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Article published in Issue Number: 070201

Street SmartsSM:
Potential pitfalls of high acquiring costs

By Michael Nardy, Electronic Payments Inc. (EPI)

In the past months, I have written articles about the contract pitfalls facing ISOs and merchant level salespeople (MLSs) in the industry today. But several interesting topics have recently come up on the GS Online MLS Forum that I felt were worth addressing.

Recent posts on the MLS Forum have contained criticism about ISOs offering below-cost fee programs, free equipment, huge bonuses and other perks for signing new accounts.

There are many great companies to choose from when submitting bankcard business. And now, there are even more ways to hedge some of the initial investment and lack of cash flow experienced by ISOs and MLSs entering the business.

I'm going to go over some pricing strategies and answer a few questions that came up on the MLS Forum regarding these new, much larger payouts. This article is not about which program is better. That is not something this column has ever taken a position on during my tenure.

Any advertised ISO program is worth as much as the value of the company behind the program.

The only way to make an educated decision about which ISO program is superior is to run the numbers and take advantage of the program you feel is best for you.

Pricing strategies: Where the money is and isn't

One of the first questions that arose on the MLS Forum was, Where does all the money come from? This certainly deserves a little bit of an explanation.

Let's examine where the true costs of this business are and what is being shared with ISOs and MLSs. There are dozens of posts and ads on the MLS Forum; and in print advertising, there are expressions like "true splits" and "direct from interchange."

But all of the splits advertised, no matter the company, have a pricing structure. This is called a Schedule A. The common thread of late has been, One man's split at 70% is like the other guy's at 50%. Why is that, and whose is better?

First, not all ISOs have the same cost basis. Indeed, they might advertise a $0.10 transaction fee, but one might be paying $0.08, while the other is paying $0.12.

Does that make either program worse than the other? Certainly not. It just makes the ISO paying only $0.08 a total of $0.04 ahead of the game. While one ISO is pocketing some pennies before splitting out net revenue with its ISO/MLS partners, the other is losing a few pennies instead.

Elementary economic principles are involved in these revenue share programs, and I think ISOs and MLSs too often are befuddled by them.

When you have 100% of anything (and I'm not talking about the profit above interchange), you can massage the numbers any which way to split out a revenue share to the ISO or MLS partner.

Without firsthand knowledge of how front- and back-end agreements are negotiated, it is sometimes hard to imagine a situation in which an MLS's transaction fee is actually lower than the transaction fee of the ISO offering it.

In any network agreement there are usually hefty minimums (guaranteeing revenue to the authorization network); a myriad of fees and costs that bundle and break out authorization and capture; and minimum terminal fees and other fees.

Amortizing an unmet monthly transaction minimum, for example, can often place an ISO's transaction fees double what it offered on the MLS's Schedule A.

To understand some of the economics, let's look at the following example:

Revenue of $250 is generated on a merchant account with 100 transactions and $10,000 in processing volume.

Per the Schedule A, the MLS's cost per transaction is $0.07 on a 50/50 split. And the ISO's cost per transaction is $0.10. There are also a $5 statement fee and a $185 interchange expense.

  • $250.00 - Total revenue
  • -7.00 - Transactions cost
  • -5.00 - Statement fee
  • -185.00 - Interchange
  • $53.00 - Revenue for the ISO and MLS to split

Splitting the $53 in half, the MLS's net profit is $26.50.

Now, it appears the ISO is also left with $26.50. However, since the ISO's fee per transaction is $0.10, the ISO's transactions cost is $10 ($3 more than the MLS's), leaving the ISO with $23.50 after the split.

So, in this example, the MLS's revenue share was 50/50. However, the actual split with the ISO turned out in the MLS's favor - at least from the ISO's point of view.

A common occurrence

Acquirers are continually devising new strategies to attract more business. These are not designed to trick MLS and ISO partners, but instead to make things easier for MLSs to compute their earnings, as well as differentiate themselves from the competition.

If we are all competing against each other, then certainly the "next best thing" that comes around would, perhaps, attract your attention and drive you to call in and request an ISO packet or more information.

For some, the argument used by the free-terminal proponents is a winning strategy. (If free terminals help you sign 20% more business than you did before, isn't the expense worth the long-term residual growth?)

If, in other words, you were able to sign 20% more ISOs by lowering your transaction fees, statement fees, BIN fees and annual fees; increasing bonuses and incentives; and offering more free services or perks to your ISOs; is the extra expense worth it?

To some, yes, but to others, no. On the MLS Forum, one super ISO recently described a small part of its business model by explaining that if $50 million were invested in a certain business model and that was designed to bring in 4,000 merchants monthly over several years, does this seem like a bad strategy?

Again, to some, yes, and to others, no. And this leads me to the all-important question: What is a leveraged ISO?

A leveraged ISO

Many ISOs have sold portions of their portfolios to fuel growth. Others have sought portfolio loans and bank financing.

Still others have received the guidance and management experience of venture capital firms that provide sums of money in exchange for a piece of the pie, e.g., the ISO.

Money can come from many external sources, but the cheapest source of funds can often be internal means and portfolio acquisitions.

For example, if your business model fuels your ISO's growth through occasional portfolio buyouts, you generally see the ISOs that sold their portfolios continue to use the money they earned through the sale to fuel their growth.

This, in turn, further builds your business, while you have the residual base of the portfolio you purchased to use in building your organization.

For the right ISO, it's a win-win, especially when the sellers of the portfolios continue to work with the ISO and service the merchants involved locally.

Notwithstanding the need for money, no single method is better than another. You, as an ISO or MLS, shouldn't be extremely concerned about an ISO taking on more and more debt to grow its programs.

That being said, I do fear the lengths to which some ISOs are going in order to bring on the business.

It isn't a mistake to pay for an account, do free equipment or offer low transaction fees. However, from the comments posted recently on the MLS Forum, it appears to be quite an endeavor to "keep up with the Joneses" and continue to offer more than the other guy.

Acquiring costs

When EPI entered this market, our costs to acquire new merchants were relatively low, something around $25 to $50 per account. But now, we are seeing those numbers rise by over $300, $400 or even $500, depending on the situation.

I feel those costs are manageable, but the goal of any ISO is to acquire business at as low a cost as possible. Of course, if we want to acquire business in today's market, bonuses and free equipment are what ISOs and MLSs are demanding.

No matter which program has piqued your interest or which ISO you currently work with, you should always feel that you are doing what is right for your business and the growth of your company.

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 ISOs and MLSs profitable partnership programs and cutting-edge tools to help their portfolios grow. To learn more about partnering with EPI, visit or e-mail Michael at

Article published in issue number 070201

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