The Only Stupid Question

Editor-In-Chief’s Note: Since one of our major goals with The Green Sheet is education, we continually seek new ways to deliver necessary information to our primary readers, who are increasingly a mixture of new people coming into this industry and more seasoned sales professionals. Each year we mail a survey to the readers of both the paper and online versions, to help us shape our editorial content in the upcoming year, and to monitor the changes each year within our readership.

In the 1999 survey, a number of readers wrote in questions and comments about the definitions within our industry, and certain expectations in costs, earnings, and contractual expectations. The following lead article is provided as answers to these questions. We were fortunate to have Mr. Vaden Landers of Bankcard Consulting Group provide his wisdom for this response.

We hope that you will find the information of value, and remind you that Mr. Landers is the closing speaker in this year’s Green Sheet Seminars. If you have other questions, or need help with negotiating your bankcard acquiring relationship or even in improving your costs, please check our seminar schedule (http://www.greensheet.com), and plan to visit with Vaden later this year at a city near you.

I hope to see you at an upcoming  Green Sheet Seminar 2000—Financial Services Sales, The Road Ahead.

Good Selling!

Paul H. Green

G S: How do you define the term ISO?

Landers: An ISO, or Independent Sales Organization, would be classified as a registered entity with Visa and MasterCard and sponsored by a member financial institution for purposes of securing point-of-sale card processing business. However, the term ISO is not exclusively used within the merchant acquiring industry, but used always to describe an independent sales force that collectively represents the growth engine behind a business concept.

ISOs come in many different shapes and sizes. A good example of a small ISO would be CPS Group, Inc. based in Queens, NY. CPS maintains a customer base of approximately 3,000 accounts and does about 300 new merchant contracts on a monthly basis. Some examples of larger ISOs are NOVA Corporation (Atlanta, GA), Merchant Services, Inc. (Plainview, NY), and E-Commerce Exchange (Irvine, CA). Each of these groups directly controls the majority, if not all, of the operational functions associated with an acquiring shop. Additionally, each boasts a national sales presence in the form of “feet on the street,” and in account representation. These players maintain merchant portfolios ranging in size from 35,000 accounts up to 300,000 accounts, and generate a combined 8,000 to 10,000 new applications per month.

It is important to explain the ISO versus Sub-ISO model so that the readers have the benefit of completely understanding each viewpoint. A Sub-ISO is simply an acquiring organization that utilizes strategic alliances with larger ISO groups in order to gain access to highly competitive pricing, products, and services. A Sub-ISO, much like an ISO, can be registered with Visa and MasterCard through a member financial institution and enjoy most of the privileges granted to an Independent Sales Organization that is operating in a “direct” environment. The primary variable is that at this level, it does not often make sense to try and stand on your own in terms of commanding the most aggressive contracts available in the marketplace. Many consider the term Sub-ISO to be a dirty word in our business while I, on the other hand, tend to be a proponent of the concept especially in circumstances where it is necessary to level the playing field.

GS: Is an MSP the same as an ISO?

Landers: “MSP” stands for Member Service Provider. An MSP has been traditionally thought of as the financial institution through which Visa and MasterCard registration is being obtained, and also the party who is making access to acquiring services available through that membership.

GS: Can an entity be an ISO and a processor?

Landers: Yes. Some good examples of ISOs who are also processors are NOVA, First Data Merchant Services, Paymentech, and NDC e-Commerce. While none of the aforementioned entities (with the exception of NOVA) consider the ISO business to be their driving focus, each possesses the ability to bring on new merchant accounts through their own terminal driving and merchant accounting platforms. In fact, in most scenarios, it is the objective of these organizations to build distribution channels through ISO alliances.

GS: What are the differences among an ISO, processor, MSP, or agent?

Landers: Perhaps the easiest way to answer this question is to provide for you my definition of each, and to outline a few examples (see the table below).

GS: What is the average expense incurred by a merchant account provider to sign a merchant from start to finish?

Landers: This is a difficult question to answer due to the fact that many ISOs employ numerous sales and prospecting methodologies when bringing on new accounts. I think I can help you to better understand what those factors are in addition to providing some insight into what you can expect to pay on a per deal basis (assuming certain conditions exist). In order to effectively evaluate your expenses in this regard you must consider the following:

1. How do I prospect? Do I make cold calls, utilize direct mail pieces, or a combination of both? What are my costs for marketing, advertising, and paperwork on a deal-by-deal basis? Obviously, as your production increases you have greater volumes against which you can spread this expense.

2. How many sales calls does it take for my staff to close a deal? Are those salespeople salaried or commissioned? Are they using the phone or their vehicles as the primary mode of getting to their prospects?

