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Issue 06:08:01

Industry Update

Summer heat wave sweeps Senate Judiciary interchange hearing

Visa alerts restaurants to lax POS installation

Discover Network opens the gates

Visa to disclose regs, with strings attached

Small payments = Big contactless opportunity


Check 21 implementation finds its stride

By Valerie Killifer,

Kelly Jaime

Closing deals with integrity and Irish charm

Trade Association News:
MWAA's annual gathering hits all the right notes


Scuttle those restaurant skimmers

By Gary Fravel


Street SmartsSM:
What to do when things go awry

By Michael Nardy

Visa modified its PCI criteria

By David H. Press

Check into check services

By J. David Siembieda

No lead left behind

By Marcelo Paladini

Relationships are the soul of success

By Chris Hester

New Products

Linux partitioning sturdier than a clothesline

Go trekking with the 1571

Company Profiles

Netopia Inc.


Are your actions aligned with your thoughts?



Resource Guide


Internet Hold 'Em: Winning the online payments game

E-commerce will rock our world, so we've heard for years. Like the boy who cried wolf, myriad warnings about new online ventures that will decimate our profession have been followed by fizzled starts. So, many of us have tuned the message out. The opportunities to service online merchants thus far haven't looked promising either.

But the obstacles that kept most online merchants not-so-profitable for ISOs and merchant level salespeople (MLSs) are starting to flatten.

Interstate banking has led to the development of national electronic debit systems. New and more reliable technologies have been deployed, and consumers are embracing these new technologies more quickly than ever before. As issues like online authentication and security are being addressed, e-commerce dollar volume is skyrocketing.

Simultaneously, boundaries between online and brick-and-mortar commerce are blurring. Traditional merchants are rapidly becoming multichannel. They're mixing storefront, MO/TO, online and kiosk sales in creative ways that fit their unique business needs. Even merchants who rely on face-to-face contact, such as drycleaners, restaurants and service businesses, are starting to schedule appointments and deliveries or take orders and payments online.

All of this is creating new opportunities, and new sales challenges, for ISOs and MLSs.

Size up the competition

Agents selling to online merchants face stiff competition from nontraditional sources, namely, software providers and alternative payment systems like PayPal and Google Checkout.

"PayPal, 2Checkout and Google [Checkout] are all huge threats because they're all positioning themselves as primary choice options for online merchants," said Joe Thompson, an independent iayment services consultant based in Savannah, Ga. "They're pushing the traditional MLS further down the food chain with their attractive low fees.

"Before, if a merchant wanted low merchant fees, they'd go with a service like 2Checkout initially, and if it didn't work out with 2Checkout, they'd come to the MLS for an account of their own," he said. "Now merchant[s are] going to try PayPal. If PayPal doesn't work, they may be inclined to try Google. And if Google doesn't work, they may be inclined to try a service like 2Checkout and, finally, the MLS.

"What this means is that it could take longer for the typical small merchant to call us looking for an account, which could result in significantly fewer online [or] MO/TO signups long term."

For the true bootstrapped Internet startup operating out of a dorm room or geek's garage, an agent may not want to do much to compete with alternative online payment systems. It's a hard sale, and the payoff outlook isn't rosy. A high percentage of Internet startups don't survive beyond two years.

Exploit PayPal's MRBP, with caution

Some agents refer newbie online merchants through PayPal's Merchant Referral Bonus Program (MRBP).

"I've suggested going ahead and setting [up] those startup Internet businesses that just want a free shopping cart and gateway with PayPal and taking the referral money," Samuel A. Silver of Make-Tell Inc. said.

"I'd warn them of the potential problems, and suggest that when they're ready, they're going to want real processing. I wouldn't advertise PayPal; [I'd] just offer it when someone insists. I think of it as outsmarting PayPal.

"Most of those Internet startups don't last. You might as well get the referral money. Then if they make it, they'll come back to you for processing. And if they don't make it, well, you've got the referral money. It's not much but it's something."

