Friday, March 03 2023
Though you might hear the term ISO or Independent Sales Organization used a lot in the merchant services business, people don't always use it accurately. Let's take a look at what this term actually means according to credit card companies and banks.
What is an ISO? - Basically, a merchant services ISO program is an entity (a company or a person) who is not a MasterCard or Visa member bank—also known in general as Association members—yet they have a relationship with these banks. This can mean many things. For example, they may find new customers, offer customer service to the merchants, or sell terminals to them.
What is an MSP? - An MSP (Member Service Provider) is more or less similar to a credit card processing ISO program, though this isn't always exactly the case. An MSP is more of a “middle man” usually, a company that is often not an Association member, but who provides services to members.
What Do ISOs and MSPs Do For Their Banks? - First of all, remember that neither MSPs nor merchant services ISO agents are actually banks. The MSP / ISO will contract a processing bank to do this, and each MSP / ISO must have this kind of relationship with a bank to be able to process credit cards.
Under normal circumstances, the acquiring bank will be an Association member with both Visa and Mastercard, and they usually register for both at the same time. ISOs in turn can have relationships with more than one bank. By the way, these processing banks can also engage in vertical integration and become their own ISOs. This isn't common, though, and normally they will just specialize in processing credit cards, since it takes a lot of resources to draw in leads all the time.
An ISO is required to disclose their processing bank on their brochures, website, and other material. Usually, these are somewhere inconspicuous, like the bottom of a page.
How Does an ISO / MSP Register with the Credit Card Companies? - It's not exactly easy. First, the merchant services ISO needs to find a processing bank that will serve as a sponsor. Next, the merchant services ISO has to demonstrate to the companies that they have the means to perform their duties. Afterwards, there's lots of paperwork to do. For example, a merchant services ISO program might have to provide:
On top of all of that, the owners of the companies will also have their credit checked.
What Kind of Fees Does an ISO / MSP Have to Pay For Registration? Once they are actually approved, the fees are $10,000 upfront. These fees are paid every year as well, as part of a review process.
What Are So-Called Sales Agents? - Many times it's helpful for merchant services ISOs to have an independent sales team, so they will hire sales agents to find interested merchants. According to MasterCard, a sales agent is someone who provides services to a member, but isn't an MSP. In other words, sales agents don't have to be Association members, since the merchant services ISO program is the one that takes care of the processing. Sales agents have to be registered, however, though the fee is quite negligible—something like $50 every year. Sales agents, though functioning somewhat independently, can't advertise as a service provider and have to use the name of their merchant services company.
What Option Works Best? - Is it enough to be a merchant services sales agent? Or should you consider becoming a merchant services ISO or MSP, even though it requires going through all that bureaucratic process? Like anything else, this really depends. How much processing volume do you have? Obviously, you get a better price per transaction as a merchant services ISO, so you'll need to make some calculations and decide for yourself whether the increased profit margin is worth the overhead costs.
Be cautious, though, when looking at proposals from processing banks. There might be some fine print in there that can come back to haunt you. Specifically, look for fees that might cut into your profit, such as minimum processing fees. Minimum processing fees are charged when transaction fees during a certain period don't reach a minimum threshold.
These minimum processing fees can sometimes be really exorbitant, so watch out for them. Sometimes they can run into tens of thousands of dollars per month, and if you can't come up with the transaction fees, you'll be paying the difference yourself.
If you don't have a large portfolio yet, this can really harm you. Let's say the minimum processing fee for you is $6,000 every month. Let's say that, like many ISO's, you make an average of between $0.07 to $0.09 for every transaction. You would basically need to make 66,600 to 85,700 transactions on a monthly basis just to reach the minimum, which is unfeasible if you are a brand new company.
Usually, your processing bank will give you a period of time to build up your clientèle, however. If you think you can manage to reach a volume that surpasses the minimum processing fees by this time, then go right ahead and become a merchant service provider. However, make sure that you calculate everything very carefully.
By the way, since you're kind of expected to increase volume over time, the whole minimum processing fee can increase as well. That's right, a bank can progressively charge you more and more. For example, they may have given you a minimum fee of $4,000 in year 1, but every year that your contract renews, they might increase it by a lot—maybe even by the original amount, so that you're paying $4,000 more every subsequent year.
You can probably see why this would be a problem. Your fees are growing linearly, but your portfolio might not be. In fact, it is unlikely that your business would be able to support that amount of growth every year, unless your company is just so great that people are abandoning their merchant service agreements just to work with you. Either way, never sign an agreement that has fine print like this. Fees that increase like this are not very sustainable and you may get ripped off in the end.
