Corrections or additions?

This article by Barbara Fox was prepared for the January 11, 2006

issue of U.S. 1 Newspaper. All rights reserved. Changes were made on

January 25, 2006.

For Credit Card Processing, the Heartland Is Princeton

A vividly brash mural dominates the Heartland Payment Systems suite in

the bank building at the corner of Nassau and Witherspoon streets in

downtown Princeton. On the left of the mural, the artist painted old,

tired buildings representing Heartland’s competition. On the right is

a skyscraper that is under construction and being built with new

technology – to show that Heartland takes an innovative approach to

the business of credit card processing.

Heartland Payment Systems is a national credit card processing company

for small to medium-sized merchants, especially hotels and

restaurants. Because it is relatively new, it can employ a newer

computer system (a client server network based on a Microsoft

platform) rather than the mainframes to which its older competitors

are confined.

"The products we are offering are built on 21st century platforms,

whereas, for our competitors, most of the platforms were built in the

’80s or even in the ’70s," says CEO Robert Carr.

That’s why, in the sassy mural by Lambertville-based artist Eleanor

Voorhees, a crane sits atop Heartland’s unfinished building. "The

experience we offer now is not that different from our competitors

because we are so new, but as we look out two, three, or four years,

we hope to substantially expand what we will offer," says CFO Robert

H.B. Baldwin Jr.

Heartland’s corporate and accounting office moved in November from

5,000 square feet on Hulfish Street to just under 10,000 square feet

on the second and third floors in the Bank of America building,

overlooking Nassau Street and Princeton University.

Heartland makes most of its money from setting up merchants to take

credit card transactions; it does not issue credit cards. The

company’s credo: To provide a fair deal and offer superior information

so merchants can understand and manage their card processing costs.

About 22 people work here, and more will be hired in the finance area

and in some executive positions. The company has 1,600 total

employees, including its commissioned sales force. Its main operations

center, with 375 people, is in Jeffersonville, Indiana, and there is a

call center for troubleshooting in Jeffersonville, Indiana, plus 76

programmers working in Dallas.

Heartland has twice been on the Inc. 500 list of fastest growing

companies; in 2004 Carr won Ernst & Young’s New Jersey Entrepreneur of

the Year award. The company went public in August of last year, and of

the $122 million raised, about $40 million went to the firm, with

selling shareholders receiving the remainder of the proceeds. The

stock was pitched at $14 to $16, priced at $18, went up to more than

$27, and is now trading at about $22. The offering was oversubscribed

by a factor of 21.

Thirteen years ago Carr moved to Princeton with a five-year-old

predecessor company to Heartland, and he began putting down deep

roots. Now he and his wife, Jill, have bought, and are renovating, the

home at 82 Library Place that had been built by Woodrow Wilson (see

real estate story on page 54). The Carrs have three children, one in

high school, one in college, and the eldest working in Manhattan at

the Paris Review.

Carr grew up in a rural area south of Chicago, where his father was a

security guard and his mother worked for 35 years as a waitress. Carr

remembers the night his mother came home with her first $5 tip. "This

was in the `50s, and she was in tears for that generosity," he says.

He is the second of six children: His older and younger brother each

have small businesses. Two sisters are nurses, and one is a retail


Growing up in a blue collar family, Carr acknowledges that he lacked

the contacts enjoyed by those whose parents were comfortable in

executive board rooms and other halls of power: "My whole life is a

monument to not knowing the right things to do at the right point in

my life. I had no experience with what a business was, no contact with

business successes or business failures. My role models were teachers.

I had no mentor. I did everything all wrong."

For his own children, Carr made elaborate plans for them to have a

different experience. His move to Princeton, in fact, was the result

of a two-year national search for schools: Princeton Day School was

his choice. Says Carr: "It was the best decision I ever made. My

children know things that I never knew until I was 30 years old," he

says. "They got a different perspective on the world."

After graduating from the University of Illinois in 1966, Carr earned

a master’s degree in one of the first graduate programs for computer

science. He worked in the software industry before going to a company

that did transaction processing.

In 1987 Carr turned his consulting firm into Credit Card Software

Systems, to sell merchant credit card processing systems for the


industry for third party providers. Meanwhile he was writing software

programs to use in the future. "We did have income coming in," he

says. "I had a couple of thousand merchants as customers." He moved

from Brandon, Florida, to Princeton in 1992, and though he had 15

employees nationally, he was working out of his basement.

