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The Green Sheet Online Edition

December 08, 2008 • Issue 08:12:01

Agents of change

A new phase in the endless game of survival of the fittest has arrived. Bailouts, bankruptcies, layoffs and foreclosures have sent the U.S. and world economies into turmoil. As credit dries up and businesses begin to fail at an accelerated rate, the payments industry will surely be affected.

Now, more than perhaps at any time in the history of payment processing, many ISOs and merchant level salespeople (MLSs) need to rethink how they do business if they expect to survive the economic upheaval. In a recession, clinging to old strategies to generate revenue, such as selling POS terminals or switching merchants based on cheaper rates, may no longer be effective.

But opportunities for increasing revenue are abundant. Dynamic currency conversion (DCC), merchant cash advance, Payment Card Industry (PCI) Data Security Standard (DSS) compliancy services and prepaid products are obvious and relatively easy value adds to keep merchants sticky and boost residuals.

Hunker down

Daniel Wadleigh, Sales Consultant to the payments industry, theorizes that human psychology mirrors the state of the economy. In his marketing manual Profit Controlled Marketing, Wadleigh discusses the four basic human desires: approval, security, comfort and significance. "It is both desire for enhancement (positive) and risk of loss (negative) that propel people to act," he wrote. In boom times of economic expansion, businesses and individuals are more aggressive in seeking out new business and trying new sales strategies. Risk-taking is a more acceptable action. If one venture fails, it is more likely cash reserves will be available to cushion the fall.

But the opposite is true in times of economic stress and recession. Money's tight. One slip-up might mean catastrophe. It is a mentality based on fear.

"When fear sets in, people cut down on spending and protect what they have," Wadleigh said.

That survival instinct is playing out among merchants. Wadleigh's manual emphasizes the desire for humans to have security (control) over their lives. Economic uncertainty means loss of control. But one way for merchants to counter that sense of instability is to say no. "The ability to say 'no' is control," Wadleigh writes.

Wadleigh believes the same dynamic is at work today. Wadleigh's business partner Ken Givens is a proven closer, with an average close rate of 60 to 70 percent. But that average has fallen to 30 percent today. Merchants are not as willing to switch processors based on a pro's sales pitch, even if MLSs are offering free terminals and can demonstrate how they can reduce merchants' processing costs.

Look inward

But if the environment is not conducive to the hard sell, ISOs and MLSs may want to take a different approach. Instead of going after new merchants, sales offices and reps can target their existing merchants and offer them value added services.

"ISOs have hundreds, thousands of merchants in their portfolios," said Gene Lieb, Managing Partner at International Merchant Solutions. "Why not go back in and see what other services that they can add? If people are complaining that it's slow, don't go out cold calling. Sit in the office and re-call your merchants."

It takes less time and effort for ISOs and MLSs to generate additional revenue by promoting new products and services to existing merchants than to cold call potential new merchants or pound the pavement looking for the next sale. It is also easier to persuade existing merchants that specific value adds can augment their businesses because trust between agents and their merchants has already been established.

Of course, ISOs and MLSs are not immune to the psychological effects of the economic downturn. They want to keep what they already have as well, and that means merchant accounts. To increase the level of stickiness of their existing merchants, Lieb believes value adds make the adhesive stronger. If nothing else, simply making the effort to reconnect with merchants will also help strengthen relationships.

"Merchants love to speak to the people that they're doing business with," Lieb said. In no particular order of importance, what follows are the value added opportunities industry experts agree ISOs and MLSs might want to consider.


Simply stated, DCC gives foreign visitors to the United States the ability to shop in their home currencies at U.S. businesses. Receipts printed out at the POS show the exchange rate and the value of purchases both in U.S. dollars and foreigners' home currencies.

In a sagging economy, U.S. merchants are desperate for sales. If Americans aren't buying from U.S. businesses, foreigners increasingly are. Since the dollar is weak in comparison to the euro and other currencies, foreigners can get a greater bang for their buck in the purchase of U.S. goods and services.

DCC, along with its online counterpart - multicurrency conversion (MCC), are ways for U.S. merchants to attract more foreign cardholders to their brick-and-mortar and online businesses.

When foreigners are given the option to accept DCC or MCC at the POS, two out of three cardholders opt in - even with the processing fee associated with the service - according to foreign currency experts at Travelex.

