The Green Sheet Online Edition
March 12, 2012 • Issue 12:03:01
Our industry has been invaded: What will you do?
Not too long ago, the payments industry was not well known. If I said I was in the merchant services business, most people had no idea what that meant until I explained it to them. For many years, the few of us who were in this business flew under the radar, left alone to create our own success.
Evolution occurs in every commercial sector - from real estate and finance, which have existed for centuries, to the payments industry, which has existed fewer than 30 years.
The current evolution in payments is taking place at breakneck speed, and I believe it is now fueled by three main forces: large corporations, regulatory measures and a rash of new agents, all of which have invaded our sphere.
By large corporations, I mean companies such as Square Inc., Google Inc., Dwolla Corp., Yahoo! Inc. and all the new products they have rolled out. The new agents I'm thinking of are people who have jumped into the industry from other professions and are looking to make a quick buck.
In this article, I will focus primarily on those two forces, not on regulatory developments such as the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Payment Card Industry Data Security Standard and new Internal Revenue Service regulations affecting our industry.
I am not opposed to growth, change or even regulation; however, I am against the idea of corporate takeovers in addition to inexperienced outsiders making decisions that affect merchants nationwide and impinge on my success in an industry that thrives on good old service and support.
Seeking a quick fix
Many of our industry's newbies made a lot of money as real estate agents and mortgage brokers before the banking meltdown of 2008. They tended to spend twice as much as they made living a fantasy lifestyle. Then they woke up and needed a new career. But they are not focused on building something for the future; they are looking for a short-term fix.
Don't get me wrong, not all of our newcomers are undesirable. I welcome those who are ethical and want to build strong relationships and lasting careers.
It's OK to have different visions of success, too. But the invaders come with a predatory mindset that has created new hurdles for the rest of us.
Let me explain. If a merchant level salesperson's (MLS's) compensation plan details getting paid a large upfront bonus per closed deal and minimal to no residual, do you think the agent truly cares about the longevity of the account?
This type of arrangement breeds MLSs who lie and mislead merchants, lease terminals and, most importantly, price accounts to the bone, with scant room for profit. Here are some effects this has on both merchants and MLSs:
- It tarnishes the reputations of good MLSs when merchants realize they got swindled by bad agents who only care about upfront bonuses, but can't distinguish between the good and the bad.
- It leaves no profit in the deal for the good MLSs to come in and invest the time needed to give merchants the service they deserve.
This influx of unsatisfactory agents is also causing greed to run rampant, damaging the industry that many of us love and want to preserve.
Greed is not always a bad thing. As Gordon Gecko said, "Greed is good!" I tend to agree to a certain extent. But coming into the industry, ripping off merchants and bouncing into the next quick-fix opportunity that comes along is not good greed.
Using corporate dollars to create a concept that is uncompetitive, unsecure and carries horrible customer service, yet, because of the corporate funding behind it, positions the company for great success, is not good greed.
Working hard for 20 basis points and getting excited every time your residual grows is good greed. Negotiating a true 80 percent deal with an ISO (as an MLS) and bragging about your deal is good greed.
Assessing new developments
When I asked industry expert and respected attorney Adam Atlas about factors impacting the industry in recent years, he said, "We are at a kind of tipping-point where face-to-face sales agents are having to square off against faceless big-brand online wallets."
This is an example of the big corporations coming in, flexing their muscles, and forcing the single, hard-working MLSs to conform, cut profits, innovate or quit.
Not all of this is negative. Those who are pioneers will always find a way to turn problems into opportunities. I foresee that corporate opportunists will make their money and then get weeded out when the business model fails (due to either lack of service or lack of profit). "The points of competition, as usual, will be service, pricing and products," Atlas said, supporting this opinion.
I doubt Square founder Jack Dorsey gives out his cell phone number for late night customer service calls like hard-working MLSs or even chief executive officers of ISOs do. I have the utmost confidence there will be plenty of opportunity for patient ISOs and hard-working MLSs to take what they do best, modify it toward new advancements and remain standing tall.
I also reached out to Darrin Ginsberg, CEO of Super G Funding LLC and an industry veteran who is well distinguished for his insight on the overall changes we've seen recently. "I think the first major change in our industry started many years ago with PayPal," Ginsberg said.
"Now, in 2012, we have companies like Square Inc., Google, Apple, Facebook (via Facebook credits), Dwolla and other newbies to the industry trying to change the payment landscape to make things easier for the small merchant.
