Article
Maximizing self-service revenue with credit card processing
Commentary: The credit card-processing industry is far more complicated than it seems. To maximize self-service profitability, deployers must understand how processing works and use it to their advantage.
Though the use of credit cards may seem about as simple and ubiquitous as it gets, the credit card-processing industry is very complicated. To maximize the profitability of self-service deployments, it is first necessary to understand how the industry works and to then use that knowledge to your advantage.
How transaction processing works
Credit card processing involves two primary occurrences. The first is simple – a credit card and, as a result, available credit is issued to a consumer. The second occurrence, merchant acquisition, is not so simple.
Merchant acquisition involves solicitation on the part of independent sales organizations, or ISOs, to sign merchants up with a member bank, or one that is contracted to process payments for card associations, such as Visa and MasterCard. It's a complicated chain. In fact, the soliciting ISO may not even directly contract with the member ban. Often, it works for a larger ISO that works for the member bank. And larger ISOs often are sponsored by member banks to also become card association members.
Throughout the life of the resulting processing relationship, the contracting merchant is typically charged various one-time or recurring fees. Additionally, each time the merchant completes a credit card transaction, there is another fee. Finally, when a new merchant is enrolled, it may be sold or given a POS terminal and other equipment to enable processing.
All of these charges to the merchant constitute the revenue that is divided among the various players in the merchant-acquisition process previously described. The various fees can be divided various ways, all of which is determined by the contractual relationship between the parties.
For example: A merchant enrolled with a member bank by a second-tier ISO completes a credit card transaction. A portion of the resulting transaction fee is paid to the card association, and the remainder of the fee is retained by the member bank. The member bank retains it's portion of that amount and transfers the rest to the primary ISO on a monthly basis. The primary ISO retains its portion and transfers the rest to the second-tier ISO that enrolled the merchant, on a monthly basis.
Although each fee consists of only pennies, credit card transaction volumes can make the business very profitable.
Maximizing profitability
Albeit simplified, an understanding of the merchant-acquisition process suggests various methods through which self-service deployers can maximize profits from credit card transactions. Some available tactics:
1. Negotiate. Processing rates and fees vary substantially throughout the industry. Many different ISOs and agents are attempting to obtain your business. After all, signing up a merchant can generate a long-term profit stream requiring little additional work. Therefore, you should be aware of competitive rates in the industry and the types of fees being charged. Although every salesperson you meet may tell you his rates and fees are the best available, only one of them can be right.
For example, some programs charge set-up and annual fees, and some do not. It's important to obtain a full understanding of what you'll be expected to pay in writing. Alternate processors may not charge the same fees you're being pitched, and just because a salesperson contacts you directly doesn't mean he'll offer you the best terms.
Also, limit your contractual commitment to the location for which you are requesting processing services. But deployers must also understand they are entering into a contractual commitment for a fixed amount of time. If you breach your commitment and the processing volume is significant enough, the processor will likely file suit to enforce the agreement. Washor and Associates has handled such suits on behalf of various ISOs.
2. Understand. Often, provisions in the merchant agreement may have an unexpected adverse effect on your business. You must read and understand the merchant agreement before signing it. If you're not careful, you may get stuck in an unsatisfactory processing arrangement for a long time or have your ability to transact with credit cards restricted by unreasonable chargeback fees.
Washor and Associates recently had a small incubator client who had been quite successful with various platform-based businesses. The client opened a new business that was less successful and stopped soliciting new customers, continuing to service existing customers only. However, the percentage of chargebacks increased because no new clients were being signed up to offset the number of chargeback transactions. The merchant's ISO refused to process for his new business and ceased processing for his old businesses, despite their monthly revenue generation of close to $500,000, with minimal chargebacks.
Furthermore, the ISO put the merchant on an industry list of clients terminated by their processors, making it virtually impossible for him to obtain an American processing relationship for his businesses. To do so, Washor and Associates contacted the individual in charge of merchant acquisition for a large member bank, and the client obtained the processing relationship, but at increased rates. All of this could have been avoided if the client had understood the terms of his merchant agreement and spoken to the ISO before launching his new product.
Many ISOs also charge merchants for permission to monitor their own account activity. This should be discussed with the salesperson, and the liabilities and cost imposed from such activity should be fully understood.
Finally, almost every member bank and many large ISOs have their own merchant agreements. Each agreement is different, and although they appear to be boilerplates, they should be carefully reviewed before execution, and any problem provision should be discussed.
3. Join the Party. Assuming your processing volume is large enough, there is no reason you cannot become an ISO or an agent.
If you're an operator of sufficient self-service equipment, many ISOs would be willing to enroll you as a secondary ISO or an agent. If your volume is large enough, there are some member banks that would do so, as well. As an ISO or agent, you would be reimbursed the portion of your processing fees, which would go to the ISO or agent that enrolls you. Since it is generally the ISO or agent that sets the various fees charged to merchants, you should be able to avoid the bulk of these fees and obtain a lower processing rate by enrolling yourself. In this regard, you should be aware that there is no special knowledge, education, training or license required. Although if you desire to become an ISO, you will need to satisfy the card association requirements for doing so. Of course, the value of this tactic will depend upon your actual processing volume and the type of business in which you engage.
If you are a seller or a lessor of self-service equipment, it might prove profitable for you to become an ISO and contractually require the merchants purchasing or leasing your equipment to process credit card transactions through you. Of course, the profitability of this tactic would depend upon the number of units you sell or lease and the type of business for which the equipment is used. This strategy is more complicated than the others suggested and requires marketing skills in addition to legal documentation. However, it should enable you to give the purchasers or lessors of your equipment better processing rates than they would be able to obtain on their own, and if properly structured, such a situation could be extremely profitable for you.
Finally, it is important to keep in mind that I have presented a complicated industry in a very simplistic fashion and that implementing the foregoing strategies requires time, effort and a thorough understanding of the process. In other words, some of the foregoing strategies are easier to suggest than they are to carry out. Nonetheless, every self-service equipment operator using credit card processing can engage in comparative shopping and negotiate to obtain better transaction pricing and fewer fees.
Lawrence Washor is an attorney at Washor and Associates, a firm that specializes in the self-service, ATM, and credit card-processing industries.
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