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Ask The Experts |
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The
Green Sheet receives hundreds of questions and research requests each
week. These requests come via e-mail, phone, fax, and our Web site. Since
we receive so many requests, we know there are many more who have
questions, but are hesitant to ask. In an effort to provide increased
educational services, we compiled a list of the 10 most common questions
asked and posed them to three financial industry experts, who have
different industry perspectives. Our panel of experts includes:
Burt Carpenter: Burt Carpenter has been
active in the credit card industry since 1987. He has run offices
representing Rocky Mountain BankCard, First USA, and Cardservice
International. He has trained over 1,000 sales representatives. His office
was the first Bankcard office to exhibit in Internet trade shows including
Meckler Media’s Internet World, The Internet Commerce Expo, and ISPCon.
He has been on the cutting edge of Internet commerce and pioneered an
online processing solution.
John E. Waldron: John E. Waldron
currently serves as Vice President Internet Marketing and Sales for
Heartland Payment Systems. He is responsible for the overall direction of
Heartland in the Internet segment, including strategy, promotion,
relationships, and automation. Mr. Waldron’s goal is to guide Heartland
to a leadership role in the Internet segment. Prior to joining Heartland
Payment Systems, Mr. Waldron owned and operated a Sales Agency of
Heartland that was able to develop an effective Internet sale and
marketing strategy. Mr. Waldron has been involved in merchant services for
Internet companies for over three years.
Vaden Landers: Vaden Landers is President
of Bankcard Consulting Group, a management consulting and software
development firm based in Nashville, TN. Founded in 1998, BCG has been
successful in partnering with a number of key players in order to deliver
turnkey solutions to its client base. Mr. Landers spent 11 years working
with industry notables such as NOVA, Financial Alliance, and PMT Services.
John Waldron told us, “When The
Green Sheet asked me to answer some questions about e-commerce from the
ISO prospective, I was flattered and excited to help. But when it came
time to write, I was stumped. Not because I did not know how to answer,
but because there are limitless approaches to selling bankcard processing.
In order to bring the most value to the discussion, I am taking a more
“general” approach to these questions in hopes that my answers will
reach a larger audience. I’d also like to thank two of my staff members,
Michael Kanestky and Jason Morrow, for their helpful input.”
We hope this dialogue provides the answers to your questions and if you
have a question to pose to our experts, please e-mail us at greenshttx@aol.com. 1.
Why should I want to get involved with the Web? Why should I bring
merchants online? Carpenter:
You should personally get involved with the Internet because it is an
extremely efficient communications mechanism. Our business is more
efficient because we can access the Web sites of lease companies and
suppliers and use the benefits of e-mail to follow up on applications, and
communicate with salespeople. The Internet as a business tool in the sales
business will continue to grow in importance. Bringing
merchants online only makes sense when it meets the specific needs of the
merchant. The ISO business has grown because sales representatives were
able to sell terminals, then move on to the next client, leaving
follow-up, customer service and processing support to their parent
organization. Putting merchants online requires a salesman to be much more
technically knowledgeable and have a more involved relationship with his
client. Merchants expect the sales rep to help with the design and
technical issues. They don’t want to be passed off to the sales office
or some other entity. Even when your processor offers those services, the
merchant expects the sales rep to hold his hand through the development
process. Building a Web site is not like selling a terminal, dropping it
off on the merchant’s counter, then going on to the next sale. Building
an effective business by putting merchants online requires a greater
commitment and level of knowledge than most ISOs are used to. Most
standard brick and mortar businesses that put up a Web site do not
significantly benefit. Only the merchant who is committed to this new form
of business will succeed. Most merchants have the idea that all they have
to do is put up a Web site and they will make a fortune. Most are very
disappointed when they find out that this is not the case. Those merchants
who put forth the effort to really learn about this new type of business
and actively market it, can find a great deal of success unavailable to
them otherwise. Landers:
The Web, and more specifically Internet commerce, is the next and perhaps
last expansion market our industry will experience, at least for the
foreseeable future. Merchants who have a product or service to sell can
reap the benefits of the captive audience offered by way of the Internet.
