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The Green Sheet Online Edition

July 24, 2023 • Issue 23:07:02

How low can merchant services go?

By Allen Kopelman
Nationwide Payment Systems

We've all heard about the race to the bottom. Is it my imagination or is history repeating itself? It was bad enough to see desperate agents driving down processing pricing, but now it looks like the race to zero doesn't stop at zero. These desperados have gone from giving merchants a deal of a lifetime to paying them to take these deals off their hands.

How can we let this happen? I set out to collect opinions on this trend at the 22nd annual Southeast Acquirers Association conference. While not all of my sources wanted to go on record, judging by their passionate responses and colorful language, it's clear no one is happy about this new trend.

Legal, tax implications

Jaron Rice, founder and CEO of Magothy Payments, made good points about agents who voluntarily split their residual payments with merchants. "If your agents are paying merchants for their accounts, they're not selling," he said. "Giving merchants any kind of rebate for merchant services is utterly absurd."

Rice also pointed out the tax liabilities that this upside-down model creates, suggesting people aren't considering the long-term implications. For example, merchant fees are a business expense that comes out of your top-line revenue, he said, and that's deductible revenue for business owners.

"Getting that money back creates a tax liability," he added, and if you're getting that money back under the table, what does that say about your ISO business partner's integrity?

Reflecting on his ISO business, Rice said Magothy Payments reports referral partner rebates and bonuses, which is legally required for partner payouts of over $600 per year. A payments attorney, speaking off the record, agreed kickbacks have legal and tax implications and are not ethical.

"This is dirty," said someone else who asked to remain anonymous. "It's not professional to give away your own hard-earned residuals, and it makes our industry look bad."

New lease on life

In 1998, when I started in this business, leasing was huge and the main way to make money. We were offering 12-month or 24-month leases, avoiding the high-priced 48-month leases and their big monthly payments. But as ISOs began selling equipment outright and then giving it away, we pivoted to selling used and refurbished POS equipment to stay competitive.

Then big integrated POS systems became huge business, and they too became "free," which isn't really free if you read the fine print. It's more of a subscription service, such as hardware- or software-as-a-service.

Today's merchants expect low entry costs and monthly fees for their hardware, software and POS systems. Technology changes fast, and no one wants to be stuck with obsolete equipment.

Any merchant who got stuck with an end-of-life or non-compliant POS would be reluctant to buy any hardware outright or to buy once-and-done software and be responsible for compliance and security patches. It makes sense to pay a small monthly fee and never have to worry about that stuff.

Writing on the wall

One of my favorite books, Who Moved My Cheese? by Spencer Johnson and Kenneth Blanchard, made some good points. The authors realized most people are afraid of change, and they created a story about mice in a maze to illustrate an effective strategy for dealing with it and to show that in a rapidly changing world or industry, it's your attitude that matters most.

Johnson describes the book as a simple parable for dealing with change, with cheese as a metaphor for whatever you want in life or in business; the maze is where you look for it. "In the story, the characters are faced with unexpected change," he wrote in the introduction. "Eventually, one of them deals with it successfully, and writes what he learns from his experience on the Maze walls."

When you see the handwriting on the wall, he added, you can discover for yourself how to deal with change so you can overcome your fears and see change as a way of gaining something better.

Overcome fear of selling

Looks like the race to the bottom is now hitting historic new lows. I want to thank the payments industry leaders for sharing perspectives on this disturbing new trend. To Rice's point, any merchant level salespeople who are giving away residuals aren't selling. They're paying merchants to help them meet their quotas. I agree with others who called this practice dirty and puts merchant services in the same class as payday lenders and credit repair service providers. This not only makes us look bad, it makes us look like a bunch of scammers.

In an industry that prides itself on self-regulation, let's take this behind the barn and shoot it before the regulators take it off our hands. It's no wonder why merchants run to PayPal, Square, Stripe, Toast and others: at least these companies offer transparent pricing.

Let's focus on selling value and service and give business owners the best possible pricing. Remember, if you can, why you got into this business, and let's get back to basics before it's too late. end of article

Allen Kopelman, a serial entrepreneur is co-founder and CEO of Nationwide Payment Systems Inc. and host of B2B Vault: The Payment Technology podcast. Email him at allen@npsbank.com and connect on LinkedIn https://www.linkedin.com/in/allenkopelman/ and Twitter @AllenKopelman.

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