From the January/February 2010 issue of ISO&Agent.
Consumers need to eat during a recession, but they do not need to get their food from restaurants, says Erik Verryden, president of National Processing Solutions Inc., a Phoenix-based ISO. The ISO has experienced a drop in transaction volume at many of its restaurant clients, while grocery-store volumes have stayed the same or increased, he says.
Verryden's merchant portfolio is not experiencing isolated fluctuations.
As the economic downturn continues to alter consumer spending habits and merchant sales, many ISOs are discovering changes in their portfolios. Some merchant categories that once thrived now are faltering with decreased transaction volumes and lower average purchase prices, while others are experiencing less difficulty.
"We've seen a lot of our merchants slide a bit," says Gil Griego, CEO of CardFinity Corp., a San Diego-based ISO.
As merchants' transaction volumes change, ISOs also can encounter problems. Many ISOs are experiencing financial trouble, yet no wide-open merchant segments exist in which they can find new business, Griego says.
Though the merchant landscape has become crowded with providers, ISOs still can find areas that are not saturated, observers note.
"You always want to go after areas that others are not necessarily in or focusing on," says Todd Ablowitz, president of Double Diamond Group, a Centennial, Colo.-based consulting firm. "There are merchants that may not have been called on [by a merchant-level salesperson] for a long time."
Finding new clients succeeding in the economy involves watching macro trends and the movements in one's own portfolio. Merchants that provide consumers with products they need, such as food or home-repair supplies, generally are surviving the recession better than are some of their peers that do not sell needs-based items, such as entertainment or luxury merchants, observers generally agree.
Tough On Merchants
The recession has affected transaction totals for many merchants, from small mom-and-pop establishments to larger retail operations, note observers. A look at recent data from two processors illustrates the impact.
Total cardholder transactions for Total System Services Inc., known as TSYS, decreased 6% in 2009 from the previous year, the transaction payment processor revealed in its fourth-quarter earnings statement.
Similarly, transaction-processing volume at Heartland Payment System Inc.'s small and midsize merchants dropped 8.6%, during the third quarter ended Sept. 30 from the same period a year earlier. At deadline, Heartland had not yet released its fourth-quarter earnings data.
Neither company revealed specific processing-volume figures for comparison.
Retail, hotel and electronics-merchant categories were "worse than average, continuing recent trends, and petroleum remains weak given lower prices," Robert Baldwin Jr., Heartland president and chief financial officer, told analysts during a conference call in November, noting restaurants, auto-parts and entertainment-classified merchants generated some growth.
Many ISOs also have noticed similar transaction fluctuation among their merchant clients, note observers.
"We have noticed a lot of merchants that have account closures," says Verryden.
Some of the most-successful merchants in the ISO's portfolio used to be furniture stores because of the high ticket prices, says Verryden. "They have taken a hit significantly," he says.
Money Movers of America has seen many restaurants and car dealerships hurt by the economy, says Anthony Holder, chairman and CEO of the Westchester, Ill.-based merchant-service provider. "Some of our sub-ISOs concentrated on them, and their portfolios were wiped out," he says.
As merchants encounter financial difficulties, many are more eager to save funds, says Verryden. "A couple of years ago, you could save merchants $50 a month, and they were reluctant to change" service providers, he says. "Now you show a $30 [per month] savings, and they want to change. Every penny counts."
'Necessary' Products
Merchants that sell needs-based products, such as food, building materials or vehicle-repair supplies, generally have experienced less decline in transaction volumes during the recession than have merchants that sell less-necessary goods, such as luxury or entertainment items, observers note.
"There are certain merchant categories that are more susceptible to having failures during a recession, like general-merchandise stores," says Nicole Schrader, a senior consultant with First Annapolis Consulting, a Linthicum, Md.-based payments advisory firm. Less-susceptible merchants include grocery stores, building-supply stores and health care businesses, she says.
"Many types of business continue to do well [in the poor economy] because they are needed," agrees Ablowitz. "People still have to fix their water heater. They have to replace their garage door."
Auto-repair stores, for instance, are doing relatively well during the recession. Fewer consumers want to purchase a new car, so they are spending funds to make their vehicles last longer, says Schrader. Similarly, consumers who cannot sell their homes instead may pay to replace broken appliances or fix ailing structural elements, she says.
Merchants selling high-priced luxury items have taken a significant hit to their transaction volumes, says Verryden. Stores that do not sell products consumers need are experiencing a larger drop in sales.
Opportunity also exists among educational and instructional merchants, says Holder. "It doesn't matter if it's a juggling school or a driving academy, they have been less subject to bankruptcies because parents are less likely to drop activities for their children," he says, reasoning that parents are more likely to make sacrifices elsewhere in their lives before denying educational programs for their children.
Other merchant categories more stable in the recession include online retailers, discounters and those with lower ticket totals that accept debit cards, note observers.
Two areas growing in CardFinity's portfolio are e-commerce and debit transactions, says Griego. E-commerce merchants "can last longer and weather things a little better in a down economy" because they have fewer expenses than do brick-and-mortar locations, while "the traditional mom-and-pops are struggling to make ends meet," he says.
And the difficult economy has accelerated growth in debit card use, says Griego. "Traditional credit cards were a little soft in '09, and that's only because of the fact that people were reluctant" to transact with credit. "They were more apt to go to debit," he says.
Indeed, there has been an increased shift from credit to debit, says Ablowitz. "Who is more likely to take a higher percentage of debit? Lower transaction-ticket merchants," he says.
Business-to-business retailers also have been increasing their card acceptance, notes Schrader. More B2B merchants are willing to take card payments than in the past because they want to ensure they will receive payment, and they want to receive it more quickly, she says.
Merchants that sell discounted items also have experienced more consumer business as increased numbers of shoppers "have been down-shifting" to less-expensive stores, says Ablowitz. "If they used to shop at Saks, they're shopping at Macy's. If they were shopping at Macy's, now they are going to Kohl's," he says, illustrating how consumers have moved down from high-end Saks Fifth Avenue to upper-market Macy's and value-oriented Kohl's.
Look For Trends
ISOs can determine which merchant categories may be poised for growth by following macro trends and watching the movement in their own portfolios, observers generally agree.
Merchant-service providers should "pay attention to a wide variety of things to tease out one trend" and "apply macro trends to their world," recommends Ablowitz. "You only need one or two good ideas. There is a lot of business out there," he says.
Not all trends, however, are applicable to every region, notes Ablowitz. ISOs should review whether a trend is salient to their markets and geographic regions, he says, noting "the Denver market is not the same as Tulsa."
CardFinity keeps close tabs on its portfolio to determine merchant trends, says Griego. "We have to watch [the portfolio] like a hawk. We have to know where it is going," he says.
The ISO also maintains a high level of communication with its clients to determine how the market is treating them. Getting feedback from merchants is important because it gives ISOs a better idea of what to expect, says Griego. "We try to keep an ear to the ground on what they are saying," he says. CardFinity established realistic expectations for 2009 based on feedback from merchants that stated the market was becoming difficult.
More merchants also began seeking alternate forms of cash flow when loans became more difficult for small businesses to get, notes Griego. "The number of merchants that wanted a cash advance, that just went crazy," he says. Merchant cash- advance companies advance funds to merchants in exchange for future card receivables. Many merchants use cash advances when traditional lending opportunities are not available to them.
Understanding how macro trends affect merchants and watching client portfolios closely can help ISOs determine which segments may be ailing and which are succeeding in the difficult economy.