Thompson thinks it's a good idea to offer PayPal as a last resort. "But I wouldn't advertise it on my site or print materials," he said.

"A real merchant account simply pays better, and it helps you build a growing relationship with your existing processor.

"It's shaky to offer PayPal upfront along with a real merchant account to smaller merchants. I think that most merchants are going to choose PayPal over a real online merchant account because of price and no monthly fees."

PayPal's MRBP offers bonuses of up to $1,000, but read the fine print:

  • You may not obtain names for referrals from group e-mail addresses, third-party bulk mailing lists or customer lists.
  • You must set up your Merchant Referral link in advance.
  • The merchant must be someone with whom you have a pre-existing relationship.
  • The merchant may not be an eBay merchant.
  • The merchant must not have a PayPal account already, even a personal one.
  • The merchant must sign up through the link you provide and may not sign up for PayPal during a reduced fee promotional offer period.
  • PayPal can discontinue or modify the MRB Program at any time by providing you with 30 days' notice.
  • If the MRBP is discontinued, its rules state you will "receive the Bonus for all of your Referred Merchants that have satisfied all of the requirements in this section prior to the discontinuation date" of the MRBP.

Zero in on merchant account benefits

Unless your merchants are small enough to store inventory under their beds, they're going to need more than PayPal or Google has to offer. "You rarely see a merchant accepting MasterCard but not Visa," Roy Banks, President of Authorize.Net, said. "That's because the merchant wants to - needs to -accept the payment form their customers dictate.

"Anything else, and they're leaving money on the table. And no matter how much PayPal or Google grows, they're just not going to replace credit cards anytime soon." Merchants who earn or have the potential to earn $20,000 a month are candidates for a merchant account and online gateway service.

They are likely to qualify for lower commission rates when using a merchant account than when using third-party payment services like PayPal. A quick comparison of costs may be all that's necessary to illustrate this. Selling by price alone may not be the best strategy. Most online merchants are somewhere between bootstrapped and taking in $20,000 a month.

"The price wars are over," Thompson said. "We can't sell services on price only, as Google is pretty much lowballing everyone. We have to offer customer service, industry expertise and even live consultation to merchants that are looking to accept payments online. If we all sell on low price, Google has us all beat."

While price is likely to be an important factor for any merchant, it's not likely to be the only one. After all, if a family member is seriously ill, do you select a doctor on price alone? The way a business processes payments can be critical to the health of the business, and most successful business people are too smart to leave that to chance. Remember, ISOs and MLSs offer invaluable services Google or PayPal don't offer.

Get creative with customer service and consulting

The payments industry's technology, rates, and regulations change at bewildering speed. There are hundreds of options for merchants. Mistakes can cost them a great deal both financially and in aggravation, particularly over the long term. It's a full-time job to keep up with the changes. Although vital, bankcard processing is only one small part of a merchant's business. Your merchants are experts in their fields; they should be able to rely on your expertise in the payments field.

Your ability to help merchants select the best of many options for their particular circumstances is something with which PayPal or Google cannot compete: They offer what they offer and have no reason to screen other options or distill industry information for their merchants.

"Since the MLS is offering a personal service to online merchants that the other third-party providers aren't offering, we should consider actually increasing the fees slightly," Thompson said. "We may as well charge slightly more for our personal services to merchants, once they realize that the cheaper service isn't always best, especially for the small/mid-sized merchant that needs a real expert opinion on which options they should choose. These new services may actually turn out to make the MLS' expertise more valuable, which increases our value, to say the least."

Additionally, PayPal reportedly suffers from customer service concerns. Some are real, some are perceived. Stories abound of merchants whose accounts were frozen by PayPal when a chargeback was disputed.

The PayPal phishing scam barrage also makes some merchants uncomfortable: It's so incessant that it appears PayPal is not taking action. People wonder, What if PayPal's customer accounts are locked because of unauthorized activity (which one of the scams threatens), and the only payment alternative a merchant has is PayPal? What if the PayPal system is compromised by hackers?

