By Steven Feldshuh
Merchants' Choice Payment Solutions East
I used to shake each time I received word from a processor that there would be a cost increase on tiered merchants, an increase in monthly fees or a newly created fee. With any impending price change looming, I would become bent out of shape, certain we were going to lose merchants. I would think, "How dare they do an increase!" Then I took a step back, did some analyzing and started to examine my own business model. That's when reality kicked in.
What I realized is that cost increases today can't solely be blamed on the greed of the processors. The realization I came to was that new expenses are very much being driven by the merchant level salesperson (MLS) strategy of selling at any cost to get the deal.
We, as ISOs and MLSs, have been in a steady race to continually lower merchant rates, even if it means the amount of money earned from residuals is not worth the time. My own office stats showed that today it takes a minimum of three new accounts to make the same amount of profit we used to make just a few years ago on one account. So, in reality, since agents continually offer stupid rates to merchants, they are equally to blame for a portion of the processors' increases.
The incentive for MLSs today appears to be in gaining signing bonuses, not in building residuals; therefore, deals will be signed with any cost structure. When leasing was in its heyday, MLSs strove to lease equipment. Today, many agents merely look for the company that pays the highest signing bonus.
I realize, too, that my company's overhead has grown much over the last few years. I have seen increases in rent, business insurance, banking costs, payroll taxes, salaries, and Internet and phone system maintenance. So why would I think our processor's overhead would be any different?
When my office signed our original agreement with our current processor, margins were strong, and writing deals at IC + .35% + $0.20 was the norm. Better than 50 percent of our signings were also tiered setups, which traditionally have been more profitable. Today, it isn't uncommon to see deals priced at IC + .10% + $0.06 or lower, and very few deals arrive with tiered pricing.
To make deals more appealing to merchants, some MLSs aren't even marking up the monthly fees. So, when I pulled deals submitted a few years back and compared them with deals submitted today, I realized how profits are being killed. Since we share in the residuals with our processor, that company, too, has seen lower margins from our business, while experiencing overall increased costs.
Is it possible the reasons why Heartland, Mercury, TransFirst, Moneris and many other processing entities found even larger entities to work with in 2016 is that they were feeling the pinch of lower margins, possible higher attrition, and increased costs due to the Payment Card Industry (PCI) Data Security Standard (DSS) and EMV (Europay, Mastercard and Visa) in addition to government regulations? Our industry continues to consolidate, and I am sure in 2017, other large deals will make the front page of The Green Sheet.
So is it any wonder processors have to become creative and come up with new revenue sources? A few years ago, monthly fees such as those for PCI compliance or noncompliance, breach insurance, regulatory products, and others just didn't exist. The same thing can be said about annual fees to cover these new expense types on top of the monthly fees.
A few years back, most processors didn't dare mark up Visa Inc., Mastercard or Discover Financial Services assessments or Visa or Mastercard inquiry/per item fees, which are normally just passed through to merchants. Additionally, today's processors are faced with more costly government regulations. Just maintaining the security on computer systems and data storage has become a massive task and huge expense. I know today that anyone storing or passing along financial data deals with hacker attacks not daily, but hourly.
Though it is difficult to get our sales engine to recognize increases, adjustments or additional fees, in most cases they do appear to be justified. Those who do not pass on the increases, are faced with going into further debt, or are teaming up with larger players who have deeper pockets than they have.
Given all of this, wouldn't it make sense for all the small and midlevel players to sell out? I, for one, enjoy being able to speak to anyone at my processor. There are levels of management to address issues, but if a call is needed, going to the top is not an issue. When you are dealing with the massive players, one tends to get a little lost in the organization. Yes, there are probably some good larger organizations, but when you are a publicly traded company, the driving interests are those of the stockholders. Larger organizations have some advantages, but I am all for keeping the midsize processor alive and well.
The bottom line is that, hopefully, your processor can pass through increases to merchants with very little disturbance to your portfolio. If increases are passed through with transparency, and customer service reps properly handle any calls from merchants by explaining the situation, the life of the processor will go on. We, as a sales organization, need to adapt to the environment, and explain to our merchant base the need for the added fee, and the overall benefits associated with working with your office or processor.
Finding a way to tackle a merchant's call isn't that difficult. Businesses have seen increases in their products or the services they sell or work with, so our small increases typically have a minimal effect on their bottom line. If talking to the business doesn't solve the issue, you can do what we do: send them a case of paper on the house or do a rate review if nothing else works.
It is important for all of us to wake up, and not freak out every time a small increase occurs. I think you would agree you would want your processor to remain financially healthy. To my office and to my sales partners, the key is for our processor to maintain timely payments of residuals, and to continue to provide professional customer service and tech support. I hope you agree.
Steven Feldshuh, President of Merchants' Choice Payment Solutions East, has 18 years' experience in sales and ISO development. Directly prior to joining MCPSE in 2012, he was President of Payment Partners. In his current position, Steven devotes the bulk of his time to assisting agents in building their portfolios. Contact him by email at firstname.lastname@example.org or by phone at 212-392-9202.
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