"These large, well-funded companies have millions of dollars to throw at a very profitable industry and are changing the way business is transacted. ... Some players will come and some will go, but this landscape will be forever changed. ... Those of us who have been in the industry for 15 or 20 years will long for the 'good old days' of selling and leasing POS equipment to mom-and-pop merchants."
(Before the advent of free-terminal programs, leasing equipment was the standard business model for ISOs and MLSs.)
When discussing the effects recent industry changes have had on ISOs, Atlas said, "Another consideration is the stability of some of the new models that appear to have pricing that is too good to be true for the long run." I feel this applies to shady ISOs that either support misrepresentations on the part of the feet on the street or offer MLSs, staff or partners deals that are total lies.
These ISOs do not understand the "don't bite the hand that feeds you approach"; they are driven entirely by a bad breed of greed.
This has created an inordinate amount of disputes recently among MLSs, ISOs and their partners. And the invasion plays a role in creating this. First, when inherently greedy people get some of their profit taken away due to unsustainable business models caused by recent invasions, they look for all possible ways to make up for this loss.
Thus, ISOs create too-good-to-be true programs for their MLSs, and MLSs lie to their merchants to earn extravagant upfront bonuses.
Second, ISOs or MLSs who are not invested in the long-term value of this business lack the ethics needed to make it through substantial landscape changes, and they buy right into unethical business practices, hence fostering destructive levels of greed in the payments space.
I have seen many ISOs that take the "bite the hand that feeds you approach" with their MLSs. But MLSs are realizing, for example, that a true 85 percent, plus bonus, per deal is too good to be true, so they are challenging their ISOs.
The most common practice I see is that ISOs are "shaving" on the back-end and not paying the true 85 percent they promised. This behavior causes MLSs to either look for new homes for their businesses or resolve the reporting issues with their ISOs. If disputes are not immediately resolved, most often MLSs start moving merchants, which opens a greater problem.
Sticking to agreements
Michael Brewer, a long-time trial attorney holding impressive verdicts and settlements, said one of the most common disputes he sees today is "a breach of a nonsolicitation provision where an agent tries to move merchants to another ISO as a result of some dispute the agent has with the ISO."
He added that it is critical for the agent to understand "what limitations might exist in moving merchants in the event that the agent/ISO agreement is terminated, since the failure to proceed properly under this scenario might result in the agent being sued by the ISO."
So, it is important that MLSs who have been victims of greedy ISOs realize that even if their ISOs may have breached or misrepresented their agreements, they cannot assume it is fair game to move merchants to another ISO.
This falls into the "two wrongs don't make a right" area. So before making decisions when involved in a dispute, find out what your agreement allows you to do.
When greed gets the best of an ISO, and when (not if) the MLS finds out, the ISO's misrepresentations will become exposed. To avoid being misled, MLSs today find they must do more research before jumping into bed with an ISO.
Such due diligence should have been customary all along, and we can thank greedy ISOs for helping MLSs wise up and better position themselves for more favorable contract terms.
To that end, all MLSs should select reputable industry attorneys to review contracts or agreements before signing them. And if disputes arise, they should align themselves with honorable industry litigators, from the infancy of the disputes, to ensure their rights are preserved.
Making wise decisions
Each of us has a choice on how to mesh with the invasion of our space. How have you adjusted thus far? Are you changing your business model to blend with new forces in our industry? If you are an ISO, what are you doing to ensure you keep your profit margins consistent? If you are an MLS, are you getting the right deal from your ISO?
I'm taking advantage of the invasion by increasing the technology side of our shop, while staying true to the concepts that make us successful.
But I am sitting back to watch a lot of the action taking place with large companies and their advancements before making any game-changing decisions, as I am not sold on these advancements just yet.
The most important factor in deciding what to do is to realize there is an invasion, that it has created greed and you have a choice regarding how this will affect you. There is not much that any ISO or MLS can do to prevent the corporate opportunists, the quick-fix MLSs, the regulators or other groups from invading our space.
However, we can prevent this invasion from creating greed among the leaders in the payments space, and we can hold strong in unity to force out those who are acting on bad greed.
People will continue to use credit cards, and there will continue to be a need for the hard-working, competitive ISOs and MLSs who have strong customer service skills and are motivated by good greed.
But, as in any type or evolution, only the strong will survive. The choice is yours.
Jeff Brodsly is the President and Chief Executive Officer of Chosen Payments, a company created with the industry's feet on the street in mind. Through his multilayered experience as an agent for a top ISO as well as a partner/owner under a top ISO, Jeff developed an organization that remains true to its agents. He can be reached at 805-910-1445 or email@example.com
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