The Green Sheet Online Edition
July 27, 2015 • Issue 15:07:02
EMV and the open floodgates for equipment leasing
With Europay, MasterCard and Visa (EMV) becoming more "real," many ISOs and merchant level salespeople (MLSs) are pitching merchants with the proposition that they need new equipment to comply with EMV regulations. And EMV has thus opened the door for ISOs to capitalize on or enter the highly lucrative equipment-leasing business.
EMV has cast aside the "leasing is dead" naysayers and allowed for certain ISOs to make a serious profit. But the leasing model's reputation and pitfalls can leave uninformed and ill-advised ISOs reluctant to push leases or cause them to fall on their faces when they do. If done correctly, however, equipment leasing can cause an ISO's income to surge.
Negotiating a good leasing contract
The first step to monetizing equipment leases is negotiating a good reseller agreement. The self-funding lease, meaning you collect the monthly lease amount yourself, is not a lucrative model because it leaves the sales organization holding the risk and duty of collecting payments.
But with a solid lease finance relationship, ISOs will ensure upfront payments that help the bottom line and create huge incentives for MLSs.
A quick stroll around a tradeshow floor or perusal through The Green Sheet will present multiple options for leasing vendors. The major players and other vendors typically offer a 48-month lease; a less common option is 60 months. And if a merchant agrees to a $100 per month lease, that could mean as much as a $3,200 payment to the ISO upfront, wired the next day.
And for an MLS, their percentage of that close upfront, as well as ongoing residuals, can allow for recruiting into multiple sales industries that do not offer such a large per-account referral bonus.
The first issue to address when negotiating such a contract is when the lease financing company will force the ISO to repurchase the lease under a buyback or chargeback clause. For that clause, negotiation will likely exist on whether the repurchase price is the full amount or the amount funded to the ISO. Negotiation may also exist on what events and the amount of time need to pass to trigger the buyback clause.
The pricing and fee split usually depend on volume commitments or personal relationships. But many other terms are negotiable and will help an ISO monetize the relationship, as well as help the leasing company avoid liability from overly aggressive sales agents.
Leasing liability – is the income worth the potential liability?
EMV hype aside, leasing still carries a nasty reputation. Merchants may complain that they are paying the same amount to lease a $500 machine that they would to lease a brand new Miata. The pitch, of course, is that what merchants pay in leasing, they make up for in their processing fees.
For ISOs that haven't focused on a leasing model, the thought of giving away pricing likely keeps them up at night. But ISOs that are deep in the leasing model prosper on the upfront financing from the leasing companies. This lump sum, upfront payment, as opposed to small payments over time, allows ISOs to pay larger bonuses to their MLSs. And that cash-in-hand model attracts aggressive sales staff who often burn out fast, which can lead to high agent turnover.
In contrast, the residual paycheck attracts agents who are in it for the long haul, in part because their paychecks may be tied up in their continued referrals.
Thus, ISOs looking to capitalize on leasing need to know the type of MLSs this will attract. Unfortunately, it draws agents looking for the fast reward, ones that may make false statements, with or without knowledge, to ensure a quick payment. Further, because they are paid upfront, such leasing sales agents have no stake in the merchants' continued business.
These internal problems can lead to external pressure from processors, banks, investigative agencies and litigious merchants. Regulatory compliance and Operation Choke Point aren't just buzzwords, task forces are looking heavily at the electronic payments industry, and merchant complaints about aggressive MLSs are a springboard to trigger these investigations.
With pressure coming from all angles, a solid leasing model requires the strong mortar of a comprehensive compliance program.
Leasing is lucrative
Despite the fact that the leasing model receives heavy scrutiny, that sales agents require another level of management, and the potential for higher merchant complaints, the leasing model is a way for ISOs to bring instant capital into their pipelines.
The leasing program must be well-vetted and have ongoing management to ensure it doesn't trigger a fine or investigation that will ultimately cost the ISO more than it makes from the program. Building a compliance program and sales strategy to successfully push a leasing program is easier than one might think, and all sales models could benefit from diversifying and expanding into an aggressive leasing sales pipeline.
James Huber is a Partner at Global Legal Resources LLP. Global Legal has advised electronic payment companies and their affiliates on every aspect of their business. Global Legal are payments litigators that defend regulatory investigations, civil enforcement actions, and class-actions. The attorneys there are experts at instituting regulatory compliance procedures to avoid liability, as well as negotiating payments agreements, mergers, and acquisitions. James can be reached at firstname.lastname@example.org.
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