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Ask The Experts

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

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.,, 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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