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Article published in Issue Number: 070202

Street SmartsSM:
Direct sales: The pros and cons

By Michael Nardy, Electronic Payments Inc. (EPI)

Deciding which ISO or processor to partner with is something that many of you as ISOs and merchant level salespeople (MLSs) struggle with constantly. The Green Sheet magazine is filled with ads offering great transaction fees, free terminals, excellent pricing and innumerable other benefits to help grow your (and our) portfolios.

The benefits to ISOs and MLSs right now are myriad. And more than one ISO owner has said on more than one occasion, "It's a great time for the MLS."

But what if all these benefits weren't necessary?

What if the super ISOs and processors no longer were looking for ISOs and MLSs, like you, to partner with?

What if all the mainstream ISO programs were gone?

It could happen; it's already taking place.

The recent rumble over direct sales

Increasingly, the GS Online MLS Forum has been the battleground of an ongoing disagreement over the best approach to growing a large ISO: sales agents, direct sales or both?

Which master should you serve: your telemarketing room and direct salespeople or the feet-on-the-street ISOs and MLSs who have worked faithfully to grow your organization into a large entity?

It seems (and the responses to a recent MLS Forum post I made indicate such) that the ISO/MLS community strenuously objects to working with companies that have an inside sales force instead of those that are 100% ISO-driven.

When ISO and MLS payments were limited to lease commissions or minimal residuals, the margins in the acquiring business were healthy, and the commission structure of many large ISOs supported the ISO-only model for bringing in new bankcard business.

Now, the environment is changing. Margins are decreasing not only due to competition, but also due to the large sums of money expended on free terminals and upfront bonuses.

For many ISOs, the bleeding these offerings cause either has to stop, or a new approach to the business must be enacted. The favored new approach (which is actually old) is direct sales.

An argument for direct sales

In this column I don't focus on how other companies do business. But in this case, I will have to extrapolate and use my best judgment in determining the benefits for those selling direct, because EPI does not use a direct marketing/direct sales approach.

The ISO/MLS community is a richly populated group. There are thousands of independent salespeople working in the merchant services industry. Keeping the loyalty of these ISO and MLS partners can be daunting, not to mention expensive.

In a world of nonexclusive agreements, ISOs and MLSs can jump from one company to another or even keep their options wide open by utilizing several processors, depending on the situation.

I spoke to one MLS who was deploying a free Nurit 8000 wireless terminal. I asked, "What about the processor? Do you care about the processor affording it?" His reply was a bit shocking, yet in a way, ordinary: "Not my problem. If they offer it, I'm taking advantage of it."

If this attitude in the MLS community is shared by not just one or two, but many, direct sales is a natural way for ISOs and processors to augment the business they aren't getting from their MLSs.

Setting up call centers or doing direct mail campaigns is a simple way to tap into several arenas, including geographic regions where an ISO has little or no MLS representation and business that isn't coming to an ISO from its own MLS channel.

Through direct sales, ISOs can also enjoy increased profits from accounts that require no residual or bonus payouts.

If the costs to acquire a new merchant can range up to $800 (as recently quoted in the MLS Forum), why wouldn't it be acceptable for processors to employ a model that not only recruited ISO and MLS partners, but also eliminated the huge amount of overhead the MLS acquiring model generates?

Why not profit on deals coming in as direct business? Wouldn't the extra money generated be put back into the business to continue fueling the MLS channels?

The argument for this type of acquiring model is often rebutted by vocal MLSs who don't agree the extra dollars saved by employing a direct sales model come back to them in the form of bonuses, better technologies and higher payouts.

A time will come when the ISO and MLS communities become so demanding that the lucrative deals being offered will simply dry up. Eliminating the huge expense of this sales channel by telling agents to instead work directly with a network or bank will be too appealing to acquiring ISOs. Unfortunately, the services lost in the process will dwarf any increase in residual income or revenue split.

There is a fine balance of what an ISO provides and what it takes in return. We are almost to that tipping point; some ISOs may have already crossed it.

The position of the ISO

ISOs don't just hold liability on a merchant portfolio or act as the buffer between MLSs and the acquiring bank. They are an essential part of the acquiring triumvirate of bank, network and ISO.

When I look at the industry and see larger and larger payouts for MLSs, I don't wish these to go away. But I also don't see too much in the way of acquiring ISOs making money.

A recent proposal that came across my desk was a classic situation experienced by many in my position: a new business that never sold merchant services before wanting the deal of a lifetime as it "ramps up" to 500 deals per month.

The individual who approached me has little knowledge of how the industry works. I don't disrespect this person, but I asked myself, "Does he know how hard 500 deals per month is to achieve?" Many in The Nilson Report's top 100 don't acquire 500 new merchants monthly. It's a daunting feat.

The ramp-up MLSs (as I call them) who e-mail me proposals are not any less valuable than those who have been in the industry for years. But their approach is indicative of the opinion I expressed earlier: It is a great time to be an MLS.

My company's position as an acquirer/ISO is not just, as I noted, to hold liability, but also to offer invaluable services such as training, file builds, deployment, conferences and new product testing - not to mention risk management, customer service and technical support.

If "going direct" were the answer to the MLS making more money, ISOs would quickly evaporate from the marketplace. It would be easy to just pay-per-click (i.e., pay for transactions) and still hold no liability or perform any functions of underwriting, customer service or tech support in-house.

In fact, when it comes to working with ISOs, an MLS's choices are so varied that whether an ISO markets direct to merchants is often not an issue of focus, but simply an afterthought.

The fact that MLSs can sign with 10 ISOs and decide where to submit their business is an argument both for and against a direct sales approach. ISOs that see value in MLSs and put aside their direct sales models will gain the trust and, ultimately, business of more ISO and MLS partners.

An argument against direct sales

To put it simply, the direct sales approach so many ISOs are taking does compete directly with the ISO and MLS partners they are trying to recruit. One recent conversation I had involved an agent who installed a new business phone line and immediately received several sales calls from the ISO the agent had just signed up to represent.

The most appropriate question for an MLS to ask a prospective ISO partner is, "Do you have any direct sales efforts in place?" The second question is, "Will these efforts impede my ability to sign merchants?"

When choosing an ISO to represent, look toward those that do not advertise or do direct marketing. The ISOs that post pricing on their Web sites and cold call from telemarketing rooms are doing a disservice to you and your profit margins.

Recently, an MLS Forum member posed the question: How does an ISO posting 1.59% plus $0.25 pricing on its Web site help the ISO/MLS? The thought was that when you just sign up a merchant at 1.80% and then the merchant views different pricing online, does this potentially hurt the deal, and ultimately, your profit margin, equipment sale, lease commission or signing bonus?

It does. An ISO's Web site should not contain pricing, contact forms or online applications. These are potentially injurious to an MLS's ability to make a living.

This should be one of the more important items on your mind when choosing an ISO/processor. Sometimes price and revenue split are not as important as whether you'll have to compete with your own ISO for market share.

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 070202

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