Tapping into the U.S. economic pulse
At the beginning of 2017, the future direction of the U.S. economy is anybody's guess, but signs appear to be positive. Sources in the payments industry expect continued growth in several sectors, while some economic observers view potential income and corporate tax reductions and uncapping of business capital expenditure deductions as potential boons to personal spending and domestic business expansion.
Leon LaBrecque, Managing Partner and Chief Executive Officer of LJPR Financial Advisors, has tracked financial trends for four decades. He believes the nation is entering uncharted waters because the indicators we typically use are going to change. "I can tell you that capital goods orders, if [Congress passes] a new tax bill, will probably rise very dramatically in 2017," he said. Along with that, he expects manufacturers' orders, interest rates and consumer expectations to rise as well.
In addition, LaBrecque sees evidence of confidence in the economy among his business clients. "They're going after the financing now," he said. "They're getting ready to purchase equipment, new buildings. I'm not talking about giant deals, but $5 million to $11 million deals." He added that going forward, the small business sector probably will be one of the biggest beneficiaries.
The University of Michigan monthly Index of Consumer Sentiment surged to 98.2 in December, its highest level since January 2004. Setting a record for the index, which dates back to the late 1940s, 18 percent of respondents surveyed expressed optimism that new economic policies would favorably impact the economy. University analysts predicted real consumption in the United States will grow by 2.5 percent this year.
However, in the final days of 2016, the national debt was approaching $20 trillion, so even minor market fluctuations could have a ripple effect on the economy. According to economist Richard Curtin, Director of the Survey Research Center at University of Michigan, growth that is too slow or expectations that are too high represent barriers to maintaining high levels of consumer confidence and impact economic stability.
Payments industry outlook
The Strawhecker Group projected continued growth in consumer use of electronic payments, where the compound annual growth rate last year hovered at 9 percent. According to TSG, broader acceptance in previously untapped segments will help fuel U.S. payments industry revenues, which are expected to reach $831 billion in 2025. Global payments industry revenues have already eclipsed $1 trillion, TSG wrote.
To monitor the health of the payments industry overall, TSG created the TSG Payments Index (TSGPX), comprised of 36 payment companies. Calculated on a value weighted basis using market capitalization, TSGPX companies as a whole have consistently outperformed the S&P 500. At the end of 2016, a $100 investment in the TSGPX in the first quarter of 2011 would be valued at $370, compared with $161 if invested in the S&P 500.
Another reliable resource that has helped many an ISO determine which merchant categories to target, TSG's predictive modeling measures spending in 27 merchant categories (see the sidebar accompanying this article). Several recent retail trend shifts identified by TSG are worth noting.
"Historically, there's been a trend of consumers shopping for electronic related devices or appliances at big box retailers," said Jared Drieling, Business Intelligence Manager at TSG. "In our model, we noticed a significant jump at specifically electronics stores taking share back away from the big box retailers because they're much more specialized." As devices become more complex and connected, consumers seek higher level expertise. Drieling noted that renewed interest in home renovation has elevated such categories as the floor covering, rug and carpet segment as niches to watch. This bodes well for lumber and building supply, household appliance and other home improvement-related businesses. On the other hand, sales in the book, department and family clothing categories have not fared well in recent months.
The expansion of electronic payments into education, healthcare, business-to-business, daycare, garbage collection, micro-merchant, and other sectors traditionally dominated by check and cash payments, represents new revenue channels. "There is a huge opportunity in those areas because they are essentially untapped," Drieling said. "We're also seeing additional acceptance markets, so think about ecommerce." He noted that this applies globally.
Increased debit card usage continues as an ongoing development. According to the 2016 Federal Reserve Payments Study, a triennial report released in December, the number of card payments from 2012 to 2015 rose 19.9 billion, with debit card usage capturing the lion's share, adding 12.4 billion payments of that total over the three-year period.
"Clearly, we're seeing more debit card usage," Drieling said. "Even those small ticket items, which typically were paid with change or low denominator bills, we're now seeing them become electronic payments."
