By Biff Matthews
CardWare International
Should your merchant buy, rent or lease that new terminal or other equipment? It has never been a simple decision, and merchants often rely heavily on the recommendations of merchant level salespeople (MLSs). When our industry was young (20 years ago) the only option was to purchase POS devices. Merchants paid $1,000 or $2,000 or more for a $450 piece of equipment.
MLSs earned most of their income from equipment sales, and by the time the ISO and regional managers took their cut, that $450 device was $700 or $800 to the MLS, and the cost to the merchant had risen to between $1,000 and $2,000. No question: The merchant's cost of entry for card acceptance was high. However, sales were brisk, regardless.
The high cost of getting into the electronic payment world did preclude some from participating, though. Things changed when the lease, a salvation for many small merchants and agents, debuted. The leasing of bankcard POS equipment expanded exponentially the field of potential merchants who could pay to play.
Typical leases ranged from $20 to $60 per month for a 36 or 48 month term. Some leases were written at $25 or $30 per month for 60 months - arguably, the POS equivalent of the infamous "dollar a month for life" plan. The equipment cost to the MLS went down to around $325, and the leasing company assumed some risk. Leasing created opportunities for far greater unit sales. Revenue went up even more.
Notably, in that environment, equipment did not become obsolete every three to four years. It worked until it wore out, which could take a decade or more.
Rental agreements are newer, and have evolved substantially, but today they are primarily negotiated for short-term and seasonal situations. Common examples include charities with fundraising programs, civic organizations with special events, merchants planning sidewalk sales, and ski slopes and boat rentals that need POS systems for a few months.
Whatever their purpose, though, rentals cause a lot of angst. People who do the math on any equipment rental get very bothered about the cost. No doubt, the money you pay for a three-day car rental equals what the company pays on its lease for the entire month.
But short-term rental is about convenience and minimal commitment. And rental charges have to absorb costs like stretches where the equipment isn't used, depreciation and other expenses involved with having equipment available at a moment's notice.
And the "free" terminal? Well, like the free lunch, there is no such thing. All agreements have stipulations, conditions and provisions for cost recovery, albeit in (very) fine print. (Hint: watch for the term "processing contract.")
Putting emotion and marketing lures aside, I believe the number one factor driving today's buy-versus-lease-versus-rent decision should be equipment obsolescence. What we see today in the POS market, whether products are sold, leased or rented, is that products are technologically obsolete, literally from day one.
Because of the elapsed time between development and delivery, POS equipment is, technologically speaking, near or at the top of its curve (and often heading down the other side) on the day it's installed.
Obsolescence is the one equipment feature that is universal. It is also accelerating. Software functionality in our industry is in a constant state of flux. As it is enhanced, and functionality increases, memory requirements increase, too. Yet terminal memory is static - no memory expansion allowed.
Merchants will not tolerate major outlays for new terminals every two to three years, so as an ISO or MLS, you need to offer a program that answers these challenges and has long-term benefits for both your merchants and yourself. This is why renting should be the option that you advocate now, as it represents the best value for your merchants' dollar.
Mind you, I am not talking about the "traditional" rental, whose terms are generally twice as long as lease agreements. We need a paradigm shift in thinking about rental agreements. These are unusual economic times, but even when there is true recovery, things will remain different from what they had been.
Will a merchant commit to a long-term lease at $60 per unit a month when the very viability of his or her business is potentially in question? Should you even propose that he or she do so? Also, the long-term lease makes no accommodation for changing needs. Programs that are agile, short-term and comprehensive are far more beneficial and viable. That means bundling in a service program and perhaps an upgrade feature at the six month point or some other logical interval.
The new rental paradigm must be to create substantial value now, with the understanding that this is a flexible, month-to-month agreement, cancellable at any time, that provides merchants with the best options available for keeping equipment as long as it meets current needs.
We, as salespeople, do not like surprises, and neither do merchants. So as part of the agreement, merchants should also get processing - and peace of mind.
If the equipment fails to function, a replacement is provided quickly. If the POS device is no longer relevant - either because it's functionally obsolete or ceases to meet industry regulations - merchants can be upgraded at a predictable cost.
If processing needs change or there's the need for added functionality, the merchant can upgrade by simply cancelling the rental of "generation 2" and replacing it with generation 3 or 4. A nominal transition or upgrade fee would cover the necessary reconfiguration requirements. The key is that the merchants get to decide.
What this does for you, as a salesperson, is create a merchant relationship that is likely to endure. You'll have a greater opportunity to build stronger, more robust residual revenue streams because you'll have predictable foundational income.
Commissions are nice, but a residual stream is what you retire on. That's why I believe an agile rental program, with service and upgrades built in for the long term, is more viable for both the salesperson and the merchant.
Of course, much of the industry is still hawking "free" terminals and various leasing schemes. Equipment leased today for three to four years will doubtless become obsolete before the end of the lease contract, yet the merchant is committed and has no flexibility.
"Free" is even worse, thanks to those two- to five-year processing contracts that often include periodic and unspecified rate increases. If a merchant keeps rented equipment five to six years, he or she will end up paying considerably more than the straight purchase cost. However, service will not be included, upgrades will not be provided, and there will be no cancellation provision to use should the merchant's business falter.
Businesses today are concerned with their own longevity and often do not have the capital for a lease, much less a purchase. Rental is, for the foreseeable future, the best answer. It is more flexible, more equitable and, ultimately, a better tool for building relationships than any of the alternatives.
Biff Matthews is President of Thirteen Inc., the parent company of CardWare International, based in Heath, Ohio. He is one of 12 founding members of the Electronic Transactions Association, serving on its board, advisory board and committees. Call him at 740-522-2150, or e-mail him at biff@13-inc.com.
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