As we move deeper into the 21st Century consumers will become
extraordinarily comfortable with making purchases over the Web, as the
above graphic illustrates. A
few additional statistics of interest regarding Internet Commerce: 8
The top 5 e-commerce markets are
Hardware, Travel, Books, Apparel & Accessories, and Software. 8
48% of U.S. households are equipped with a PC. 8
33% of U.S. households are online, 10% of which have shopped on the
Internet within the last 3 months. Waldron:
The Web is one of the fastest growing new business markets, and each site
that goes online to sell products should and will accept credit cards. It
is without a doubt, one of the key components for online success. Since
the Internet is growing at such a fast pace, it’s not going to turn back
the clock for anyone, or any businesses that aren’t willing to embrace
the e-commerce revolution. This is an important concept for the bankcard
industry to grasp. If you acknowledge the need for education and training
in terms of selling your services to this industry, it will only allow you
to prosper as the market grows. We’ve
already begun to witness the ways in which the Internet and e-commerce
movements are having a revolutionary impact on the economy. With
projections of online credit card purchasing anticipated to surpass $50
billion, and over 150,000 online companies accepting credit cards by the
end of the year 2000, I’d say you have great potential for signing up
new accounts. 2.
Where is the money to be made? Carpenter:
For the ISO, the money is to be made by selling software or monthly
hosting fees for credit card and electronic check processing solutions.
Some ISOs have tried to sell Web site hosting and design. We find this to
be a different business than our core business of credit card processing.
Our success has been in setting up strategic alliances with existing
Internet service providers, rather than trying to be their competitor. Landers:
As in traditional brick and mortar environments, with any point-of-sale
transaction resulting from a credit card purchase, ISOs and their agents
can earn revenue through discount and fee income. In fact, direct
processing costs and merchant related fees are typically higher for
Internet retailers in order to offset any additional risk exposure
associated with this market segment. Depending on the level of risk
liability a particular ISO retains on his portfolio, the Internet
merchant, if underwritten and managed properly on the back-end, could
prove to be a more profitable venture. Additionally, an ISO has the
capability to mark-up Internet related billing items such as Gateway fees
and Internet access via an ISP. Waldron:
Depending on how you operate in the business today, you know the
general areas where you make your money: leasing, app fees, interchange
etc. But I want to focus on the other opportunities you have to make
additional revenue. For instance, you might earn revenue from markup on
the recurring and transaction fees from the real-time transaction gateway
that you offer your merchant (i.e., Authorize.net, CyberSource, or Signio).
Or you might earn income from e-Check or the markup on all the additional
services that mid-large e-commerce merchants choose, like tax calculation,
risk management, and distribution control or the offering of a complete
e-commerce package that includes everything from Web site hosting to the
promotion of the merchants site. Most
Internet accounts are signing up with a processing rate of 2.30%+ and
$.25+ per transaction, and with a $75.00 average ticket you are looking at
approximately 50 basis point profit. As volume increases online your
revenue sharing becomes very lucrative. 3.
How much money are we talking about? Carpenter:
The profitability is less than selling hardware to new stores. A much
greater effort and level of knowledge is required. The primary advantage
is being able to increase your merchant base geographically. The ISO must
also be prepared for the customer service challenges that this brings. Landers:
As in any situation, the revenue an ISO is able to realize depends
greatly on his/her internal cost structure and fees charged to the
merchant. Assuming that all things are equal, an average Internet merchant
will probably pay a Gateway Fee of $25, a Monthly Minimum of $25, an
Internet Service Provider fee of $30, a discount rate of 2.75% and a
transaction fee of $.30. The table above illustrates the average
cost for each, the mark up to the customer and the revenue retained by the
ISO to cover all operating expenses and cost of sales. In
addition to the above-mentioned fees, there are opportunities to make
money on Web site design, depending on your technology partner and the
service offerings available to you. 4.
What experience should an ISO who wants to get into the e-commerce market
have? Carpenter:
First, they should have a thorough understanding of the credit card
industry. This would include a knowledge of chargebacks, foreign card
interchange, fraud prevention and control, and how their processing
organization functions. Next they should be thoroughly familiar with the
Internet as a user. I would suggest some very basic knowledge about how
hyperlinks are programmed into a page. They should understand the
disadvantages of online processing. Most merchants don’t understand that
in the Web based environment a “call center” response is processed as
a decline. Factors such as what the merchant is selling, hard goods or
online content, whether the merchant receives orders from other than Web
sources, and what their volume of business is from each source, should
determine whether to use online processing or online ordering with an
offline processing solution. Landers:
Basic industry experience is still the most critical element in
Internet situations as it is with traditional retail environments.
