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Street SmartsSM:
Uncovering the Truth Behind Revenue Sharing

By Ed Freedman

I receive telephone calls every week from MLSs across the country. Inevitably in these conversations, one issue in particular always seems to come up-the concept of revenue sharing.

I constantly hear, "Ed, why won't you pay me more than 50%? Some guy just offered me 60 or 65%, even 70%." Inevitably, I end up spending more than an hour explaining the difference between our definition of a revenue-sharing program and everyone else's.

In order to save myself a lot of time in the future, answering this question over and over, I'm writing this article so that I can have this conversation just one last time, with all MLSs at the same time. In the process, I'll expose many of the catches the offers that appear too good to be true (they usually are) probably hold.

One of my goals in writing this column is to help arm every MLS with the tools necessary to evaluate revenue sharing programs effectively. I want you to be able to uncover the hidden problems in these offers before you send a lot of business somewhere with false hopes.

Unfortunately, there are a lot of deceptive practices being used out there. You need to get down and dirty to understand exactly what type of revenue sharing program you've agreed to.

Consider a scenario where an MLS gets in front of a merchant who explains he was just offered a flat rate of 1.25% for all of his transactions (no downgrades), a $0.10 transaction fee and a $5 monthly service fee. You know it's not an honest offering; you just wish that merchant would take the time to dig a little deeper to uncover fees or other problems hidden in the deal.

It's the same sort of thing when you're talking to any ISO/MSP, and they're explaining their revenue sharing program. You need to have effective tools to dig up those hidden fees and issues. That's what I'm going to give you.

To confirm what I believe MLSs are up against, I posted the following query on the GS Online's MLS Forum:

"How are you making a decision when it comes to compensation plans? How do you evaluate them? Is it based on percentages or do you dig deeper? What are you looking for and how can you be sure you're getting it?"

The responses were immediate, decisive and detailed. Here's just a sampling:

"The ultimate fair contract: XX% split over true profit. All costs laid out in Schedule A. All costs applied to income generated and anything over true costs is shared in split.

"This would include the following:

  • Annual fee cost: 0
  • Batch fee cost: Less than 1.5 cents
  • Interchange costs: True interchange with no markup prior to split
  • Dues and assessments cost: Same as above
  • Monthly statement fee cost: Less than $6.50 (There is some leeway here. Good customer service has to be paid for somehow!)
  • Transaction fee cost: The lower the better

"Forty to 50% of the above could very well be a lot better than 70% - 80% of a marked-up contract! Basically, a contract where ALL income is shared with the agent. This also helps the ISO, as the agent can compete with any and all banks and ISOs out there-they would all have the same costs.

"With negotiation, some costs may go up and some may come down. The idea is to get the best you can get while making sure you both make money. If the ISO doesn't make money, they will not be servicing your merchants very well, and you will lose them pretty quickly to a competitor. And if the agent doesn't get a fair share, he will end up going to an ISO that cares enough to offer that fair share." -gmartin

"I get upset when I find out that companies advertise that they offer a 50/50 revenue split program, but they offer buy rates of 1.67% for Visa/MasterCard, then 50% above that.

"They actually raise the costs by 20 - 30% and then say they are offering a true 50/50 buy rate program. Some companies have 15-page price guides and have actually raised all the buy rates numerous times PER MONTH on the sales agents over the course of 10 - 12 months.

"If I were one of those agents, I would give them three chances. After they raised buy rates on me enough times, I would simply go elsewhere. There are too many ISOs out there to do business with; you don't have to go through this.

"Some of these ISOs force sales agents to pay fees of $500 or $1000 to register as an ISO/MLS or they won't pay their residuals anymore."

"The definition of 'revenue sharing' is different with each processor, as is the definition of what is a 'cost' with each processor. To label a program as a true 'revenue share program' is misleading, as all processors have defined their costs differently.

"We have reviewed many of the most popular and advertised 'true revenue share' programs, and all have been marked up from true costs.

"We understand that this is necessary from a processor's perspective, because otherwise, sales reps would give away processing at cost just to get an equipment sale. The 'revenue share' title means very little, and is somewhat misleading to the uninformed sales representative."

"I think people are too focused on the basic interchange rate. You have to look at the package as a whole. One company might have a higher rate by a few basis points, but then offer a lower cost-per-transaction or good revenue sharing on mid- and non-qualified.

"If I were an ISO, I don't think it would make sense to split everything exactly 50/50 because a well-run ISO has overhead including training, marketing, customer support, liability and network fees. If an ISO is working out of their house, that's one thing...but you get what you pay for."

"To me the most important factor is the contract negotiation making sure the interchange split is not one that's grossly marked up. We just had an experience with a 'high risk' processor that claimed a true interchange split; however, we quickly realized the true interchange split included a ton of padding for profit. I think if it's an interchange split then it should be based on interchange and actual cost and then split.

"The trick is having a realistic understanding of both interchange and average cost. Obviously, interchange does not change based on the processor in question, but costs may vary.

"In summary, knowledge, a good partner, fair split with a great contract equals my definition of a good interchange program."

"All of the above responses are respectively correct. First, it is most important to know where the majority of your business is coming from (mom-and-pops, restaurants, MO/TO, etc.). Then get yourself in line with members here that are doing the same [type of business].

"Next, understand that anyone can generate a spreadsheet easily-it's what they fill it in with that counts. There are those that give you true functional numbers that work, and then there are those that let you see what they want you to see, and that's it.

