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The Green Sheet Online Edition

December 08, 2014 • Issue 14:12:01

Street SmartsSM

Merchant attrition – Part 2: Call the locksmith

By Tom Waters and Ben Abel
Bank Associates Merchant Services

In our last article, we discussed the various attrition prevention methods that we, as an industry, employ to keep our merchants in our grasp. But sometimes, like trying to hold onto a toddler who just downed a few Red Bulls, they wriggle away from you and make a dash for it. Just as you may set up a defensive barrier to prevent that escapee toddler from tumbling down the stairs, most merchant level salespeople (MLSs) sign their merchants into agreements that contain some kind of defensive clauses to prevent them from fleeing.

Defensive measures

We reached out to members of GS Online's MLS Forum to hear their thoughts on such defensive measures as contracts, early termination fees and liquidated damages. Highlights from our discussions follow. First, I'd like to define the two terms we will be using in this article in case anyone is not familiar with them:

  • Early termination fee (ETF): If you don't know what this is it may be your first day on the job. While it can be titled a few ways (for example, "deconversion fee" is one we've heard) it is a fee assessed when someone chooses to opt out of a contract prior to the full term being realized.
  • Liquidated damages: This term is a bit less well known and may be new to some greener agents in the field. The primary concept behind liquidated damages is that a party is due the amount of compensation that the party would have gained if the agreement in question had been not been breached.

    In our industry, this is typically calculated by a processor assessing a multiplier, based on the remaining amount of months in the agreement, to a figure that they determine to be its "monthly profits." Depending upon the number of months remaining in a contract at the time of cancellation, this can be a very expensive fee assessed on the merchant.

Leave the door open or lock it?

The first thing we'll look at is forum members' views on contracts and whether some kind of punitive financial fee should be levied if a merchant leaves early. The forum seemed rather in unanimous agreement, if sometimes begrudgingly, that ETFs in contracts have a place in our industry.

This sentiment was well voiced by user Dee Malik, who stated, "I personally do not like ETFs in the industry but think that they are a necessary evil in our business. When you think about it, what is the merchant really getting for a three-year commitment as compared to, say, a cell phone? That being said, we have one. In a cell phone agreement, they receive a free phone and maybe better rates ... The disincentive to leave is more important to me than the fee, just as the noncompliance fee, as an incentive to fill out a SAQ, is more important than its fee."

This is a great point that in some other industries there is a benefit to signing a longer agreement, for example, getting a free iPhone instead of shelling out $699 for it. In our industry, the contract term, and thus the ETF, is not a value-add for the merchant, but rather a protective clause for the processor and agent.

Living up to your agreements

Forum user empire agreed with contracts and the need for a term saying, "When you engage in a merchant agreement, you and the merchant are saying, 'I accept these terms and am giving XYZ ISO the right to process my transactions for XX months at the pricing listed on the application.' Then the 'next best thing' walks in and the merchant switches. I believe an ETF should be used to hold the merchant to what they agreed to.

"If they are not willing to call our agent first, take advantage of our Meet/Beat guarantee, or allow us to review the new offer, then they shouldn't be surprised if/when an ETF is charged. If you sign a contract, you should abide by the terms. Most processors and ISOs are more than willing to make it right.

"When you lease a car, you don't dump the lease after 12 months because the dealer's new offer is a newer car for a lower payment. You signed the agreement for a 2012 model at $499 a month for 36 months. If more people treated this industry like other industries that have contracts, there would be less attrition and churning."

This view is also very fair. We, as agents and processors, work hard to provide a good product to our clients, and there should be some kind of mutual respect and reciprocity in the relationship between client and vendor when an agreement is made. Just like a restaurateur would still charge you if you took a bite of their sandwich and then left the establishment because you were suddenly enticed by the store across the street, we should hold merchants to what they have agreed to.

Valuing yourself and your services

Forum user maketelinc echoed this feeling that an MLS should stand behind what the agreement states, termination fees and all. "Waiving it doesn't make you look better than the new company ... being wimpy isn't good for business," maketelinc wrote. "I have tried both ways … those who paid the ETF call me … and come back sometimes, or even recommend others. Those who begged their way out of it usually are never heard from again."

