What the Financial Crisis has meant for the Payment Card Industry: An Interview with Phillip Tomlinson

David Evans from FinReg21.com interviewed Phil Tomlinson, CEO of TSYS, one of the largest payment card processors in the world. Phil has been in the payments business for over 40 years and with TSYS since the mid-1970s. He’s been at the helm of TSYS since 2004, navigating some of the toughest waters in history. He spoke to David about the changing industry and how TSYS has manages to maintain its dominance as a payment card processor with increasingly targeted legislation. To watch the video of this interview click here.

DE: It’s been just about a year since the collapse of Lehman Brothers helped send the global economy into a tailspin. How has the card industry weathered the storm?

PT: I think it’s been spread out in the media pretty well that the card business has really struggled in a lot of different ways. Obviously we needed to start thinking about high unemployment. Following that will be higher delinquencies and then higher charge-off rates (and we’ve seen all of those in many banks reach historic heights). Also, I think we are probably paying for some of our past sins. We’ve seen two huge regulatory efforts come down out of Washington in the U.S., and we’re dealing with those as we speak. I think certainly that’s going to make doing business a little bit harder for the near term and I think it’s going to hurt the bottom line for the near term.

DE: In your opinion, what parts of the industry have fared better than others?

PT: I think commercial card has done well. I think the merchant business has done well. I think that typically the Visa and MasterCard branded consumer cards and a lot of the private label cards have really struggled to keep up. Again, it’s primarily due to charge-offs and the cost of higher delinquency rates.

DE: You mentioned charge-offs a couple of times. Have we got any more nasty surprises as banks rack up more write downs from charge-offs and credit card defaults?

PT: Well, I think there’s still a bubble coming. I think it was Jamie Dimon [Chairman & CEO, JP Morgan Chase & Co.] a couple of weeks ago who said that they were still looking at some difficult times through 2010. I think we’re starting to see some stability in the smaller banks. I think the larger banks’ data that is very public speaks for itself. Those numbers are still pretty high, although there are some things out there going on that are somewhat encouraging.

DE: What are the things that are encouraging?

PT: Well, you know, the real estate market seems to be finding some footing. The unemployment rate is slowing down. I think the vast majority of analysts and economists and even the Federal Reserve think we’ve probably bottomed out in this recession. I’ve been working in this business a long time and this is my fourth major recession, but this one has affected the card business much more than any in the past have.

DE: And it’s affected just about everyone much more than anything in the past.

PT: It has. I don’t know that anybody has been unscathed by this recession and I think that will continue for some time. What we’ve told the analysts, the TSYS analysts on Wall Street, is that we just want to get 2009 behind us. Let’s move on to another year and see if things can’t look better on a go forward basis into the future.

DE: You mentioned real estate and unemployment and so forth. Are there other leading indicators that you’re looking at to try to gauge how the card business is going to be doing in 2010 and 2011?

PT: Everywhere I go, I make judgments about what’s happening, particularly to the card business. Every time I go in a restaurant, every time I look in the restaurant parking lot, every time I go into a department store or get on an airplane, I’m making judgments as to whether we are making progress or whether we are backsliding. I do think we’re starting to see some confidence build up; maybe the consumer is just tired of not buying and wants to buy a little bit. We also have seen the transaction level, if you will, on cards stabilize in at least the same range as it was this time last year. We had some pretty dramatic drops in those transactions in the fourth quarter of ’08 and the first quarter of ’09.

DE: Especially the first quarter of ’09, people seemed pretty scared.

PT: And I think they had good reason to be. I mean it was kind of unknown ground for most of us and by every measurement you can come up with, it’s the worst economy since the Great Depression.

DE: Do you think the credit card industry contributed to the crisis by extending consumers too much credit that they just couldn’t afford?

PT: You know, I think that we probably had some part of it. I mean I don’t think there’s any question, we probably extended credit to some people who frankly couldn’t afford it and were counting on the fees to make up for it. And I think the subprime caught up with some of the banks that were really playing subprime – and when you look at the availability of credit in general with the mortgage business, I think a lot of people basically just got in over their heads and as things start slowing down, there was a snowball effect. These factory jobs, as people quit buying things, they started cutting back in factories and it was a snowball effect. It’s going to take some confidence for us to start working our way through that. I don’t know that there’s a massive change yet, but there is change and it’s to the positive.

DE: Like mortgages, most credit card debt has been sold off into the market; it’s been securitized for the last decade or more. How has credit card debt done relative to mortgage debt? Do you have any idea?