Another (Not Great) Alternative - One thing you can do is to try to find a small bank that doesn't have any minimum fees at all. The problem here, though, is that their pricing might not be as good of a deal as larger processing banks, and their service might not be as reliable.
Besides, these smaller processors often have their own version of a minimum fee requirement—instead of transactions, they require you to bring in a certain number of new clients per month. If you don't comply, then you could stand to lose your residuals. In other words, you could have worked for years to build up a portfolio of dozens of merchants, and you could be bringing in a huge volume for your bank. You might have built up to tens of thousands of dollars per month for yourself, but your bank requires you to bring in five new merchants, and you only brought in four.
What happens? You lose all of your income, just like that. Does that sound fair to you? Your processor still has all of those accounts, but you are left in the dust. It's not really “passive income” if you have to keep adding a certain arbitrary amount of merchants per month, is it?
Conclusions - All of this can be confusing if you are new, but you can probably draw a few conclusions from it and get an idea of your game plan. To put it simply, if I had to start in this business over again knowing what I know now, I would just pick a large ISO and become a merchant services agent for them. This would help me learn about the industry and build up some income, and I wouldn't be risking falling victim to some fine print from my processing banks, or having to pay huge fees just to stay in business. I would work with several merchant services ISOs until I had decided which one was the best fit for me long-term.
After that, I would stop working with all of the other merchant services ISOs and concentrate on the best one exclusively until my volume had increased substantially. Once I thought I could pay all of the entry fees, I would consider becoming a merchant services ISO myself. I would speak with my merchant services ISO and see if they have a sponsorship program. Either way, I would shop around and be a hard negotiator, and not settle with a sponsor until I had a fair deal that I could actually work with.
Last, I'd hire an attorney to look over the paperwork. Yes, attorneys can be expensive, but in a business like this they are worth their weight in gold. You don't want to sign something without understanding all of the ramifications. Once that was settled and the deal seemed right, only then would I sign the agreement.
10 Things Your ISO Partner Should Provide
Merchant services such as POS systems and credit card processing are an invaluable part of any retail business, and as such the job of a merchant service company is critical. The role that the merchant sales agents of these companies play is just as important, as they are the intermediaries that make all of these deals work. If you are a merchant services agent, you are going to need a partner company that is on your side, or else you are not setting yourself up for success, and you are bound to disappoint your customers as well.
As a merchant services sales rep, you're running a business, so it's actually your responsibility to make sure that you have everything that you need to get the job done. Part of that responsibility encompasses choosing a merchant services company that you would be proud to be partners with. In business, relationships are everything, and you need to choose the kind of relationship that will benefit all parties involved, or else it won't be sustainable. Because of this, it is important to “shop around” and make sure that you have carefully examined the terms that you will be working with.
Not all companies will be worth it because they may be trying to get you to push a shoddy product or to try to sell way above market price, so you must choose carefully. There are a few key things that you should keep an eye out for that will indicate a promising choice, and ideally the company that you choose as your partner should exhibit all of these traits and provide you with all of these resources. Let's take a look at them closely to get a better idea of what your business will require:
1) A Win-Win Partnership
Of course, a business (even yours) will always act in its own self-interest, so agreements will often be skewed at least slightly in the favor of the merchant service company that you're working with. The point is to carefully review the terms and make sure that they are at least fair before you go ahead and sign up. It may seem like overkill, but you might even want to hire a specialized lawyer to look over the paperwork if you feel like you might miss something or if you're not totally sure what you're getting into. At any rate, make sure you have an exact idea of what the terms are before you get started or it may come back to haunt you later. As “the little guy,” you have a lot more to lose when things go wrong.
Here are a few things you're going to want to keep in mind when you're looking over your agreement:
- You shouldn't be liable for your merchant's losses or chargebacks.
Make sure that this is stated plainly in black and white. You shouldn't have to bear any of the risk of the merchants and should be held blameless in the event of losses. You also shouldn't have to pay for any chargebacks that the merchant experiences.
- Your revenue sharing model should be balanced.
This is especially true when it comes to your residuals. Make sure that you have a fair amount coming to you for every sale. You do all of the heavy lifting to get the lead, so you deserve a cut of the profits for as long as that customer pays.
- Don't let them force you into exclusivity.
Don't allow yourself to be seduced by a single company because you never know how things are going to turn out, especially if you're new to the business. Relationships can fall apart, or you might notice better deals with new companies as you work. Never paint yourself into a corner and sign any kind of exclusivity agreement.
- Make sure that you get what you're entitled to, even after a contract ends.