With the added service, merchants increase their average ticket and the actual and virtual foot traffic to their real-world and e-commerce store locations. Additionally, DCC and MCC reduce merchants' costs because they are not charged foreign card handling fees.

ISOs, of course, reap multiple benefits as well. They get a percentage of that additional transaction fee; they get happier - and therefore stickier - merchants; and they have to look no further than the merchants in their existing portfolios for possible beneficiaries of the service.

When Thompson Morris, Chief Executive Officer of DCC Merchant Services U.S.A. LLC (recently acquired by TriSource Solutions LLC), talks to ISOs, he offers them simple advice. "Do yourselves a favor. Look at the merchant statements, look at your own portfolio, look at the summary page," he said. "It takes no time to look at the summary page and see the level of activity as it relates to foreign cards.

"It's isolated on that page because they are charging them a premium and charging them for handling. It is clear that you can actually identify those merchants that have a good level of credit card processing, good volume of foreign credit card processing. And those are your ideal merchants to go talk to because you can save them money and also provide them with a tool that's going to delight their customers."

Lieb heartily agrees. "If reps would take advantage, they could earn more money promoting DCC than they can credit card processing," he said. "And it's all in the same industry. So you never have to leave the industry to increase your revenue base."

Merchant cash advance

As the economy sours and credit becomes harder for businesses to attain, cash advance takes on a more important role as a funding tool for merchants. When a coffee shop needs a new espresso machine or a hair salon needs to upgrade its shampoo station chairs, ISOs can prefund merchants and be reimbursed over time based on a percentage of the businesses' credit card transactions.

Cash advance is therefore a way for merchants to receive funding without having to fork over huge down payments or jump through the hoops of banks to secure loans.

"It is a big opportunity," Morris said. "If it's used properly, it is the best way of generating additional revenue on top of credit card processing. The ISO just needs to pay attention to the merchants that they're signing up for cash advance - that it is used for the purpose of expanding the business, used for the purpose of replacing equipment without interrupting cash flow."

However, Morris cautions ISOs against employing cash advance as a lifeline for struggling or failing businesses. That caveat is why Henry Helgeson, President and co-CEO of Merchant Warehouse, believes cash advance is too risky a venture.

"I think there might be short-term money there," he said. "But, in the long term, those ISOs are going to find themselves, more than anybody, typically the lender of last resort. And these days nobody wants to be the last in line."

If cash advance based on credit card receivables is deemed too chancy an opportunity, ISOs might investigate cash advance using check receivables - not credit cards - as the repayment mechanism.

The reason check-based cash advance is considered a more stable value add than the more traditional credit-based model is because the vertical market in which check volume remains robust is business-to-business. And businesses that pay other businesses with checks are more likely established entities with, perhaps, government contracts and histories of sound business practices.

Professional Merchant Advance Capital LLC (ProMAC), in partnership with Global eTelecom Inc. (GETI), launched such a check-based cash advance service in September 2008. Christian Murray, GETI's Director of Business Development, said the vertical comprises corporations that handle checks from other corporations and government agencies.

"There's a huge amount of check volume that pumps through those networks, as well as ACH [automated clearing house]," Murray said. "So that's where the volume is quite considerable from an opportunity standpoint and also from ProMAC's perspective." Those businesses also are "going be more high profile clients," he added "They're going to be more established. They're not going to be the businesses just started last year.

"Not only does it open up a vertical market for the ISO channel, it also secures larger opportunities and higher volume. And that's where things are going."

PCI DSS compliancy services

The responsibility of implementing, maintaining and upgrading merchants' security systems based on the requirements of the PCI DSS imposed by Visa Inc. and MasterCard Worldwide on all businesses that accept electronic transactions falls on ISOs and their acquirers. So ISOs and MLSs should be knowledgeable on the subject and could leverage that knowledge to become expert consultants.

"It's not a hard sell," Morris said. "There were, in the beginning, ISOs that were very, very resistant because they had small merchants and it would have cost them money in order for them to demonstrate that they are in PCI compliance.