However, I highly recommend, especially for those organizations who will
focus a tremendous amount of energy on attacking this market, educating
yourself and your sales staff as much as possible on the Internet and the
e-commerce marketplace in general. There are a number of periodicals whose
primary focus is Internet commerce and related trends, which would serve
as good reading material. Waldron:
Well, experience with computers and the Internet is a must, in my
opinion. An ISO should spend significant time researching e-commerce and
how transactions work online as compared to the retail world. Learn the
regulations of Visa and MasterCard as they apply to MOTO/Internet
transactions, so you can help your merchants understand the regulations
and how they apply to their business. Learn the risks that Internet
companies take on with Internet fraud and how you can help your merchants
overcome these challenges. When doing business on the Internet you’ll
conduct most of your daily operations via e-mail, phone, and fax. Learn to
make your communication clear and concise. Remember that e-mails do not
have personalities, and if your potential customer is not comfortable with
your message or tone then he or she probably will not be a potential
customer for long. 5.
What should my first step be? Carpenter:
First be an experienced user of the Internet. Then build your own Web
page and try to sell something other than a bankcard product. This will
help you understand the technical issues and what the merchant is up
against. Integrate your processing solution into your page. Only then will
you know how it truly works. Referring to descriptions or online demos is
not sufficient. Landers:
Select the right strategic partners for facilitating your desired growth
in the Internet segment. You will need to choose a vendor or partner who
has access to the tools which will offer your customer the ability to
e-commerce enable their existing Web site, design a Web site from scratch
and protect themselves from the potential fraud activity that is inherent
with Internet processing. Waldron:
Research. If you are not familiar with the Internet you need to spend
some time and research what makes online companies successful and what
your competition is offering on the Internet. The Internet can work in
your favor if you have a solid and cost effective offering. There are many
places online where merchants are talking about the good and bad
experiences they’ve had with ISOs and making recommendations and
warnings. In
my opinion the net has created a wonderful opportunity for a merchant to
secure a fair offering for their merchant account. At any point in time a
merchant can type in the words “Merchant Account” into a search engine
and come up with Web sites for hundreds of providers. If the merchant is
smart, and many of them are very knowledgeable, they won’t go with the
first provider they come across. For this reason, if you’re going to
sell services online, build a well-designed site that your prospective
merchants can view and navigate easily. First impressions are important,
and if a merchant feels comfortable with your online presence then they
are more likely to sign up with you. Today over 50% of our Internet
merchants apply online without ever talking with someone in our company. 6.
How can I decide if e-commerce is for me? What types of questions should I
be asking myself and my merchants? Carpenter:
First are you willing to put forth the effort to learn everything that
is required? Are you able to teach your sales reps what you’ve learned?
Will my merchants truly benefit from a Web presence? Should their site be
e-commerce enabled, or would they be better off with an
advertising/informational site? Do you really like working on the computer
or would you rather be outside selling? Landers:
It is a business decision, and one driven by the demands of your
merchants and your sales force, both equally vital customer lifelines. The
main thing you will want to do in order to decide if making a move to the
e-commerce arena is for you, is to do some research on your own and listen
to what your customers are telling you. If significant portions of them
are saying they need an Internet solution, it may be time to consider one. Waldron:
Ask yourself about your marketing strategies. Simply putting up a site
doesn’t mean that customers will flock to it. You need to figure out how
you are going to drive traffic to your site, specifically prospective
merchants. How much will you charge for your product and what do you
anticipate in new signups? What is it about your offering that is
different than the other 500 online providers? What is your niche? Find
out what is important to your merchants and how you can tailor your
program to help them. 7.
What kind of a commitment is necessary to make selling e-commerce or Web
stores a viable livelihood? In other words, should this be the only
venture or should I be working with other products and ideas on the side? Carpenter:
We don’t feel that selling e-commerce products can be a sideline. A
considerable investment in learning time and energy is required. The
Internet is evolving rapidly and change is constant. You must be committed
to keeping up with those changes. Landers:
In order to be a player in the e-commerce arena you must commit
yourself to the task of risk management, from both an underwriting and
on-going loss prevention standpoint. You must also make an investment in
the education of your sales and support staff to ensure they will market
and service the product effectively and with a good deal of comfort. As
far as making this segment of the payments processing industry your
singular focus, I do not recommend it. I have never been a big proponent
of putting all eggs into one basket, and suggest that this approach be a
mere add-on to your existing suite of products and services. This is not
to say that you will get hurt if Internet commerce is your primary market,
provided there is adequate demand and you are able to capitalize on it. Waldron:
While doing business on the Internet it is important to be versatile,
because online business models and methods are changing constantly.
Consistently researching new programs and ideas is important. I personally
feel that selling merchant services to Internet merchants does require a
degree of specialization either by you, personally, or by a designated
department in your organization. The income from the residual side of the
majority of your online setups is probably not enough to switch your
entire business model to an e-commerce focus without retaining
concentration on your current retail model. 8.
