Relying on ISO Resources

I t isn't often that you hear such an honest assessment from a company president. But Michael Kopp, Chief Operating Officer of Electronic Data Resources, says this about the concept that led to the formation of his company: "We are pleased where we are, but it hasn't been the slam dunk we envisioned in the boardroom."

What Kopp and two other industry veterans, President/CEO Bill Blakey and Vice President/Finance Charles "Skip" Whitley, envisioned was a company that would service the smaller mom-and-pop market that was being overlooked by the consolidation of some of the big processors. In 1999, in West Palm Beach, Fla., they brought together what they had learned at such organizations as NaBanco, NOVA and First Data and set out to knock on doors and talk face-to-face with merchants being underserved.

"It was risky and it continues to be a risk, in that you are ultimately dealing against economies of scale," says Kopp. "You can get undercut. You ask if the bigger guys are going after the same merchants we are. It certainly has not been as easy as we had hoped."

They originally had hoped to have company-owned sales offices in which spaces would be leased for three- to six-month rentals with regional hubs and smaller district offices for longer periods of time. They had no plans at that time for any agent or ISO programs. They believed that if they could hire the right people to learn the business from them, they would provide all the necessary tools and benefits and reap the rewards of a successful bottom line.

"At the height of EDR's past life, we had 20 sales offices open at any given time," Kopp says.

Then, about a year ago, the top management started realizing it was spending an awful lot on office space and recruiting. In the early days, EDR was able to attract and keep the people it wanted. From '92 to '96 it had been successful in building the organization. But the environment changed.

"We started shaking our heads," says Kopp. "We asked, 'Why is it so difficult now?' "

The answer lay in the advent of the Internet and the terminal manufacturers getting competitive through resellers like Horizon and Tasq.

"Any individual could sell equipment, earn residuals and be their own boss," Kopp says. "We couldn't compete. Our prices were too high to compensate our overhead."

The industry evolved as independent agents were able to get better deals. Those same sales agents who worked underneath regimented organizations became independent sales professionals. Electronic Data Resources needed to evolve as well.

"The one nice thing about being a small company was that we could change," says Kopp. And so they did. In May 2001, EDR bought 1st Premier Bankcard Solutions and acquired about 60 sales agents. In the process, EDR started closing its own sales offices, converting existing salespeople to independent agents.

"In less than three months we turned the company around 180 degrees from direct sales to 80% of our volume effectively being driven through our agent program today," Kopp says.

The remaining 20% of EDR's volume comes from a new channel - franchise and association endorsements. Electronic Data Resources representatives regularly attend association meetings and run ads in association newsletters to show off competitively priced processing services that heretofore might not have been offered to this special market. Today, EDR's core competency is credit card processing, providing electronic payment solutions for the small retailer with one exception - EDR doesn't play in the Internet world.

"I never subscribed to the business model, risk aside, that mom and pop will be willing to pay $75 a month to have Web presence," says Kopp. "I never bought into that. The smaller merchants weren't Internet and marketing savvy. They may have had a product, but many didn't see any response online. I subscribe to face-to-face transactions. We never were in, so we never had to recover from losses due to Web revenue or lack of like so many others did in 2000."

Another differentiator is that EDR owns the risk. "Unlike a lot of ISOs who own the residual stream but not the risk, we do," says Kopp. "We have our own BIN (bank identification number). There's a lot of friendly reselling of services in the industry. Unless you are a member bank, you must have a sponsor bank, and we use City National Bank as our sponsor bank and NPC is technically our processor, handling the movement and settlement of our merchant funds."

EDR's agents and ISOs do work through Electronic Data Resources' BIN, no different from processing infrastructures such as NOVA or Vital. Does that mean EDR sees them as competitors?

Kopp sees everyone who has an agent program as being a competitor of Electronic Data Resources. He believes EDR stands out because it is small enough, has the experience and has the clout behind it with the world's second-largest processor handling its money movement.

"We are not supporting an agent bank, not doing research and development, not spending money on terminal technology," says Kopp. "We go out and package the best for our agents."

Kopp stresses that the biggest difference between EDR and its competition is that EDR puts the majority of its money in supporting its agents and ISOs. "Where we are best suited, where we've created our niche, is in our support center for our salespeople," says Kopp. "They have someone to call, not only to process deals and provide status reports, but to cheer them on."

