ver the past few months, I believe the payment processing industry has undergone a profound change. The free terminal initiative, pioneered by United Bank Card Inc. (UBC), has quickly spread and is reshaping the way ISOs and merchant level salespeople (MLSs) conduct business.

This development has sparked industry-wide controversy and ignited the most viewed discussion in the history of GS Online's MLS Forum.

The Forum thread titled "Free Terminals ... low to zero equipment revenue: Is this a turn for the worse or better?" served as a battleground where supporters and opponents debated the pros and cons of providing equipment free of charge. The debate became so heated after 184 posts that the Forum moderator ultimately locked it.

In addition, "Free Lunch?", a recent article in The Green Sheet ("Street Smarts," by Ed Freedman, Jan. 24, 2005, issue 05:01:02), addressed the topic. The article evaluated free terminal programs as a concept and included many different opinions and perceptions.

(For example, the author stated that "It's not an industry norm for a 50/50 revenue sharing program to give the ISO partner the first $15 on the monthly minimum ... " On the contrary, as part of the program, UBC evenly splits the monthly minimum with MLS partners.)

Despite the conflicting opinions, UBC's free terminal program has proven to be extremely successful for those innovative enough to employ it. Since we introduced the program, our MLS partners have submitted a record amount of new merchant applications; residual streams are building quickly or rapidly.

I would like to address the realities of the initiative to clear up any inaccuracies and misconceptions that exist. On Nov. 22, 2004 UBC rolled out the offer, which provides POS equipment free of charge to its ISOs/MLSs who can then turn around and give the product free of charge to their prospects.

UBC provides a free Lipman NURIT 8320 POS terminal and ePad signature capture pad and an Ingenico Corp. eN check reader to merchants who sign up for the service. UBC will also pay ISOs/MLSs an additional $100 up-front bonus per merchant application to counteract the loss resulting from giving away the terminals, which ISOs/MLSs usually sell or lease to merchants. Too Good to Be True? Perhaps the most common questions that come up in discussions of a free terminal program are "Is this offer real?" and "What's the catch?" Providing free equipment is real. It might not be realistic for some of the more debt-laden acquirers and ISOs to offer, but for salespeople and organizations that align with the right processor, it will result in real profits. There is no catch; we offer the same program that originally brought us success, only now the equipment is free.

"The free terminal program opens all kinds of doors for me because I can give the merchant the best of all worlds. Offering the free terminal gets their attention so that we have an open ear for them to hear our complete program offering. This program provides complete flexibility to tailor whatever program we wish, to be as competitive as we wish." - Richard Dorsey, Electronic Funds Capture

Is It Really Free?

Another misunderstanding is that the equipment is not really "free" because it's proprietary. Although merchants must return the equipment at the end of the contract, they never incur an equipment cost; they receive replacements within 24 hours and updated hardware at no additional cost.

If merchants choose to end the agreement completely, unfortunately they won't know the satisfaction of "owning" a piece of POS machinery. However, perhaps giving up a state-of-the-art credit card terminal might persuade them to reconsider their decision to terminate the contract in the first place.

"This is a free program. Most ISOs are charging a $79 annual fee, and most ISOs are charging $0.35 for a batch fee. From what I know about this program, the agent has complete flexibility to change the mids, nons, statement fee and monthly minimum. As far as people saying, the merchant is paying for it; they just don't know it. From what I can see, most merchants are paying these fees; they are just not getting anything for their money. At least with this program they are getting equipment to use for their money." - Jason Hansborough, Merchant Exchange Systems

There's an Annual Fee?

For merchants to qualify for the free equipment program, ISOs/MLSs charge them a $79 annual membership fee. If ISOs/MLSs choose to waive the fee, merchants will then need to purchase one of UBC's non-proprietary terminals. The annual fee is necessary to maintain the free replacement program; it also covers the cost of 24-hour customer service, technical support and shipping costs. Many companies charge this fee, and it's often more than $79. And many of the companies that require it do not offer free equipment, guarantee overnight replacement or provide updated technology.