Another closely monitored trend is the changing demography of the U.S. population. Millennial-readiness to adopt technology is expected to exert upward pressure on emerging payments for the mobile, omnichannel world currently under development. Surpassing baby boomers in total population, over 75.4 million millennials (ages 20 to 36 in 2017) entering the work force will ultimately shape the digital commerce playing field.
To take advantage of this vast market potential, Drieling advises acquirers to structure bundled offerings that help unify business functions in niche-specific markets. "The key is becoming a technology player, becoming specialized in a product or service, and becoming vertically focused. From a merchant perspective, payment is just another checkmark they need to set up, structure and help run their business."
Payments employment outlook
To understand the hiring side of payments, Impact Payments Recruiting revealed several trends that have emerged. Candidates versed in regulatory technology, the prepaid sector, data science, content delivery, the payment facilitator model, ecommerce, mobile commerce, platform integration and technology, in general, are in high demand right now.
Impact Payments noted that job searches and clients looking to fill positions didn't slow during the holiday season as they normally do. "It's innovation and new products and new parts of their companies that they're developing right now, which makes it an exciting time to be a part of it all," said J.T. Driscoll, President of Impact Payments Recruiting.
Payment companies today are seeking candidates from diverse backgrounds, not just payments. "They want strategic, innovative mindsets," said Marc Badalucco, Director of Business Development at Impact. "Whether they've been in the trenches on frontlines or leading large teams, it doesn't matter what type of department, these guys and gals need to be able to roll up their sleeves."
Both agreed that understanding and working with independent software vendors and value added resellers is a beneficial asset for payments industry job seekers today. "They're looking for a sales rep that can be a sales rep, but is dangerous enough to be a presales engineer at the same time," Badalucco said. "Now that the economic conditions look favorable for business, the technology is just sitting there ready to go."
General employment outlook
The U.S. Bureau of Labor Statistics reported a low unemployment rate of 4.6 percent. And today's job market, by most accounts, is more stable, competitive, specialized and dependent on part-time workers hired from the growing ranks of the "gig" economy where online marketplaces link candidates to work much as temporary staffing firms have done, but with candidates in command of hours.
According to economists Lawrence Katz and Alan Krueger, from 2005 to 2015, the percentage of American workers engaged in alternative work (defined as temporary help, on-call, contract, independent contractor or freelance) rose from 10.7 percent to 15.8 percent. "We find that 94 percent of net job growth in the past decade was in the alternative work category," Krueger stated.
The on-demand economy that is attracting this self-directed workforce has also attracted 22.4 million consumers, who spend $57.6 billion annually for transportation, delivery, home services, freelance work, and health and beauty services, among other offerings, according to National Technology Readiness Survey data.
Alternative work is nothing new. The mechanics behind it are what's shifting. "We've had independent contractors and freelancers, but they were all individuals working on their own and trying to find jobs on their own," said Michael Ting, Senior Vice President of Digital Markets at Hyperwallet Systems Inc., whose firm initially built its platform to manage cross-border payments for the direct selling industry, but has since expanded.
"What these new companies have done is essentially create a platform for people to showcase themselves and to acquire jobs," he said. "It also enables people of all skill levels to participate." He added that newer independent contractors are often unaware of the business implications, which means the demand for products and services aimed at providing business management tools for this labor force will generate opportunities for experienced providers.
Experts have indicated that the on-demand niche is one of enormous scale. "There have to be companies like Hyperwallet and others that are bridging that gap between the legacy payment infrastructure and financial services infrastructure, and allowing it to be usable for the new type of companies and new type of workers we're seeing today," Ting said.
He noted that most companies in the digital marketplace and on-demand space are technology companies first, so they prioritize technology. "It means that all the partners within their ecosystem have to match the advanced level of sophistication and the ease of use of their technology," he said. "When they plug into our platform, behind it is a global payment network that allows us to transfer funds to bank accounts in over 90 countries."