Real or not, these concerns expose an underlying fear: If PayPal (or something like it) is merchants' only payment option, PayPal has more control over their payments - and therefore their income - than the merchants themselves.

Emphasize control and branding

Having their own merchant accounts gives merchants more control in resolving payment disputes, such as those involving customer chargebacks. Many merchants think PayPal tends to decide such disagreements in favor of the purchaser. A merchant account also gives merchants control over their customer data, which potentially could provide valuable marketing opportunities.

Eric Remer of PaySimple believes his company, a provider of Web-based accounts receivable software, provides several benefits neither Google nor PayPal offers. "PaySimple is dedicated to promoting our customer's brand, not our own," he said.

"With either Checkout or PayPal your customer is building a relationship with the payment processor, because a Checkout or PayPal account must be opened by your customer in order for you to accept their payment via either of those vehicles. Further, Google and PayPal both process the actual transactions for merchants, taking on even further ownership of the relationship ... potentially profiting off float time between settling and transferring funds to merchants. And, both Checkout and PayPal actively market to these customers and may even promote your competition to your customers."

Remer said PaySimple's solution can function completely on the back-end with "our customer's own shopping cart, or we can create custom-branded secure Web pages for shopping cart payments or online bill-pay. In contrast with PayPal, the transition to a PaySimple payment screen is seamless. Purchasers don't have to go to a separate site for payment processing."

Banks thinks the value of a merchant account goes beyond a simple payment process. "It's a proven business model that has evolved over time," he said. "It's a true merchant banking account: The merchant has a relationship and a history with the financial institution, and it is FDIC insured. Access to the funds cannot be withheld."

A big challenge for merchants is that most online merchants are actually multichannel. They aren't just selling online. They may have a storefront. They may process MO/TO sales, or even mobile sales. This is a huge opportunity for ISOs and MLSs.

"The ISO is in the perfect spot to not only explain the merchant's cost of processing to them, but to help them find one solution that provides the best option for every type of transaction they use, or may want to use," Banks said. "Who else can give them that kind of information?"

Become a solution provider

To compete with alternative payment solutions, such as PayPal or Google, that bundle shopping cart and other online benefits, processors or ISOs need to create solutions that specifically fit the needs of online merchants.

"I think that in the future ISOs will be solution providers, not just payment providers," Banks said. "If the online merchants don't find their needs met by ISOs, then other solution providers will start bundling merchant services. A reseller can look like a real hero to the merchant if they not only set up processing but also help them streamline or market their business better. And in the future I think those things will all be integrated."

Silver highlighted the need for processors to offer shopping carts. "For the profitable accounts, the lack of a shopping cart is more of a problem than PayPal itself," he said.

He also sees QuickBooks and Peachtree as threats. "Think about it. The software does accounting and inventory for the merchant, too," he said. "With the click of the mouse, they can process a transaction.

"Both companies also have total POS solutions. All of us by now must have lost at least an account or two to them. We have to get our acts together and be able to offer comparable packages at the same cost to be able to survive."

Dan Schatt, Senior Analyst with Celent LLC, thinks payment providers need to move beyond the tactical work of serving as a gateway or processor.

"As merchants search for any edge that can increase loyalty and lower shopping cart abandonment, they will enlist a new breed of provider that can do more to increase their profitability than what has been offered in the past," he said.

"The most effective payments capabilities will be hard to discern from a merchant's merchandising program and will blend into the look and feel of the merchant site."

Schatt thinks today's alternative payment options will not only address many industry fraud issues head-on, but they will also couple authentication and payment options with strategic marketing capabilities to become an extension of a merchant's marketing program.

"The most innovative products will allow merchants to promote unique offerings, spurring loyalty and retention benefits that ultimately make a merchant more profitable," he said.

So, here's the secret to snaring online merchants' business: Serve their needs and boost their profitability in ways so creative that you leave the PayPals and Googles of the world stuck in the Web, ready to fold.

Article published in issue number 060801

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