PT: You know, I think they both have performed in general pretty poorly. Again, you read about it in the media every day, particularly about the mortgage industry. Card debt is unsecured, so that’s one of the first things that people might not think about paying – it might not be at the top of their list. If you’re in trouble, I think you’d want to pay your house, your power and your utility bills, buy groceries, and you’re down to the basics. I know the mortgage dilemma caught me by surprise. I didn’t realize that we had gone that deep into the mortgage cycle and had that many problems. I certainly was not by myself in that area.

DE: You weren’t by yourself and it seems like the Federal Reserve Board, Congress, the banks, and just about everyone else didn’t realize it either.

PT: I think what happens is when times are so good for so long that you just start feeling like you’re bulletproof and maybe that you can always overcome any obstacle. It’s a great lesson for all of us. I spoke to a crowd of young people who were probably from 25 to 35 years old and I said, we need to learn lessons from this. We need to really be thoughtful about what we’ve seen happen during this recession and particularly the younger people who will continue to be working over the next 20, 30, 40 years. We say this every time we have a recession, but certainly this is the first recession that has really, truly affected the entire country, in my opinion. It’s the worst one I’ve ever seen.

DE: TSYS works with many banks in the U.S. and around the world. What are you hearing from them on what their biggest challenges are, and where you see their prospects in the next few years, either for cards or just generally?

PT: Particularly the large banks, they’re working on surviving. It goes back to difficult economic times, past dues, charge-offs, and capital issues and it’s not only in the U.S., it’s around the world. Again, I come back to these regulatory issues that we’re having to deal with that are a much bigger issue for the U.S. issuers. Nobody else in the world (that I’m aware of) has passed anything quite of that magnitude.

DE: The Credit Card Accountability Disclosure and Responsibility Act that we’ve all gotten to know and love as the CARD Act of 2009 was signed into law at the end of May by President Obama, and the first round of new rules and regulations hit on August 20th. How has the CARD Act affected your customers?

PT: I think they’ve had to become more focused on working with us to make sure that all of the appropriate changes are made; certainly when you’re that focused on anything, you lose focus on growth, and growth certainly has not been anyone’s focus here in the last year. I think most people are trying to get their house in order and get their past dues or delinquencies down, and this is just another layer of burden that we’re going to have to deal with on a go forward basis. The card industry has been regulated for a long time, particularly in the U.S. We’ll get through this. Cards have too much utility to go away. Imagine trying to check into a hotel with cash. Imagine trying to buy an airplane ticket. They’d probably call Homeland Security to check you out. So the utility of a card is really rather incredible. And so I think cards are here to stay. But I think we’ve got to be more disciplined. I think the card industry has a history of being very innovative; I think tough times will bring new ideas, and I think we’ll recover.

DE: Nevertheless, Congress was pretty mad at the credit card industry. It seemed to be something the Democrats and the Republicans could really agree on.

PT: That’s right, and I think that they had some examples that would probably embarrass most all of us in this industry.

DE: What got them so irritated?

PT: According to the Congressmen that I have spent some time with, they had a lot of complaints from card holders. Certainly some of those complaints were founded and some were not, but the truth is that we just need to continue to improve our service. We need to make sure that we’re being fair and that we’re getting a fair return. I’m not in the issuing business but we are in the processing side of it and we want to do the right thing with card issuers. I know that I can’t think of one of our clients who does not want to do the right thing, but things happen. Sometimes there are problems in the authorization system; I’m talking about the worldwide system or the settlement system where sometimes it’s very difficult to track down what went wrong. Frankly, the card industry has always been a fairly easy target for politicians to rail on about and to complain about because I think a lot of consumers think that their interest rates may be too high and they’ve paid on their cards a long time.

And so I think some of these disclosures that we are putting in place now, they won’t be harmful long term. Others will have some financial ramifications that we’ll struggle with for awhile, but again, I have total faith in this industry to rebound. We’ll think of new products, we’ll think of new ways of doing business. I go back to the Carter presidency when the prime rate went up to about 22% and we were all scrambling, trying to figure out ways to continue making money in this business and we got through that and we’ll get through this. It’s going to take awhile, but I think the industry will come out maybe more healthy than ever.

DE: There have been some articles in the Wall Street Journal suggesting that at least in the near term, one effect of the CARD Act is going to be to reduce the availability of credit to consumers. Do you think that’s likely to happen?

