Web Acquirers Eye New Business

  During the heady days of the dot-com boom, merchant-acquiring banks signed up Internet retailers en masse in an attempt to grab share in a new market that some researchers projected would hit $100 billion in sales by 2001. Thoughts of huge transaction volumes and revenues to be earned from the sale of additional bank services to Internet merchants, such as cash management and payroll, were dancing through the heads of many executives in the acquiring divisions of full-service banks.
  Trouble was, acquirers soon discovered that many Internet merchants were ill-equipped to compete successfully. Indeed, many Internet-only merchants were led by visionaries and skilled Web-site designers, but rarely did they possess the business acumen a viable company needs.
  Consequently, many Internet merchants entered the game without a solid business plan and were plagued by such problems as poor fulfillment or customer service, and cumbersome return policies. Worse still, some simply sold products or services for which there was little demand.
  Such shortcomings meant that instead of capitalizing on the opportunities e-commerce presented for cross-selling financial services to Internet merchants, many acquirers spent more time teaching those clients to reduce chargebacks, whether they liked it or not, to prevent them from suddenly failing. That's because nearly all of Web merchants' sales come through credit or offline (signature-based) debit cards.
  "Five years ago, there were a lot of merchants just looking to get up a Web site to sell products or services without giving much thought to a business plan," recalls Chris Lee, vice president for Louisville, Ky.-based National Processing Inc., owner of National Processing Co., the nation's second-largest merchant acquirer. "Processors had to work hard to educate Internet merchants that how they ran their business affected card acceptance."
  Much has changed since the bottom fell out of Internet retailing in 2000. As the weak sisters shut down their Web sites, the door opened for the stronger e-retailers and some new ones to fill the void. These survivors and second-generation e-merchants are better equipped to provide a higher level of service to consumers and have the financial resources to handle the volatility of an economic downturn.
  Many of today's leading Web merchants are brick-and-mortar retailers and catalog companies that consider e-commerce as a complement to their existing sales channels and and have the infrastructure in place to support online sales. These players include Lands' End, the big catalog apparel retailer bought last year by Sears, Roebuck and Co. Lands' End typifies the merchants that have already cut their teeth in a non face-to-face sales environment. And even the Home Shopping Network has a Web site.
  Whereas the main goal of e-retailers from 1995 to 2000 seemed to be name recognition and revenue generation, the leading Internet retailers today are focusing on profits. Amazon.com in the fourth quarter posted its second-ever profit. Niche players such as eBags Inc., BlueNile.com and Shoebuy.com also say they're quite profitable.
  The rise of these and other, more professionally run Web-only retailers is freeing acquiring banks to at last pursue cross-selling opportunities as aggressively as they do with non-Internet merchants.
  "The name of the game in acquiring has always been to deepen relationships with clients to get as much revenue as possible," says Dan Murray, director of consumer credit research for Needham, Mass.-based TowerGroup. "In the current economic environment it is certainly the right strategy."
  With Internet merchants showing greater signs of financial stability, cross-selling has become the dogma of acquiring banks. Some banks have even developed integrated sales forces that market services both to branch-based merchant customers as well as Web merchants.
  "There is no reason not to talk to an Internet merchant about cash-management services and acquiring services during the same sales call," says Debra Rossi, executive vice president of Business Internet Services for Wells Fargo & Co., one of the pioneers of Web acquiring.
  More than 99% of Internet merchants signed by San Francisco-based Wells Fargo have a merchant checking account with the bank, according to Rossi.
  Selling Point
  "One of the strongest selling points is that a merchant with a checking account through the acquirer can have funds from card receipts deposited in a day as opposed to two or three days," she says.
  Faster deposits translate into improved cash flow, which is highly attractive to Internet merchants since they pay higher discount rates than brick-and-mortar merchants. The higher rates are due to the lack of a customer signature on a card receipt, which Visa U.S.A. and MasterCard International say constitutes a higher risk for fraud and chargebacks.
  Not only has the increasing emphasis by Internet merchants on profitability prompted acquiring banks to pursue more cross-selling opportunities with them, it is creating a desire among some Internet merchants to obtain card processing and merchant banking services from a single entity. This is prompting at least a few banks to pull processing services in-house rather than offer them through a third party.
  "Banks now view e-commerce as a transaction business, which is why more of them are directly offering processing services to Internet merchants," says Julie Fergerson, co-founder and vice president of emerging technologies at ClearCommerce Corp., an Austin, Texas-based provider of processing and risk-management software. "They no longer want to let third parties handle that end of the client relationship."
