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Getting With The Program Traders Magazine, December 2012

Mary Schroeder

Andy Brooks is concerned about what he sees as inequities in stock markets. And as head of U.S. equity trading at T. Rowe Price Associates in Baltimore, he's doing something about it.

The 33-year veteran of the T. Rowe trading desk has, for instance, taken on order routing practices, co-location of servers in the same facilities as exchanges' matching engines, and "inaccessible" quotes and high cancellation rates in the halls of Congress, as recently as September.

T. Rowe Price Trading Desk

"There is a growing distrust of the casino-like environment the marketplace has developed over the past decade," he said in testimony before the Senate Committee on Banking's Subcommittee on Securities, Insurance and Investment.

Brooks expressed concern to the subcommittee about the maker-taker model, payment for order flow and internalization of orders, as well as the widespread use of co-location, which he believes creates an uneven playing field between short-term traders and long-term investors. He also warned about the blurring of the lines between broker-dealers, which now match their own customers' orders against each other's, and exchanges, which match what orders are, in effect, left over.

In an interview with Traders Magazine, Brooks talked about the challenges market participants face, as well as his history at T. Rowe Price and the U.S. equities trading desk there.

"We're concerned about the erosion of investor confidence, as well as the fact that the market seems to be out of balance in terms of its orientation toward investors-geared more toward those with very short time horizons, and less toward those whom the market was originally intended to serve," he said. "We think it's a very good time to bring the industry together and try and experiment with some ways that might make investors feel better about the marketplace and its commitment to everyone, in terms of transparency and disclosure, and equal opportunity."

Brooks proposes creating a number of pilot programs to address issues as they are identified, which would then provide data and results that could be analyzed and assessed.

For instance, stock markets now operate on penny spreads, so-called decimalization. That can make it unprofitable to trade in companies whose shares are not widely traded. So one pilot program could test spreads of more than penny-three cents, five cents and 10 cents, for example. Many small companies need their stories told, and wider spreads might incent brokers to do that.

Another pilot program could eliminate inducements to order routing such as the maker-taker model, which rewards "makers" of liquidity with rebates on commissions and charges "takers" of same. This pilot would track the results of applying standard fees to both sides of a transaction.

Another program could reward market participants who take on obligations to make markets in specific stocks with preference in receiving order flow in the stocks they are handling. This would help make sure "their quotes are bigger, tighter and more real," said Brooks.

Yet another program, tried so far in different forms by Direct Edge and Nasdaq, could charge a fee for each quote a firm generates past a certain threshold, to curb excess quotes that just get canceled. The threshold should be low enough to have impact and be the same across all exchanges, Brooks said.

"There's been a lot of positive change over the last 15 to 20 years, but also some unintended consequences. Maybe some of things we all thought would be good haven't been so good. Let's step back and try to experiment and see if we can find some better solutions," said Brooks.

Brooks believes "all of us have to reaffirm our obligation to protect the markets. What's clear is that more people need to weigh in on the conversation."

The buyside hasn't generally done a good job in presenting its views to regulators to represent the interests of investors, he said.

"The high-frequency trading crowd has been very successful at presenting their side of things, that they're the best thing since Mom and apple pie. The buyside has not been nearly as effective in suggesting perhaps the activities today aren't as constructive as they should be," he said.

Three Decades in Trading

Brooks joined T. Rowe Price in 1980, a couple years out of college. He assumed his current role in 1992 and reports to Clive Williams, the global head of trading.

The biggest change in market conditions over Brooks' career has been the speed at which trading decisions are implemented and market participants interact, he said. This, of course, is a consequence of the advance of technology in market operations.

The result has been an exponential increase in volume that an open-outcry system would not be able to handle, he said. "But," he added, "the old system wouldn't have had a flash crash."

Some things haven't changed, like the ability to identify good companies at cheap valuations, he said. That still is a good money manager's stock, you might say, in trade.

"Trying to identify good companies that are mispriced to find great multicycle investments is an ongoing challenge," he said.

Brooks runs a desk of 12 traders, divided into a large-cap desk and a small/midcap desk. Each trader is responsible for specific product lines and portfolio managers. Their secondary job is to be knowledgeable about particular Standard & Poor's industry sectors, such as health care and energy.

"We utilize the sector responsibility to leverage our knowledge base and help us process information. It also allows our traders to get closer to our analysts," Brooks said. "It's important for traders to retain some ability to be a generalist. It's important to have an awareness of different markets because you'll be supporting and backing each other up."

