Donna Embry, senior vice president of strategic development at Louisville, Ky.-based Payment Alliance International, has been with the firm since 2006. Embry is also the incoming president of the Midwest Acquirers Association.
ISO&Agent Weekly recently sat down with Embry to get her views on what’s ahead for the industry.
Q: How did you get started in the bankcard acquiring business?
A: I happened to be lucky enough to be a computer programmer at Citizens Fidelity Bank in Louisville, Ky., when the industry started—literally. I started there in 1966—at the very genesis of credit cards. I was involved from the very beginning, which allowed me to truly be at the forefront of ATMs, point of sale, debit cards—the whole industry!
At Citizens Fidelity, my role was product development, but my colleagues and I weren’t actually called product developers. The CEO had a vision for an “acquiring landscape”, which was years ahead of others, and he asked that I play an integral role to achieve this vision. We worked hand in hand to develop the acquiring landscape for the industry and chose to make bankcard and acquiring a primary revenue source for the bank by spinning off a wholly-owned subsidiary focused on issuing and processing. We were closely tied to what later became VISA and MasterCard, and we were one of the top five acquirers in the country at the time we were acquired by PNC in the 1980s.
Q: What do you see as the biggest challenges to ISOs?
A: One of the biggest challenges is trying to keep up with the industry. The industry is rapidly changing and expanding, and there are so many different paths that payments can take so it’s very complex for an ISO to keep up. It’s very hard to choose which path to take and what to be a leader of or even a follower of in many instances. On the flip side of that, you have the pressure of credit cards and credit card acquiring being a commodity.
ISOs have to maintain and compete in a commoditized industry, and there’s also the pressure of legislation coming down on the industry. It comes down to what consumers want, how quickly and efficiently we can provide it to them, integration of the bells and whistles that make the product attractive to merchants and consumers alike, and be profitable for the ISOs themselves.
Q: How well are ISOs meeting those challenges?
A: It depends on the ISO and how big the ISO is. The successful ones have learned to find partners—to pick the best of the best. Nobody can do this alone. Even the very large ISOs work very closely with technology partners to drive new products and services. It’s much broader than just bankcard acquiring.
ISOs that don’t do their own processing need the right processing partner or partners. The cost of entry for processing has become a barrier for many ISOs due to various legislative pressures, technology issues and PCI security requirements. So they need to find the right processing partners to fit their business model as well as the market itself. Then you have the various payments and payment options because retailers are demanding more than just credit and debit cards.
If they are selling hardware, then they need to partner with the right manufacturers. If they are not planning on being their own operation and support area, they need to be able to offload that back office service as well.
Their challenge is to define how they want to fit. Do they just want to be a sales organization or take more of a thought leadership position that helps define the industry? It’s an evolution of any independent, small company. As they grow, their value expands and they take on more. To get started and to stay in this industry and to keep up with it, is really a matter of working with partners that do it and do it well.
Q: How can the industry attract more young people?
A: In some cases, ISOs are becoming a family business. For example, I have started to see fathers bringing in their sons, mothers bringing in their daughters, and so on. That’s one way, obviously.
On the other hand, many people don’t know a lot about the industry and it’s very difficult to grasp it overnight. If you haven’t lived and grown up in it, you lack the exposure that you really need to be successful.
It used to be that banks were the primary players in all these businesses. So people got a job at a bank, and they were able to get trained and excited about this industry. These days, I don’t think many young people know the industry exists because it’s become second nature to their daily lives and they simply don’t know how to get engaged in this industry.
There should be technology and industry payment-related classes that are taught at universities to help students understand how dynamic this market is and how it works. If you really play in this industry, you touch every area, and every aspect of the economy. You get involved with legislation, technology, retailing, you get to understand consumer behavior and marketing, and you get to reap the rewards of your efforts.
I also think that the industry as a whole does not do a good enough job of succession planning—to go on campuses to get bright minds. Technology companies seek out the bright minds, and ISOs of all sizes should follow their lead by becoming more of a presence on campus and by offering internships and jobs to college students, for example.
Once these young, inquisitive minds understand all they can do in this industry, it would definitely excite them. For me personally, it is very exciting to know that I helped define and develop what has become known as this massive electronic payments industry that I continue to help evolve even today.
Q: How has the recession affected ISOs?
A: ISOs have been affected in multiple ways—good and bad. Obviously, the recession has impacted consumer spending and shopping behavior but the fallout hits the retailer’s bottom line the hardest. That dovetails into merchants going out of business because they can’t sustain the impact, as well as fewer businesses being started or fewer new locations added.
In my opinion, the economy is starting to recover, and we’re better now than we’ve been but it has also given ISOs a chance to step back and see what other businesses they should be playing a part in. This allows an ISO to learn where they can fill gaps, where they can make themselves recession-proof in the future, and still be profitable in an uncertain economy. One big example of that, for Payment Alliance and our market partners, was our leadership role in the ATM business so we aren’t just focused on the bankcard side of the business.