"There are a lot of ISOs charging an annual fee similar to UBC but giving nothing but 'BS' as to what it is for. I don't mind charging an annual fee when I can really explain what it covers. I do see the UBC free equipment as just that, FREE! If you're selling or leasing a terminal, are you going to then waive the batch fees? Annual fees? Or all the other misc. fees we all know are added anyway? I think not!" - Neil Mink, UBC

"I've Been Doing It for Years ... "

Some salespeople are convinced that these types of programs offer nothing innovative because they've been giving away the Trans 330 for years. Unlike any other "free" terminal offer, UBC is unique in its ability to provide the latest generation of equipment. Rather than simply offering an archaic terminal based on 15-year-old technology, we provide a complete state-of-the-art processing solution.

UBC also provides the additional benefits of SigCapAccess, the only nationwide signature capture network available to the average-sized merchant. We developed this network in-house, and it's only available to UBC merchants.

UBC's free terminal program is also compatible with an online application, a feature that allows merchants to sign up for a merchant account and receive instant approval and an MID directly from the ISOs'/MLSs' Web sites.

"The new free terminal programs being offered are revolutionary in terms of the flexibility for the MLS and the benefits for the merchant. Unlike programs that provide a Zon Jr. or a Trans line terminal, with this program I can really offer merchants something of value, something that I would use." - Jaime T. Goff, Merchant Services

How Can an ISO/MLS Live on $100 per Merchant and No Equipment Fee?

Remember that ISOs/MLSs are not really in the business of selling equipment; that's the manufacturers' job. ISOs/MLSs provide a service and sell functionality. Offering free equipment is the rational move and should result in a flood of signed merchants.

However, the $100 bonus is not intended to serve as a substitute source of income, but rather a supplement to the residuals that salespeople can earn. It's shortsighted to try to support a company based solely on equipment sales. Successful ISOs/MLSs rely on a steady stream of residuals, and that is precisely what this initiative creates.

"When we were selling terminals, we would seldom make over $100 profit and usually less. The serious reseller is in the business for the long haul and the residuals, not the fast up-front money. UBC's free terminal program has positively affected my income. Residuals are growing faster, and the up-front money is more than we were making by reprogramming terminals or selling them at cost. We even give 100% of the $100 bonus to the sales rep." - Edwin Cornia, Electronic Bank Data

Enterprises Enhancing the Industry, One Free Terminal at a Time

I believe free terminal programs are here to stay. Ultimately, the industry will need to reinvent itself to accommodate these initiatives, and the changes will benefit everyone.

Providing merchants with free equipment is the perfect solution for ISOs/MLSs seeking a method to not only increase the number of merchant accounts that they sign but also to reduce portfolio attrition. This approach also serves as an excellent way to remove outdated equipment from the market and eliminates the practice of gouging merchants with outrageous lease terms.

Despite the hopes of detractors, free terminal programs are not going away. Companies that implement these types of initiatives do not intend to bring about the early demise of the businesses and individuals who support them.

Free terminal programs are also not stunts to attain short-term publicity. After all, if giving away terminals is only a fad, and the companies that do so are doomed to fail, why have these programs caused such a stir in the industry?

"The way I look at it, we are getting a lot of the older refurbished terminals out of the marketplace. We are enabling our merchants to be compliant with both truncation and Triple DES; our reps can up sell for gift and loyalty and/or check guarantee. It is a win-win situation for everyone involved." - Lazaros Kalemis, Alpha Card Services Inc.

I believe that it will soon be standard practice for merchants, much like savvy mobile phone shoppers, to seek out the salespeople who provide free top-of-the-line credit card terminals with a signed service contract. As an ISO or MLS, will you be able to oblige these merchants? Jared Isaacman is the founder and Chief Executive Officer of United Bank Card (UBC), a payment and transaction processor serving businesses nationwide. UBC handles the merchant accounts for more than 20,000 locations and processes in excess of $2 billion annually. Visit UBC's Web site at www.unitedbankcard.com or call 1-800-201-0461.