By Paul Bridgewater

I’m not quite ready to make the move to K Street, but I am happy to report that I spent September 21st lobbying Congress on behalf of America’s small and medium businesses (SMBs). As part of the Electronic Transactions Association’s annual “Payments Fly-In,”

I joined more than 50 payments and technology industry leaders to meet with members of Congress and their staffs. Most of our discussions focused on EMV chip-card migration and online small-business lending (also known as alternative lending), both of which have important public-policy implications for SMBs.

Topic One: EMV migration

Let me recap the discussions around EMV first. Why do lawmakers have an interest in EMV migration and adoption rates? The answer comes down to the importance that elected officials place on supporting SMBs, which are the engines of their state and local economies. For their part, SMBs care about EMV compliance because the liability shift that took place in October 2015 means that SMBs have a much higher risk for potentially ruinous exposure to fraud if they’re not EMV compliant.

(About that “liability shift”: Since October 2015, businesses that don’t have equipment able to process EMV-enabled debit and credit cards are financially liable for chargebacks that stem from counterfeit fraud. To be clear, the move to new terminals is voluntary: small-business owners face no legal requirement to upgrade; however, those who choose not to adopt EMV will be leaving themselves open to expensive repercussions when they process fraudulent purchases on outdated terminals and the fraud could have been prevented with EMV-compliant equipment.)

Naturally, lawmakers and their staffs wanted to know what we in the payment industry are doing to help SMBs become EMV-compliant. An EMV-compliant business, after all, is best positioned to keep hiring people (read, voters) and contributing to overall economic growth.

The status of EMV migration

I was impressed and encouraged by the strong grasp of payments issues demonstrated by lawmakers and their staffs. There were some very strong, probing questions around our EMV-migration progress report; the line of inquiry by elected officials and their staffs went something like this:

The great majority of the transaction volume in the United States today comes from EMV-compliant retailers; yet only 33 percent of U.S. businesses are EMV compliant. Those figures indicate that enterprise-level retailers and businesses have gotten the lion’s share of attention from acquirers and processors, while small and medium businesses have been left behind on the road to EMV compliance. What gives?

Please note that the summary answer I’m about to give to the above query is my own account of our discussions on Capitol Hill in September, and not the official Electronic Transaction Association (ETA) line; however, I think much if not most of what I’m about to say is in line with ETA policy.

Why are enterprise-level retailers so far ahead of SMBs in terms of EMV compliance? For the most part, it’s because big-box retailers and other enterprise-level retailers had (and have) the resources (money, staff, clout with acquirers and processors, etc.) to become EMV compliant. When the liability shift came, these big businesses wanted to shift the liability off themselves and back onto the financial networks. The big enterprises committed to getting compliant, and they made it happen.

What about SMBs and EMV compliance? What happened there? Let’s talk about small businesses first, because as we’ll see, it’s actually been easier for small businesses to become EMV compliant than for medium businesses to do so.

The EMV focus is squarely on SMBs

Consider the typical small business when the EMV liability shift came in October 2015: That business would have a POS terminal on the counter (or perhaps in a home office) where transactions were processed; in October 2015, there was already a pretty broad set of EMC-certified terminals that a small business could use right away.

In those segments of the small-business community where fraud is prevalent, we saw business owners replace their terminals pretty quickly (encouraged by processors and acquirers like Sage Payment Solutions). Between enterprise-level businesses and small businesses, we’ve gotten to the point at which about one-third of all U.S. businesses are EMV compliant. To sum it up, for many small businesses, it was a pretty simple decision to swap out a terminal and immediately become EMV compliant.

Becoming EMV compliant is often more challenging for medium businesses. That’s because those businesses typically use point-of-sale solutions that are integrated into their middle- and back-office software systems; what’s more, those systems are often designed for a certain “vertical,” like dentistry, chiropractic, nonprofit, medical office, etc.