While Electronic Data Resources outsources its settlement and merchant support, it's proud of the fact that its ISO support is completely in-house. At EDR, every agent and ISO has an account manager. Those managers handle the deal from the time the agent walks in the door, so to speak, to the time their merchant is in the system and up and running. And what is the most in-demand product or service that ISOs are walking out the door with? According to Kopp, check truncation is starting to pull away from the processing pack.

"Most merchants are going to get bombarded by sales agents on credit card rates," says Kopp. "It's become generic and ingrained all structures. But if you walk into a merchant and have a solution for bounced checks, it becomes personal and interesting for that merchant. Check truncation could be the answer for them. When you walk into a merchant's store and they have bounced checks on the wall, that's a guaranteed sale for our agents."

By selling directly to its agents via competitive pricing, the cost to merchants for processing services is set by the agents of Electronic Data Resources. EDR doesn't charge application fees and pays a cash bonus for every deal in addition to residual payments. Those bonuses could run from $25 up to $100 depending on how many deals the agent writes. EDR incorporates a 30-day residual payment structure, paying out the third Wednesday of the following month through ACH direct deposit.

"We started our agent program in April of 2000 and have never missed a payday," says Kopp.

Close to 5,000 merchants are being serviced by Electronic Data Resources. The turnaround time for an MID can be same day at EDR, but because more than half of the submitted deals usually are missing some piece of information, it's more like 48 hours. What is Kopp's take on those companies that promise as low as a four-hour turnaround?

"In my 14 years of doing this, same-day promise is one of most overrated and over-marketed services," says Kopp. "It really doesn't happen. On the merchant side, it usually takes two to three trips to get them up and running. We're not perfect, but we sure stand behind our services."

More than 100 ISOs are taking advantage of that service, and another service Electronic Data Resources offers is equipment purchase. Working through partnerships with Hypercom, Lipman and VeriFone, EDR offers equipment to those agents who don't opt to purchase it on their own.

"We offer equipment, have it on our pricing guide, but since many agents can get it cheaper by themselves, it's not a big goal," says Kopp. "We are focused more toward portfolios and transaction-processing volume as opposed to equipment sales." The biggest challenge facing EDR's focus is being able to attract both agents and merchants in an ever-competitive marketplace. Kopp believes that EDR has the tools in place to grow and compete on a national level, and he sees 2002 as his company's breakout year.

"We feel our best plan is in place," says Kopp. "We're satisfied with the way we ended 2001 and look forward to doubling our merchant base in 2002."

What does the industry face in 2002? "I think that there will continue to be a wonderful cycle," says Kopp. "As big as the big guys get, it always gives the little guys an opportunity to grab the ones that go below their radar."

But Kopp also sees the window closing on smaller processing companies entering the arena.

"It is going to be harder and harder for companies like Electronic Data Resources to get started," says Kopp. "It is wildly expensive. We burned through $1.5 million just trying things. In order to get your own BIN, a bank has to be willing to put its neck on the line, and not many are willing to do this given the last couple of years and the scams. You need a really good reputation. And it's a really strong due-diligence process. We were fortunate - our pedigree helped."

That pedigree and processing prowess also might be a hindrance for Electronic Data Resources down the road.

"At the end of the day, we probably will be sold or absorbed, but right now we are not looking for that. We're happy with who we are now," says Kopp. "We realize it means you have succeeded if one of the top processors wants to buy your business because they have liked what you've done. That is a long-term objective.

"We have seen many bought and sold, so we're not silly enough to think we won't become an acquisition candidate. When the right time comes, we would be open, but we are happy with our niche now and the way we are running things. We are probably too small for anyone to make a serious offering. But who knows what the market will be like two to three years from now."

When Kopp looks at that future market, he's concerned with one issue that he believes the industry is not addressing - the potential pitfall of renegade agents, those unscrupulous professional thieves who submit applications with imaginary merchant accounts or real merchants with their own account numbers on the check.

"There is a lot that flies under the fraud parameter radar," says Kopp. "In our zeal to get the app process down quicker and sign up more merchants, we've left ourselves exposed. We're going to have to start taking the necessary steps, verifying account numbers, calling back merchants. But then the question arises - do you hold up your whole process to find that bad merchant account, or do you hope your back-end system will catch the squirrelly activity?"

Kopp believes there is a need now for a shared database of bad or renegade reps that every processor can go to, similar to a bad merchant database.

In the meantime, Electronic Data Resources will continue to provide its merchant customers with the most current products in today's market for electronic payment, via the ISO community.