The Green Sheet Online Edition
January 21, 2009 • Issue 09:01:02
2009: Challenges and opportunities
The coming year promises to be one of the most challenging since the early 1960s, perhaps even since the Great Depression. So what twists on selling traditional merchant processing could help boost business for you, as ISOs and merchant level salespeople (MLSs)? And what ancillary products have potential to increase merchant retention and enhance revenue generation?
I've assembled a small platter of potential opportunities that may suit your ISO or MLS business. Hopefully, these ideas will lead you to consider new revenue streams, re-evaluate the services and products you offer, and help you thrive in 2009 and beyond.
Many of you are used to processing and servicing traditional brick-and-mortar merchants. However, over the years you may have been approached by merchants who were declined services because of the type of businesses they own and operate.
The payments industry classifies tobacco, travel, adult-content, Internet-based, gambling, pharmacy and sometimes even card not present merchants as high risk. Many of these are legitimate, stable, ethical enterprises.
Why not consider working with merchants classified as high risk? Why wouldn't you want to work with margins of 200 to 300 basis points? If you are a publicly traded company thinking about an initial public offering (IPO) - whenever the IPO market returns - or building your organization for later sale to a larger public entity, the high-risk side of our industry is not for you.
In the United States, compliance with the Sarbanes-Oxley Act is difficult enough of a headache for public companies without introducing the complexities of a portfolio holding high-risk merchants.
However, if your company is privately held and you have an appetite to increase your margin and stabilize your income stream, you should at least investigate the possibility of servicing these types of merchants. There are a number of firms that specialize in placing such merchants and are worth your time and energy to explore.
Sleeping cash giants
I think we're all still waiting for the government's stimulus package to trickle down, but I'm not sure we've seen its effects yet. Nevertheless, we can seek a different sort of stimulus. The market is ripe for value added services like merchant cash advance and alternative funding products. Merchants who could previously obtain funding because they had solid credit scores are finding that banks are now turning them down.
Obviously, I'm not suggesting that an organization advance money recklessly. However, I am saying that there is a very large pool of worthy prospects who would be prime candidates for cash advance or alternative lending products like receivables factoring (money advanced on account receivables balances).
Nontraditional models of merchant advance or receivables lending are thriving in the current environment as companies seek to maintain cash flow. Business owners are also willing, now more than ever, to consider scenarios in which they would consider receiving an infusion of funds from nontraditional sources.
New kinds of integration
Implementing integrated payment processing solutions may sound like a daunting task for smaller, cost-conscious firms, but a potentially bleak 2009 should at least give you pause to reflect on this opportunity.
Many ISOs evolved from the Web hosting and Web and software design community. They found themselves in the payments sphere simply by virtue of processing their clients' recurring monthly subscriber or mainte-nance fees.
Firms that migrated from the information technology sector soon discovered they had developed software platforms for taking payments or had designed specialty payment acceptance products that allowed specific types of clients in distinct verticals to accept payments. For example, Intuit purchased a merchant processing ISO to keep itself entrenched in back-office, recurring revenue streams.
It all comes down to account generation and merchant retention. What better way to keep merchant accounts than to offer a payment system integrated into a back-office product that can be used daily and is cost-effective, secure and efficient?
Opportunities exist to evaluate new verticals and invest in the necessary products or solutions to keep merchants within them sticky. Prospective verticals include the medical, legal and accounting sectors, as well as municipalities, nonprofits and utility companies.
Many payment professionals advocate focusing on one vertical and sticking with it. Here's why: The traditional model of 'blast marketing' to all merchant classes and competing solely on basis points is a difficult model to sustain. Basic economics would suggest blast marketers have a short lifespan and that only a handful can survive and thrive.
Merchants who feel supported and trust their current ISOs to keep them secure and solvent are less likely to entertain blast marketers offering reduced processing fees and free equipment.
A more effective and proactive approach to de-commoditize ISO offerings, combat blast marketers and enhance value to merchants is to pick a handful of verticals and train staff to become specialists in those areas. Assess sectors with promising future growth. Find out who is currently processing in those areas and determine how you can best compete.
Lessons from history
As we enter 2009, ISOs should be looking at business growth and costs. Perhaps it's time to re-evaluate sales staff compensation. Along with a traditional residual program, introduce a points program similar to frequent flyer models in which MLSs can earn points towards various bonuses based on their performance and closings.
Restructuring your residual payments is another option. Look at paying more upfront money to your MLSs and less on the back-end, which may improve future cash flow, depending on how strong your merchant retention rate is. Firms with strong account retention will benefit more than companies that simply 'churn and burn' through accounts.
It is said that if we don't learn from history, we are doomed to repeat it. There are volumes written about the Great Depression. Many economists have analyzed the causes and effects of that period, including which businesses actually thrived after the market crash of 1929.
Much of what took the United States out of that difficult time was the growth of pre-World War II military equipment manufacturers and supply companies. As a result, brand new industries emerged - and have continued to do so - for decades. Many of those industries born of pre- and post-war economic strife are now vertical markets the payments industry services.
And those same verticals that have evolved since the Great Depression and World War II - including government sectors and the hospitality, travel, medical, fuel and airline industries - are the very ones that we now struggle with today.
The current economy is taking a hit, but better times inevitably cycle back around. And with the baby boomers now getting into their 50s and 60s, there will be a growing need for all things related to health care and leisure activities. Financial and payment consultants are seeing increases in businesses across all sectors as retiring boomers access and take steps to reinforce their nest eggs.
The economy is, and most likely will always be, a roller coaster. But there are always opportunities for creative types to figure out new angles and identify new growth areas.
Lane Gordon is managing partner at MerchantPortfolios.com, a company that specializes in marketing ISOs, portfolios and residuals for sale. Prior to MerchantPortfolios.com, Gordon spent a number of years working in the merchant processing industry. Mr. Gordon holds degrees from the Massachusetts Institute of Technology and Carnegie Mellon. He can be reached at 866.448.1885 x301, firstname.lastname@example.org, or fax 508.638.6444.
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