But by his account, the family had a hand-to-mouth, meager existence:

"I was making a living . . . barely," says Carr in a telephone

interview. "I had moved to Princeton with the confidence that things

would get better. It’s a pretty unique story. Not too many guys are in

business for so many years before they are successful."

At that point his wife, Jill, was working in the business, and also at

Princeton University’s electrical engineering department. They lived

in Princeton Borough, on Lover’s Lane and Route 206, and they were

paying three tuitions to Princeton Day School.

Carr says that his familiarity with the restaurant business had

nothing to do with focusing on restaurants. "We wanted to start out

with hotel customers, but the technology for payments there is much

more complex, but we DID have the technology to be the premiere

restaurant processor." Restaurants need a way to handle tips, with

reports to the servers on how tips are allocated and reports to the

landlords and owners on revenue. "We knew we could be in front of that

technology first."

In 1997 he formed an alliance with St. Louis-based Heartland Bank,

changing the name to Heartland Payment Systems (HPS) and buying a

processing firm, Omnicard. HPS bought out the bank’s shares in 2000,

and Carr hired Baldwin as CFO.

Baldwin, a Princeton native, has a privileged background. He is named

after his father, who was the chairman of Morgan Stanley in the late

`70s and early 1980s. A 1976 graduate of Princeton University with an

MBA from Stanford, Baldwin had worked at Goldman Sachs and CitiCorp,

and at Smith Barney he was a managing director in investment banking.

Most recently he was CFO of a staffing company based on Long Island.

His wife, Margaret Sieck, was an editor at Sports Illustrated and they

have two school-aged children plus a son who is working for an IT firm

in Research Park.

"Most of the existing platforms are mainframe driven platforms, which

makes it much more difficult to create new functionality," says

Baldwin. "For example, over the short term, we are looking to do

something as simple as providing a better statement to the merchant.

Now they get 10 to 20 pages of numbers and have no ability to

understand what the real costs are."

"Depending on what card you pull out, a merchant may pay as much as

three percent or more," says Baldwin. American Express charges the


processing fee, and Discover’s charge is lowest. A Visa reward card

costs the merchant less than a Visa business card. Another factor:

whether or not the mag stripe is worn out. That’s because it costs

more for the clerk to key in your credit card number. Such

non-automatic transactions are riskier. "For each card there are more

than 100 interchange rates, and it is easy to get confused."

Heartland prides itself on fully disclosing its fees, in contrast to

its competitors which Baldwin suggests sometimes use "aggressive

pricing approaches, and bait and switch" to get the merchant’s

business. The Heartland system works on the competitors’ machines, and

vice versa.

One giant competitor is First Data, which targets all size clients,

large, medium, and small. Other competitors are the banks, such as

PNC, Bank of America, and U.S. Bank. Fifth Third Bank and Global

Payments are also competitors. "But we are the only one that focuses

exclusively on small to mid-size clients," says Baldwin.

At its founding in 1997, the firm ranked 61st in the nation in the

number of contracts it had, and now it ranks sixth. It started with

$500 million in annual volume, and now it is processing more than $38

billion in annual volume. It had 25 sales

people and now has nearly 1,000. "And all of that was through organic

growth," says Baldwin. "All our merchants were sold by Heartland

salespersons and installed on Heartland’s platform. Other companies

grow through acquisitions, but we think it is better and cheaper to

grow one merchant at a time."

The top eight companies in the credit card transaction market

processed $1.2 trillion last year, and this year Heartland will

process about $33.5 billion in transactions, working with Key Bank to

accomplish this. Heartland has a 2 or 2.25 percent share of the

overall market (which amounts to $700 million) and

about 5 percent of the small to mid-size clients.

Dining tabs represented about 57 percent of the company’s

transactions, but it hopes to expand to quick service restaurants and

other atypical markets. "Our long term objective is to be number one,

and we would have 20 to 35 percent of the market," says Baldwin.

`Over the longer haul we will be able to deliver the name of the

consumer, which is especially valuable when the customer charges back

the transaction," says Baldwin. "We will also provide such

functionalities as allowing merchants to customize their own

statements, generate their own statements, and print them out at their

convenience." Merchants will also be able to download their general

ledger entries into an accounting system. "Typically they have to do

their entries manually. Right now, all they get is a paper statement

and a print out of the numbers."

