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Commissions, Commissions, Commissions

By Lin Fellerman

I would like to tackle a subject that not even an 800 pound gorilla wrestles with. Not to sound like a broken record, but for as long as I can remember, too many ISOs and MLSs have marched in lockstep to the tune of the "buy rate" in the land of check guarantee and conversion.

In the credit card acquiring world, where one size-or one rate-fits all, I suppose it is a given that all of a merchant's volume is run through a system where generally all merchants participate.

The key word is "all," and the result is a pooling of risk in a portfolio that, as in the insurance industry, allows you to intelligently price after taking care of your fixed and variable cost structure, inclusive of risk and fraud related chargebacks.

In this environment, the economic simplicity of the buy rate notion may even make sense except for two important caveats:

  1. The effectiveness of a buy rate assumes that a salesperson will not be greedy and overprice a given deal in order to gain the largest spread, and therefore the greatest short-term income stream.

    The merchant may have had an even bigger spread beforehand and thinks this salesperson is a hero, even if only for a day.

    Unfortunately though, if one salesperson can walk in the door at the right moment, then so can any other salesperson on any given day. That account is at risk the moment it is sold. While that may be true no matter what spread is created, logic dictates that a "reasonable" spread creates a more reasonable likelihood of a long-term relationship.

  2. Selling or leasing equipment at prices far above fair market value allows a salesperson to give a prospective client an unusually low discount rate where very little commissionable spread exists.

    Unfortunately, the next salesperson through the door might fill the merchant in on equipment pricing realities. That first salesperson will never sell anything to that merchant again-and may not be able to enter the premises without a flak jacket and bulletproof vest.

    Saving the client an extra 10 basis points on $10,000 in monthly volume just doesn't quite offset the $3,000 paid for the 48-month lease on that brand spankin' new equipment with pinstripes and whitewalls. That relationship (if there ever really was one) will certainly not stand the test of time.

You can probably see that I have strong views on the subject: greed gets me crazy. And the only thing worse than short-term greed is long-term greed.

There is generally an unwritten rule which, simply stated, is this: If merchants say they will guarantee all checks, they don't always do it. If they say they won't guarantee all checks, then they are telling the truth.

How does a check provider price on the basis of a buy rate? Each merchant profit analysis needs to stand on its own, given that the loss ratio varies based on the volume and selection criteria of checks actually authorized through the system.

Unlike credit card paper, a merchant can simply take his or her checks directly to the bank, bypassing any need for authorization.

Therein lie the costing and pricing dilemmas. The check world does not live with a fixed interchange rate that takes risk into consideration.

How do you give a specific industry client a 1% buy rate when you know from past experience that the loss rate will exceed that number for a third of the clients, that it will be lower for another third of them, and finally, it will equal that for the last third of merchants?

Don't sell at that price, you say? Don't price that way is more like it!

Those deals priced too low will get increased swiftly, and merchants will correctly assume that they were sold a bill of goods.

What kind of message are we sending when we knowingly price half the merchants for a rate increase? Add to that the additional buy rate "spread," and you add insult to injury.

If you want to price individual merchants as a pooling, it's only logical that some win and some lose. Those who are losers are re-priced and eventually turn up in that dreaded "attrition" category no one wants to talk about.

I don't mind talking about it, though, and I have said before that the average merchant attrition rate exceeds 20% in our industry.

This is measured in terms of declining volume and rate: volume, when the customer leaves or alters his check authorization policies; rate, when competition rears its ugly head (a beautiful thing!) as it does so often in a "buy rate" environment.

Presumably, the check provider can price by industry and type of check authorization policy.

The use of sophisticated risk management systems and negative files enables merchants to be priced as correctly as possible, notwithstanding variations of losses by geographical regions.

If the buy rate phenomenon is ignored, and the proper retail price is created by the check provider and subsequent sales agent commissions based on the proper "entry" discount rate, then unreasonable price spreads (defined as "price gouging") and ultimately, high attrition rates, would go the way of the dinosaur.

As merchants increasingly adopt electronic check conversion, and the likelihood of authorizing "all checks" all the time becomes more realistic, then the notion of a multi-tiered buy rate structure for given industry segments could be considered-but hopefully not at the expense of creating inflated prices (defined as "greed" and "avarice").

I would much rather have the sales agent be my partner than my middleman. Middlemen create value-added mark-up along each rung of the price ladder.

Think of merchant association deals in which the check vendor tries to be all things to all people. By creating a "one size fits all" rate, it can't possibly be accurate except for that one moment prior to the first customer transaction.

Not all merchants will authorize the same amounts-some will do a lot, minimum billers will do none at all. Some will even choose to not sign up if the association rate is already higher than their existing rate.

You tell me how one rate creates uniform prosperity for all, given the different risk levels associated with specific industry classes and merchants within each segment.

On the other hand, partners care about whether a deal is profitable from the minute it is signed. Their motivation is long-term value creation, and who can argue with that concept?

Lin Fellerman is Founder, President and CEO of San Diego-based Secure Payment Systems, a national provider of electronic check and gift card processing services. Prior to founding SPS in 1996, Lin was a 20-year employee and 10-year President of Telecredit/Equifax Check Services (now Certegy Check Services).

To learn more about SPS look them up at or e-mail Lin at

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