PT: I think that’s probably going to happen. I’d probably be willing to bet you dinner on that. I think it’s just the fact that you are so restrained by your ability to price things. For years, we had the ability to do risk-based pricing and the new regulations have really hamstrung those types of capabilities. So I do think that for younger people, people who have had impaired credit in the past, I think there will be some tightening up of credit.

DE: Let’s talk a little bit about the challenges and the opportunities ahead. There are always lots of opportunities and risks facing the card industry. Going forward, what do you think are the biggest challenges facing the industry, putting aside the regulatory environment?

PT: I think we’ve got to continue to make the card valuable to consumers and to the commercial card user. Certainly it’s very valuable today. I think that we have got to improve our reputation. I think it has been sullied somewhat by all of the discussion of these new laws. I think probably the most pressing issue is to get back to strong profitability because without that, you don’t have anything, and all of that goes back to this surge in delinquency and ultimately charge-offs.

DE: One of the things that has happened, in part as a result of the financial crisis, is that home equity loans, which have provided a fair amount of competition for credit cards, have been reduced dramatically. Do you see that as possibly helping out the credit card business?

PT: I really don’t know at this point. You would think that people will continue to be looking for lines of credit, and cards are an easy way to do that. You can manage it, but I do think that the consumer will be held to a higher standard for the foreseeable future.

DE: Phil, you’ve been working at implementing Six Sigma strategies to improve TSYS. Do you mind telling us a little bit about Six Sigma and what you’ve been doing?

PT: I have a mantra that says you’ve got to be faster, better, and cheaper to survive in this economy we have today, and one of the ways to be faster, better, and cheaper is through Six Sigma efforts. As a matter of fact, every other Tuesday we have what we call a group leadership meeting in which about 300 of us come together. We’ve awarded green belts to six different people for running projects that really made a difference; we improved processes, we saved money, and we got things out the door faster. As a matter of fact, I’m a green belt myself. I figured if I was going to ask people to do it, I should do it. And of course at TSYS, the security badges that have the green border around them signify that you are a certified green belt holder and that’s a pretty big thing around here. We’re starting to get more and more black belts who lead projects. It’s just good old common sense to me that you do anything you can to improve the ultimate product that your customer is going to get.

DE: True.

PT: And anything that you can do to reduce cost and prices is good for everybody.

DE: You’ve been in the card industry for four decades now. What has surprised you the most?

PT: That sounds like a really long time, but it’s pretty amazing. I’m still having lots of fun in this business, on most days. I’ll say the last year hasn’t been quite as much fun as some previous years.

DE: Certainly challenging.

PT: I think the thing that surprises me, that I love about this industry, is that I’ve seen a couple of generations of management and team members come and go at TSYS. And the issuers in the group that we have today are smarter, better educated, and they’ve got more drive. I just get astounded at how much better the people become and I think it’s part of our industry. We push people, expect a lot out of them. I mean we’re subject to put you on a plane to India tonight – we have ex-pats all over the world. Frankly, it probably took me longer than anybody around here to understand that Columbus, Georgia is not the center of the universe. It’s been fun watching our business expand internationally. We’ve done that in a big way and have had a lot of great success; the resiliency of this business just amazes me and that’s why I’m so confident that this industry will bounce back pretty quickly.

DE: Implicit in what you’re saying is that despite the fact that the industry has been around for awhile, there are really very significant growth opportunities ahead.

PT: I think there are growth opportunities. I think you’ll see new products. I can think back to when I got in this business in the mid-1970’s. It was a pretty simple, straightforward business and now it is so much more sophisticated. We had one interchange rate and basically one finance charge routine, one late charge routine. Today, I think we’ve got 250, 270 interchange rates around the world. We’ve got thousands of finance charge routines, late charges – I mean tens of thousands. You can get a card with your dog’s picture on it or you can just get a regular old Visa or MasterCard. There’s so much more flexibility. It is so much more customized than it’s ever been and that’s going to continue. Reward programs, which I thought originally might be just an idea-of-the-month, have turned out to be great programs; they’ve been good for charities, they’ve been good for education, and they’ve been good for people personally.

DE: Last question, Phil. Where do you see TSYS in ten years?

PT: Ten years is a long time, but if I had my druthers, we would truly cover the Earth. We’ll be a very, very international company. We will be the dominant payments processor on this globe and although the competition out there is very, very tough, that’s what we’ve got our sights set on. We want to create opportunities for our people. We want to create a wealth system where people can make some money around here and retire in good stead. We want to have a reputation that is above and beyond anyone else’s in this industry for doing quality work, for being transparent and being honest and doing the right thing. I think we’re making progress towards all of those goals.