From the standpoint of available money for ISOs to build out their organizations, at first no one was lending. I think it’s come back somewhat, but there is still a lot of capital opportunities for ISOs to obtain; it’s just not as easily attainable as it was before the industry became so commoditized.
Q: What's the future of the regional acquirers' shows?
A: I think they are a crucial and valuable component for our industry. They complement the Electronic Transactions Association’s national show because smaller ISOs don’t always have the luxury of being able to take off three to four days to attend the ETA. Also, there is so much going on at the national show that ISOs don’t always have time to attend all the sessions they would like.
The regional shows provide an educational element for the industry—the Cliff Notes version if you will. And because they are spread out over the course of a year, it gives players in the industry a chance to discuss and debate issues and new products or technology that arise during the year instead of just reading about them in the various industry publications. It also gives vendors a chance to meet with multiple clients in one place, instead of having to schedule multiple trips.
Q: What advice would you offer ISOs?
A: I would tell ISOs to reflect internally so they truly understand what their core competence is and determine if they have the game plan they need to support it—or what they need to do to get there. They need to really build their own roadmaps and not get caught up in all the various technology unless it’s something that they are passionate about. Stick to the business and their plans by formulating more than just a one-trick-pony strategy. Don’t just offer one service or one product, because merchants are demanding much more than that. Merchants price shop, so you must be a differentiator and be able to clearly show why your offering is more valuable than the next guy selling similar payments-related services.
More than anything, ISOs need to understand the market they are serving. The more they understand payments and how they work, the better consultant and provider they can be. Merchants don’t understand this business, and ISOs can become that partner by helping educate them. Merchants don’t know what they don’t know—they look to their ISO partners to help them understand what they should or need to know. We’re the experts, so why not help merchants make sense of all the complexities and allow them to do what they do best—run their business.
ISOs should also understand the consumer—their thoughts, their shopping and spending habits, etc. Those of us in this industry are not typical consumers. You have to look at the mass market and truly understand what consumers want, why they want it, and what solution works best to fit their demand. Just because you think you would do something, doesn’t mean the mass market would do it too.
Q: Do you anticipate anything by way of regulation that could have an impact on ISOs?
A: The whole industry ought to pay attention to the new Consumer Financial Protection Bureau that was created as a result of the Dodd Frank legislation. That group is going to look at the payment industry and all the different payment types such as prepaid cards and the rules and regulations surrounding them. They are also looking very closely at money transfer and money transfer licenses such as money orders and check cashing type services. All of those could have an impact, positively or negatively, on services that ISOs sell.
The Federal Trade Commission is also getting very involved with anti-money laundering and the rules and regulations around these fraud schemes. Many times processers have rules imposed on them that require additional reporting, security requirements and other changes to their programs that result in higher costs. That typically shifts to the margins that an ISO may or may not have.
Q: What do you expect in terms of industry consolidation?
A: A lot of ISOs get into the business to build it and then sell it off after a certain period of time. There’s a constant churn in the ISO world. In the long run, there will be fewer of what we would consider to be the “old bankcard acquirers” and you’ll see expanded services from processors. It’s just a natural evolution.
The challenge for many ISOs is whether mandated regulations and rules keep them from keeping up with the software and prohibit them from moving forward. Platforms get old, ISOs don’t want to reinvest, and it’s easier to sell off the business. It’s the lifecycle of every business and a level of financial investment should be allocated in every ISO’s business model to accommodate for such changes.
Q: What will the industry look like in five to 10 years?
A: In five to 10 years, you’re going to see a lot of different players. I think there will always be a need for ISOs, but I also think you’re going to see companies like Google and PayPal, which are at the core of what consumers do, become the new issuers or processors. The way processing is performed will change, but there will still be a need for a distribution channel.
I see ISOs aligning with companies like Google and PayPal as opposed to aligning with card companies. Card companies aren’t going away. I just think ISOs will have to align themselves with these companies because consumers have. Consumers are very aware of these companies as they are consumer facing brands, so ISOs should determine how they play a role with these entities and form partnerships sooner rather than later.
Consumers, for example, are already demanding the ability to pay for items in retail locations just like the way they pay for merchandise online. The Consumer experience and mobility will be the dynamic that forces change in the payments industry.
Q: What role will financial institutions play?
A: You can’t discount financial institutions because they are at the heart of settlement. I think they will continue to play a key role, but it will be interesting to follow how they handle the mobile technology revolution with their customers. It’s definitely something to watch. Will they embrace mobile technology? Will they become the new ISOs? Will they partner with ISOs?
Like all other businesses, they are looking for revenue income. In a way, they could have the same model as an ISO and have a base of customers they cross sell to, whether it is for services they offer themselves or simply refer to an ISO and still make money. They have a great revenue potential from both the consumer and business perspective, and ISOs have a lot of opportunities to work with them so it’s a win-win for everyone. When I started in the business, financial institutions were the only entities that could play in the payments industry versus how it’s dramatically evolved today. But they will always be a key player in the payments value chain.