By Ken Musante
Eureka Payments LLC
Having just returned from the Electronic Transactions Association's Annual Meeting & Expo, which celebrated the organization's 20th anniversary, it was interesting to see how the industry and exhibit hall have changed over time. In the early years the largest booths were Visa Inc.'s and MasterCard Worldwide's. Terminal manufacturers and leasing companies commanded attention with their booths and legions of staff. Bankers roamed the floors.
Fast forward 20 years. The card networks are the undercards. You have to look really hard to find a banker. Alternative payments, mobile payments, security companies, ISOs, processors, gateways, integrated software solutions and middleware ruled the show. In short, there is a much greater diversity in exhibitors today.
One of the reasons is that the payments industry is more competitive, more complex and more diversified. Years ago there was one niche: card-present merchants. Merchants needed terminals. Today, many merchant level salespeople (MLSs) have all but acquiesced retail business to low-cost processors and large banks. The margins are small, the demands are high and attrition lessens the rewards.
Some MLSs have instead focused on harder to place merchants because of greater loyalty and higher margins. Given recent decisions by the card brands that make processing for "continuity merchants" more difficult, I posted this question on GS Online's MLS Forum:
"What has been your experience with these merchants, and how are you advising them? Also, excluding adult content merchants, are there any other merchant types (or merchant characteristics) that you have been having difficulty with, and how have you handled them?"
As was evident by the responses, many MLSs do not pursue this niche. GMartin wrote, "Seems like a very limited scope article that would affect very few in our industry." GMartin's response highlights one of the attractions for hard-to-place merchants. Not everyone pursues them and, hence, they are a niche.
Alexpher responded by directing folks to a post that discussed the Federal Trade Commission's complaint against continuity merchants. The article, written by David Husnian, discussed the common theme that defined continuity merchants as merchants who sell products (often for a low price) to consumers who are then up-sold a continuity program that may or may not be properly disclosed.
Steven_Peisner has about as much knowledge in this niche as anybody I know, so I am pleased to post his opinion. He wrote, "My first comment would be that the recent actions taken by the Card [brands] could be best described as 'enforcement actions' of rules that have been in place for many years that may have been overlooked for a period of time.
"Those acquirers that have chosen to stop taking continuity merchants altogether may actually be making a poor business decision based upon the actions of a few 'bad continuity apples.' Not all continuity merchants are bad. That being said there are a bunch that will go nameless that have really screwed things up for everyone.
"If you have any continuity merchants, even if they have never had any problems, it might be a good time to give them a call and advise them of the card [brand] rules with respect to continuity and 'free trials' if they are offering any. It isn't that the card [companies] don't want merchants of these types to make money, it is that they want them to follow the rules and as long as they do that everything will be fine.
"I find working with merchants that are high risk or hard to place more rewarding because the merchant knows just how valuable we, as merchant services professionals, are to the equation of their continued success.
"Currently we have found ourselves acting more as consultants to merchants, agents and processors that want us to come in and access one or many of their merchants that may fall into this category. In other cases we have been hired to 'clean' the merchant up in order that they may continue processing.
"As you mentioned this is an ideal niche, but it is time consuming, frustrating, and you will spend a lot of time educating your merchant; sometimes the reward will not be for a long time. That is why we charge fees upfront for consulting services.
"The first thing that your merchant will have to understand is that they will increase profits by decreasing losses, not necessarily increasing sales - in the end it's not how much you make, Mr. Merchant, it how much you keep that will allow you to keep your merchant account, and without a merchant account you make nothing. Once a merchant understands that philosophy your timeline job is a lot easier."
Obviously we all would like to be able to charge upfront fees. Peisner found a way to do it by becoming an expert and "professor" to this niche market. The enforcement actions that Peisner referenced were taken shortly after the first of the year by one of the card brands. It handed out very significant fines (typically $100,000 per violation) to a host of processors that violated long-standing rules.
Visa issued a March 2010 bulletin that warned about "deceptive marketing practices used by certain online merchants that sell nutraceutical and business opportunity products. The merchants featured ... generally sell acai teas, teeth whiteners, colon cleansers, and free government grants or other 'get rich quick' schemes.
"These products are routinely sold using a free trial period that leaves consumers with little time to cancel or return the product before it converts into a recurring charge," Visa stated. Visa went on to warn acquirers that those that violate its Merchant Chargeback Monitoring Program thresholds, due to an online merchant selling nutraceuticals or business opportunity products, may be placed into the High-Risk Merchant Chargeback Monitoring Program, which eliminates the 90-day notification normally afforded acquirers and allows Visa to assess an immediate chargeback handling fee of $100 per chargeback.
This effectively puts acquirers on notice that they are at risk if they fail to monitor the merchants within their portfolios. Visa's bulletin goes on to caution acquirers that merchants meeting the following criteria should be reviewed more carefully for:
Moreover, acquirers should question merchants or ISOs that submit multiple applications from the same MLS containing any of the above characteristics or multiple applications from different LLCs with similar addresses, phone numbers, email extensions or principal names.
The concern is that the merchant may be trying to disguise the depth of the problem by spreading out the transactions over numerous accounts or acquirers. With this warning, an MLS better make appropriate revenue because recent history tells us that the card brands are going to make examples out of noncompliant continuity and hard-to-place merchants.
In an effort to understand how MLSs could serve this market and avoid fines, I spoke to Forum user Dominic Guardino of Guardino & Associates LLC. Dominic advised me that he does not place any business with domestic acquirers. Instead, he uses agents around the world and signs any legal business, typically Internet merchants.
I was shocked to hear the types of merchants he signs. Even more impressive is that the appetite of his acquiring partners has remained aggressive and has not changed with the poor economy. One of the reasons Dominic works with overseas processors is they do not have to conform to some of the more restrictive rules placed upon domestic accounts. Dominic is so bullish on this niche that he is pursuing a strategy to offer a prepaid card product to his merchant base (www.mygacard.com).
For a processor's perspective, I spoke with Jeff DePetro, Vice President of Payvision. DePetro believes the economy has created opportunity within the hard-to-place merchant category. This has caused some traditional players to get into this market and, unfortunately, some got burned.
These acquirers may have managed the credit and fraud risk, but what they did not anticipate was the compliance risk associated with this niche. DePetro warned any acquirer against certain types of merchants that possess contingent or future liability. However, he stated that some registered high-risk merchants, like adult content providers, are secure merchants from a credit standpoint, since the average tickets are typically small and spark little credit risk.
The key is properly managing the overall risk; the credit risk, the fraud risk and the compliance risk. Certainly DePetro's experience and tenure allow him to do just that.
Hard-to-place merchants are a niche. Understand them, cater to them and serve them, and you will develop a lasting relationship and an above average return. Because they are a niche, however, serving them with vanilla products and solutions is a mistake. Both you and the merchant will be dissatisfied at best.
Please log onto the Forum. Participate in the discussion, and help shape the topics for our next and future articles.
Ken Musante is President of Eureka Payments LLC. Contact him by phone at 707-476-0573 or by email at kenm@eurekapayments.com. For more information, visit www.eurekapayments.com.
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