The traders work closely with the firm's portfolio managers and analysts and "have a keen appreciation of what [the portfolio managers and analysts] are trying to accomplish," Brooks said. "It's important for traders to have a clear sense of mission. It's easy to get in trouble in these markets if you don't have a clear idea of what you are doing."

The firm's turnover is relatively low "and our trades tend to be incremental, but our people have made decisions, so the trading desk wants to be decisive, and we're not afraid to do block trades," said Brooks. "If we buy a stock that we like and it goes lower, our sense is to buy more."

The trading team is not afraid of technology. Trading strategies take in both dark pools and algorithms. "We're going to source liquidity wherever it resides," he said. "Over the years we've tried to have an open mind about chatting with anybody who might provide liquidity or innovation in the marketplace."

"But we're concerned the market has become too complicated. It's cluttered and confusing," he added, with roughly 50 different equity venues, for instance, lit and dark. "We're outsmarting ourselves with all of these different ways to trade. In the spirit of encouraging innovation, we've probably allowed too much competition, and it's time to reassess."

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Big Banks See 7.1% Drop in Trading Revenues Traders Magazine Online News, January 25, 2013

Mary Schroeder

Equities trading revenues declined 7.1 percent in 2012 for five big investment banks, even though overall daily volume on U.S. markets fell 18.5, according to financial reports released last week.

Overall, revenue for the five banks fell to $21.8 billion from $23.4 billion in 2012, based on their financial reports for the fourth quarter and full year.

Three big traditional investment banks, Bank of America Merrill Lynch, Goldman Sachs and Morgan Stanley, reported an average decline in revenue of 11 percent for their institutional equity trading businesses for the year ending Dec. 31, 2012.

Revenue for the three banks dropped from $6.1 billion in 2011 to $5.5 billion in 2012, according to year-end figures released by the banks.

Faring better were Citigroup, which saw its equity markets revenue stay essentially flat, at $2.4 billion for the year, and J.P. Morgan Chase, which saw a drop of 1.6 percent to $4.4 billion in its equities markets business.

The revenue declines are the result of lower volumes in both equities and derivatives trading, said Howard Tai, a senior analyst with Aite Group.

However, while the large banks have suffered a revenue decline, they are faring better than smaller firms, said Larry Tabb, founder and CEO of Tabb Group. “We have seen a number of smaller firms go under.”

Newedge UK Financial, Ticonderoga Securities, WJB Capital, Kaufman Bros., Momentum Trading Partners, ThinkEquity LLC, Rodman & Renshaw LLC and WJB Capital Group Inc.all shuttered their equities trading operations last year.

Trading Volume Down

The revenue declines come as average daily trading volume was down 18.5% in 2012, according to consolidated statistics recorded by the Nasdaq OMX Group.

The drop in trading volumes is due to the shift of institutional and investor money from equities to fixed income, Tai said. As well, retail investors continue to suspect that the market infrastructure is stacked against them in favor of high frequency traders, at least from an intraday trading standpoint, he said.

At the same time, lower market volatility reduces the need to hedge with derivatives, he said. The CBOE Volatility Index, or VIX, has fallen from a peak of 79 in October 2008 to 12.6 on Thursday. That is the lowest level since the credit crisis erupted in September 2008.

Indeed, according to The World Federation of Exchanges’ (WFE) annual survey of global markets, the number of on-exchange equity derivatives contracts traded in 2012 decreased for the first time since 2004, dropping by 20.4 percent to 14.9 billion.

The drop in equity derivatives is probably explained by the significant decrease in volatility observed in 2012, WFE said.

Another challenge for banks’ institutional equity trading businesses is that equities are primarily traded electronically, with minimal commissions, Tai said. The margins for IPOs and secondaries are a lot higher, “so you need for companies to come to the stock market to raise money.” But with interest rates so low, they are going to the debt market instead, he said.

Volumes are also low because equities tend to move up or down together so there is less incentive to trade, said Tabb. “Coke and Pepsi are moving in the same direction instead of in relationship to what their real business model is showing,” he said. “A lot of what’s driving the market is macro shocks. Is Washington going to default on their debts? Will the euro break up? If the euro breaks up, it doesn’t make a difference whether I own France Telecom or Fiat. All European stocks are going to go to hell in a hand basket.”

