By Jeffrey I. Shavitz
Affinity Solutions Inc.
With Street SmartsSM serving as a "voice" of our industry, I wanted to know what GS Online's MLS Forum members had to say about a number of issues of importance to payment professionals today. And forum member clearent suggested I present some "difficult and challenging" questions to our readers. To that end, I posted a number of controversial questions on the forum and received such a strong response that I've split the resulting Q&A into a three-part series.
In this first article in the series, I have included the first three questions, along with the answers offered by MLS Forum respondents. These responses have impacted the way I perceive the business versus my peers. The answers have given me many other topics to reflect upon as well. I hope that reading the varied thoughts presented herein will provide insights about how you run your business and the values you impart to your organization, your merchants and ultimately yourself.
Note: When drawing remarks from the MLS Forum, member's forum handles are used and presented in bold, italic type. Some are the individuals' real names; others are not.
Question 1: Do you still offer the terminal leasing option when in reality, we know it's a very expensive solution for the merchant? As a follow-up, what percentage of your deals include leasing terminals, selling terminals and/or offering gateways?
MLS Forum member Steve Norell wrote, "Yes, we do but I have to admit that it is less and less every month. However, when we do it's in the $15 – $25 x 48-month range. At those rates, you can almost make a case for the merchant to lease. Especially since the EMV issue is looming larger."
"I have never done a lease," Diego wrote. "Ever since that young puck with the plane started giving away terminals, we never looked back." Open to leasing, nwbc stated, "Have never not offered a lease option, although if a lease is chosen, we'll replace if needed during the term and remind them at the end to either upgrade or buy it out."
Marinesteban posted, "Not on the terminals/I would say 50 percent terminals/50 percent gateways."
Steven_Peisner wrote, "Lease a terminal … why? If a merchant asks, 'What do you charge for a terminal?' I already know that whatever price I quote is too much." "If we are just talking about a solitary processing terminal, then no, there's no reason in my opinion to put a merchant on a lease today when there are better options available," Jotucker1983 stated. "These options include just having the merchant purchase the terminal outright, utilizing a terminal rental program where the merchant can use the equipment as long as they remain a client, or just buying the terminal for the merchant and giving it to him for free for his service."
My thoughts: I have never written a lease in my entire career in the industry. I find it to be taking advantage of a merchant especially since the price of terminals has become so cost-effective. I remember several years ago reviewing an elderly merchant's statement and realizing that this merchant had been charged $40 per month for 12 years for a Tranz 330 because the processor continued to charge even after the term had expired.
Question 2: What percentage of your deals do you now price on interchange plus pricing?
Steve Norell wrote that 99 percent of his deals are interchange plus.
For Marinesteban, the percentage is approximately 70 percent.
Diego stated, "Our ratio is 60-40 interchange, up 10 percent from last year."
Jotucker1983 wrote, "No, always IC-plus pricing."
Steven_Peiser and Jotucker1983 both stated their deals are 100 percent interchange-plus. Jotucker1983 elaborated. "IC-plus pricing gives you the opportunity to educate your merchant on how the pricing works in our industry, how we make our money on our end, and why we make our money (our role in the transaction processing cycle) on our end," he said. "While some might consider this to be informing the merchant 'too much' and might prompt the merchant to further try to chop down the rates, what I find is that it helps to keep the merchant informed so they aren't fooled into switching over to another company that promises rates that can't be fulfilled." Reflecting upon his time in payments, nwbc wrote that in more than a decade he has "only priced two merchants other than interchange plus pricing. … I've always believed that if you couldn't hold them with this pricing, you would never be able to hold them with tiered pricing due to the number of games played with tiered pricing. Small caveat here, my new product is not interchange pricing and will be a fixed pricing schedule." My thoughts: In the past two years, I have begun to write the majority of my deals on interchange plus. There were times that I suggested interchange plus to a tiered merchant, and candidly, the merchant just didn't "get it" (or maybe I didn't explain interchange very well). Regardless, I kept the merchant on tiered pricing and the "apples to apples" comparison made the cost benefit analysis easy to understand.
Question #3: If a merchant has 3/6 tiered pricing, will you continue to use this pricing versus switching the merchant to interchange pricing?
Diego responded, "We sell apples to apples here."
Steve Norell wrote, "[We s]witch them to ICPT as it fits into our sales model better. Not that I stole it, but isn't that what HPS has been doing for years? ICPT and why it's better than all the others? It depends on what the merchant wants/needs. Not all merchants want to see every charge as a line item as it looks like nickel and diming. Some prefer a bundled structure for simplicity (be that flat rate or a 3/6/9 tier structure).
"IC pricing is great for merchants that use the information provided, but for many merchants the only thing that really matters is what they spent at the end of the day. If that's the case, who cares what the structure is, provided the fees paid are in an acceptable range. I hear a lot of agents say, 'But that's the only fair pricing structure because the merchants knows they are getting cost,' to which I just point to the Heartland/Mercury lawsuit and many statements for various ISOs with APF set at $0.0269.
"If I knew it was 0.60 percent more than the cost, probably not. However, assuming I got my costs down to what I deemed acceptable, I'd average out the costs over many months (six to 12) and then find a processor to give me the flat rate I want. Once I got that rate, I'd only accept a flat rate lower than what I was at already or equal if there was another valuable service. My reason for that is simple. If my rate was, say, 2.50 percent, I don't think customers would notice when I increased the cost of my products by 2.50 percent.
"Imagine going to a restaurant with good food. Last week you bought their burger plate for $10 (processing cost would be $0.25). This week it was $10.25 (processing costs would be $0.256). When $0.25 is added to the price to cover processing costs and is netted out, the remaining fee is only $0.00625 or 0.06 percent – so I keep the margin I want in the food plus when someone pays with cash, I earn a little more. Least that's my logic. … Personally, if I owned a business, I'd want to be on a flat rate as it's much easier to manage expenses when they are known."
Marinesteban posted, "Yes, unless it doesn't make sense (i.e. B2B customer with a very low non qual tier)." Steven_Peisner wrote, "Switch to interchange plus – mostly due to the fact that the next guy in will tell the merchant how much I am ripping him off and that he can save him from 25 to 50 percent (of the 5 basis points that I am charging above interchange)."
My thoughts: As mentioned above, I try now to convert to interchange plus as a way to prevent future attrition.
Stay tuned for the next two articles in this series as we probe such issues as what payment pros hate and love about our industry, ethics of salespeople in the industry, attrition numbers, and much more. I will share my feelings about questions I've asked, as well. Again, please feel free to contact me with additional thoughts.
Following are all of the questions I asked that set this three-part series rolling, thanks to the strong response from members of the MLS Forum:
The first three questions are addressed in this article, but there's still time for you to weigh in on those, as well as the remaining questions, which will be addressed in Street SmartsSM in The Green Sheet issues 15:06:01 and 15:06:02, which will be published June 8 and June 22, 2015, respectively. You can reach me, Jeffrey I. Shavitz, at 800-878-4100 or email@example.com.
Jeffrey I. Shavitz is the Managing Director of Affinity Solutions Inc. and its Navigator product. His experience in payments including co-founding Charge Card Systems Inc. that was sold to Card Connect in 2012, Alternative Merchant Processing, dedicated to high risk merchant processing and Charge Card Funding involved in the cash advance space. His first book "Size Doesn't Matter- Why Small Business is Big Business; Profit NOW from the Small Business Boom!" will be released July 2015. Prior to entering the payments space, he worked at Lehman Brothers in its Investment Banking division. For more information, he can be contacted at 800-878-4100 or firstname.lastname@example.org.
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