Editor's Note: This is the second of a two-part series on strategies payment professionals are using to succeed during a time of tremendous change in our industry. This article shares perspectives from MLSs on the topic; the first article, "Thriving in a disruptive market - ISO strategies," The Green Sheet, Jan. 14, 2013, issue 13:01:01, addressed what ISOs can do to address disruption in the payments sphere.
In 2013, competition for merchants is fierce, because the feet on the street are confronted by the new kids on the block. Merchant level salespeople (MLSs) are pitted against new and disruptive payment services providers that offer sometimes attractive, sometimes confusing new technologies, services, business models and pricing.
MLSs must demonstrate value and services that compete with these new players, such as Dwolla Inc., PayPal Inc. and LevelUp Inc. Dwolla, with its online and mobile payment network, charges merchants 25 cents for each transaction over $10. EBay Inc.-owned PayPal is now available as a POS option at 18,000 retail locations, where merchants pay a fixed price of 2.9 percent plus 30 cents per transaction.
And through its quick response code-based payment app, LevelUp generates revenue based on the success of its reward and loyalty programs for merchants, and not by charging interchange.
MLSs and sales executives interviewed for this article said they are not bothered by competition from these industry newcomers.
The payment service they see most often in competition with them for merchant business is Square Inc., the mobile payment acceptance company that charges retailers a flat 2.75 percent interchange fee per transaction. Some noted that Square is building a large network of merchants with its mobile applications and could eventually develop into an alternate payment network all its own.
Square may be a good option for growing smaller merchants. But payment observers predict that as these businesses expand, they will outgrow Square's capabilities and demand more comprehensive services provided by ISOs and MLSs.
Joshua Bryson, an MLS at Jacksonville Merchant Services in Northern Florida, is focused on growing long-term market share in the upper end of the hospitality market. He doesn't mind supplying a customer with a free terminal, but he's seeing fewer such deals that make sense at the midsize-to-large hospitality merchants.
Bryson said he lost six opportunities last year to competitors offering free POS systems. "The opportunities I lost were smaller one-station deals that were solicited by new agents with little to no knowledge of bankcard, POS or service after the sale," he noted. "I've yet to see a large restaurant, bar or group use free POS in my market."
Bryson believes he may be better off missing out on such opportunities, as it gives him time to win larger accounts. "I do have an option for penny-pinching POS prospects that leaves a fair amount of meat on the bone; enough that it is worth it to sell, program, install, train, support and lock in the credit card processing," he said.
"It's just that merchants that fall for or want the 'free POS' are of a certain mindset, and you cannot always break that up."
Niles Crum, President of NDS Payment Solutions in Illinois, agreed that many MLSs seem concerned about Square. He sees Square as a solution to which he can refer prospects that do less than $1,000 per month in transactions. Crum said that for these businesses, Square is a good option because it doesn't charge statement fees, government regulation fees, or Payment Card Industry Data Security Standard compliance fees, and it has no minimum monthly fees.
"Square kind of forces the MLS to focus on more profitable accounts, which in my mind is a good thing," Crum said. "That's not to say that down the road they may not be more of a threat to us. But they don't get better interchange rates, so we should be able to compete with them should they [target] larger merchants down the road."
Peter Davidson, Chief Executive Officer of payment solutions provider Brooks FI Solutions LLC and Chief Accounting Officer of Universal Business Payment Solutions Acquisition Corp., said, "As a merchant, I'd want to be sure to go to somebody who can give me a complete product. At the end of the day you don't want to focus on the small guys."
Jeff Fortney, Vice President of ISO Channel Management at Clearent LLC, said, "You go into a merchant and find out where it hurts and learn how to fix it. Square is the biggest challenge because it offers a fixed price at low volume. The MLS should know there's no difference in interchange fees after the merchant reaches a level of $2,000 per month in transactions.
"If the merchant wants to argue, let them. If they like Square, tell them it is a good solution, and move on. The goal is to improve the merchant ability to accept payments. Merchants aren't stupid. They know 2.75 is not a great price. Square gets to compete with us; we don't need to compete with them."
Fortney believes MLSs will discover that when businesses are big enough to be profitable for MLSs who serve them, the MLSs will be able to demonstrate to those businesses that Square is not the best option.
MLSs might also learn from VeriFone Inc.'s decision to abandon the micro-merchant market. VeriFone CEO Douglas Bergeron said in a Dec. 13, 2012, conference call held to discuss the POS manufacturer's fourth quarter 2012 earnings report that VeriFone would no longer compete directly to acquire micro-merchants because the category was not profitable enough.
"Customer acquisition costs, industry search engines or TV advertising cannot and will never justify the razor-thin margins produced by merchants with infrequent volumes and extremely high attrition," Bergeron said. "I think you can see evidence of other competitors' similar experience, as they shift their own business models to wallets.
"My belief that the only possible survivors in this fundamentally challenging business model will be companies who might have an opportunity to provide other services to these micro-merchants."
A push is underway in the payments industry toward low-cost, easy-to-use technology that is both comprehensive and scalable. But some feel the sweep of payment technology raises merchant expectations without improving their understanding of what the technology can (or can't) do.