  ClearCommerce counts among its clients London-based HSBC Holdings Inc., which last November reached an agreement to acquire Prospect Heights, Ill.-based Household International Inc., as well as NPC and Omaha, Neb.-based First National Bank of Omaha's First National Merchant Solutions. NPC and First National do their processing in-house.
  To illustrate her point about the value banks see in offering e-commerce card processing, Fergerson says that one client bank that provided just cash management, payroll and some related services to a merchant nearly lost the relationship because it did not process Internet card transactions. Fergerson declines to give more detail.
  "The advantage of having an all-in-one banking relationship for the merchant is that all transactions run through a single database," says Fergerson. "That lets the controller view daily card receipts against cost of operations and other financial data, which gives them more control over managing cash flow."
  But providing a full suite of financial services to Internet merchants is not always enough to guarantee they will stay in the fold. "Acquiring continues to be a price-sensitive business," says TowerGroup's Murray. "Once you have a good, extensive relationship with a merchant, price can become less of an issue, but it is still important."
  To that end, many acquiring divisions will sweeten the offer by discounting financial services through the main bank. Wells Fargo will even go so far as to provide some services for free if a merchant signs up for three or more services. "When you cross-sell, you can afford to give better pricing on different products because you are getting more business," explains Rossi.
  That's a critical point with regional and national merchants that generate the card volume to command the lowest price from acquirers. Historically, these merchants have had no qualms about splitting acquiring from other banking relationships if it meant getting a lower price on the former. But as more of these merchants enter the online arena, many are expressing a preference to work with a single provider in both areas.
  Expanding Relationships
  "If a merchant has a good deal on a full slate of banking services, they tend to think more about the value of the overall relationship when getting pitched a lower price on processing services," says Lee of National Processing, which is 86% owned by Cleveland-based bank holding company National City Inc. "The longer an Internet merchant is in business, the more likely they are to expand their banking relationship with their processor if they can. A lot of merchants desire simplicity when it comes to their banking and processing relationships, and they are asking for it."
  That doesn't mean an Internet merchant will not pull a processing contract if it receives a better offer, but it does lessen the chance. Hence, the trend is giving acquiring banks an advantage over non-bank acquirers, which are prohibited by law from offering traditional banking services, when it comes to signing and retaining Internet merchants.
  Not inclined to be at such a disadvantage, non-bank acquirers are getting around that obstacle by leveraging, if they have one, their association with banks that own a majority or partial stake in their business. Dallas-based Paymentech, for example, actively refers new Internet merchants in need of additional banking services to Bank One Corp., and vice versa. Bank One owns 55% of Paymentech; processor First Data Corp. owns the rest.
  "Although we have never really lost merchant business when we were just an acquirer, we don't want to be in a position to now lose business because we can't offer more," says John Shirey, group manager of product development and e-commerce for Paymentech, the acquiring industry's leader in mail-order and telephone-order transactions.
  Still, caution is the watchword when signing Internet merchants. Acquirers that fail to perform due diligence on any prospect, whether it is a pure play or not, risk signing a merchant prone to chargebacks and failure.
  "E-commerce is now more a matter of economic conditions and how well merchants run their business," says Larry Perlstein, vice president for Stamford, Conn.-based Gartner Inc. "There are opportunities for merchants to thrive, but they need a good business plan."
  More Casualties Expected
  The elements of a good business plan include identifying a viable niche, providing first-class customer service, a multi-channel marketing plan, and offering customers multiple payment options. The latter may include an Internet-only currency, such as that provided by eBay Inc.'s PayPal. Without that balance, few Internet merchants can expect to survive in the long term, let alone weather another dip in consumer spending.
  "The Internet merchants that have survived are relieved, but it is still too early for them to celebrate," cautions Ken Goldstein, an economist for New York-based The Conference Board. "It is uncertain whether there is going to be enough of a surge in consumer spending to keep a lot of these players afloat, which means there is likely to be more thinning of the ranks. Survivors will have established customer relationships and run their business well."
  Keeping that in mind, some acquiring banks are leveraging merchant relationships in non-retail categories to grow their online acquiring business. Wells Fargo has launched a program that allows colleges and universities to accept payment for books, room and board and tuition online.
  "The idea is to pull the brick-and-mortar business online by showing merchants how the Internet can make their sales process more efficient," says Rossi.
  Add that trend to the increasing desire of Internet merchants to obtain financial services other than processing from their acquirers, and it appears the pieces are in place for acquiring banks to finally make cross-selling a profitable proposition in the online merchant arena.