Heartland facilitates both pin-based and signature-based debit cards,

an increasingly popular option for small purchases. Baldwin and Carr

like to tell about the lawsuit that helped to lower signature-based

debit "interchange" rates.

It seems that Wal-Mart filed a suit against Visa and MasterCard on

behalf of all merchants, everywhere. "The judge told the bank card

issuers to lower the debit rates by one-third for five months. We

chose to pass on the savings to our clients, but it worked out that

virtually all the other players in the small and mid-size market did

not pass it on," says Baldwin.

The settlement resulted in retroactive savings for the five-month

period, and although Wal-Mart and the largest merchants reaped the

biggest rate reduction, all the interchange fees decreased a little


Heartland’s competitors, Baldwin says, made a lot of excuses about why

they couldn’t be bothered to do the accounting and return the saved

fees to their clients. "Our clients could see the rebate, and our new

merchant signings went up by 25 percent immediately afterward."

"As we have gotten bigger, our goals have changed, and we have gotten

much better. I would never ever have thought we would be number one in

the business," says Carr.

And just how does he plan to get to be number one? "It is just the

power of the way we do the business and how ineffective and self

serving the other business models are," says Carr. "After labor and

food cost and possibly rent, but not always rent, credit card fees

become the third or fourth largest expense for our restaurant


Carr also has faith in his compensation plan for the relationship

managers. In an unusual policy for this industry, the salespeople are

employees on commission, not independent contractors. His biggest

failure, he says in commentary posted on the website, was starting out

with so many independent contractors that could not be effectively

controlled. "We solved this by going to a 100 percent employee model

in late 1999 and have been improving ever since in the key metrics of

portfolio performance."

He thinks this gives him a competitive advantage, saying it is "unique

in today’s marketplace and will remain so unless someone chooses to

make a substantial investment in unrecoverable expenses to duplicate

Heartland’s achievement."

With a recruiting letter posted on the website, Carr says he is

looking for "impeccable personal integrity" and motivation to build

"significant wealth for themselves and their families over the next

four to five years." Successful sales people will meet margin goals

and should expect to work 50 to 55 hours per week. Those who sell nine

accounts per month, he suggests, will start earning six figures in

five years.

Those with previous industry experience, Carr warns, may have to

unlearn it. "Occasionally," writes Carr, "you will be required to

`leave money on the table’ because we do not permit price gouging. Our

merchants are in the habit of talking to one another, and we cannot

jeopardize our reputation and risk losing future referrals."

Another unusual policy is that Carr is content to let his employees

stay where they are – witness the far-flung operations centers.

Flexibility in family location is important to him.

His own choice was a university town, and it is no accident that from

his window he can see Nassau Street, the gates to Princeton

University, and Nassau Hall. He is, after all, a history buff and

enthusiastic fan of Woodrow Wilson, former president of Princeton

University and the 28th president of the United States.

Heartland’s 11 1/2 feet by 5 1/2 feet mural, acrylic on canvas, faces

the Nassau Street windows. Though the artist, Eleanor Hoyt Voorhees,

declines to say what this one cost, her prices range from $125 to $200

per square foot.

Voorhees worked with the decorator of the Carrs’ Library Place home to

paint a monochromatic landscape mural for the dining room there. If

the Wilson dining room needed to have little color, the Heartland

decor needed lots of color – vivid shades, a la Matisse, plus black

and chrome.

"Bob Carr wanted the mural to represent the company’s potential to be

Number One, even though it is not yet," says Voorhees, "and he wanted

it to show the company is growing from the ground up, not through

acquisitions. He showed me how he grew from number 61 to number six,

and that his goal is to be number one in the industry."

A larger building to the left represents one of the biggest

competitors but has no logo. "In the painting, the only building with

a logo is his," says Voorhees. "I showed it under construction, not

yet the largest, but with the potential to be the largest and

strongest. And some of the other large buildings don’t grow straight

up; they have additions. The only road in the painting leads to


Heartland Payment Systems (HPY), 90 Nassau Street, Second Floor,

Princeton 08542; 609-683-3831; fax, 609-683-3815. Robert Carr, CEO.

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