"It doesn't matter who they are. Some will quote you a nine-cent transaction cost, others maybe seven or 10 cents. But this doesn't mean that that is their actual cost. Rather, it's the cost of providing you, the rep, with support for you and your merchants.

"Ownership, portability, and buyout should also be considered. The real key is to know what you want, including the merchant base and your expected profitability. You should also know what your merchant base expects from you, not just what the bankcard-end wants.

"I have found that over the term several real ISOs can handle your needs. If you're serious, follow all the guidelines given throughout this thread and you should be able to make a right decision."
-Q What's the truth behind revenue splits? To begin with, after you hear the revenue-sharing program percentage, whether it's 50%, 65% or 100%, your first question should be, "Upon what cost structure is the split based?"

You must get detailed pricing that includes every line item including interchange, assessments, any basis points above, monthly minimums, fees for monthly service, per item charges (Visa/MasterCard and non-bankcard), chargebacks, retrievals and annual dues.

After you get the detailed list of the cost structure, you need to drill down the splits of these items. I've seen deals where agents get 50% above everything, but the first $12.50 of the $25 monthly minimum goes to the ISO partner. That's a good example of something that's not a true 50/50 program-all it's really doing is manipulating the percentages.

You don't end up with 50% on this program; in fact, you'd likely need to start with 70 or 80% to end up with your 50%. What about when a provider charges an annual fee? You don't earn any money on these fees, much less your 50%. How about termination fees? ACH reject fees? Are you starting to get the gist of this?

Why do ISOs conduct business this way? I think it's because they believe MLSs are either too lazy or not smart enough to figure it out. They probably get only a few people who question these items and just deal with them individually.

After you're done digging into the cost structure, there are several other issues that you should bring up and then run through your calculator.

These include:

  1. Who pays for your Web site; marketing materials; business cards; download programs; PIN pad encryption and swap outs; merchant training and reprogramming; welcome kits; wireless activation fees and Internet gateway license fees?
  2. What is your ISO partner's commitment to helping you offset the costs involved with acquiring accounts? Is it a short-term incentive or a long-term plan to assist you? The answers to these questions should help you evaluate the ISO's intentions.
  3. Does your ISO partner offer a production bonus and/or conversion bonus program? If they don't know what you mean, explain that you're looking for some assistance in offsetting the cost of acquiring accounts; specifically, explain that you're looking for upfront bonuses in the range of $100 - $250 per deal, without sacrificing any residual income.

Once you pose these questions and receive satisfactory answers, your next step is to ask about your agreement with regard to liability for merchant credit losses.

This is an important area and you need to be able to evaluate the cost of accepting liability. Someone's 80% split program with liability can work out to be a lot less than 50% without liability.

Even if you're willing to spend the money to staff an experienced risk management group and you're doing the number of deals necessary to support this expense, you can still lose hundreds of thousands of dollars on one deal. You need to evaluate whether you want a sure thing-or this big responsibility.

Most companies that accept liability don't know what they're getting themselves into. It can kill both your residual income and your business. It's like building your portfolio on a deck of cards rather than a solid foundation.

Equally important is ensuring the agreement protects your residual commission if you decide to stop doing business with this processor. Make sure there are no exclusivity clauses, no pre-set forced buy-outs and no easy way out of stopping residual income payments.

In this case, your own investigation is not good enough: Seek advice from a qualified attorney to answer all your concerns.

Finally, know with whom you're doing business. Wouldn't you prefer to do business with a company that has enjoyed a great reputation for many years to doing business with a start-up company?

Remember, when you're analyzing your revenue sharing program, a 50/50 program that provides multiple free services, upfront payments and no liability/responsibility for merchant losses can be worth a lot more than someone else's 60%, 70%, 80% or 100% program.

Now that the truth behind revenue sharing programs has been exposed, you have the tools to start doing some good investigation. Get to work!

On a separate note, I'd like to remind all of you hardworking MLSs that Paul Green and The Green Sheet have agreed to buy the first year's membership to the National Association of Payment Professionals (NAOPP) for every reader who sends in a success story to me at

Tell me and other MLSs how something you gleaned from a "Street Smarts" article led you to a success, and just by sending in the story, you get a free one-year paid membership to NAOPP!

Paul also offered a one-time paid conference fee to the regional conference of choice to the MLS who is selected each month as having the best success story.

And what would a contest be without a grand prize? For the best story received in 2004, the winner will be awarded a fully paid trip to the 2005 ETA Annual Meeting and Expo, including hotel, airfare and registration fees. This is your opportunity to give something back. I look forward to reading your success stories.

My next column will focus on another hot topic. Look for my post on the MLS Forum and be sure to include your name and affiliation for recognition. Feel free to send your comments on this column and any other topics to .

As always, thank you for your continued support.

All truths are easy to understand once they are discovered; the point is to discover them."
-Galileo See you next time where the rubber meets the road.

Ed Freedman is founder and President/CEO of Total Merchant Services, one of the fastest-growing credit card merchant account acquirers in the nation. Freedman is the driving force behind all business development activity as well as the execution of Total Merchant Services' marketing plan, including recruiting and training independent sales offices and establishing strategic alliance partnerships with leading vendors, so that Total Merchant Services can provide its customers with the highest quality and most reliable services available.

To learn more about Total Merchant Services, visit the Web site at . To learn more about partnering with Total Merchant Services, visit or contact Freedman directly at

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