It has been said that you should ever put all your eggs in one basket. This is true in life and in business as well. Banking and other industries typically keep no more than 10 percent of their capital and surplus capital on loan to any one borrower or related group of borrowers. It is estimated by merchants that 80 percent of their earned revenue is generated by only 20 percent of their customers, this is called concentration. There are also monopolistic practices that work do dominate certain parts of industry and business that affect the payments industry.
In the payment industry, we see that Visa Inc. and MasterCard Worldwide are monopolies in the industry, making in nearly impossible for new payment networks to arise in the industry. An new industry that wishes to attempt to gain a foothold against the monopoly faced by competitors may require a small business loan to get started if they even hope to compete. Other examples of monopolies are VeriFone Inc., MagTek Inc., RDM Corp., Panini, and Ingenico. These industries tend to dominate the POS device market. Because ISOs and developers only wish to certify to a few venders, they focus on those that are the most compatible with their needs. There is a large amount of complexity involved in this decision process, which is why it is difficult for new business or industries to form because of the existing concentration. In the instance of POS, acquirers and processors are needed for complete functionality. Processors do transaction authorization, capture, clearing and settlement from the POS to the network for front-end processing. They also handle the back-end processing by sending the money to the merchant.
Because some acquirers do their own processing and some send their processing out to be completed by a third-party, the situation can become quite complicated. An acquirer generally has to use one processor for front-end processing and another for back-end processing. There are also often different merchant accounting systems in play. The sheer complexity of the processor process, it has caused barriers to any new POS networks to be formed. This has continued for at least the past 15 years.
Although monopolies and consolidations can often bring about success for those in the top spots, they can also cause great difficulty and profit loss. For example, there is the First Data, BofA alliance. When it was formed, BofA brought 240,000 merchants to the alliance, while First Data brought 140,000 in. This concentration of businesses would be considered a good thing from a strategic business stand-point at first glance. After KKR bought First Data in 2007, their debt rose by $20 billion, which was over twice the company’s annual revenue. The company’s annual profit became negative $500 million. First Data subsequently lost $3.8 billion in 2008, $1.1 billion in 2009, and $1 billion in 2010. As a result, the company has now had to renegotiate some of its debt to extend to the year 2017. Some people argue that this level of debt is of little consequence because First Data is subsidizing merchants and ISOs through these massive losses, but that will mean little if the company continues to experience revenue losses of this magnitude. In the end, this shows that industry monopolization and subsequent concentration may not be in the best interest of those involved.
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