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The Green Sheet Online Edition

June 25, 2007 • Issue 07:06:02

Kicking the horse we all rode in on

By Biff Matthews
CardWare International

We have a problem. By "we," I mean all of us who recommend, sell, service, warrant, repair and (too often) replace POS devices for credit card transactions. If you are a merchant level salesperson (MLS), this problem applies especially to you. Over time, the price of POS devices has plummeted - and so has their quality. In the past 24 months, the average failure rate for new equipment, which we at CardWare International monitor carefully, has risen precipitously.

The failure rate on such equipment, which held steady for years at about 1%, has now tripled. Warranty issues have quadrupled, too, from 2% to 8%.

And the trend line is straight up. It's noticeable, disruptive and abusive. It also compromises the viability of the businesses on which all of us rely for our livelihood.

The cost of repaired and remanufactured POS equipment has been driven down as well. We have witnessed a startling rise in failures for equipment that is tested prior to deployment to the merchant.

There is also a substantially shorter average interval before equipment fails during operation - even when predeployment testing is thorough, repeated and well-documented.

Nose diving prices versus quality

Manufacturers acknowledge privately that with selling prices in virtual free-fall, they can no longer afford to test components on arrival, nor can they test finished assemblies.

There is a continuous push to use less-costly components. The consensus is that a high failure rate is inevitable, and the marketplace accepts that.

Twenty years ago, independent tests discovered that a new and wildly popular coffee maker had a 50% failure rate. The company knew it, but the profit margins were so substantial that it didn't matter. The company simply replaced the faulty units.

Well, this is not coffee. It is the livelihood of the merchants we depend on. And we can't tolerate this downward slide indefinitely.

An editorial I read recently opined that the biggest problem environmentalists had to overcome was that the environment has deteriorated so slowly that it never seemed like an emergency demanding immediate action.

At some point, breathing becomes difficult, and you can't see through the smog.

That's the equivalent of where we're headed. Merchants cannot conduct business when transactions are compromised by inferior devices that don't perform properly.

It's more than equipment

High failure rates might - might - be more tolerable if this were just about the gadgets. But, of course, it is not. Replacements for failed equipment must be programmed and encrypted.

Before that can occur, there's the entire swap-out scenario that plays out: phone calls, rush shipping and so forth.

I can encrypt and program a terminal and put it on a plane for same-day receipt at a merchant location. But who is willing to pay for that, particularly given the low perceived value of the equipment?

In an ideal world, same-day swap outs are challenging to orchestrate. But even if they were easy, is this where we want to be?

We're still talking about a merchant enduring a full business day of useless POS equipment at a time when more than 50% of transactions are credit card dependent.

Returning to the programming and encryption issue for a moment, manufacturers, rather conveniently, do not warrant these high-value, skilled services, even though without them their devices are no more useful than paperweights.

And for most retailers, a standby terminal is not an economically viable option.

If the industry is unwilling to pay a fair price for quality equipment, the alternative is acceptance of ever-climbing failure rates. For the MLS, the issue is no less than reputation and its companion, customer retention.

Bye-bye, merchants?

With enough failures, customers walk. They may not find better alternatives, but that will not stop them from leaving.

This is particularly true if the failures happen, as Murphy's Law assures they will, on holiday weekends and on Saturdays. This is when the time needed to secure a replacement is longest because no carrier delivers on Sundays or holidays.

Sunday is approximately 15% of the week and 20% of retail volume. Equipment that goes down on Friday can be up again on Saturday.

But if it goes down on Saturday on a holiday weekend, the POS won't be up and running again until Wednesday. That is half a business week, which will always be devastating.

Manufacturers must understand that the products they have created are nothing less than business-critical tools. They must demand that quality be returned to the manufacturing equation and commit to turning around both failure rates and the mean time between failures.

The acceptance of higher failure rates for repaired and remanufactured equipment is equally troubling. The attitude appears to be, "well, it isn't new, and we can't check every component."

It's no surprise that failure statistics on reworked equipment have spiked in line with those for new devices.

Epidemic shoddiness

Part of our work at CardWare is to check 100% of all new, remanufactured and repaired equipment we receive, whether terminal, PIN pad, integrated unit or whatever.

We identify failures and deal with warranty issues immediately, so malfunctioning equipment never enters our inventory, much less a merchant's store.

Even with an exhaustive quality protocol that tests and proves all transaction types and works properly the day it is certified, the failure rate for the first 30 to 90 days following deployment is stunning.

These are clearly component quality issues or problems with shoddy re-assembly of the product by an authorized warranty service facility or dealer.

We formerly used two repair facilities exclusively. When failures rose, we changed facilities - and, (long story short) we have now gone through a dozen or more repair facilities.

Every one has serious, chronic issues with equipment repair. In the game of remanufactured equipment, switching the source for the equipment changes nothing but the nameplate. They all use the same dismal repair facilities.

Heads up, MLSs

As MLSs, you are closest to the retailers. You can reap hefty profits on equipment sales. As such, you must become part of the solution by holding repair/remanufacture facilities accountable for quality.

If there are component issues, they must be addressed. The downward price pressure on new and remanufactured equipment is making it uneconomical to service, so there is no alternative to MLS involvement in addressing these problems.

If you are not willing to support quality as an ethical concern, merchants will continue to experience crippling levels of business interruption. I do not believe that is a choice we want to make.

Whenever I visit a cell phone facility, there's always a line of customers with service complaints. Prices in that sector, too, have been driven down to where product disposal is not just the technical inevitability, but also a marketing objective. It is failure turned religion.

It's common business wisdom that price, quality and service are the three pillars of business. And that you can have two, but never all three.

Business gurus protest otherwise (mostly to sell books). But, in fact, it is impossible to achieve all three for any longer than a short term.

My concluding thought: You, as MLSs, must be willing to pay a fair price for the quality and reliability customers need to operate efficiently. Equipment is not a convenience item.

The issue of reliability falls to you who sell equipment. Merchants look to you to solve processing issues. You recommend and install equipment, and now it's your reputation that's on the line. Act accordingly. (Churning is now officially out of fashion.)

I'm aware of companies hiring retention specialists and high-level managers with the title of Vice President of Retention at the ISO level. Many people are involved in the supply chain, but, in the end, it all comes back to the quality of POS terminals.

It's not the check guarantee company or the Discover card processor, or the electronic benefit transfer processor that creates the failure. It all flows through the terminal.

Whatever the cost of the equipment, it is miniscule compared with the cost of business interruption. It's time we all acknowledge that reality and work to fix these correctable quality problems.

The horse we all rode in on deserves nothing less. end of article

Biff Matthews is President of Thirteen Inc., the parent company of CardWare International, based in Heath, Ohio. He is one of 12 founding members of the Electronic Transactions Association, serving on its board, advisory board and committees. Call him at 740-522-2150 or e-mail him at biff@13-inc.com

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