The Green Sheet 2.0 :: E-Magazine

September 08, 2008 • Issue 08:09:01

MLS compensation options

By Jason Felts
Advanced Merchant Services

Compensation FAQs

How, exactly, do MLSs get paid?

Payments to MLSs are based on the types of compensation programs they choose. For example, upfront bonuses could be paid weekly or monthly, while residual income is payable once every month.

What kind of splits do ISOs offer?

Clearly, the question becomes what is the split from? If the split is a genuine revenue share program (not a buy rate), without the schedule dramatically marked up, the MLS should expect a 50/50, 60/40 or even 70/30 split, without having to take risk.

Often, part of the equation is how much business the MLS can deliver: the more business, the higher the split.

Is revenue split before or after an ISO deducts expenses?

The split should be based on actual interchange, dues, fees and assessments plus costs paid to the processor/front-end-back-end and sponsor bank. Ideally, a split would be a direct split from interchange and real processing cost, not a split of a split. Additionally, it should not include the ISO's operating cost, only the actual processing cost paid to its vendors.

If expenses are deducted, what are they?

Everything on Schedule A in an MLS agreement has a cost. This includes transaction fees, statement fees, retrievals, chargebacks, network fees and so forth. The key is to review your contract's Schedule A to determine if the ISO has dramatically inflated the cost.

Who owns the residual stream?

The ISO/MSP owns the merchant account; however, an MLS can contractually have ownership rights with full residual stream portability.

What does residual stream portability mean?

This provides MLSs the right to sell their residual streams to whomever they choose. Often, an ISO has a first right of refusal when an MLS wants to sell a residual stream. Some companies adamantly oppose the idea of MLSs selling to third parties. Make sure you have an assignment clause in your agreement.

How many new deals does an MLS have to bring in monthly to generate a livable amount of revenue under the different sorts of payment arrangements that exist?

It varies. Some people are looking for $50,000 per year; others want $300,000 or more. To pinpoint the program that would work best for you, identify your monthly financial goals, and allow your ISO to assist you in creating a compensation program that will help you excel.

How long should an MLS expect to work before he or she can fully sustain herself or himself as an MLS?

Some can achieve this in one month; for others it takes years. It depends on ability, training, compensation plan and overall initiative.

n this installment of Street Smarts, we will reveal the many compensation models available to the merchant level salespeople (MLSs). For many MLSs, there are so many options available that it becomes extremely confusing.

First Step: Research and determine which compensation model(s) work for you. There are many different ways for an MLS to receive income from an ISO or merchant service provider.

Many ISOs tend to have a one-size-fits-all approach to compensation: You either fit into their box or do business elsewhere. Some ISOs and MSPs actually offer multiple compensation models. That's why it's critical to do research before you sign any contract.

Following are six distinct compensation models:

1. Residual income based on buy rates, with 100 percent over

This is how nearly every MLS was paid 10 years ago. The concept was to mark up every income stream payable to MLSs and then pay them 100 percent over the ISO's cost.

Advantages: It provided the feeling of making 100 percent. It was easy to offer subagents 50, 60 or 70 percent, based on receiving 100 percent yourself.
Disadvantages: Pricing was not competitive and did not include every income stream. You had marked up buy rates. Therefore, to make any money, you had to sell well above cost. Often, agents sold barely above the floor to stay competitive.

2. Revenue share with marked up Schedule A

Many ISOs have migrated from the buy rates to revenue sharing programs. ISOs usually mark up certain fields in the MLS contract's Schedule A, including transaction fees, monthly statement fees and so on. This approach typically allows MLSs to be compensated on every income stream as opposed to a select few.

With this approach, you need to make sure your split (50, 60, 65 and up) is based on interchange, dues, fees and assessments.

Advantages: Income on every stream and can be more competitive with pricing.
Disadvantages. ISOs still mark up Schedule A. If you have subagents, typically they receive a split of a split.

3. Revenue share based on actual ISO cost

This concept allows MLSs to be the most competitive by receiving a Schedule A based on actual cost, without the heavy markups. ISO costs should include interchange, dues, fees, assessments, and exactly the amount charged by the front-end and back-end processors/sponsor banks.

