ISOs and merchant level salespeople (MLSs) have their hands full with the challenging business of selling merchant services day to day. Inevitably, certain value-added services or internal processes are overlooked simply for lack of time or resources. It is the purpose of this article to highlight a few areas where ISOs can add new services or tighten up business practices to offer better customer service and run more efficient operations.
The four areas of focus are in chargeback management, contract signing, data breach insurance and ethical business practices. These topics tell a story of missed opportunities and unnoticed (or ignored) signals. But ISOs and MLSs can remedy these shortcomings and thereby improve their relationships with merchants and create healthier enterprises for themselves.
In conducting ongoing research into its specialized field of chargeback management, Chargebacks911 has uncovered alarming information: only 27 percent of chargebacks are disputed, and merchant service providers are telling merchants to not pursue chargeback claims, resulting in merchants leaving millions of dollars on the table that should be going to balancing ledgers and reducing losses.
"Not are they only telling merchants, advising merchants to accept all chargebacks and not fight back, but we also have several processors at this point who actually said that they will refuse to accept representment," said Monica Eaton-Cardone, co-founder and Chief Operating Officer at Chargebacks911.
According to Eaton-Cardone, the reason for this prohibition is simply an overload of chargebacks in the system that has strained the resources of processors and issuing banks. The reason for this overload has everything to do with the clash between modern digital technology and 20th century legacy systems.
Today, because of digital technology, it is getting easier for consumers to initiate chargebacks simply by clicking buttons on e-commerce sites, often under "No Questions Asked" policies. And due to archaic bank processes, often these actions are flagged as friendly fraud, which puts even more pressure on an already overtaxed system.
"Banks are getting harassed by consumers that are just wanting to have the bank perform an alternative refund," Eaton-Cardone said. "And these consumers are not evil. They're not malicious. … They assume, 'Oh, look, all I have to do is click a button to cancel my recurring [payment] on my account. Or get a refund. And I just didn't have time to call the merchant."
With issuing banks "getting hammered" with these requests, they don't have the automated processes to keep up with the volume, Eaton-Cardone noted. She said banks are not staffed to handle the avalanche of paperwork required to follow the time consuming, 20th century representment rituals required by the card brands in chargeback disputes, such as sending out snail mail and faxes.
"What 21st century business uses a fax?" Eaton-Cardone said. One bank even told Chargebacks911 that it had been having problems with its fax line and hadn't received any chargeback paperwork for days, leading to a bureaucratic breakdown and the inevitable passing of the buck – "Sorry, there's nothing we can do," was the bank's response, Eaton-Cardone stated.
Or, take for example, a consumer who cancels a magazine subscription online, which triggers the filing of a cancellation authority letter by the cardholder's issuing bank. "These letters are mailed out to the processor," Eaton-Cardone said. "And the processor has to send this letter to the merchant so that the merchant knows to cancel this subscription. So, bottomline, this never happens. No merchant ever knows that there's any cancellation [and] the cardholder never contacts them."
It's the quintessential bureaucratic nightmare as the bank asks the processor why it charged the cardholder for the purchase when the bank had mailed out the letter. "The processor doesn't pass on that paperwork because they lack the staff and resources, providing it even got sent in the first place," Eaton-Cardone said.
Under this stressful and inefficient system, service providers, from large acquirers to ISOs and independent software vendors, are throwing in the towel, so to speak, and telling merchants not to dispute chargebacks. But Eaton-Cardone believes this decision is shortsighted and will result in more fraud and more costs.
"I've had plenty of stressful conversations with processors and their merchants having issues with CNP [card-not-present] fraud and chargebacks," she said. "They're under a lot of scrutiny from Visa and MasterCard. They don't want a lot of chargebacks. So why does it make sense for them to not defend themselves against illegitimate cases?"
Long term, banks and processors will pay more in chargeback and fraud costs for allowing illegitimate chargebacks to go undisputed than if they spend the money today to fix the system, Eaton-Cardone added. For ISOs, one solution is to partner with a chargeback specialist that disputes chargebacks on behalf of merchants.
"At the end of the day, the merchant is going to make more profit by recouping so much of these costs," Eaton-Cardone said. "They can actually afford to increase their refund policies, have 24/7 customer support, reduce chargebacks, and you're sending the right message back to these issuing banks that are ignorant to the fact that a lot of their cardholders are filing illegitimate chargebacks."
"It's a very logical, simple, commonsense play," Eaton-Cardone added. "It's a win-win for every single party in the value chain."
Maybe the biggest mistake MLSs, especially newbies, make is when they do not read ISO agreements. According to Montreal-based payments attorney Adam Atlas, many of the contractual problems faced in the ISO realm arise from parties not reading the agreements they sign.
"And that is usually a factor for new entrants in the ISO business," he said. "You meet a friend who's in the business and they sign you up as an agent and you trust them, so you don't bother reading the agreement."
One common problem with contracts involves limitations on what types of value-added services MLSs can sell. Atlas said the classic scenario is of an agreement that limits agents from offering services that could lower merchants' transaction costs. For example, some processors do not have the ability or the inclination to offer tools that allow merchants to leverage big data.
Atlas said track 3 data on bankcards can be used to implement loyalty programs that, when effective, increase revenue for merchants and, thereby offset overall transaction costs. "When you process a transaction as a merchant, you can decrease your costs of processing it to the extent that you increase the amount of data that you collect on the transaction," he said.
However, if acquirers and other processors do not offer that big-data capacity, MLSs can suffer. "Some processors are not capable of making use of the additional data to achieve that lower cost," Atlas said, resulting in merchants that will eventually leave agents for better deals with other processors.