The larger banks and brokers are faring “much better than the smaller folks,” Tabb said. That’s because the larger firms are attracting more business and pick up a greater slice of the available volume.

With fewer commission dollars, buy-side firms are concentrating flow with larger firms that can provide more services such as research, corporate access, IPOs and capital, Tabb said. And “the dealers have been doing a better job of rationing these services to buy-side firms that don’t meet volume and revenue projections, he said.” Dealers are also ticking rates up and not being “as aggressive in pushing everything through low-cost low-touch channels,” Tabb said.

Bank of America Merrill Lynch and Morgan Stanley declined to comment. In its 2012 financial results, Goldman Sachs said that lower equities commissions and fees reflect lower market volumes.

Separately, net revenues for Goldman’s equities client execution market making business grew by 4.6 percent in 2012. Revenues grew from $3 billion in 2011 to $3.2 billion in 2012. The increase primarily reflected significantly higher results in cash products, principally due to increased levels of client activity, the company said. Excluding the impact of debit valuation adjustment (DVA), revenues for that business declined by 10.5 percent for the year. Debit valuation adjustment forces banks to mark to market their debt every quarter.

For their part, JPMorgan Chase and Citigroup, historically focused on retail banking, commercial banking and debt underwriting in the U.S., reported flat institutional equity trading revenues for the year. The firms weren’t as affected by lower equity volumes because their business is more focused on fixed income, and hence they carry lower operating expenses for their institutional equities trading business, Tai said.

JPMorgan Chase declined to comment. In a call with the media last week, Citigroup’s CFO Gary Crittenden said that the institutional equity trading business was improving but that there was still more work to do. Mark Costiglio, a spokesman for the bank, declined to elaborate.

Banks’ institutional equity trading groups provide electronic trading, trading in equities, options and futures. Some banks like Goldman and JPMorgan break out their prime brokerage business separately while some, like Morgan Stanley and Citibank include it in their institutional equity trading group results.

Fourth Quarter

Revenues generally dropped from the third quarter to the fourth quarter because concerns about the fiscal cliff kept investors away from the markets, Tai said. However, revenues increased in the fourth quarter of 2012, when compared to the last quarter of 2011, because 2012 was a bull market for equities while 2011 was a bear market, Tai said.

Year over year, revenues for the five banks gained from $4.3 billion to $4.8 billion. But their combined revenues fell 4.8 percent in the fourth quarter, from $5.1 billion in the third.

Bank of America Merrill Lynch reported that equities sales and trading revenue was up 9.4 percent in 4Q 2012 compared to the year-ago quarter due to increased client balances in financing and improved trading performance in derivatives, according to the firm’s 8K. Revenues grew from $652 million in the fourth quarter of 2011 to $713 million in 4Q 2012. Fourth quarter 2012 revenues were about even with revenues from 3Q 2012.

Goldman reported a 45 percent jump in revenues for its equities client execution business in the fourth quarter of 2012 compared to the year-earlier period. Revenues grew from $526 million in 2011 to $764 million in 2012.

The increase reflected significantly higher net revenues in derivatives and higher net revenues in reinsurance, the company said. These increases were partially offset by a 7.7 percent drop in commissions and fees, reflecting lower market volumes, the company said. Revenues from equities and commissions and fees dropped from $782 million in the last quarter of 2011 to $722 million in the last quarter of 2012.

During the quarter, the company’s equities business operated in an environment generally characterized by low volatility levels and an increase in equity prices in Asia and Europe, Goldman said.

Morgan Stanley reported that equity sales and trading net revenues were essentially unchanged from the prior year quarter, although stronger performances were noted in the derivatives and prime brokerage businesses.

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Finding the Silk Road for Fund Trade By Mary Schroeder August 13, 2012

Setting up a mutual fund in China or India may be appealing to U.S. fund companies because of the growing affluence and high savings rates in those countries. But it is a long and multi-faceted process.

The effort typically requires a joint venture, and as a result "it involves both a corporate transaction as well as setting up a domestic fund product," said Chris Christian, a partner with Dechert, an international law firm with an

investment management practice.

Complicating matters further, the Chinese government doesn't allow a U.S. manager to acquire more than 49% of a Chinese asset manager, so the U.S. manager doesn't have control over the joint venture, said Christian.

"In India and China, you need a domestic fund, which requires substantial infrastructure" said Christian. "In Hong Kong and Latin America, customers can and will buy a non-local domiciled fund."

