n response to a number of inquiries we received at The Green Sheet and comments posted on the GS Online MLS Forum, we asked our Advisory Board members the following questions:

"Many comments in the MLS Forum suggest that income from equipment is hopelessly low, and upfront fees and residuals are at the lowest point in five years. If so, what can be done? How can we educate MLSs on the business models available for financial success in this marketplace in the face of reduced equipment income? Can the regional and national associations help with this education? If yes, how? And what do you plan to do to support these educational efforts?"

Judging from the number of responses we received, this is indeed a hot topic of discussion.

The changing face of our industry has many MLSs concerned about their ability to generate a good income in the future. These changes seem to be diminishing traditional lines of revenue.

However, most of our Advisory Board members agree that these changes also present MLSs with new opportunities. New technologies and equipment make it possible to combine value-added products and services never before available and offer them to merchants. The key is education.

Tony Abruzzio, GO Software, Inc.

"Needless to say, as we move forward in the future, there will always be pressure for merchants to control cost. So, we must improve our cost structure to remain competitive. It's not business as usual. We should look in the mirror at our technology and delivery systems to improve our own operational efficiencies so that we can keep margins. In addition, we must embrace new products that provide value to merchants and add them to our portfolio of products. Our merchant customers have been doing this for years: Would you like an appetizer before your meal? How about dessert? What about that extended service contract with the new car or a gap insurance policy?"

"Concerning the reduction of income from equipment, I have heard that the margins are so small as to make earning money very difficult. MLSs now look at equipment sales as a way of closing the important deal: the processing agreement. Here are a few solutions I see to this problem:

• Look for new equipment to sell. There are prepaid and loyalty programs for which more sophisticated and expensive equipment can be sold or leased.
• Consider offering better customer service as a basis for higher prices on equipment.
• Do thorough research on merchants to make sure they are in the appropriate credit category (i.e. A, B, C or D). The wrong classification could cost the ISO profits.
• Negotiate with leasing companies for volume discounts to match the size of your business.
• Start your own leasing company; it's not hard. You can build a leasing company one lease at a time."

"Clearly we are dealing with a commodity both in the cost of equipment as well as in the revenue for ongoing merchant services. Our company works with many large companies to place payment systems inclusive of merchant services. Unfortunately, the average MLS is very poorly educated. By and large, the information base that they work with is severely limited by old models of competitive sales. There is always someone else who will undersell whatever product or service they are offering. My only advice is to draw a line in the sand. You must have the knowledge to really add a value-add to the proposition. DO NOT SELL PRICE!"

"I don't agree that equipment income and residuals are hopelessly low, as long as the MLS is selling more than just equipment. If you combine true value-added services to the merchant and reliable lead generation and understand the concept of building a brand, there is still great money to be made. Building a brand takes time, money and integrity. Reliable lead generation may be even more difficult. Value-added services mean understanding more than just bankcard. It's not easy, but it can be done. We support these efforts by providing this kind of program to our MLSs."

"From the viewpoint of an equipment provider, this situation is one that has been five to 10 years in the making. We, as an industry, have made a commodity of the equipment side of this business. The evolution of feast-then-famine has ended with merchants going directly to eBay to purchase terminals and printers. There is no end to the sources for our precious equipment. How long is the list of equipment advertisers in The Green Sheet Resource Guide? Also, check the listings for Agents, ISOs, Relationships, MSPs and Portfolios. It's no wonder individual residuals are diminishing.

"Our industry is changing at a rapid pace. What we really need is an intense education of the sales force and then an intense education of the merchants. Transaction processing now encompasses many different fields: check conversion, check guarantee, medical transactions, debit, credit and loyalty programs. How many of our sales people know how and when to sell each of these? How many ISOs have sufficient knowledge in wireless technologies to train the sales people to sell solutions to the merchants, not just equipment?

"As with any business, there are three high-cost items associated with a client base. Acquisition and retention are the first two. This is where it all begins, and hopefully the results are worth the costs. The third cost item is attrition, or, more positively, client retention. It definitely has a dollar value, and the MLS is the first to feel it.

"A client retention program should be part of the MLS training. Why did the merchant leave? Did they have the wrong program? Did they have the wrong equipment? Did the MLS understand their business well enough to help them? The answers to these and other questions might help the MLS to retain the merchants they have worked so hard to win and to sell the equipment that is productive and economical rather than the merchant's choice based on low cost."

"I personally don't think the income generated from equipment sales or leases is suffering the way some play it out to be. Granted, things have changed in the last few years. Without a doubt the presence of online equipment retailers like MerchantWarehouse have changed the equipment game slightly, but have not all-out eliminated it. Before MerchantWarehouse, there was always eBay.