Many businesspeople have respect for those who value the service or product they provide. If you have to beg people, or sacrifice even making a penny, to get clients, that's a strong sign that you're doing something wrong. Mbruno made a great follow-up point to this, saying that an ETF can then be used as leverage to reel the merchant back in. "When a merchant does leave and the ETF is collected (which obviously isn't a guarantee), the ETF dollars can be used as an incentive for them to come back," he wrote. "This works especially well when the new company has a no ETF policy. If the merchant chooses to come back to me, they get the $$$ back when they re-app (which includes a new three-year term). If the merchant chooses not to come back, they lose the money. More merchants come back than leave."

Instead of saying that the ETF will be waived, it can be refunded to the merchant if he or she chooses to return. This is a win-win for all parties involved except, of course, for the new processor who poached your account.

What kind of lock to use?

In questioning what kind of financial clause is used, be it an ETF or liquidated damages, the sentiments on the topic seemed to be rather parallel. mbruno stated, "I like having the ETF on the application in an easy-to-spot place rather than buried in the terms like liquidated damages often are."

User Dee Malik said something similar and followed up with, "I do not deal with any company that offers a liquidated damages clause to their prospective merchants. I don't care what the size of the ETF is as long as it is clearly stated in the contract. I do not like open-ended ETFs of any kind. I have this view of high- or low-risk merchants."

The attitude of both these forum contributors seems to align on the topic of clarity to the merchant. With liquidated damages the language is typically written in legal jargon and deep in the terms of the agreement. One could argue that it is everyone's responsibility to carefully review the terms of anything they sign, but we all know that is simply not the case.

This was clearly demonstrated in August of 2013 when a Russian man rewrote the terms of his credit card agreement before sending it back to his issuer and then sued them for upwards of 24 million rubles when they violated the updated terms. During questioning about it in court, the financial institution's only defense was that it had not reviewed the returned documents before approving it.

This, of course, is an outlier of comedic proportions, but it stands to make a point. The relationship between an MLS and merchant should be one grounded in trust, not sneaky clauses snuck in under the merchant's nose. Many would agree that those kinds of maneuvers are why our industry frequently carries a bad name. An ETF clearly written on the agreement is a plain way to make sure the merchant is aware of the financial repercussions of an early exit.

Comparatively, if a merchant leaves you and is hit with a multi-thousand dollar liquidated damages fee the merchant was unaware of, you are almost guaranteed to have burned that bridge with an extra coat of napalm and severed any potential business dealings.

At the end of the day, try as you might, you are probably not going to keep every merchant you board. This is just a fact of life in any client or portfolio based business. There are, of course, various ways you can attempt to thwart that attrition, but it is unlikely you will be successful 100 percent of the time.

Doing business in the real world

In a perfect world, merchants who were tempted by competitors with promises of a golden goose or magic beans would come and speak to you before taking any impulsive actions, but this is simply not the case. Because of this, and because we can appreciate the value of the products and services we provide, it is reasonable and understandable to have a contract in place that has some kind of financial inhibitor tied to it.

To be fair and honest with our clients is also important, though, and that inhibitor should be disclosed overtly and the merchant should be made aware of it, especially if you ever plan to get the merchant back into your portfolio post-exit.

By demonstrating that we value the service we provide and by standing behind the agreements we sign, we generate an aura of worth for our companies and our services. On the other hand, by giving it all away in the hopes that will get a merchant to sign with or stay with us, we further push the idea that we are simply interchangeable widgets ready to be discarded once something flashier comes along. end of article

Tom Waters has been dedicated to the merchant service sales profession since 2001. Currently, he is responsible for cultivating relationships with entrepreneurs in information technology, accounting, sales and marketing in his role as Sales Director of Bank Associates Merchant Services (www.bams.com). Using fresh and matter-of-fact training methods, Tom has contributed to the success of thousands of agents, affiliates and clients. He can be reached via email through t.waters@bams.com or via phone at 347-651-1065.

Ben Abel is Regional Director at Bank Associates Merchant Services. Since joining the team in 2006, he has risen through company ranks with a paradigm that his success was measured by the success of those around him. Ben is a dedicated, pioneering trainer whose methods of merchant services consultation have helped many agents expand their portfolios in terms of processing volume, deal count and profitability. He can be contacted at 347-866-9571 or ben@bams.com.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

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