3. Are site surveys required or do I have to employ enhanced underwriting resources due to the fact it is a virtual or higher risk prospect?

4. How many times do I have to enter the same information for a given customer once he/she has decided to enroll in the program? What are the costs associated with running multiple platforms as opposed to operating in a single-point-of-entry environment?

5. How do I get the deal to the bank? Do I have to send it overnight, can I fax it in? What about an online application?

6. What will I need to deploy to the customer and how will I choose to facilitate that action? Will there be hardware, software, kit material, or a combination of all three, and how is the cost of shipping affected?

7. What do I have to pay the sales rep in order to incentivize him or her to be productive? What about benefits, bonuses, etc.?

Based on how you would respond to the above questions, your cost for signing a new merchant and processing the related paperwork could range from $150 to $250 or more.

GS: On the average, how does a merchant account provider earn money? That is, what percentage of statement fees, transaction fees, discount rates, etc., do they earn?

Landers: Assuming all things are equal, the average merchant yields anywhere from $40 to $50 in net revenues on a monthly basis. This number is obviously higher in some scenarios and lower in others based on the portfolio make-up. In a virtual world, an ISO will be more heavily dependent upon recurring fees as the primary revenue source due to the fact there are minimal amounts of sales being transacted. Conversely, in traditional retail scenarios, there are more sales being processed, so discount rates and transaction fees begin to play a larger role in the revenue picture. Unless you have merchants who are doing significant sales volumes, your fee-based revenue will always serve as an insurance policy against a modest revenue figure averaged across the entire merchant base.

GS: As an ISO, how can I decide if a particular processor is for me?

Landers: Unless you are intimately familiar with all merchant accounting and terminal driving platforms, it would probably be a good idea to seek professional assistance or get some advice from a trusted resource that has had extensive experience making decisions in these arenas.

There are so many different aspects of this type of vendor relationship to consider when interviewing possible service providers. Your choice of partners, especially in this area, will be critical in ensuring the successful transportation and settlement of POS traffic, whether brick and mortar or “click and order.” In order to be productive and profitable well into the future, you would be well served by conducting extensive research and performing competitive analyses of not only pricing, but products and support as well.

GS: As an ISO, how can I decide if a particular bank is for me?

Landers: Outside of price, which is supremely important in obtaining BIN sponsorship, your bank partner must share the same basic philosophies as to sales and marketing, underwriting, risk exposure and merchant operations, as do you and your acquiring organization. Again, because of the complexity of negotiating these types of deals, it is important to make sure you have secured the advice of a professional or business colleague who has had a lot of experience with clearing banks.

GS: As an ISO, before I sign anything or agree to anything, what should I ask banks?

Landers: Because a large focus of our management consulting firm focuses on working on behalf of ISOs to research and negotiate the many options available to ISOs and Agents, I strongly recommend investing in getting someone to represent your best interests, if not BCG, someone else who has a proven track record in this area. I can’t tell you how many times we are contracted by ISOs to fix poorly structured agreements after the fact as opposed to structuring the best possible deal on the front end.

With regard to the questions, specifically relating to banks, they should be focused on the following:

1. Your flexibility in all areas of acquiring operations. Who does enrollment, customer service, implementation, training, and so on?

2. What underwriting guidelines can you both agree to abide by based on your ability to absorb losses and the bank’s willingness to take on varying degrees of liability?

3. What kind of pricing is the bank willing to provide based on your business plan, the bank’s available BIN space, and their desire to fill that space with your business?

The list goes on and on, and should get to the heart of the matters that are important to your business and the issues that are crucial to the bank. Again, we would be happy to work with you in identifying prospective bank partners and putting together deals that make sense for everyone involved.

GS: As an ISO, before I sign anything or agree to anything, what should I ask processors?

Landers: When negotiating with processors on any level, authorization and capture vendors as well as clearing and settlement partners, you should focus on price as compared to product offerings and reliability/track record in the industry.

For example, you will need to understand what point-of-sale products (terminals and/or software) are certified, what Internet capabilities exist, what application functionality is available, what the history of down time has been for the network(s) and so on. Once you have a comfort level with your ability to sell, to  motivate your sales group to sell, and the product and service suites offered through a given processor, it is time to talk price.

Vaden Landers is President of Bancard Consulting Group, a management consulting and software development firm based in Nashville TN. Since 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. Bancard Consulting Group is located online at http://www.bancardconsulting.com. Mr. Landers can be reached by calling (800) 801-9552 x214 or by e-mail at bancardconsulting@compuserve.com.

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