"But because this is now a mandate by Visa and MasterCard, there's not much choice, regardless. The exposure is too great for ISOs not to make sure that they're merchants are PCI compliant. It's not worth the risk. And, in addition to that, since it's something that is mandated, it's built so that you can also create a revenue stream for yourself."


Opportunities to set up merchants with prepaid card programs abound, from gift and loyalty card to general purpose reloadable prepaid card programs targeted toward unbanked consumers without access to bank accounts or lines of credit.

To highlight but one opportunity for ISOs, Tim Sloane, Director of the Debit and Prepaid Advisory Service at Mercator Advisory Group, mentioned gift card malls. Despite the ubiquity of gift cards in the marketplace and the perception that all businesses now provide them, Sloane argued that such is not the case.

In a teleconference to publicize Mercator's 5th Annual Network Branded Prepaid Market Assessment, Sloane said prepaid distributors like Green Dot Corp., Incomm, Blackhawk Network and Coinstar Inc. have failed to penetrate about 26 percent of retail environments (at least 94,000 outlets).

Choosing from merchants already in their portfolios, ISOs could create networks of local merchants to offer consumers dinner at a local restaurant and a movie at the local theatre, for example. These merchant-funded discount networks married to restricted authorization network cards would feature primary brands on the front of cards, with two or three noncompetitive brands on the back.

With such localized networks - merchant communities so to speak - businesses can lock in consumer spending to their retail locations and increase return rates. ISOs benefit from higher residuals; merchants are also tied more closely to their services.

Yet more

Of course, opportunities for ISOs are not limited to the ones just mentioned. A few others are:

  • ACH check clearing - The market is wide open for supplying small and medium-sized businesses with back office functions like remote deposit capture (RDC). Roughly 24 million businesses exist in the United States; banks only service the top 1 percent with RDC.

  • Buying bank portfolios - Given the present state of the economy, banks are looking to sell merchant portfolios to generate liquidity. But based on the size of the portfolio ISOs intend to buy, return on investment may take two to three years to materialize.

  • Processing high-risk merchant accounts - Adult content providers, online pharmacies and so forth experience higher than average levels of fraudulent transactions. Thus, acquirers and sponsor banks are shying away from processing those accounts. But for ISOs that can manage the fraud levels effectively, they can realize huge profits in this sector.

So, even in this troubled economy, a plethora of opportunities exist. But some industry insiders lament ISOs and MLSs are not taking advantage of them.

Same old same old

At IMS, Lieb has about 400 registered MLSs. IMS sends out weekly e-mails to its reps touting many of the value adds featured in this article. IMS can put its agents in direct contact with the vendors that supply these services. But Lieb said hardly any of its agents follow through.

Take DCC, for example. "You go into any major city, all of the hotels deal with the international travelers," Lieb said. "They take hundreds of thousands of millions of dollars in foreign credit card sales. Imagine earning 20 basis points on all of that money conversion. You know, reps just walk away from all of that." And Lieb doesn't understand why they don't pursue the opportunity. "It seems silly that they don't," he said.

"If you have that customer base, why not offer them more services?" But this reluctance among ISOs and MLSs to jump on new opportunities is evidently not a recent phenomenon. Morris pointed out how long it took gift and loyalty cards to gain traction in the marketplace.

"[Sales forces] stayed within their comfort zones and didn't adapt to the new product as quickly as they could have, or as quickly as it was desired by the industry," he said

Wadleigh said the same thing is happening today. The opportunities are "too new, too different," he said. When he does a Yahoo search for "online merchant account," he gets 400,000 hits. "They're all the same," Wadleigh said.

Morris believes it is just another example of the human condition. "You are used to doing something a certain way and you've generated enough revenue for you to be in the business," he said.

"It may not be generating as much revenue as it used to. But what does that tell you to do? 'I need to work harder rather than smarter.' I think that, in itself, really puts it into perspective. They are more willing to work harder rather than smarter."

But viewed from the merchant's perspective, free terminals and cheaper processing is perhaps not the pitch they want to hear. "They've heard the credit card processing song for the past 20 years, and it's an old song," Morris said. "And that's not necessarily a popular song today."

Change that tune

A British biologist once said, "It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change." That biologist's name was Charles Darwin.

Change or die. That's a pretty blunt statement. But maybe it's as simple as that. Can ISOs and MLSs afford to think any other way? end of article

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