The 49% ownership cap is an obstacle, but that entry barrier is no longer the biggest problem for overseas institutions entering China.

"The Chinese capital market has been increasingly open, and this stance has been once again enhanced in the latest nation's five-year strategic plan,'' Mike Fan, an analyst with Morningstar in Shenzhen, said.

"We do see changes especially when the new China Securities Regulatory Commission (CSRC) governor came to his role last year, the speed of new fund companies rolling out reached almost historical high in 2011 and this year."

The real difficulty, says Fan, is actually running the asset company in China.

"It is not rare hearing that overseas shareholders having conflict with local management, or that CIOs couldn't manage well and achieve good returns in the local markets," he said. "The challenge is really to find the best balance point between insisting the best practices and values in matured markets and finding a successful route in the less developed emerging markets."

American companies have actually not been the biggest foreign players in China, according to Fan.

"My guess for this would be the market in the U.S. is quite mature and big enough," Fan said. "But for the Europeans and especially the Asian

companies, they need this market."

Setting up shop in India

Some fund companies that have ventured into India relatively recently have found the going a bit tough. T. Rowe Price, which bought a 26% stake in UTI Asset Management Co., a Mumbai-based investment manager, and UTI Trustee Co., which provides trustee services for mutual funds, for $142 million in early 2010, has reportedly been frustrated because it hasn't been able to agree with the other stakeholders on the appointment of a new chairman.

As a result, UTI Asset went without a top executive for close to a year, leaving the company adrift in a competitive market.

Setting up a fund in India "is not impossible or that difficult but it is not that easy either compared to [doing so in] developed markets,'' said Siddarth Shah, partner, head of the funds practice at Nishith Desai Associates, a law firm headquartered in Mumbai.

The first step is to determine the class of assets that a U.S.-based fund company wishes to target. All four categories of investments are regulated by the Securities and Exchange Board of India (SEBI), but are governed by different sets of regulations.

The four classes are: alternate assets, which include private equity and real estate and require an investment of at least 10 million rupees (or $180,000) per investor; mutual funds, which are targeted at the retail market; portfolio management, which is targeted at high net worth individuals who can invest a minimum of 2.5 million rupees (or $45,000); and collective investment schemes, which are targeted at retail investors and allow an investor to profit from sales of agricultural produce or profits from raising livestock.

The next step, according to Shah, is to set up an entity in India that will act as an asset manager. India restricts and regulates some foreign investment, but allows foreigners to set up an entity in India to carry out investment

activity. However, the Indian entity needs to be capitalized to a certain level and that level is determined by the percentage of foreign ownership.

For instance, with 51% foreign ownership or less, the firm must have $500,000 in shareholder capital. For a foreign stake of between 51% and 75%, there must be $5 million in capital. If foreign ownership is above 75%, $50 million in capital is required.

"The $50 million capitalization requirement is why people generally don't set up their own entity and look at joint ventures, but there are firms that have set up wholly owned entities in India such as Franklin Templeton," Shah said.

U.S. firms scouring the market for a joint venture partner typically look for a firm that has a good understanding of the Indian market, or a strong distribution network like a bank, brokerage or loan company, Shah said.

Next a firm needs to apply to SEBI for a license. The regulator will do an audit to ensure that the firm has adequate employees and information systems.

For licenses for a mutual fund or collective investment scheme targeted at retail investors, the level of scrutiny is high. Approval can take from six to 12 months, Shah said. For a portfolio management or alternate investment fund, licensing could take three to four months.

Firms must then comply with an extensive set of regulations governing each type of investment vehicle. These include completing documents such as a key information memorandum, which includes details about the fund and its operations that must be disclosed to the investor.

The entry of foreign players into the Indian market has slowed down a bit lately.

"One big reason has been the stagnation of assets of the Indian fund industry ever since the ban on entry loads (sales loads) in August 2009,"

said Dhruva Raj Chatterji, an analyst with Morningstar in India. "Distribution of mutual funds has been affected, and financial advisors and intermediaries and are not finding it as lucrative to distribute mutual funds, as before."

Abolished were entry loads of 225 basis points, earmarked for paying commissions to distributors.