We think that in the marketplace today, there are about 3,500 variations on vertically specific software solutions that integrate point-of-sale systems with middle- and back-office software; a substantial number of those systems require EMV-capable readers to be integrated into them before a medium-sized business can become EMV-compliant. The challenge has been that processors who need to certify those software systems must do so on a one-by-one basis, and those certifications can be quite complicated. Add to that that processors have been under-resourced, and the result is a logjam in the medium-business space: medium businesses just haven’t had the resources they’ve needed to adopt EMV at the same pace as enterprise and small businesses. Things are, however, changing for the better.

What the payments industry is doing to speed up EMV adoption

We as an industry are currently working very quickly and diligently to solve the problems identified above and to speed up the process of medium-business certification. Processors have brought new staff into their organizations to speed up certification, and they’ve also adopted and deployed tools to help accelerate certification. In the next six months (I’m writing this at the end of September 2016), we fully expect the logjam to ease and the rate of EMV certification of medium businesses to begin to accelerate noticeably.

As I see it, there were two main goals we had in reporting to Congress on the status of EMV migration in the United States: 1.) to update lawmakers on the status of EMV adoption because, as mentioned earlier, EMV is of major importance to SMBs, which are the cornerstones of state and local economies; and 2.) to bring officials up to date on what, exactly, the payment industry is doing to promote EMV adoption. No one is satisfied that EMV compliance in the United States stands at only 33 percent one year after the liability shift; however, Europe took five years to reach 50 percent compliance; we plan to have 90-94 percent of all U.S. businesses be EMV compliant by October 2020.

Topic Two: Regulating alternative lending

On the topic of alternative financing, my payments industry peers and I had a similarly productive discussion with lawmakers and their staffs. Acting as advocates on behalf of SMBs, we sought to raise awareness among elected officials that alternative lending is an important, emerging tool for assisting SMBs with their targeted cash-flow needs.

I was honored to give the ETA’s presentation to elected officials and their staffs. Beyond the products and services we provide, Sage takes seriously its role as advocate for and champion of SMBs; speaking to the lawmakers who shape regulations around alternative lending was an important opportunity to advocate for SMBs and positively influence policies that affect them.

The Electronic Transactions Association’s position is that alternative lending, which is already subject to the same regulations that govern banks and other financial institutions, should not be regulated further by additional legislation or by agencies like the Consumer Financial Protection Bureau. The ETA has taken this position (with which I agree) because the government may be mistakenly grouping alternative lenders together with payday lenders and providers of same-day and title loans.

Given that alternative lenders are already subject to existing regulation, the ETA contends that additional incremental regulation would likely stifle the growth of alternative lending and, therefore, greatly limit the value that SMBs currently derive from having access to this non-traditional source of capital.

The growing, positive role of alternative lending

We in the payments industry are seeing a growing—and positive—role for alternative lenders in helping SMBs grow their businesses. SMBs typically turn to alternative lenders for capital that’s designated for very specific uses, such as adding extra staff ahead of a busy period, purchasing extra inventory ahead of a holiday season, and so forth. And typically, SMBs are engaging with alternative lenders by employing a specific ROI process or business plan focused on how accessing new capital will help them grow their business.

We’re also seeing that the types of lenders emerging in the SMB alternative lending space have very clear visibility into the cash flow position of potential borrowers: Typically, these lenders have a strong understanding of the SMB applying for a loan by seeing real-time cash flow and account balances. These lenders don’t necessarily use traditional underwriting processes or credit ratings to determine whether an SMB gets a loan; however, their alternative techniques can be quite effective in determining the fundamentals of the loan based on the true health of the business.

Summing it all up

I found my day on Capitol Hill to be quite educational in terms of seeing and understanding how senators, representatives and their staffs think. It was also instructive to learn how they view the payments industry. The good news is, lawmakers struck me as being quite well educated on payments topics and how those topics impact SMBs. We also conveyed to our hosts that we, payments industry leaders, are ready and willing to help them however we can (by educating them in certain areas related to payments, providing research) make the best possible decisions for America’s SMBs.

Got questions about EMV payments? Download our white paper and ensure your business is EMV compliant.

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