Part of what makes merchant services so lucrative is that you will have access to residual income streams even long after your initial sale. As the sales agent who established that lead, you are entitled to the residuals from the merchants that you have sold to. It doesn't matter if your contract with the merchant services company expires or is severed in some other way, you must be able to still receive that income for the life of the merchant's account. More importantly, you should be able to sell these residual streams as well, or secure loans against them.
- Make sure that you can move your merchants to another processor in the event that you are not paid.
Normally, payment processors aren't going to want you to take the leads you gave them and then switch them to another processor, but you may have to do this to protect your asset. This may take some negotiation, but you're going to want to establish that if the merchant services company fails to pay you your residuals from a given merchant, that you can switch the merchant to another service provider.
This is not a completely exhaustive list, which is why you will want to check with a lawyer if you can. Speaking of lawyers, make sure that your contract specifies that you can recover attorney's fees in the even of a lawsuit.
2) A Price Model That Works
Selling merchant services is a line of work with a huge potential for both active and passive income. As you might expect, this means that you're certainly not the only merchant services agent out there and that you have tons of competition. Though it is always best to not attempt to compete on price, and to focus on value creation for your customer, you won't get very far if your prices are too high.
Try to negotiate to get the best deal with the payment processor or else you are going to have a hard time selling your wares. The fees for your merchant can really add up, so make sure that you are passing on the savings. In the long run, the better deal your clients get, the better your residuals are likely to be. Remember that you are helping your merchants to stay in business.
Perform your due diligence and make all the calculations before you determine if a deal is worth it or not.
3) Multiple Payment Processors
Your merchant service partner ideally should allow your merchant to use many different payment processing services. The more options, the better, because there's nothing worse than losing a
potential lead simply because they want to use their current processor. Whatever POS system that you are selling, it should be flexible and allow for many different processors and payment methods.
4) Good Customer Service
Customers are the heart of your business, and without them, you can't hope to thrive. Ideally, since so much of your business is based on residuals, you want to acquire customers that you can serve over the long-term. One of the things that will absolutely kill customer retention is bad technical support and customer service. You may be doing the best you can to solve your client's problems, but if the merchant services company can't hold up their end of the bargain when it comes to customer support, it is like you have wasted all of your efforts.
Makes sure to ask lots of questions before you sign a contract and do plenty of research about the company, because you are ultimately putting your valuable merchant connections into their hands. Take a few of these factors into consideration:
- The size of their customer support department.
What kind of investment, in terms of labor, do they make in the realm of customer support? If you or your clients call to fix some technical issues, how long will you have to wait before you can talk to a human being?
- The quality of the customer support.
Are the people on the other end of the line well-trained? Do they actually successful solve your clients' problems in a timely manner, or do they seem under-trained and clueless? Do novel problems that don't follow their script make them confused?
- The hours of their customer support lines.
Do their customer support call centers have decent hours? Ideally, they would be available around the clock, though this isn't always realistic, of course. Another thing you will want to consider is what happens if a client calls and it is after-hours.
- Whether they do out-calls.
Is the merchant service company willing to send tech support technicians out to your merchant's location? Many times, this can actually be faster and easier for your merchant than their having sit there on the line with a remote technician, especially if the problem is hardware-related.
- What is the training like?
What kind of help does the merchant service provider give to your client to get them up and running? Do they offer training material? Do representatives from the company go on-site to show them?
- Are you informed about customer service issues or kept in the dark?
At the very least, you should get a call or some form of notification when your merchant is having technical trouble. Even better, it would be great if they provide you with a way to remotely access all of your client's trouble tickets.
Remember all of these factors when you are choosing a good partner company. It can mean a lot when it comes to customer retention. The thing is, it may be hard to determine some of these things—like, for example, the exact quality of their customer service team—until you are actively working with them. This is why it is so important to never sign an exclusivity deal with any one company when you are first starting out, as there are always going to be a few unknowns that you can't quite fathom until you're out there helping your merchants to succeed.
5) Upsells That Actually Provide Value
A large percentage of the income that you will be making will come in the form of upells because it's simply easier to sell to an existing customer than it is to sell to a potential one. This is a classic example of the “foot in the door” technique, and you will find that you will be using it a lot.
Upselling can be a great source of income for you, but what about your customer? These are going to be long-term relationships for you, so you don't want to rip your clients off by selling them useless services that they don't need. This is why you want your partner to offer genuinely high-quality products that you can upsell to your clients. For example, if you sold a POS system to a merchant, and you learn from your regular communications with him that he is in need of liquid cash, you might be able to make a decent profit if your merchant services partner also allows you to sell short-term merchant loans.
