By Jeff Fortney
Even in the best financial times, businesses fail. It's a constant in the professional world that affects employees, investors and vendors, including payment processors. Little can be done to predict or forecast a business failure. Even merchants who are perceived as healthy can fail.
Several years ago, I taught a seminar on attrition. One module was based on the three most common reasons why businesses fail. By understanding these reasons, ISOs and merchant level salespeople (MLSs) can recognize the symptoms.
The first two reasons are commonly understood:
The third reason is insidious, but it can be controlled. I think of it as death of a thousand cuts. In this case, costs are not managed well, or worse, they are not even reviewed. Unidentified expenses, inadequate planning, and billing or revenue errors lead to slow business death. By the time it's recognized, the damage is already done. The only way to prevent or ameliorate this situation is to recognize its potential early, manage ongoing costs and control expenses.
A prime example of this type of business failure is the restaurant with a long line out the door that closes up shop within six months of its grand opening. The demand was there, but cost management and revenue control were not.
Lately, I've noticed a trend among certain payment professionals. It seems many ISOs and MLSs forget they are managing businesses and are responsible for everything that entails. Many fail to understand their true costs, control their expenses and price merchants accordingly. I often hear comments like, "I don't understand why my residuals aren't growing" or "I can't figure out why I earned less this month even though my merchants processed more."
Many people with great potential enter our industry, find limited to no success and ultimately leave the business. Simply put, they don't make enough money to survive in the industry. They may be great salespeople who close plenty of deals, but they fail to manage the revenue side of their businesses.
Sadly, many in our industry aren't even aware this is happening to them. By the time they discover the problem, they have most likely lost significant revenue – revenue that cannot be recovered.
If you find you are or could be at risk in this manner, first, stop the bleeding. Make this your top priority. Begin by examining your operating costs, the largest of which is your processing partner relationship. Start your analysis there.
To thoroughly analyze your costs, examine your ISO agreement and Schedule A, along with your most recent residual reports. Have your merchant agreement handy, too, as you will need to reference the small print. Also, have a place to jot down your notes and questions.
Start with your Schedule A and go line by line, asking yourself whether you understand each cost and what it impacts. If you are not 100 percent sure you understand a particular cost, make note of it. Make no assumptions. If you are even remotely concerned about a cost, note it.
Don't restrict your review to line items. Read the full schedule. Look for anything you haven't noticed before or find confusing. Remember, every line on a Schedule A affects your costs. You must understand your true expenses, not just one or two specific lines.
Compare your residual report billing to the line items you understand. For example, if you have a cost for authorizations, confirm that the billed amount matches your Schedule A. Also check your residuals for any expense that isn't reflected on your Schedule A. Add your questions or concerns to the list of issues you plan to discuss with your processing partner.
Next, prepare to review your agreement with your processing partner. Be aware of any clauses or provisions impacting your bottom line. For example, is there a minimum residual clause or a minimum production requirement that, perhaps, you do not fully understand? As you did with your Schedule A, note anything that appears to be a concern and bring it up with your processing partner.
Next, look at your merchant agreement, and do what few ISOs and MLSs ever do: read the small print. It may appear to be standard boilerplate language, but there could be a clause that references billing to your merchants that isn't part of your revenue.
Finally, review two or three merchant statements and see if any pass-through fees are above the true cost or the cost you anticipated. You may not be sharing in that revenue and this should be noted. Remember, your success is based on your ability to price a merchant at a level that generates satisfactory revenue. If fees are padded, they impact your ability to price a merchant and thereby dilute your revenue.
Jeff Fortney is Vice President, ISO Channel Management with Clearent LLC. He has more than 17 years' experience in the payments industry. Contact him at firstname.lastname@example.org or 972-618-7340. To learn about how Clearent can help you grow faster and go further, visit www.clearent.com.
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