Now fund companies provide an upfront commission to distributors in the range of 50 bps to 100 bps for equity funds out of the funds' overall expense ratios, said Chatterji. "As a result, their margins are getting squeezed'' and distribution of mutual funds has been affected because they are less lucrative than before. Word count: 1,069 Treasury & Risk Magazine www.treasuryandrisk.com

Threats to Corporate IT Outpace Security Measures Just 38% of companies align IT security with the organization’s risk appetite. BY MARY SCHROEDER November 4, 2012 Threats to companies’ information security are accelerating at a significantly faster pace than the security enhancements those organizations are making, according to a recent Ernst & Young survey. Seventy-seven percent of respondents indicated an increase in external threats, and nearly half (46%) said they have noticed an increase in internal vulnerabilities.

“The bad actors are leaping ahead, and there are more of them,” says Chip Tsantes, a

principal at Ernst & Young. And their motivations are different from what they were in the past.

“It’s one thing when you were dealing with criminal networks who were looking for credit card numbers or to drain bank accounts,” Tsantes says. “Now we have anonymous groups and certain nation states that are behind attacks against financial services companies, not for monetary gain but just to harass or try and get other information or disrupt the economy of the U.S.” He adds that such groups are also targeting the defense, energy and telecommunications industries.

With a number of cyber attackers, each with different targets, “the scope of what you need to protect has increased, the complexity of protecting it has increased, the sophistication of the bad guys has accelerated and then throw into that cloud computing, mobile, bring your own device, and it’s not as simple as it used to be,” Tsantes says.

All of these factors emphasize the need to develop a robust security architecture framework, according to Ernst & Young. That includes both business and technical constructs to keep an entity safe, secure and nimble so that it can react to new or different threats as they emerge, Tsantes says. It’s also critical that the business and the executives in charge of risk partner with IT on information security. Yet according to the E&Y survey, the information security agenda continues to be led by IT rather than being focused on the overall business strategy. Just 38% of the companies surveyed align their information security strategy to the organization’s risk appetite and risk tolerance, according to the survey.

“When I talk to companies about where they are spending their security dollars and the top 10 things they’re trying to protect, it’s rarely the case that there’s a strong correlation,” says Tsantes, pictured at left. “That speaks to the need to get the risk team involved in setting those priorities and understanding where you’re going to concentrate your spending and your people.”

Tsantes says he has seen a couple of companies whose risk groups played a key role in information security involving intellectual property by spotlighting that as sensitive information and identifying that it could be accessed simply via a base credential. “We were able to add additional hurdles to get to that intellectual property so if someone compromises their account, they still couldn’t get to that information without an additional factor, like a fingerprint or a token or other strong authentication,” he says.

One of the most striking trends in information security involves the significant increase in efforts around threat and vulnerability management (TVM) by financial services firms. Many more companies are doing exercises where they take a very sophisticated attack scenario,

get the business and IT people in a room and run the exercise, Tsantes says. Based on that, the company builds a playbook so that if an attack actually happens, they have guidelines for defending against it and communicating with customers, the C-suite and the board of directors, he explains. “We’re seeing a lot of proactive and reactive activity in this TVM space.” Word count: 582

Companies Invest Steadily in HR Technology In lean times, businesses want to be sure every hire works out. BY MARY SCHROEDER September 13, 2012

Human resources and HR technology have taken on greater importance as the sluggish economy puts a premium on avoiding unsuccessful hires. A recent survey shows companies continue to invest in such technology, and many intend to change the structure of their HR operations in coming years.

A Towers Watson survey of HR and HR IT executives from 628 global organizations found 31% plan to spend either more or much more on HR technology this year, while 53% say they will spend about the same.

“Organizations have to make sure that any new hire is so much better than in the past,” says Derek Beebe, a senior consultant with Towers Watson. “If you hired someone five years ago and it didn’t work out, that was unfortunate” but companies had some buffer, Beebe says. “But now, organizations have to be so much more precise because they don’t have the extra profits to address some non-perfect hiring.”

When it comes to HR management system providers, Workday is the up-and-coming star. Workday is a fairly new company with a very small market share, Beebe says. But when Towers Watson asked about what systems companies are planning to deploy, 24% of those planning a deployment said they were going to implement Workday’s system, making it the most popular choice along with SAP, which was also cited by 24%, while 8% said legacy PeopleSoft, which is owned by Oracle.

Workday, founded by Dave Duffield, who also founded PeopleSoft, offers a core HR technology system that uses software-as-a-service (Saas) technology, making it dramatically less expensive to deploy and maintain. And because it’s brand new, the Workday system takes advantage of the latest technology, Beebe says. “In the world of HR technology, Workday is a very disruptive and enabling technology.”

