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Street SmartsSM:
What is registration anyway? - Part II

By Michael Nardy

The first article in this three-part series provided an overview of the card Associations and what registering and gaining recognition for a business name can entail. This installment delves more deeply into the types of organizations that go through registration and how the process works.

The registered ISO/MSP

When you register, your contract will dictate the nature of your responsibilities and rights. For example, you can register and have no additional duties or responsibilities above soliciting merchants for a bank's merchant program. Or you can register with an investment of millions of dollars and build the infrastructure of a brand new ISO.

Deciding what kind of organization you aim to be is the first step of the registration process.

The sales and marketing ISO

This type of organization does a lot of deals, has an active telesales group and a robust external staff of merchant level salespeople (MLSs), be they employees or independent contractors.

The sales and marketing ISO emphasizes application volume and subcontracts most of the "heavy lifting" work, such as customer service and technical support, so it can concentrate on supporting sales agents and work on new accounts all the time.

This is a valid business model shared by organizations in many fields. Focusing on sales and marketing does not mean that an enterprise doesn't support its clients or perform tech support and customer service. Many do.

The full-service ISO

This model contrasts with the sales and marketing organization in that much of the heavy lifting is done in-house. This includes terminal file builds, risk management, underwriting, customer service and more.

Taking a look at a company's approach to the industry and the responsibilities it fulfills in-house can help you identify what kind of organization you're dealing with.

Many sales and marketing ISOs grow into full-service ISOs after a few years in the business. The sheer capital outlay, in many instances, makes the cost of starting out as a full-service ISO prohibitive.

What model is right for you?

If your ISO subcontracts out terminal builds, underwriting, risk management (or, perhaps, if they do not have risk), it is probably a sales and marketing firm. Full-service ISOs perform all of these operations and more in-house, keeping every part of the process under one roof.

One type is not better than the other. Your choice depends on your goals, your expertise and how you think your business could benefit most by the talent assembled by your management team.

Underwriting and approval

A sales and marketing organization does minimal underwriting in the form of pre-underwriting "scrubbing" (making sure an application is okay and contains all the information necessary). Then it forwards the application for final approval to its full-service ISO or bank sponsor.

When an agent for a sales and marketing company submits a deal, it may be pre-approved in-house and then forwarded to the company's sponsor processor for final approval. The sponsor processor (Chase Paymentech Solutions, Global Payments Inc. or First Data Corp., for example) spends time underwriting the application, while the sales and marketing concern generates more applications and supports its sales team.

The full-service ISO performs its own underwriting and approvals in-house. When you send in an application, it approves or declines the deal and boards it into the network's internal systems. Chase Paymentech, Global Payments and First Data exemplify this model.

Although the bank may have final say about whether an application gets approved, full-service ISOs have usually made the decision (or are required) to hold liability for the accounts they approve.

To register or not to register ...

Registering is really just gaining the ability to market under your own name. It will not secure your portfolio any more than an MLS contract will. It will not make you more money. If anything, it will cost you more. It doesn't mean you will perform risk management; this is reserved for those ISOs with liability. It also doesn't mean that you'll build your own files (or that you would want to).

For every registered organization, there are probably 10 MLSs that make more money just hitting the streets and boarding new merchants. I know of several MLSs that make more in residuals than some registered organizations.

Furthermore, many registered outfits are three-man shops with no liability, no customer service duties, no underwriting duties and no tech support/deployment responsibilities ... making more than $50,000 in residuals.

The model of registering with full liability is not necessarily a path to easy money.

What does registering look like?

This question depends on your sponsor organization's package. National Processing Co. (NPC), which is associated with Bank of America, has a pricing and feature package that can start you with a scaled entry into business as a registered ISO. If you talk with Chase Paymentech, it might give you a different package altogether. Why? These groups bundle a network and a bank together.

The network is the tool that you use every day when you process credit card sales. This is how you get from the terminal to the issuing bank for authorization and back to the terminal.

If you were to register with Global Payments, you most likely would have access to the Global East and Central networks. NPC would give you access to its Tandem network, among others. So when you select a package, a network is usually bundled into it.

What about your bank?

This is another crucial ingredient. The way to a business relationship with Visa U.S.A. and MasterCard International is through a sponsor bank. In the case of Global Payments, for example, HSBC is the sponsor bank.

The reason many packages bundle a bank and network is because getting your own bank relationship takes a good mixture of luck, industry experience, financial reserves and a solid business model. Still, all these things and more won't necessarily get you a direct bank relationship.

This process might also be called getting a BIN, or bank identification number. By giving you a BIN, the bank gives you access to the financial stability of its organization. You can either add rivets, steel and concrete to make the bank stronger, or you can use the wrong building materials to weaken the structure.

Adding solid business to the bank-assigned BIN will make it strong. Placing a lot of high-risk business into the BIN will cause it to weaken and can expose the bank (and you) to tremendous liabilities.

Banks maintain stability and shield themselves from liability by using a buffer: an ISO goes through a larger ISO or network to get to the bank. If you are a small ISO, this gives you access, it shields the bank from a direct relationship with you, and it enables the larger ISO to grow while performing the myriad daily tasks you require.

Are you responsible?

When establishing a relationship with an organization like Global Payments or Chase Paymentech, you might hear, "We'll give you this access, but you need to give us something too." Such ISOs may want you to put up a monetary reserve because they are giving you access.

If you want to perform your own underwriting, and approve a deal, board it to the network and activate a merchant ID, you might need to prove that you can handle the responsibility.

Can you sustain a loss of $50,000 and stay in business? Would you have to sell some residuals to cover the loss? What kind of experience do you have? Who is on your board of directors, and what qualifications do they have? How many deals will you bring to the network and bank? These are all questions to consider; larger ISO/network organizations will certainly ask them all before agreeing to work with you.

Part III of this series will further define the minutia of a registered ISO's journey through the registration process.

Michael Nardy is Chief Executive Officer of Electronic Payments Inc. (EPI), a founding sponsor of the National Association of Payment Professionals and one of The Green Sheet magazine's Industry Leaders. EPI is one of the nation's fastest growing privately held payment processing companies offering ISO and MLS profitable partnership programs and cutting-edge tools to help their portfolios grow. To learn more about EPI, visit epiprogram.com or e-mail Nardy at mike@elecpayments.com .

Article published in issue number 060501

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