much higher level from efficiency and accountability standpoints. It forces some separation between those who are really good at executing their business model versus some who maybe can ride along in favorable terms without the same level of attention to detail and the same standards. What's not broken out in U.S. Bancorp's financials is that, even in a difficult year from a consumer-spending standpoint, Elavon is still poised to grow our pretax contribution year over year in double digits. [Elavon would not disclose specific numbers.] Part of our strength is diversification and what's proving to be a very prudent approach to risk management in our banking business and merchant-acquiring business. We're fortunate to have very broad geographic diversification. And we have all types of merchants with whom we do business, from very large national and international conglomerates to local restaurants, grocery stores and your local dry cleaners.
Which parts of your business are suffering most from the downturn, and which segments are faring better?
There's no question that we are being impacted by lack of consumer confidence, and we see that reflected in same-store sales growth. Certain sectors, such as government services, medical services and education, have held up reasonably well, even in a bad economy. People still pay their tuition bills and bills at the bookstore. But on discretionary spending, we're seeing some merchants experience significant pressure. Specialty retail stores, home furnishings, apparel and certain restaurants appear to be suffering, particularly of late.
How is the economy impacting the acquiring business in general and Elavon's relationships with its customers in particular?
The U.S. already is a consolidated acquiring market. The top four or five merchant acquirers process for about 90% of the market. Acquiring is much more fragmented and diversified in Europe, where the top five acquirers control maybe 20% of the market. So the table is set there for substantial consolidation to come. A lot of banks have historically kept their merchant-acquiring business in-house, particularly in Europe. Many banks have a payment system in which the card-issuing business, the ATM-driving business and the merchant-acquiring business are all bundled together working off the same system. But many banks, while they make money on the card-issuing side or the ATM-driving side, are at best breaking even or even losing money on the merchant-acquiring side. So more banks now are reaching out to us to be their third-party acquirer. Because Elavon is exclusively focused on payments, we do not pose a competitive threat to banks who seek to partner with us, whether that's through the sale of a portfolio or to work with us in an alliance.
As an acquirer, how are you able to help your merchant customers achieve and maintain compliance with the Payment Card Industry Data Security Standard as their own budgets tighten?
Our goal–and the goal of most acquirers–is to ensure that cardholder data remains secure throughout the entire transaction cycle. Acquirers, including Elavon, are insisting that new merchants being boarded are PCI compliant. We work with Trustwave and other compliance providers to provide merchants with access to the right tools and services to assess their processing environment and comply with industry standards.
What if a merchant asks for more time to meet a PCI requirement given its IT budget constraints?
Unfortunately, we're at a point where we're not authorized to board that merchant. Before, we would have some flexibility to work with them or give them time. We can't compromise the integrity of the payment system and start making exceptions. We can do some things to help them, but at the end of the day, before they're officially boarded and processing cards through our network, it is absolutely mandated that they are PCI compliant.
Why is Elavon's new single platform in Europe important?
We pride ourselves on operating efficiently. When we do acquisitions, buy assets or purchase portfolios, we don't leave them on legacy technology platforms. We've had one single processing platform in North America for a long time. Our international processing platform, which we call IPP, is a platform derived from some of the core tenets and the basics of our North American platform. IPP has multicurrency and cross-border capability that our North American platform does not have. It's a huge competitive advantage to us. Not only does it control cost for us, but if a merchant is processing in multiple countries and multiple currencies, we're able to provide them with consolidated reporting and settlement. We own the entire payment process end to end, but we have the benefit of local market support.
And working with only one platform helps us be responsive to industry regulations like the Single European Payments Area and to security requirements like PCI. We have pronouncements from the card schemes that interchange is going to change with certain different card types. In those cases, we have usually just a few days or weeks to respond to those interchange requests, which is easier to do when we only have one platform to change. It also makes us more responsive to new product initiatives like mobile commerce and emerging technologies.
Are there other areas of the globe where you are looking to expand your acquiring business?
It is absolutely our ambition to expand beyond North America and Europe. Southeast Asia would be a logical extension of our footprint. Some of the growth dynamics and economics of that region of the world are extremely appealing to us. We wouldn't go in alone, but when we find the right bank or financial institution to partner with, that really facilitates the ease of entry into new markets. Partner banks have been a great key to our success in the U.S. and Europe. They've helped us understand the regulatory and credit environments and make good decisions on the types of merchants with whom we do business.
With Democrats controlling the White House and more congressional seats now, what legislative and regulatory changes do you expect for the payments industry in 2009?
The Senate races were as important or more important than the presidential race from a payments standpoint. I expect to see rather active engagement at both the state and federal levels with the new paradigm of substantial Democratic leads in both the House and Senate. Democrats are really going to be able to drive federal and state policy changes much more quickly than before. We're going to see policy changes on interchange. We're already seeing policy changes on issuer practices, and we're going to see more legislation like the Credit Cardholders' Bill of Rights. We'll also see increased focus on data-security legislation. And the last one I would highlight is financial literacy, making sure customers and merchants understand what they're signing when they sign a contract with a payments company, whether it's on the issuer or acquirer side.
What potential legislative changes concern you most as an acquirer?
I really hope that we as an industry don't find ourselves having interchange dictated to us by federal or state mandates. To legislate or dictate very specific interchange provisions can really undermine the payments industry. The vast majority of Democrats and Republicans realize that. But there is the Conyers-Cannon bill on the federal horizon, and there were something like 25 bills in 14 states that weren't enacted or passed last year but could re-emerge this year. This is a very competitive industry, and I have faith in free markets as long as the consumer is protected and the merchant is protected with disclosure, with acceptable business practices, adequate security and privacy, and contracts everyone really understands. Our merchants are smart and know how to shop around and ask for terms that benefit them and their businesses.
Any other thoughts on the year ahead for the payments industry?
Even in tough economic times, this is a great business. It's a great industry that's getting better all the time. We have a lot of heart in this company and really care about doing the right thing on behalf of merchants, our alliance bank partners, our independent sales organization and member service provider community, and our community-bank channel. I'm really proud of our company, and the tough economic times have really forced us to pull together and operate at even higher levels than we've been called on before. CP