No padding should be included. Often, MLSs can negotiate higher revenue shares if they are not participating in upfront bonuses, free terminals and so forth. Sixty to 70 percent would be a good number, based on actual cost and no risk.

Advantages: You receive more residual income, based on higher splits with lower costs. Includes revenue streams often omitted from MLS compensation, because this model shares everything touching the merchants.
Disadvantages: Incentives are often not included. But clearly, you can see that, in the end, MLSs pay for such incentives as free terminals and bonuses.

4. Upfront bonuses

Many ISOs have been offering signing bonuses, production bonuses, conversion bonuses and other types of bonuses when a new merchant account is approved. These can vary drastically from $50 to $1,000 or more, based on predetermined criteria.

Advantages: Upfront cash flow, which often helps new MLSs get on their feet.
Disadvantages: Nearly 100 percent of the residual income is lower in these types of programs. You will typically have a marked-up Schedule A and a lower split than could be negotiated without bonuses.

5. Upfront residual acquisition program

This allows agents to sell their accounts upfront. Let's say, for example, your income on a merchant is $60 per month, and you are participating in a residual acquisition program that pays you 18 times the monthly residual (18x).

You would receive $1,080 by selling the account, as opposed to waiting 18 months (or more) to receive the revenue. It would only take eight comparable sales per month to have a six-figure income.

Advantages: Immediate infusion of cash.
Disadvantages: You are selling your residual income. Therefore, you must sell the same number of accounts the following month to make the same amount of money. And you are losing your safety net of recurring revenue.

I recommend to all who participate in AMS' acquisition program to only sell a percentage of their accounts. This provides MLSs with some upfront cash flow (more than bonuses) while allowing them to build a strong residual at the same time.

6. Employee with salary plus commissions

A few companies in the bankcard world require their MLSs to become W-2 employees. Typically, they receive more of a "draw" than a salary, and the compensation is usually a hybrid of the other models discussed here.

For example, an MLS would receive 12x (or so) upfront and, in 12 months, would receive a small residual payment of 15 to 25 percent on the accounts they had booked a year back.

This package offers the feeling of security because of the draw. However, like anything else in sales, you must produce. And, if you are producing, this is almost always the sure way to make the least amount of money.

Advantages: As an employee, you could be eligible to participate in health care programs, retirement plans and other benefits. You usually have a weekly salary or draw against commission.
Disadvantages: In the long run, you will almost always make less money than if you go into business for yourself. It's easy to show the difference in the long-term income to any real producer. While this may be a decent option for newbies, it's not ideal for those seeking a long-term career in the payments industry.

After you identify the compensation model or models that best suit you, the next step is to select a solid company with a strong track record, and then negotiate an excellent agreement.

Have the contract reviewed by a good bankcard attorney; you are welcome to e-mail me for referrals. Selecting the right processing partner is a critical step in ensuring your long-term success, so make sure you do your diligence.

I asked GS Online's MLS Forum members what types of compensation models they prefer, and why. I also asked what is important to them in a compensation plan.

Here are excerpts from the comments I received:

High compensation with poor merchant support is useless, as the customer will leave for greener pastures, and residuals will be gone. Upfront bonuses and free terminals are great for an agent starting out, but it will affect the residuals paid in one way or another. - GMartin (Gary Martin)

Above all, I want transparent reporting so I can verify the actual dollar amounts. In terms of various compensation plans, I think without question you need the ability to place a free terminal. I don't do it very often, but if you need to, the ability must be there.

I also want the ability to have an upfront bonus. I realize the upfront bonus is a tradeoff somewhere else in the residual stream, but I still want to be able to receive one at my choice. I want to be paid on all income streams and have a competitive schedule of costs. The processor I use primarily has everything I mentioned, which is why I signed with them originally. - MTY MSI (Robert Dickerson)

In summary, find a partner that offers multiple compensation programs or at least one that's a suitable fit for you. Then do due diligence on that company and its agreement. Ask the company for assistance to determine how you can meet your financial goals. Invest in yourself through great training, and dive into this business determined to succeed.

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