From the advent of electronic payments in the 1980s through the turn of the 21st century, the leasing of payment terminals helped countless ISOs and merchant level salespeople (MLSs) generate immediate income while gradually building their merchant portfolios. MLSs didn't have to live off of their savings or work more than one job when they embarked upon a payments industry career. They could devote full-time effort to the trade, and ISOs could easily retain and train the talent they needed to build their businesses. Thus, POS terminal leasing was booming.
However, several factors have eroded the leasing business in recent years, among them are a rash of technological advancements, including online and mobile payment options that do not require terminals; the practice of giving away instead of leasing terminals to merchants, which began in 2004 and has expanded to include today's sophisticated POS systems; the ongoing recession; and, to some degree, old-fashioned greed.Changing technology: New technologies continue to create new opportunities for ISOs and MLSs; however, they also bring new challenges. One challenge is the encroachment of newer entrants on the POS scene, such as Square Inc. and PayPal Inc., both of which have set their sites on obtaining a piece of the traditional payments pie.
Free terminals: Much has been said and written about the upheaval free terminal placement caused in the industry. Many feet on the street were strongly opposed to it initially; others endorsed the practice from the start. Debate still occurs over whether "free" terminal placement is really free, but the practice is now an accepted way to get equipment in the hands of merchants, along with sales and leasing.
Economic factors: When the Great Recession took hold several years ago, many small businesses defaulted on their equipment leases. These defaults contributed to banks' reluctance to lend money to new businesses and made it difficult for ISOs to find underwriters for leases.
Questionable behavior: The payments industry has long dealt with a fringe element of unscrupulous ISOs, MLSs and vendors, and leasing has not been immune. One recent example of trouble on this front: a leasing company in California, recently agreed to settle allegations it participated in unfair competition and misleading advertising by misrepresenting the terms, costs and length of the payment on equipment leases; misrepresenting the type of equipment; not delivering promised products and services; and even forging vendor signatures on leases.
Whether leasing has been more affected by greed than other aspects of payments is debatable. And despite these impediments to leasing, many ISOs and MLSs believe leasing remains a credible option for some merchants and a viable, supplementary source of revenue for ISOs.
Jack Kimbal, President of the ISO World Payment Services Inc., believes leasing still has a place in the ISO tool kit and is especially useful when reps are assisting new businesses that don't want to tie up resources that could be used to invest in the new enterprise. For example, a terminal that would cost $700 upfront to purchase can be leased for $40 per month, reducing upfront expenses.
Kimbal added that leasing even makes sense for established companies when money is tight or when the business can't borrow enough money for the POS system it needs. Also, it is often easier to upgrade equipment when leasing versus when buying. In addition, leasing can be deducted on tax returns right away, reducing tax liability immediately. And leasing typically does not use up available credit lines, Kimbal noted.
On the downside, a lease typically binds a merchant to a 36- to 48-month contract and yields an effective interest rate of more than 20 percent per year in borrowing costs.
"Although the effective interest rate is high on the lease, remember that the leasing company is taking the risk of the default and you are joining a pool of lessees who are typically higher risk," Kimbal said. "Remember, most business owners will lease when money is tight, and this increases the risk of default to the leasing companies."
If the money saved from not having to buy POS equipment is invested, the returns could more than make up for the high interest rates charged for the POS system. "The decision to borrow money at 20 percent annual interest and re-invest it at 30 percent annual interest makes sense all day long, don't you think?" Kimbal said. He added it should be simple to find an investment that would offset the annual interest expense of leasing.
When advising merchants, Kimbal urges them to calculate the annual interest rate on a lease before signing a contract. Also, in determining whether leasing makes sense, a merchant can conservatively estimate the expected profits from additional credit and debit card sales every month and subtract the cost of the lease payment to calculate whether leasing is a viable option, Kimbal noted.
That said, Kimbal feels leasing should be considered only when there is no better way to finance the POS terminal or system the customer needs. And for when a merchant decides to opt for a lease, Kimbal offered the following advice:
"Coach" Ron Tunick is President and Chief Executive Officer of the ISO Nations Transaction Services in Ventura, Calif. He took his company out of the leasing business after the recession hit. "Leasing is not what it was 10 years ago," he said. "Merchants are much more intelligent. They know there are outlets out there for new and used equipment. Some have learned to ask questions. Five years ago, when the recession hit, leasing changed dramatically. Today leasing is almost nonexistent."
Tunick needed a way to replace the revenue source his MLSs lost as a result of the lost leasing channel. His solution was to develop a mobile payment application for his merchants, and he foresees the app replacing the equipment lease as an upfront income vehicle for his MLSs.
"We put our processing system into a mobile app," he said. "When we roll it out, it will be a competitive edge. We can sell the mobile app for $1,500 to $2,000 and have it installed in a week to two weeks. It is very comparable to doing an equipment lease model, and the merchant, salesman and consumers all benefit."
Looking back at his leasing experience, Tunick offered ISOs still involved in leasing this advice: educate the merchant. "Too many times how leasing works, when it comes to credit, equipment costs and the term length, when these are not properly explained to the merchant," he said. "The merchant needs to understand what happens at the end of the lease, as well as other costs like prepaid penalties."
Tunick said if leasing is the only option available to the retailer, the merchant needs to calculate whether the business has the ability to monetize and recoup the lease. "It might be smarter to put a $400 piece of equipment on a credit card," he said. "You can't get out of a lease. The failure rate of new businesses makes a three- to four-year lease a risk."
"As an ISO, I want to do what's right for the merchant and make sure the merchant gets it right for the consumer," he said. "Before considering their sector, go to a local bank and ask for a loan to buy the equipment. Sometimes a small community bank will work with a startup business. When a customer asks about equipment leasing, inform, educate and do what's right."
Though the number of ISOs and MLSs offering leasing has thinned, leasing companies are cautiously optimistic about the future of their sector. "We are seeing a resurgence of the respectable lease," Wendy Zucker, National Sales Director at Barclay Square Leasing in Hicksville, N.Y., said. "There is a niche for leasing. It just depends on what's right for the customer and what's right for their business."
Kyle Moys, President of Executech Lease Group in Vancouver, Wash., stated, "Leasing can offer a great rate and put $500 to $1,000 in a sales agent's pocket. We offer great rates and upfront money, and the merchant can write the payments off."
He added that often merchants who sign a lease can save on processing costs. "For a merchant, when they show a savings on processing, it is a win-win even after you add the merchant lease," he said.
Brad Oliver, President and CEO of Azura Leasing in Grand Rapids, Mich., affirmed that leasing is still viable even in a marketplace where many companies are offering free equipment. He said it is essential to adapt the lease terms to the customer and the lease to the technology. "Our customers end up with a good new piece of equipment, and they get a good buy-rate on processing," he said. "We don't gouge the company."
According to Oliver, now that banks are so cautious in the leasing market, companies offering leases must get complete background information on potential customers. He also recommended diversifying by offering complete processing systems and ATMs in addition to credit and debit card terminals.
"Leasing is a very essential part of an ISO if it wants to help its reps," he said. "Leases make money upfront for agents while they build their residuals. Leasing is vital to building a sales force. Employees need to make money while building a residual income. When you are looking for another revenue source, leasing makes for a perfect choice."
Leasing may not be the right choice for all payment professionals, but it clearly still has a place at the payments industry table.
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