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The Green Sheet Online Edition

December 10, 2007 • Issue 07:12:01

Small merchants mean big future

By Jeff Fortney
Clearant LLC

Consider this scenario: After a successful sale, the merchant level salesperson (MLS) places a signed contract, a voided check and a statement copy into her briefcase, shakes the small curio shop owner's hand and walks out. As the MLS walks to her car, she checks her cell phone and listens to voice mail from another merchant. The query requires a simple answer and she quickly calls before she heads to her next appointment.

Sound familiar? If you are an ISO or MLS, this is more than common. You balance the need to manage your existing portfolio with the need to grow. You monitor the income earned from your residuals with high hopes that it will continue to grow and to insure you are being paid what you should.

Tall tales

Yet for all the effort, stories still abound about the future, or lack thereof, for ISOs and MLSs. There has been much written about how a direct sales force is the only future for a healthy processor. Many are saying the market is drying up (or has dried up), and the cost of acquisition is such that a direct sales force is the only way to compete in today's market.

Contrary to these many articles and interviews, rumors of the demise of the ISO and MLS have been greatly exaggerated, to paraphrase Mark Twain. In fact, by examining today's marketplace, reports should be that ISOs and MLSs are thriving.

The terms ISOs and MLSs here are defined as the truly independent sales representatives, and not those working for another company as salespeople in the traditional sense.

Yes, ISOs and MLSs technically represent or sell for another, but their goals are the residual revenue; the building of a business model - not a quota to keep a job. Agents may represent only one company, or multiple companies, but their goals remain the same.

According to several recent studies, there are 3,000 to 10,000 ISOs and MLSs currently active. Like many small businesses, not all will survive. Not all fit the definition either, as many aren't building a residual base today. Yet, those are the minority. How does the majority survive if all the soothsayers, who claim there isn't a marketplace for the ISO and MLS, are correct?

It all begins with the merchant base and the availability of a deep enough pool. The small merchant has been, and continues to be, the bread and butter of ISOs and MLSs.

The larger providers still look at this market as more work than the effort is worth. They may market to it, but it isn't the business sector they want to own or dominate.

The majority of these mom-and-pop merchants are building solid businesses, with the ultimate goal of making a living while being their own boss.

Several may grow to moderate size, but the vast majority that survive will remain reasonably small. What they want and demand fits perfectly within the offering of ISOs and MLSs.


The soothsayers claim this merchant type is squeezing margins to a point where they no longer place value on service - it's all price.

Many in the small-merchant pool have the same needs as larger merchants but, because of their size, are grouped with other small merchants when dealing with the larger companies and their sales staff.

This makes small merchants feel as if they aren't significant. Partnering with the right ISO and MLS, they regain the feeling of importance by receiving personal service that otherwise would not be available to them.

Small merchants also want access to the same product mix as the "big boys." Many see the need for everything from prepaid cards to identification card programs.

Consumer demand has created several secondary revenue sources for small businesses. Although margins may be thinner on basic processing, the added source increases revenues in other areas while improving merchant retention.

Combined, these sources and the provided service by ISOs and MLSs have kept the return percentage on the small merchant exceeding the return on the medium to larger merchant.

The fact that 600,000 new merchants are established every year, and the emergence of nontraditional card acceptors, keep the pool growing.

Slow gratification

Some industry veterans claim ISOs and MLSs can't adapt how they sell to the new marketplace. It is true that, unlike 10 years ago, upfront revenue is harder to generate. Ten years ago, an ISO or MLS would expect to sell or lease a terminal on every merchant contract because terminals were evolving quickly as market demands changed.

Today, the majority of merchant-owned terminals in place are more than sufficient to handle the demands placed upon them by merchants. The immediate gratification of a terminal sale has been replaced by the long-term benefit of residual return.

There are still terminals to be sold or leased, but not in the same quantity as in the past. The need to gather accurate information about your customers to sell them more services indicates a deepening relationship, not a lack of opportunity.

And, like chameleons, many ISOs and MLSs have adapted and found other sources of revenue to replace the equipment revenue of the past.

Stunted funds

Some claim that, with the advent of free products, the revenue sources that have kept the ISOs and MLSs healthy have dried up. The result is that they are forced to live off residuals alone, or on upfront bonuses. The truly independent ISOs and MLSs have quickly recognized the pitfalls in both these offerings.

They are writing merchants without offering free equipment and are, instead, reprogramming existing terminals. If a merchant truly needs equipment, they offer to sell, lease, or even rent the equipment, sometimes even at cost. Successful agents have avoided bonus programs. They understand that these bonuses are recouped by the payee, usually in the first year. The resulting losses of long-term residual revenue, as well as the reduced value of the portfolio, are too great a cost.

They don't see these offerings as revenue opportunities. Instead, they look to residual growth and value as their goal.

Long relationships

Naysayers assert that in a down economy, attrition will kill ISO and MLS revenue because of increased competition for the same merchant type.

Ask any ISO or MLS and you will find out why attrition is such a concern. ISOs and MLSs will also tell you the best defense against attrition is good, honest service coupled with a larger and more diverse merchant base. In other words, a relationship.

Merchants like ISOs and MLSs who take a keen interest in their businesses and work hard for them. If bonds are strong, merchants will remember the efforts made and remain loyal to their ISOs or MLSs, which will be a bonus during difficult times. Attrition, no matter how good the service, is a given. Enterprising ISOs and MLSs avoid banking on just one merchant to keep the money flowing in.

If their residuals are in five figures, solid ISOs and MLSs will tell you 500 merchants are more desirable than 50. With this diverse portoflio, they can withstand losing a merchant or two without taking a huge financial hit.

Half and half

Some payments professionals believe the only source for ISOs and MLSs will be companies that won't act as true partners, but instead will use agents to their advantage, greatly reducing the returns an ISO or MLS would normally receive. There is some truth to this. Some processors look at ISOs and MLSs as subservient. These processors are exposed by their contract provisions. For example, terms such as vesting period, exclusivity and minimum productivity for payment are common in these processors' contracts.

Survival of ISOs and MLSs is truly predicated on their partnership choices. Who they choose to represent has a significant impact on their success potential. Sadly, the most common cause of ISO and MLS failure isn't lack of business; it's the selection of the wrong processing partner.

Future growth and prosperity are truly predicated on this initial selection. The right partner is one who recognizes the contributions of ISOs or MLSs, and wants to be a part of the growth. These partners don't play games with residual percentage credits, nor do they build in significant revenue prior to calculating expenses. They provide the reporting, the tools and access to income opportunities that all agents need today.

Such processors exist. They may not advertise as much, but they can be found. Will ISOs and MLSs have a place in the future? It goes without saying; the need is as great as it was 10, 15 even 20 years ago. Consider this scenario: The MLS submits a merchant application to his processor and sets it down by his computer. He logs into his partner's residual system and smiles, for he knows his future in the industry is bright.

He is finally working with people just like him who want to build a successful business. And like them, he works hard to gain profits. He remembers this as he rises to go to his next appointment. It is his career, after all. end of article

Jeff Fortney is Director of Business Development with Clearent LLC. He has more than 12 years experience in the payments industry. Contact him at jeff@clearent.com or 972-618-7340.

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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