"The fact is that an educated merchant looking for just a 'box' will always find the right price. I still firmly believe this is just a small minority of the tens of thousands of new merchant accounts issued each month. As Mike Grossman from Lipman USA says, 'You have to sell more than just a box.' That is a very true statement. If an MLS is offering a terminal for $699 and the merchant finds it on the Internet for $399, that is a 'no brainer.' However, there should be more to the sales process than just terminal for terminal. "An example I use over and over again involves a little role reversal and picturing myself as a merchant. I consider myself a somewhat savvy businessperson, so I believe I can spot a fair deal when I see it. If I were a merchant and a salesperson came in and offered me a terminal that processes all major credit cards, debit and check guarantee (which saves me money on bounced check fees), age verification, electronic gift and loyalty cards, or even signature capture to prevent chargebacks, and this whole package was rolled up for $49.99/month or some other equivalent lease, I would say it sounds like a good deal.

"As a business owner I would do some quick math. That whole package for $49 helps create more revenue for my business and saves money, and it still costs a heck-of-a-lot less than my cable TV bill. Where do I sign up?

"The point to my statement is that not all business owners are looking for the rock bottom price. If they are, you are probably not presenting the product or the service correctly. Granted, I have certainly seen the price shoppers and the above example does not apply to everyone, but the situation still remains that leasing and generating some decent money from equipment sales is still possible. If you believe that your market is too competitive, or there is no chance of making a living on equipment alone, then consider revamping your strategy and refining your sales techniques because there are people out there doing it."

"While income when selling conventional equipment and services has certainly 'tightened,' opportunities for earning a very nice living still abound. The potential income from non-qualified transactions is just one source of income that did not exist in the 'old days.' Check guarantee and conversion allow for additional upfront and residual income and gift card services have just begun their growth.

"The power of the new terminals allows for many extra services to be added such as time & attendance and the ability to greatly reduce transaction time via a wireless or Internet method. In addition, certain ISOs offer finder's fees, reprogram fees and bonuses that assist the salesperson in making money for today while growing their residual income for tomorrow.

"I believe the responsibility of education and training belongs to the merchant processors and the ISOs. In order to thrive in a world that is changing fast, sales representatives must find an ISO that not only has the services to sell, but also takes the time to educate the salesperson on what the service does and how it can be sold."

"Income from equipment sales had been very high in the past. It's not surprising that this flow, through market forces, has leveled out. I think the market needs to continue to explore other ways to compensate for the reduced income levels by offering other value-added services and products. "I think the MLS can be educated in regard to the business models available. This needs be done with a focus on the value provided to the customer in order to prevent a backward movement on the integrity front. Improvements in quality and fairness to the customer have been made over the same period in which revenue from equipment has declined. We need to make sure we do not jeopardize the improvements that have been realized.

"The regional and national associations can act as facilitators and coordinators of training courses. They can go out to their memberships and request members with specific abilities or knowledge to volunteer to aid with training. I would support this effort by offering my services."

"More and more agents face tougher sales challenges to stay competitive. Merchants have become increasingly astute about products and pricing and are able to shop around for the best offers. Their knowledge has created fierce industry competition and has ultimately produced diminished equipment sale profits. Agents are earning less money to support overall business operations.

"Cardservice International recognized this trend a couple of years ago and came up with a solution for their sales force known as the Cardservice Agent Alliance Program (CAAP). CAAP is a revenue sharing plan that helps agents cut through the challenges and reinforce revenue generation. The program is specially designed to increase agent profits from their existing revenue streams and to extend new opportunities in order for agents to build a more profitable business. We are doing everything we can to create residual revenue opportunities for our agents to help offset their lower upfront income.

"Regional and national associations can assist with continued agent education; however, ISOs and acquirers should take the lead. For example, here at Cardservice International we are revamping our intensive three-day new agent training. The new training will focus on helping the agent build a comprehensive business plan and road map to success. We want to help them build long-term goals so they can succeed.

"The training also focuses on a consultative sales approach. This approach requires that the agent educate the merchant about the product and service benefits during the sale as well as fully disclosing all details of the relationship before asking a merchant to sign an agreement. By immediately establishing an honest relationship based on integrity, the salesperson elevates himself to a business consultant, resulting in long-term loyalty and merchant retention."

"The merchant services business has been unique. In most businesses, companies try to commoditize their complements. For example, if you sell cars, you want gas to be cheap, and if you sell gas you want cars to be cheap. However, the merchant services business has tried to have it both ways.

"MLSs maximized revenue from both payment processing services and equipment sales. This compensation practice created an inefficient market where merchants were at times taken advantage of and paid many times over for equipment costs via leases. This inefficient market invited competition. "Times have changed. You can now buy equipment on eBay; the price of a complete computer system is less than a payment terminal; and cell phones, which can be obtained for free from the carrier (because they commoditized their complement: the phone), have more processing power than payment terminals. The net effect is that MLSs will continue to see pricing pressure as new entrants enter the market with greater value propositions and more efficient business models. We have a white paper that discusses these changes titled 'Next Generation Payment Terminal' available at www.tpisoft.com/downloads . "What is an MLS to do? In my opinion, they need to embrace change and become comfortable with new technologies that allow them to provide more value and differentiate themselves. When the commoditization of computers happened, the computer businesses that survived either became the lowest cost producers (Dell) or became solutions providers versus box pushers.