6) Free Credit Card Terminals
Sometimes clients aren't going to want to pay for hardware upfront, especially if they are going to be paying a substantial monthly fee. A similar evolution has happened in other subscription-based electronics industries, such as the cell phone industry, where the customer receives the hardware for free or at a huge discount, but pays a service fee for its use. Nowadays, the POS industry is leaning in this direction, so don't be surprised if your clients don't expect to pay anything upfront.
In order to cater to this demand, make sure that your merchant services company offers a free terminal deal, even if they have other options that require paying for hardware. As time goes on, you may find that there will be more and more of an expectation in the market for free credit card terminals, so be prepared. If the merchant services offer all-inclusive package deals that will get the client started for absolutely no upfront cost, that is even better. If your potential client basically has nothing to lose, then the sale is much more likely to happen. A lot of the time, paying upfront for a equipment isn;t really worth it unless there is some major advantage to it, such as greater flexibility and not having to be tied to a specific merchant service provider.
7) Decent Analytics
In our age of technological progress, there's really no excuse for a merchant service to not provide you with analytics on the back-end. This will allow you to manage your business and examine where the money is coming and going. You might have access to a few different kinds of information, including your merchant's sales activity, their history of tech support calls, and maybe even information about your own residuals or the activities of agents who are working under you.
When it comes to any business at all, you can perform the trial and error that you need to perfect your sales strategy much better once you have access to a decent level of analytics. Ask about this before you decide on a merchant service company. Even if you don't plan to make heavy use of these tools (though you should) it at least shows that your partner is technologically advanced and that
they are ready to meet the challenges of the future head-on.
8) Good Training Material
There's no point in your client even purchasing a POS if he isn't going to know how to use it. Examine your merchant service provider's training and information material. You want to do this before you get started selling because 1) you need to familiarize yourself with how the system works if you are going to sell it anyway and 2) you need to decide if the information material is actually decent.
A good service provider will offer more than manuals, too. You want online resources, and some sort of payment processing sales training program, especially one that involves merchant services representatives from the company coming out to the field and showing your client exactly what they need to do. As with providing good customer service, a decent training program of some kind is critical. If your client feels that the system is too difficult or cryptic to use, he is bound to drop you sooner or later, and that is a stream of residuals that you will lose out on.
It just makes good business sense to make sure that your client is on board and that there are no problems from the beginning. Play the long-term game by making sure your merchant has everything that he needs.
Though, as mentioned before, you will probably find that more and more of your clients will expect a free credit card terminal, since the industry is trending in this direction, some clients will still want to lease equipment for various reasons. Perhaps they are interested in something more high-end, for example. Maybe they want a credit card terminal that is not tied to a specific merchant service, so that they have the flexibility to switch if they feel the need, but this means that they must buy the hardware themselves.
Even when a client wants to pay for the equipment, though, he might not have to pay upfront. Having a fair leasing plan means that the client can afford the terminal even if he doesn't have as much capital to spend upfront. This kind of flexibility is key in accommodating all kinds of merchants, and you want to look for a merchant service provider that offers this kind of option just in case.
As with any other kind of sale, you should receive a percentage of the monthly payments that your merchant makes on the equipment. Make sure that this is part of the agreement before you sign up.
10) Help Analyzing Statements
Reading merchant statements and coming up with just the right pricing for your client can be complicated. This can be a headache even for people who have been working as sales agents for awhile, so you can imagine how confusing analyzing all of this unfamiliar financial information can be for someone who is totally new to the business. Make sure that your merchant service company is willing to help you on this front, and that they will provide you with merchant statement analysis services if you should find that you need them.
Getting into merchant service sales is a great choice if you're looking for a challenging and rewarding career where you can legitimately help customers while making a decent income for yourself. There are few lines of work that allow this level of residual income and revenue sharing, and there are many directions that you can take in this business.
The first factor that you should keep in mind, though, since it affects so many other things, is
your choice of partner company in this endeavor. They should be willing to give you a fair cut of the deals, should be willing to negotiate with you on the details, and they should provide good customer service to your merchants that will allow you to retain them as customers for a long time to come. The key here is to find a company with which you can forge a long-term relationship that works for both of you.
Not all merchant service providers are created equal. First and foremost, you will want one with integrity—this is the trait that really encompasses all of the others. A company without integrity is not one that you will be able to work with in the long-term because you will never be able to create trust. Make sure to perform your due diligence an research the reputation of every merchant service that you're considering working with, but a good place to start might be with North American BanCard. We are a solid company to work with and have a great reputation of helping our sales agents every step of the way. Of course, you don't have to take our word for it—always ask for recommendations and look at reviews before you make that first critical partnership decision.