"There are various other scenarios where sometimes ISOs or processors are lacking," Atlas added. "Merchants leave and ISOs and agents get the short end of the stick."
Another factor to consider before agents sign on the proverbial line that is dotted is the culture of the processor under question. And the type of culture agents can expect is available for dissection at the time of contract negotiations. If processors take a "my way or the highway" approach to contracts, a red flag should be raised.
"The way by which a negotiation takes place is in some ways indicative of what we might expect under the future performance in the agreement," Atlas said. "And this is the good times, right? This is when they are trying to solicit you as an agent and get you to refer new accounts as an agent. And if they are absolutely intransigent, at that stage how are they going to be if something runs off the rails down the line?"
Atlas once had a small California pizza chain as a client. The six-location business was operating an out-of-date POS system that was breached by overseas hackers. The fraudsters stole thousands of credit card numbers, and the chain was fined $350,000 by the card brands, which put it out of business. If the company had had data breach insurance, it would still be in business today, Atlas said. "It boggles my mind as to why more ISOs don't sell that," he added.
Tom Mulligan, Vice President of C.L. Frates and Co., said no more than 20 percent of merchants purchase data breach insurance, which means not enough ISOs are pushing it. ISOs should provide such insurance if for no other reason than to protect themselves, he added.
"If an ISO has a merchant that has a breach, technically the PCI folks will fine and penalize and require the ISO to pay for the audit, fines and penalties," Mulligan said. "They have to pay for it, not the merchant. And, at that point, the ISOs go back to the merchant to get that money." C.L. Frates and Co. offers data breach insurance polices from $50,000 up to $250,000 through a handful of ISOs with portfolios of 7,000 to 8,000 merchants to smaller ISOs with 200 to 300 merchants apiece. Mulligan said larger merchants have the resources to take care of themselves; insurance policies can be especially beneficial for the smaller, level 4 merchants, which can be wiped out by breaches.
The reason why more ISOs don't provide breach insurance is because they feel it makes them less competitive by adding extra dollars to merchant fees, according to Mulligan. In lieu of breach insurance, ISOs build reserve accounts of several hundred thousands of dollars that they can access to cover breach-related costs.
Mulligan said the reserve account route is a simple way for ISOs to protect themselves. However, reserves do not gain interest. "The money is just sitting there," he noted. "And the problem with it is that your return on a reserve account is virtually nothing. … It's just a balance sheet item, so it's not like you put that away and you get some sort of tax advantage; you don't."
Breach insurance, on the other hand, allows ISOs to liberate that reserve money. "If you go with the insurance policy, first of all, the cost on it is basically a run-through to your merchants [and] you can free up your whole reserve to buy another small portfolio," Mulligan said. "I'm sure an ISO can figure out a way to put a couple hundred thousand bucks to better use."
Mulligan said the standard policy costs merchants around $12 a month, and ISOs can bundle the insurance with Payment Card Industry (PCI) Data Security Standard compliance and data protection services. He believes breach insurance is therefore an inexpensive way ISOs can safeguard merchants, and help themselves in the process. "They will probably be able to retain their merchants, keep their merchants solvent and maybe make a little money on it," he said.
Maybe the easiest way to improve business processes is to make a commitment to being an honest broker of merchant services. That means transparency in pricing and not promising what you know you can't deliver.
"What's needed is more education and overseeing of reps," said Bill Hoidas, Director at Matrix Payment Systems. "And, of course, some integrity for most ISOs who are still living in the dark ages of let's lie to open an account [and] sell the merchant something they don't need."
Hoidas does not pull his punches when it comes to certain ISOs and MLSs – thieves, he said – who take advantage of merchants by leasing POS terminals at exorbitant rates. "The industry, as a whole, still has the mindset of let's board the merchant, rip them off and ignore them after the account is open, and see how long it takes the new merchant to catch on and leave. Then let's charge them an early closure fee to make our industry look even worse."
Not only do predatory practices give the industry a black eye, but they also diminish the business climate in which players operate. "Owners of many ISOs think they are geniuses because they know how to play the bait-and-switch game with impunity because of small-type font used in the terms and conditions that the merchant rarely sees and even less frequently ever reads," said Robert O. Carr, Chairman and Chief Executive Officer at Heartland Payment Systems Inc.
In 2006, Heartland published The Merchant Bill of Rights. The document, available at www.merchantbillofrights.org/, details 10 rights that merchants should have when it comes to card acceptance – from the right to know the fee for every card transaction to the right to live customer support all day and all night, every day of the year.
Carr suggested that all merchant service providers adopt the precepts of the Merchant Bill of Rights in their dealings with merchants. "ISOs/MLSs will benefit significantly by adopting and living by the Merchant Bill of Rights, not to mention the Sales Professional Bill of Rights," he said. The latter refers to the list of rights he compiled for agents in the payments business.
By following these best practices, bait-and-switch tactics, also known as "teaser rates," would be outlawed. "When the salesperson makes a claim that is false, the merchant gets irate at the salesperson even when the salesperson tells the truth as he or she understands it," Carr said.
Burying the actual rates in the fine print of merchant contracts is not a productive long-term strategy, he added. "What happens? The sales rep is vilified by the merchant, and the merchant leaves or gives up, thinking everyone in our industry is a crook," he said. "By endorsing and living the Merchant Bill of Rights, the ISO and those representing the ISO, can stand tall and know that their merchants are treated with respect and integrity. That makes for a sustainable business."
Not only do ethical business practices lead to sustainability in the long run, it is the one value-added service that costs ISOs and MLSs absolutely nothing to implement.
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