It's easy to sometimes forget that the card companies' networks are the main payment rails, their cards are the most trusted payment methods, and they have established the technical standard for connecting merchants with customers. MLSs should not try to think for merchants, Fortney advised. "Most retailers are not payments geniuses," he said. "Before the MLS gives away a POS system, the MLS needs to ask if this customer needs a new POS system. Merchants who need those solutions are already techno savvy.
"Giving them a solution is not the way to go. It's better to sell them a solution that works on the iPad they already have." Fortney also said it is a mistake to adopt technology early; it is better to wait and see what customers want. "You don't want to be a pioneer because 80 percent of the original American pioneers who settled the West were killed by disease or Indians," he noted.
"If the merchant is all about 'price and free,' the merchant is going to choose that option, but most savvy merchants know nothing in the world is free."
Fortney added that a significant number of MLSs make the business harder than they should. "A salesperson needs to stop and listen to a merchant before selling instead of starting to sell when they are walking in the door," he said.
Bryson is finding more banks competing in the hospitality market. "With the conversion of Wachovia to Wells Fargo and the entrance of Fifth Third Bank to my market ... I'm seeing more and more of their presence and competition for new merchants," he said, adding that some have been successful going up against him.
However, he remains confident competing against the banks as they "provide no loyalty, no gift - just 'we're the bank and we're direct.'"
MLSs need to keep up with what is happening on the street, too. "2012 was a good year," Fortney said. "Growth and quality improved. Merchants are listening to the service pitch and are paying less attention to savings. What merchants are fighting for are additional customers and customer stickiness."
Fortney expects larger merchants will endeavor to better maintain and market their businesses, which provides opportunities for astute MLSs. He envisions sellers recognizing this merchant desire and selling them gift and loyalty programs to tie the consumer back to the retailer. Gift and loyalty programs also tend to create stickiness between MLSs and merchants in the process. Merchants are also aware of the coming introduction of Europay/MasterCard/Visa (EMV) technology to the POS environment, Fortney noted.
The card companies are pushing merchants to accept the more secure EMV chip-embedded cards for debit and credit card transactions by 2015 or face potential liability for card fraud carried out on noncompliant terminals.
This effort to get merchants and consumers to adopt EMV chip technology offers MLSs an opening and an opportunity to engage with merchant customers and new prospects, Fortney pointed out.
Mobile payments continue to offer new selling opportunities for MLSs. Ken Paull, CEO at ROAM Data Inc., pointed out that low-end merchants are creeping up in market share, but most of those businesses are still sensitive to the price of terminals, making mobile a viable solution to offer them.
However, merchants who adopt mobile payment technology and solutions from firms new to the industry often find there's nobody to call if the technology fails or if they have questions about chargebacks. Paull said MLS solutions become compelling for these merchants when the retailers discover that MLSs offer better service, lower rates and chargeback protection.
In addition, Paull said mobile solutions allow MLSs to integrate new apps into back-end systems. These apps can often be downloaded automatically through the application programming interface (API) strategy build-out.
"You can't quantify the value in terms of time savings, efficiencies, reduced errors these APIs can have on a business," Paull said. Mobile is a key shift, he added. "Some get it; some don't. Forming the right partnerships is important," he said.
MLSs even have a place in new technology companies entering the marketplace. For instance, PayPal is seeking partnerships with ISOs and MLSs to push its Payflow gateway service out to merchants. PayPal made its reputation online, but is now making an aggressive move into the brick-and-mortar realm. In order to do that, it needs the feet on the street.
Bryson said MLSs will need to foster new selling strategies and employ more new tools than they have over the past five years, "Changes in consumer technology have created a desire by merchants for new and improved technology solutions," he noted.
Bryson expects to add a variety of online and mobile phone ordering technology solutions to his tool bag in 2013, if for nothing else than to have "something unique to discuss with prospects." But that doesn't mean he will ignore merchants in his bread-and-butter category: large bar and restaurant groups, as well as single locations.
Crum said he is interested in adding mobile texting and email marketing to his offerings this year. "Also, getting a strong POS alliance will be important down the road," he said.
"The main threat to me is the many software providers that have exclusive agreements with merchant account providers which lock us out of these accounts when a customer of mine begins to use software that only allows the merchant account provider to process the credit card transaction. This is a big concern to me going forward. I am currently in talk with Sage solutions for this very reason."
Crum indicated he is concentrating on business-to-business and card-not-present transactions. "I have found an awesome Level III product that helps the merchant with interchange optimization and have actually been able to increase my pass-through markup and transaction fees as a result," he said.
Crum will continue to conduct quarterly business reviews with clients to check on their results and help continue to reduce costs. "At that time we discuss Payment Card Industry-mandated security solutions and ancillary products such as check programs and gift card programs," Crum said.
Industry observers tend to agree that while the payments business is changing around the edges for MLSs, merchants will continue to rely on the feet on the street for their depth of knowledge, hands-on experience and reliable customer service, despite new types of competition in the payments realm.
"As I move forward, I focus on being a problem solver and consultant," Bryson said. "My approach is more about seeing if our solution is a fit for a merchant and if it can solve problems they are having. Solutions come from knowledge, technology and product/service partners."
The consensus among those interviewed for this article is that MLSs have cause for optimism because no matter how much disruption occurs in the industry, the fundamentals of sales remain the same: person-to-person relationships enhanced by education, service and good partnership
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