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Street SmartsSM:
Free Lunch?

By Ed Freedman

Free Lunch?

I've been inundated with phone calls and e-mails from merchant level salespeople (MLSs) all over the country inquiring about recent ads they saw in The Green Sheet that offer "free" terminals.

They're asking, "What's going on out there? Are these offers real? Is giving away terminals really necessary?"

For more than 20 years, MLSs have made an excellent living selling and leasing terminals. Does this mean all these people are out of jobs?

To further this discussion, I posted the following on GS Online's MLS Forum on www.greensheet.com:

"My next 'Street Smarts' column will focus on the 'free' terminal craze. Do you think this is a good or bad thing for our industry? Is it good or bad for you, the MLS? What about your ISO/MSP partner? Or merchants? What are 'catches' that you can live with, and what terms and conditions of these 'free' offers turn you off?" The response was immediate and very interesting. Here are some excerpts from one of the most discussed topics ever to hit the MLS Forum:

"I can see the want ads now: 'Can you give away a free machine? No experience necessary.' Even MLSs who are currently making most of their income from terminal leases will be forced to move toward a residual-based compensation. I think in the long run, this will be good for them. I think it will eventually lead to a better quality MLS and block of business, but only because it will weed out equipment-based compensation salespeople (I'm talking whammer-bammers here).

"Initially, merchants of all sizes can relate to a free offer, but as the statements roll in, it becomes apparent what pays for the machine. Larger merchants could leave the ISO, leaving a dwindling average volume client base. If this is what the ISO wants to accomplish, it might be a great thing." - Desdinova

"Free terminals are here to stay. This will lock in the merchant under a long-term contract and keep him there. The good part is it will get rid of the scum who are ripping people off by leasing a Tranz 330 and printer 250 for $69 per month for 48 months. The bad part is merchants will not want to pay the fee associated with the 'free terminal.'

"There is always a catch to any offer. It will drive the small-minded out of this business and might push some acquirers to offer this to the agents and ISOs. This is good and bad for MLSs. The good: It might help some people sell. The bad and the good: It will make it tougher for new people to come into the industry.

"ISOs might have to step up to the plate, but I don't see this happening and being wide-spread. The monthly fees are going to be great to sell against, with a reasonably priced terminal and smaller monthly fee (i.e. no signature capture fee, etc.). If a lot of the big ISOs start giving away free terminals, it could put the MLS out of business. Merchants are a funny group; they don't all buy on price or have the attitude, 'If it's free, it's for me.' Some people will take it, and some will look at the monthly fees, etc. and pass." - ccguy

"I don't see what all the fuss is about. If the ISO, in this case, UBC, wants to give me a free terminal and $100 to sell the merchant, then I am all for it. If not, then I won't. I get the best of all worlds. There is no gun to my head to use it or not use it.

"This is much to do about nothing. Years ago the banks loaned the terminals at no charge and got 4% - 6% discount fees. The way Visa/MasterCard is going, we are heading for 4% - 6% again so we will have to give the terminal away for free.

"There was an ISO not too long ago sending out post cards promoting free equipment. When I called, it was only a T330 and P-250. He made no ripples in the market. So it is like I started out saying: I don't know what all the fuss is about." - JFK

"The free program is good and bad for everyone as follows: This is an excellent program for all those that embrace it and start selling it to their advantage. It will definitely build your residual portfolio. The key to this program is the residual portfolio. This is a residual portfolio building program! This will only be a bad program for those who do not embrace it.

"This is the new competition for those that sell and lease equipment. You will never be able to overcome objections or close the deal when your customer has been offered free equipment by your competitor. The only way you can win a customer is if the free equipment comes with bad customer service and technical support.

On another note, this is a big country. There are thousands and thousands of new merchants every month, as well as millions of existing businesses. So the opportunity to lease and sell equipment for whatever price you offer will always be around. Until the day you meet your competition and they offer the free equipment. Good luck." - rhendrix76

"Actually it is not free. It is a 'free placement.' A free terminal means they can keep the terminal if they go out of business. Once these merchants change processors, there goes the terminal. Now that is not free. All this is is a program where we are going to charge you $10 per month (batch fees) and $79 in 60 days (annual fee billed in month two) for a rental. There is nothing free about this program." - NCBlue

"Had a competitor do a mailing to all chamber members offering the 'free' terminal. I got calls from 10+ clients who got the letter and asked about it. I explained nothing is free, but that I would take over their lease payment making their terminal 'free' and match the other guys' rates and service if they liked. So far, no takers.