What types of merchants are the most profitable to operate online? Least
profitable? Does this mean that an ISO can make the most money from these
types of merchants? Carpenter:
The online businesses with the most volume currently are vice sites,
Adult content and online gambling. Fortunately this is changing. Product
sales are increasing. This year was the first year we have ever seen major
Television advertising for Web sites. The trend for major retailers to get
online is increasing. Public acceptance is growing. The most profitable
merchants are those that really work their business. They use targeted
e-mail effectively, have a banner advertising program, exchange links with
other sites, and do a lot of offline advertising to drive people to their
sites. They need to offer a product that is unique or unavailable
elsewhere, or offer a common product at a significant discount to give
buyers the incentive to use their services. The least profitable are those
who put up a Web site, register on the search engines, and expect the
world to beat a path to their door. Too many people start a Web business
after only reading a magazine article or attending a seminar but have no
business experience. The majority of these fail because they expect sales
to happen automatically just because they have a Web page. Landers:
Simply put, the most profitable merchants whether online or in a
traditional retail environment, are the ones who don’t do any
transactions or a very small volume. The reason for this is, a merchant
who does little or no volume will generate revenue in the form of monthly
minimums and statement fees totaling somewhere in the neighborhood of $25
on the low end and $35 on the high end. Best of all, there is no risk
associated with these accounts, which further enhances your overall profit
position. The least profitable merchants are the ones who cause you
management headaches and present a risk nightmare. Because your cost
structures are pretty much the same for all merchants, the most
determining factor in your merchant profitability is making sure that
accounts are priced accurately and ensuring you do not have a bunch of
customers that are a drain on operating expenses or resources. 9.
Who pays me? Not just who signs the checks but, where does the money come
from? Application fees, transaction fees, residuals, monthly fees, etc. Carpenter:
Just like in the physical world the majority of income for the ISO
comes from selling the merchants set-up. Where in the physical world this
would involve delivering a terminal, in the Internet world this would
involve selling or leasing a processing solution. There is also ongoing
revenue if a monthly hosting fee for an online processing solution is
charged. Residual
income from actual transaction volume is not significant from most
merchants at this time. The biggest mistake of ISOs and sales reps is
undercharging for set-up costs. They expect the ongoing revenue to be
larger than it is. The costs of customer support need to be amortized into
the set-up fees charged. Landers:
The question of who pays me and what you’re paid depends greatly on
the type of relationship you have structured either with an ISO or
sponsoring Bank directly. If you deal with an ISO you will be paid by that
organization on a monthly basis, typically 30 days following the previous
month’s transactions. In a BIN relationship, payment of residuals is
usually done 1-2 weeks faster and a deposit is made directly to an
operating account you are required to maintain at the Bank. There are a
lot of factors that go into determining whether or not you are an ISO
player or a “direct” player, it is not as simple as saying “I would
like to get my money faster so I think I’ll sign up with a Bank.”
Finally, the answer to where the money comes from is simple...merchants!
Merchants are charged for processing and discount fees on a monthly basis,
which results in residual income for sales agents. The money is paid by
the merchants to ISOs who are then responsible for settling up with
terminal driving networks, processors, various third party vendors, and so
on. When all expenses are netted out of the income stream generated from
the merchant relationships, a residual payment is made to each agent
representing the particular ISO or Bank, depending on your situation, of
course. 10.
Is this an industry with job security? Carpenter:
Only if you are able to adapt to the changing technology and needs of the
merchant. Internet usage and merchant Web hosting will continue to grow
geometrically in the future. Transaction volume is at only a small
fraction of its potential. New paradigms are constantly evolving. The
latest trend is free Web sites. Landers:
Without a doubt. Think of a world without electronic forms of payment, it
simply will not happen. Even the utilization of checks as a form of
payment has matured to the point money can now be deducted from your
checking account at the time of sale. Internet processing is yet another
payment mechanism this industry has embraced, and will continue to do so
until there is a reason it should not. In the meantime, and until we live
in a true cashless society, you should enjoy being a part of taking us
there. Waldron:
This industry has tremendous job security if you know the industry, and
operate intelligently and honestly within it! The Internet and e-commerce
are only going to get bigger, and now is an excellent time to get
involved. Something to remember about signing up merchant accounts online
is that there is a low entry cost, but to do it properly takes time,
money, and dedication. While the internet still feels quite new to a lot
of people, and there are many ISOs and Banks that are just catching on,
there are also a number of experienced companies that have got an edge on
this and have been financially successful with their offerings and
efforts.
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