The Credit Crunch is Everyone’s Crisis

Here's How to Cope

By: Biff Matthews, President, Cardware International

I recently attended a business retreat whose participants included a balanced
cross-section of small business owners.  The US economy was a main topic of
conversation.  The consensus is that tightening credit, and economic conditions
overall, will worsen before they improve, irrespective of what the Federal
Reserve does.

One participant, who quoted ideas from the recent book, The Roaring 2000s
Investor by Harry S. Dent, shares the author’s prediction that the US will suffer
a depression, not a recession, about 2010.  Yes, depression.

Still optimistic, the owners moved the discussion to how, as small business
owners, we can remain profitable, and add meaningful value, during a significant
economic downturn.

The dominant view is that cash is king, and that improved liquidity, along with
increased cash reserves, are requisite to weather the storm and take advantage
of opportunities created in adversity.  There’s nothing unseemly in acquiring assets
or a business from a competitor who is highly motivated to sell, for whatever reason.

So what does the current worsening credit crunch, coupled with a predicted
downturn in the economy, mean to the MLS – and how can they prosper
during tenuous financial times?

Merchant volume is the product of the consumer’s willingness to buy. 
This is diminishing for many due to unemployment, under-employment,
or over-extension of easy credit.  Consumer spending is only predicted to
rise by 2% in the 4th quarter, and since consumer activity is 70% of GDP,
the ripple effect is significant, and inescapable. 

Exacerbating the situation is a negative savings rate that continues to worsen,
and a cut-off for many families of their ability to regard home equity as a
bottomless piggy bank.  The net is that disposable incomes are on the decline,
and that will produce equivalent drops in consumer spending.  All but the top 10%
of earners will migrate from consumption to safety mode, curtail spending to
essentials and forgo most discretionary spending.

The most serious down-side for the ISO and MLS is that our customers,
the merchants, will experience higher failure rates.  This is particularly true
within sectors, such as restaurants, that are perennial residents of the financial
precipice. Other businesses, particularly those with slim margins, or who rely on
high volumes of discretionary dollars, or are not well-insulated, may fail as well. 

Fewer merchants with lower average sales volume produces lower residual income. 
As an MLS, you need to anticipate and manage for this scenario.

So how does the MLS prosper during turbulent financial times? 
I believe the best strategy is an aggressive return to the basics of the business –
those core competencies that made you successful in the first place.

Use targeted prospecting in areas where growth may be slowing, but is unlikely
to stop. Focus, too, on business categories such as utilities, grocery, medical care and
pharmacies, and petroleum, that are less vulnerable to the economic pendulum. 

Be more methodical in sales efforts, increasing the number of cold
(or “warm” calls.)  New business will continue to open, and surviving businesses
will, even more, seek to reduce expenses and improve sales opportunities.

Identify businesses whose volume didn’t fit your original model.
(This is not the time for model-gazing.)  Resell current merchants who
would benefit from an upgrade.

Sell additional products to help merchants manage more efficiently. 
Service your customers more creatively, and actively explore additional
services or functionalities that can help them be more productive, or reduce
costs.   Help them manage the inevitable tightening of lease terms, or rate
increases that will occur as vendors seek to offset losses from lower-then-
normal equipment sales.  

While not appropriate for every merchant category, products such as EBT,
gift cards, and prepaid cards, along withtelephone cards and top-up, along
with prepaid cell phone, create additional store visits, thus encouraging
shopping and sales.

Of course, if you’re already considering sale of a merchant portfolio or
residual flow, move quickly before the value in term of multiples falls with
the corresponding drop in volume and residuals. 

None of this is rocket science, just a simple return to the techniques that
helped us succeed in the first place.

Focus on being a true partner by offering products or services such as acceptance
of HSA or FSA cards, or benefit reimbursementthat will support the business
during a downturn.  Keep in mind the adage  “Do no harm,” which will become
most important in the near term.

Bad economic times increase the incidence of bad checks.  Offer check
authorization or guarantee to reduce these losses, along with check truncation
to reduce internal processing and banking costs.

Offer remanufactured equipment, which generally costs less than new devices. 
Offer earlier generation devices that meet the core processing needs of the
business today.  This will get you in the door so you can return another day,
when you’ll have the opportunity to up-sell when the economy and the
merchant are on sounder footing.

Offer only those services that will truly save your merchant money,
or increase his sales.

Seek out those few remaining paper-based merchants and give them an
inexpensive remanufactured or used terminal.  A Tranz 330 or 380, Nurit 2085
or a Hypercom T7P will help them protect the card transactions they will
continue to have.  Assess a different rate if needed to offset free equipment,
but persuade those last holdouts to convert to electronic processing.

A surprisingly large percentage of merchants have stand-alone terminals
without a printer.  Printers speed the receipting process in addition to streamlining
the settlement process, reducing the merchant’s labor expense.  A reduction in
the settlement process of just 5 minutes per night will recover the investment
in the printer in less than a year.  (Yes, just 5 minutes.)

Now, too, is the time to service your merchant. Is signage current, clean,
and likely to encourage card usage?  Is the POS equipment clean and able to
convey a positive appearance for both your company and the merchant? 
Are support and authorization stickers current?  Are Quick Reference Guides
available?  Does the merchant have a back-up method for when (not if)
electronic processing fails?  If not, this is the time to educate and up-sell a
back-up imprinter and forms.  It isn’t sexy, but it is practical, and that,
I would suggest, is what is called for now.

While not appropriate for every merchant category, products such as gift cards
and prepaid cards produce store visits, and encourage sales that would
otherwise not have occurred.

Ask your merchant how business is doing, and his plans for weathering the
economic storm.  Ask what the plans are for the future, actively listening for
future add-on sales opportunities.  Identify what you can do now to help his  
businesses survive and grow.

Ask how competitors are doing, which are expected to survive, and what is
known about that businesses’ future plans.  Active listening is a powerful tool
that yields sales opportunities, not always immediately, but eventually. 
This is the environment for partnerships, not quick-hits.  And, as one
business fails, another replaces it, so be ever vigilant.  As a wise friend
once counseled,  ‘be in the present.’

With fewer start-ups, now is a good time to focus on ensuring that those
merchants currently in your portfolio stay in your portfolio by remaining viable,
and by recognizing your value to their success. 

In my view, the merchant cash advance business, lending money to
merchants with marginal credit, is the retail equivalent of the sub-prime
mortgage business – a train wreck, doubly so when the economy is unsteady.

In turbulent economic times, it’s those businesses that have cash, or are liquid,
and are not burdened with excessive debt, that survive and ultimately prosper.
But regardless of economic conditions, it’s prudent to manage your business
as if a recession were imminent.

The basics never go out of style.  They are not trendy.  Careful, qualified
prospecting and cold/ warm calling to sign new merchants, working with
current merchants to help them succeed through new or additional services
and products, and excellent service teamed with active listening for opportunity
will all sustain you and your business. 

Biff Matthews is President of Thirteen Inc, the parent company of
CardWare International.  He is one of 12 founding members of the ETA,
serving on its board, advisory board and committees.  (740) 522-2150

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