Check Service Rebates, How Much is Enough?
Check Service Rebates, How Much is Enough?
Undoubtedly if you have been an ISO for any period of time, you have become aware that there are a variety of ways in which an ISO can be compensated by a Check Approval company. This is of course true of Bankcard services and perhaps many other income opportunities of an ISO. However, this article will deal with Check Guarantee Rebates, acknowledging that many of the points herein made, have applicability elsewhere within the Payment Services Industry.
These payment methods range from what has been referred to as a life time residual, to a one time payment, and from ongoing payment percentages, which are as high as 15% of the Check company's gross revenue, to as little as a one-time payment of $21.00. (See Ultimate Check Guarantee story, The Green Sheet, 95:10:02, October 16, 1995.) http://www.greensheet.com
Common sense tells us that as Sales Professionals, we want to be paid the most that we can for our sales services, but should look beyond the absolute rebate amount, to such things as reliability of anticipated payments, and customer longevity. Perhaps we should also consider IF the promised payment amount can be justified on a long term basis, if it is a long term payment that we are seeking.
Life Time Residuals: We assume that the term means the life of the account, not the life of the Sales Representative, although this is not necessarily a given, and should be clear in the compensation agreement.
Additionally, ISOs should consider both the longevity of the Check Service provider, and the accounts. The failure rate in Check Guarantee companies has been quite significant historically. The Nilson Report of September 1984 reported the top 14 Check Guarantee companies. Of those reported 6, or (43%) no longer exist. Gone are, Accept-A-Check, Comp-U-Check, Check Reporting Service, Inc., National Check Record and Metro Check, the very first Check Guarantee company to employee ISOs.
In addition to the names above, many companies both came and departed the check arena during the last decade, and many of them utilized the services of ISOs. We would imagine that you can name a few in your market, that no longer exist, such as Check America, Supercheck, Inc. and Data Check Associated, Inc., but the point is that it is a difficult business in which to make money.
Considering account longevity is also an important factor in weighing potential Rebate income.
Unlike bankcard, not all Check Guarantee customers will make money for the service provider.
Needless to say, perhaps, the better the
discount rate ratio to
check losses, the better the longevity of the account. But, then how exactly does the ISO know this?
Some companies have approached the problem by simply charging a high rate, say 6% like the new Ultiate Check Guarantee program. Others have a fair price, and expect that a portion of the new base will be lost.
From an industry perspective, 33% of the new customer base will be canceled because they are unprofitable at the rates sold. While this number seems excessive, it represents less than 8% of the new sales volume, and tends to be smaller accounts or selective users of Check Guarantee services.
This of course leads to the final point about comensation and longevity. The ISO is in the best possible position to know the nature of the accounts that they are selling. Simply put, this means that the ISO, rather than the Check Guarantee provider, is in the position to determine if the current customer rates are being undercut too severely to be profitable lasting customers, and even to know that there is planned selective check use.
If you as an ISO consider these factors, perhaps based on the way your office sells, a one-time fee is a better payment mechanism for your sales approach. By example, a customer Guaranteeing $1,000 per month with a discount rate of 1.50% yields $15.00 of income to the Check Guarantee company, and $1.50 to the ISO at a 10% rebate.
A one-time payment of $25.00 would take nearly 17 months to be earned on a monthly residual basis, and would need to be weighed against all of the other longevity factors, when considered.
Payment Justification: It may be a worn out phrase, but the concept of a win-win situation may be one of the most important things to consider in long term residuals.
ISOs know that historically it has not been easy to get all Bankcard or Check Guarantee programs to actully meet their long term residual payment obligations. Payments often continue without any problems whatsoever, so long as the ISO continues to sell. Sometime later, however, someone in the program begins to ask: What are we getting for the money that we are paying?
Some programs have been sold, leaving the ISO to accept a one time payment of anywhere from 10 to 20 times their current monthly residual, and with no recourse.
We all know that it is just this thinking that has caused many arguments and some litigation over maintaining on-going residuals, since the on-going residual approach as a method of payment is by far the most costly of any approach.
This is also the reason on-going customer support has become an issue with many programs, so that the service provider feels that they are getting something for their money, down the road.
Residual based payments have no cost to the service provider, until something is sold, which makes this a relatively risk free approach. But, payment "forever" is very costly.
In the case of the Check Guarantee marketplace, residual based payments range from 4% to 15% of the service providers gross revenue. Flat rate discounts are ever becoming a thing of the past, and over the last five years, prices have become more and more unbundled. This means that an ISO must recognize that payment may or may not be based on ALL the revenue that a Check Guarantee provider receives.
Put yet another way, 10% of all revenue, including late fees, statement fees, transactions fees, etc., could well be more money than 15% of the Guarantee Revenue or Discount Rate.
Finally, an ISO needs to know that very often the rebate payment, can be more money than the Check Guarantee service provider earns on that book of business, and the service provider takes all the on-going risk.
By way of example, Comp-U-Check, Inc. (mentioned earlier), reported earning $16,976,971.00 in gross revenue from 1974 through, and including 1981 (8 years). The pre-tax profit for this 8 year period was reported as $857,496.00, or 5% of revenue.
Moving from one of the smaller players (Comp-U-Check was the fifth rank Check Guarantee player in 1984) to one of the biggest, perhaps, complete the picture:
Telecredit reported gross earnings of $124,285,000.00 from 1976 to 1980, with reported pre-tax profit of $8,891,000.00, or a 7.1% return. By 1981 Telecredit was diversifying into other business segments, and reported a gross profit of $158,540,000.00 from 1981 to 1983, with reported pre-tax earnings of $18,378,000.00, or a return of 11.5%.
Again, the point is that historically it has been difficult for Check Guarantee companies to earn more in their businesses, than ISOs were expecting to receive in on-going residual rebates.
This obviously makes this less than a win-win situation, and should be considered in the overall review of rebate payment options available.
It would appear that what ISOs should be looking for would be a program that permits them to make a choice as to the method of sales remuneration, and perhaps permits this choice on an account by account basis.
As an example, the CrossCheck, Inc. ISO rebate program permits, a one-time $25.00 payment, a 50% of first month, and 5% ongoing choice, and a 10% ongoing payment choice. The two residual-based choices are also capable of being increased by 5% (to 10 and 15% respectively) when a prescribed sales level is attained. These residual based payments are also based on ALL revenue.
Finally, when it comes to Check Guarantee, you should also consider talking to someone who hasn't sold for 8 or more years, and is still receiving Check Guarantee rebates. In this regard CrossCheck ISOs seem to be alone in the industry.
In the end an ISO should make informed choices about the payment options which are available within the industry. Look for those programs that have the flexibility to meet your sales needs.
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