A November 2007 study conducted by First Annapolis, a Maryland-based payment industry consultancy, revealed that acquirers are giving away POS terminals to their merchant clients at an advancing rate. The findings indicate a trend of what acquirers are willing to do to attract business in an increasingly competitive market.
The study characterized the trend as "a particularly disruptive form of price competition."
The research is based on the equipment financing strategies of 19 acquirers, ranging from small ISOs to major acquirer-processors.
Almost two-thirds of the acquirers surveyed - representing 60% of the entire industry in volume transactions - were offering free terminals as an incentive for prospective merchants to sign up for their service.
In the payments industry, offering free terminals usually means offering free terminal placement.
The merchant does not actually pay money for the terminal, but the merchant does not own it either; the title to the terminal is retained by the processor or acquirer.
But free terminals have also been a carrot dangled by ISOs to attract merchant level salespeople (MLSs) to acquire merchant processing accounts for them.
MLSs could then sell, lease or rent devices to merchants to stimulate business for ISOs, while MLSs pocket the POS sales upfront.
But now it seems some ISOs are bypassing the MLSs more often and going straight for the merchants. What does this mean for the MLSs?
Ken Boekhaus, Vice President of Marketing and Business Development for Electronic Exchange Systems, said in "Free-terminal talkathon," The Green Sheet, Feb.12, 2007, issue 07:02:01, "If you approach a prospect with free-terminal options in your pocket, you can maximize your profit in each account and walk away with more deals. Free terminals are not ruining the MLS business; they are just transforming it."
Many acquirers have counted on the upfront revenues gained by the selling, leasing or renting of equipment to fund sales incentive plans.
The free terminal trend is occurring at the same time that competition is intensifying and, as a result, sales productivity is falling, causing the purchase cost of terminals to increase.
The First Annapolis study found that approximately 9% of merchants now receive free terminals, as opposed to terminals that are rented, leased or sold.
"Though 9% doesn't seem like much ... this particular form of price competition is disproportionately disruptive to cash flow precisely because it is front end loaded," the study stated.
"But even more fundamentally, when the net acquisition cost ... of a merchant becomes higher than the value of that merchant in a sale, then most ISO's main economic premise is fundamentally altered."
Marc Abbey, Managing Partner at First Annapolis, told The Green Sheet the trend is not "long-term good for salespeople" because it puts "a lot more pressure on the sales models in the marketplace [and] exacerbates trends in the acquiring business."
Abbey noted that in the long run, as always, "some businesses will succeed and some will fail."
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