Outside the gig economy, hiring across the board for U.S. employers appears to be robust. ManpowerGroup's national net employment outlook for Q1 2017, derived by subtracting the percentage of employers planning to hire from the percentage expecting decreased hiring activity, stood at 16 percent with all 13 industry sectors surveyed planning to increase payrolls.
"This is a positive sign for job seekers and the economy at the start of 2017," said Kip Wright, Senior Vice President of Manpower North America "But not all skills are created equal. We continue to see significant differences between industries and employers demanding increasingly specific skills to fill positions."
Consumer spending outlook
At the end of 2016, the value of U.S. consumer assets totaled more than $100 trillion, creating optimism that opening of wallets will continue into 2017. "Third quarter total consumer assets were $103.8 trillion," LaBrecque said. "To put that in perspective, in the first quarter of 2009, they totaled $68.5 trillion. And the debt service ratio in Q3 2016 was only 10 percent, well below the 13.2 percent in 2007 leading up to the recession."
If last year was any indicator of an increased appetite for spending, U.S. consumers racked up $21.9 billion in credit card debt in the third quarter of 2016, the seventh largest third-quarter debt accumulation in 30 years, and were expected to finish the year with an $80 billion net increase in credit card debt, according to WalletHub's 2016 Credit Card Debt Study.
Michael Rittler, Head of Retail Card Services at TD Bank, whose department manages promotional financing programs for customers through retail clients, said retailers are optimistic that purchase volumes will increase this year. A TD Bank survey of furniture retailers found that 80 percent expect same-store purchasing volume to rise in 2017.
For large ticket purchases, such as jewelry and furniture, he said the journey and first impression of a store often begins online and ends in the store. "From a credit perspective, as an extension of their brand this represents a key opportunity to pre-qualify customers online, so that when they're in the store it can be a seamless transaction in the store," Rittler noted.
This financing model has also become popular for smaller ticket purchases, where consumers elect to spread out payments. "Areas where people are accustomed to a monthly payment type scenario, like cell phones, where technology quickly changes and upgrades are needed," he said. "In that case, it's really not something that becomes an enabler of the purchase, but a convenience, because it syncs up with how they think of the product."
In either case, financing simplifies the transaction for the consumer and produces the desired end result in that more products can be sold and existing customers retained as product upgrades become available.
To sustain consumer spending, monitoring creditworthiness and confidence are key. Recent developments in the auto industry point to an alarming trend. With auto dealers posting three years of record breaking sales, the Federal Reserve estimated that 6 million sub-prime borrowers were at least 90 day delinquent on their auto loans. Over-extended consumers could be problematic in certain sectors of the economy.
The housing market bubble burst of 2006 serves as a reminder that too much optimism is never advisable. But sound decisions based on solid research can go a long way toward ensuring a steady income in 2017 whether the economy is steady or rocky.
SIDE NOTE:Which merchant sales categories made the grade?
The Electronic Transactions Association's U.S. Retail Holiday Spending Report Card, powered by The Strawhecker Group, analyzed spending trends at 3.5 million card-accepting merchants in 27 retail categories based on 57 consecutive months of credit/debit same store sales data. To help ISOs chart a plan for targeting merchants with positive growth (A, B grade), flat sales (C grade) or negative growth (D grade), results are as follows:
- Household appliance stores
- Lumber and building materials stores
- Automotive tire stores
- Computer software stores
- Discount stores
- Floor covering, rug and carpet stores
- Home furnishings and equipment stores
- Automotive parts, accessories stores
- Men's and boy's clothing stores
- Auto and home supply stores
- Gift, novelty and souvenir shops
- Hardware stores
- Radio, TV and electronics stores
- Retail nurseries and garden stores
- Shoe stores
- Women's accessory and specialty stores
- Men's/women's clothing stores
- Miscellaneous general merchandise stores
- Miscellaneous furnishing specialty stores
- Book stores
- Department stores
- Family clothing stores
- Hobby, toy and game stores
- Jewelry, watches, clocks, silverware stores
- Miscellaneous apparel and accessory stores
- Miscellaneous retail stores
- Sporting goods and bicycle stores