Meanwhile, there have been several significant acquisitions in the talent management area in the last year, including SAP’s acquisition of SuccessFactors, Oracle’s purchase of Taleo and, most recently, IBM’s agreement to acquire Kenexa.

The acquisitions are “a sign that HR is very hot, like CRM used to be five or six years ago,” Beebe says. “The bigger organizations don’t want to get left behind. They’re seeing that it’s better to purchase than build it themselves given the pace of innovation in these markets.” Talent Management Systems Getting and effectively deploying talent and performance management systems is by far the leading HR service delivery issue, according to the Towers Watson survey, with 40% citing that as one of their top three priorities, while 22% cited streamlining business processes, recruiting and staffing systems. Talent management includes performance management, learning management, compensation planning, recruiting and career management. These systems provide visibility into what employees are working on, including their goals and objectives and how effective they are in accomplishing them, says Beebe, pictured at right. “They allow the organization to drive the results of their business and change the culture a bit for more efficient use of limited assets.” Deploying performance management technology effectively involves not just turning the system on, but making sure that the people, managers and leaders “understand how best to

get the desired behaviors using the technology,” he adds. The Towers Watson study found that 52% of respondents said the technology is only somewhat effective in achieving the desired outcome, while 14% said it’s neither effective nor ineffective. Indeed, the survey found that a key area of focus for respondents is improving the HR technology that they have already deployed or adding another module. Their goal is “basically getting the most out of what they’ve already spent their money on,” Beebe says. “It’s all about expanding and improving, vs. ‘We need to go with a new provider.’” What’s next in the HR technology space? Companies have seen how successful technology can be, so now they’re beginning to look at implementing it more fully across HR functions, Beebe says. “Organizations realize that if they get HR service delivery right, it can be very cost-effective and provide tremendous returns to their organization. Organizations are willing to change HR and invest the money because they know in relatively short order they’ll get a nice return on it.” More than half of the respondents to Towers Watson’s survey were from large and mid-sized organizations with more than 5,000 employees. Word count: 708

New Payment Platform Mixes It Up American Express’ Payve supports corporate checks, ACH, wires and cards. BY MARY SCHROEDER July 9, 2012 American Express has launched a new digital payment service that provides corporations with something that banks to date have not been able to offer—a consolidated offering that supports check, ACH, wire and credit card payments.

Companies using the new service, Payve, send a file to American Express that can include instructions for multiple vendors and various payment methods. American Express directs the payments to each supplier using the designated method, and Payve processes the payments to clients’ banks, allowing companies to maintain their existing banking relationships and corporate processes.

In addition, an American Express team will help clients add suppliers and support their

transition to electronic payments, says Andrew Jamison, vice president of global corporate payments.

If American Express helps get suppliers to accept card payments, corporations benefit from the efficiencies associated with moving away from paper checks and by leveraging the float of the card cycle and incentives for early payment, Jamison says.

Banks have internal conflicts that prevent them from offering a service like Payve that consolidates check, ACH and card payment options, says Aaron McPherson, practice director at IDC Financial Insights.

“Cards were never part of treasury, so you’ve essentially got these two divisions which are competing with each other,” he says. “Banks have not been able to make peace between their different operating units to create a single offering with cards, ACH and check. But that’s what businesses have been wanting a long time. They want a single relationship manager and a bundled offering.” Payve makes it easier for American Express to sell to corporations because it can offer all the payment methods that corporates want to use, McPherson says. “On the other hand, it helps grow the card business because once they’re in, they can offer the company greater rebates for more card business.”

McPherson says it’s likely that corporations will use EDI for payments to their biggest, tier one suppliers. They typically use checks for their smallest, tier three suppliers.

Companies do enough business with tier two suppliers to prompt them to gain efficiencies by automating the payment process but not enough that they want to spend money on EDI, McPherson says. That’s the space that commercial cards and a new generation of ACH products have targeted, he says. Card providers have also been targeting the small, tier three suppliers since a small business is more likely to be willing to accept cards because its real issue is cash flow. “If they can get paid faster by taking a card, they’ll give up the discount rate,” he says.

A larger supplier would likely rather be paid via ACH or a check, which clear at face value, McPherson said. “But since a lot of businesses have a 2% discount for paying within 10 days, it’s not completely out of line to charge 2% to take a card,” he says. “So over the last 10 years, there have been considerable inroads made in commercial cards. It’s probably the fastest growing card segment.”

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