"I think the free terminal will help make a weak salesperson weaker, but I don't see any real impact on the industry. Except that those who are just starting out can't pay the rent until residuals build up. That's a plus for those in the business, but a minus for those starting out. I couldn't afford to get in this business at this time. Could most of you? Think about it. How many of us needed equipment money to live on?" - Starsales

"I think as long as the sales representation discloses all the 'catches' that it can be a good deal. I worry that if the catches such as: 1) The terminals are proprietary; 2) there are annual/other fees charged and 3) mid/non mark-ups are not disclosed, then 'free' terminal programs will blow up.

"If the merchant truly understands the program and how the terminal will eventually be paid for, it is a good fit for smaller merchants and a good tool for an honest MLS. Maybe it's me or the market that I am in, but I almost never see annual fees charged to the merchants that I solicit, and my ISO partners never force me to charge one." - Nature

"Why do you have to give a small-volume merchant a new terminal? Wouldn't you achieve the same objective with a refurbished terminal? Are small-volume merchants going to compare and contrast terminals? When have they seriously done that? I bet you that nine out of 10 of them don't seriously look at the capabilities of the terminal manufacturers' product, which is also available on the Web, white papers, etc.

"Few merchants will get past the word 'free.' They'll pause at set up, run through minimum processing and be more than happy to listen to a pitch about a yearly fee a year from now. I can't believe that this model, free terminals, would even seriously consider giving small-volume merchants a new cutting edge terminal for free. For what?

"Lastly, I don't believe that they were the ones on the top of the list to receive such a deal. The only thing that I can surmise is that those who don't want these folks to be successful in this endeavor are fishing or wishful daydreaming of these companies demise." - Utrue

Great debate! As you can see, everyone feels a little differently about this craze. So, will it take over the industry, or is it just another bankcard fad? And what exactly are these ISOs offering for free?

I don't think I could say it better than "NCBlue" did. The concept should be known as a "free placement" as opposed to a "free terminal." I agree that extra charges such as an annual fee basically turn this into an equipment rental program. Any terminal that comes with a chip that makes it useless to use with any other processor is a placement or rental; it is not a free terminal.

With regard to the discussion on "rentals," instead of billing merchants $7 - $12/month, they are getting a $79 - $99 annual fee ($6.58 - $8.25 per month rental), plus any other additional processing fees.

Even if there are no additional processing fees, then the sales agent pays for the rest of the rental costs with less residual income. I know some programs say you sacrifice nothing, and that may be the case if you only analyze the offering from that company.

I also agree with "Nature." Annual fees are not an industry norm. Total Merchant Services does not charge them (99% of the time), and with the credit card processing statements we review, we see less and less of this.

In addition, 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 (or 100% of the monthly minimum on the first $15) and 100% of the batch deposit fee of $0.35.

So what's 50/50 about? Who pays for this terminal placement program? To me, it looks like the MLS and merchant pay for the "free placement" of the terminal.

I have a suggestion for people who want to offer something such as free terminals to merchants: Do it on your own. Get your ISO/MSP partner to help you offset the cost with production or conversion bonus payments.

And, if you don't want to do it for free, then make merchants comfortable and give them a rental fee for the terminal. That's really what you're offering. Be straightforward, and you'll get more merchants to respond.

If you really want something of value that is truly free in our great industry, check out the "free" information on GS Online (www.greensheet.com). There you can read issues of The Green Sheet and GSQ back to 1995.

Look for my next post on the MLS Forum and continue sending me your feedback. I can't stress enough how vital it is to our industry that everyone's voice be heard.

"There ain't no such thing as a free lunch" or "TANSTAAFL."
- Robert A. Heinlein used the phrase and acronym in his 1966 sci-fi novel, "The Moon Is a Harsh Mistress."

The phrase "free lunch" comes from the practice of some saloons in the 1800's offering free lunches to those who purchased drinks.

See you next time where the rubber meets the road.

Ed Freedman is founder, President and Chief Executive Officer 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 www.totalmerchantservices.com . To learn more about partnering with Total Merchant Services, visit www.upfrontandresiduals.com, or e-mail Freedman at ed@totalmerchantservices.com.

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