"I believe successful MLSs will become solution providers that sell more than just merchant services: integrated solutions that allow businesses to become more efficient. Integrated solutions are much stickier and provide more value.

"Tying these technologies together in innovative ways (for example, you have the POS system send a text message to the business owner's cell phone when a credit card is processed, or you solve their merchant statement reconciliation problem) will provide these opportunities for the enterprising MLS. In my opinion, MLSs need to learn about new technologies and partner with the new entrants and technology companies to provide these complete solutions."

"Though the income on the commodity aspect of this transaction is lower, this does bring up an interesting opportunity for this industry. The income stream for these MLSs is shifting from hardware to transactions/value-add/recurring revenues. MLSs need to sell more than equipment to survive; they have to sell their 'value added services.'

"Since the existing merchants have already purchased a payment device, up-selling the merchant on software applications or services associated with that device (such as loyalty or gift cards) becomes a potential recurring revenue stream. Currently, training on these applications/services and how to incorporate them into the current MLS product offering is available from many sources, such as online forums, ETA, regional acquirers' meetings, processor/ISO shows, etc. Education is about action, not position. The goal is to not just focus on the MLSs, but to work with them to create market opportunities to understand the demands of the end-users: to become instrumental in helping them drive new business and new business lines.

"Having an extensive and diverse service- and application-development network can help introduce MLSs to the array of value-added services available; it can also help them decide which is most applicable to their existing business model and help them realize the opportunity that this new service means to the MLS and their customers. Active participation in the 'networking' of these organizations will improve the industry for all segments."

"I think it's important to be aware that there are many opportunities to make money in the payments industry today. However, this may require some diversification into other services; check guarantee, gift cards and online and wireless solutions come immediately to mind. MLSs should look for a program that is in line with their own objectives for financial growth. Does the program offer lifetime residuals that can mean a hefty return in a couple of years?

"On the other hand, maybe the program is flexible, letting them choose from a selection of compensation plans each time they sign an account: a one-time payment for small accounts or lifetime residuals for larger accounts. Also, they should check to see if partnership opportunities are available.

"Businesses are out there with these options, and MLSs can find them at the shows put on by ETA on both the national and regional level. We've been very pleased to see the emergence and interest in the regional shows over the past year. These types of shows are great places to discover the many opportunities out there for MLSs. In addition to exhibiting at these shows, we also participate by speaking at the seminars and training sessions associated with these shows and strongly recommend them as great resources for MLSs looking to increase their income."

"Isn't eBay the greatest...or the worst!? Yes, it's true that income from equipment is way down. And furthermore, income from fees and residual income is tougher and tougher to come by. I think in order to get a better handle on this it helps to have a brief historical perspective. In the '80s and even the '90s merchants were on the wrong end of a feeding frenzy. From the start of time, or the beginning of electronic draft capture (EDC), there have been many honorable and forthright companies in our industry.

"However we have had, and still have, our share of rotten apples. When merchants were less educated and unaware of how the bankcard process worked, they were slammed. Merchants were coerced into equipment leases at unfair and unrealistic monthly prices. And at the same time, those same merchants were 'taken to the cleaners' on their processing deals. All in all, many nefarious salespeople and similarly shady bankcard companies all got rich at the expense of unsuspecting and unsophisticated merchants.

"Fast forward some 20 years, and oh, how the times have changed. A little thing called the Internet has come along. Furthermore, merchants have learned from previous mistakes and now have a real handle on how our industry works. So what do we do now? We do what we were always supposed to do: offer goods and services at a fair and reasonable price and back it up with proper customer service. Like most things in life, our industry is cyclical.

"So the next time technology and/or innovation swing our way (and it will), let's not take advantage. Whether it will be terminals that go IP, gift card programs, check truncation or whatever the next hot product or service is, let's police ourselves. Let's weed out the churn-and-burn types and handle our business in a professional and forthright manner. No gouging, please. No bait and switch, please. No hiding fees, please. Just goods and services from the top of the deck, and back it up."

The Green Sheet thanks the members of the Advisory Board for their responses. These industry experts help to educate MLSs by sharing the knowledge and experience they have acquired during their years in the industry. These individuals enable The Green Sheet to provide its readers with valuable insight and information to use in their future endeavors.

If you have an idea for discussion that you think would benefit a broad number of individuals working in the payments industry, please send it to Julie O'Ryan, Vice President and General Manager of The Green Sheet at julie@greensheet.com . We will incorporate your suggestions in upcoming Advisory Board inquiries.