he first article in this series, published in the first February issue of The Green Sheet (February 10, 2003, issue 03:02:01), has generated much comment. Part II of this article will dig deeper into some of the macro-economic issues of the bankcard acquiring industry. This time we will try to relate some of this data to those salespeople affectionately known in our industry as the "feet on the street."

One of the major unknowns in our industry is just how many people solicit and provide services to the 4 million merchants in America. Charles Fote, Chairman and CEO of First Data, said on his investor conference call on February 18, 2003 that 4,800 salespeople represent First Data's merchant business, selling all of its products. First Data and its alliance partners acquired 44.6% of the nation's bankcard volume in 2002, according to the January 2003 GSQ figures (slightly adjusted by me). If First Data's "feet on the street" coverage is typical, then 10,762 sales representatives would be selling merchant services in the U.S.

According to one industry gadfly, Brett Mansdorf, there are between 24,000 and 28,000 reps on the street ("New Association's Aspiration: Pave the Way to Street Savvy," The Green Sheet, February 10, 2003, 03:02:01). Let's assume for the sake of discussion that these two estimates represent the extremes of the range of the number of "feet on the street" in our business.

In Part II, I want to take a different perspective on the macro-economic landscape using some of the information presented in previous articles in this series. You might need to refer to those articles to understand some of what follows.

Let's start with a discussion of some metrics of the four non-bank public companies in our industry. These companies in aggregate processed about 68.7% of the acquiring volume in 2002, according to adjusted GSQ figures.

These companies are First Data (44.6%), NPC (12.4%), Concord EFS (7.0%) and Global Payment Systems (4.7%). If we remove the earnings from Western Union, TeleCheck, equipment and other non-recurring product sales, the STAR and NYCE networks, ATM driving, Canada and other non-U.S. venues and other non-acquiring revenues, the four companies claim annual recurring acquiring revenues of about $2.6 billion and operating income of about $1.3 billion in the aggregate.

If this is close to being accurate (these figures are problematic to extract from the data reported) and also representative of the acquiring industry in general (two big ifs!), then the industry produces net revenues of about $3.8 billion (8.6% higher than the estimate calculated using the discount-fee method used in Part I of this article) and operating income of about $1.9 billion.

Now let's look again at the costs of processing a bankcard transaction. These four companies process the vast majority of the transactions not processed by Vital. Let's assume each of these companies processes transactions with a cost of 2.5 cents, including all fixed and variable costs (a typical fee to a supersize merchant) and provides all help desk, back office and accounting functions for an extra $100 per year per merchant.

Let's do the math: 2.5 cents times 17.1 billion transactions equals $427.5 million and $100 per merchant times 4 million merchants equals $400 million for a total cost of $827.5 million. These figures represent my best guesses of what the actual fixed plus variable "processing costs" are on average for the large transaction processors.

If we take the $3.8 billion net revenue estimate, here is a breakout summary of where the net revenue dollars are going:

• Net Revenue 3,800 million
• Processing Costs 827.5 million
• Gross Margin 2,972.5 million
• Expenses 1,072.5 million
• Operating Income 1,900 million

If these numbers are in the ballpark, then $1.07 billion is left to pay for all of the non-processing expenses of our industry after taking out the processing costs and operating income. These non-processing expenses include all of the operating costs of running the businesses - including administration, finance, travel and entertainment, product development, the mergers and acquisitions department, IT support, directors and officers insurance, marketing, selling expenses, legal fees, office expenses, settlement of class-action lawsuits, insurance, in-field service and ... ISOs and all other sales compensation.

Therefore, ladies and gentlemen with "feet on the street," out of the $22.65 billion collected from the merchants in this country for bankcard processing fees, only $1.07 billion is left for all of the expenses that the CEOs and the Boards of Directors of the various businesses believe they need to spend to continue to generate and grow the $1.9 billion of operating income generated in aggregate by their companies.

How much of this $1.07 billion do you think is going directly into the pockets of those people called "the feet on the street?" How much is allocated to pay for the in-field servicing of the merchants - the additional duties assumed by ISOs and their independent contractors for the so-called face-to-face service of their merchants?

The fact is that no one knows the answers to these questions. Because of the excessive lack of disclosure that plagues our industry, we are forced to make educated guesses.

Let's take a few hypothetical figures and see how they play out. Let's assume, for example, that 20% of these expenses are paid to the sales employees, independent contractors and ISOs. That would mean that about $200 million is going to cover the income and expenses of the 10,762 to 26,000 salespeople in the industry.

If this estimate is close, then the average rep earns between $7,692 and $18,584 to pay for his out-of-pocket expenses and then to earn a living wage. Of course, these residual commissions are supplemented by the extra income from non-processing expenses, mostly from equipment sales, as well as from income from non-industry employment.

If the amount were 25%, the average pay to sales reps would be in the $23,230 to $9,615 range. At 15%, the range is $13,938 to $5,769. It is hard to believe that more than 25% is going into the pockets of the sales reps. It is far easier to believe that less than 15% is a closer number. But, for the sake of argument, let's assume that the average rep earns somewhere between $5,769 and $23,230 in annual residual earnings.

We all know that people can't make a living in this day and age on that kind of money - even if they live in the most remote parts of rural America. So how do these 10,762 to 26,000 people make a living?

Most of "the feet on the street" formerly earned a living primarily by selling equipment for big prices. On the February 18 First Data investor call, a Wall Street analyst asked about FDC's accounting treatment for signing bonuses. Fote said that about $275 million was generated by FDC in product and equipment sales (this number was excluded as non-recurring revenue and was not included in the numbers above) and that the up-front expenses such as signing bonuses were accounted for as equipment costs.

Equipment commissions have driven the sales models of the majority of ISOs and sales representatives in our industry for the last 15 years. ISOs are clearly the preferred channel of merchant acquisition for the large acquirers when there is no affinity relationship, such as a banking relationship, to drive the merchant sale.

If merchant turnover is one-third because of merchants going out of business and two-thirds because of changes for competitive and "other" reasons (another statement on the February 18 First Data call), then 500,000 to 800,000 merchants probably change processors in any given year. Depending upon the economy, another 200,000 to 500,000 bankcard-accepting merchants change hands and/or open their doors for the first time each year in the hopes of achieving success, buying an existing business or starting a new venture.

It's hard to believe, but some of these 700,000 to 1.3 million merchants are not sophisticated and still have not learned to shop for credit card terminals on eBay or at Sam's or Costco or from an acquirer who does not focus on the leasing game. In fact, some of them are so young or new to America that they have never even heard of the horror stories of the Peachtree or Cherry Payment days. Some of them have never even heard of the pre-FTC version of Certified Merchant Services!

These na‹ve and inexperienced merchants form a pool of potential victims for a four-year non-cancelable $59 equipment lease for a used piece of equipment manufactured in 1988 offered with a "lifetime" warranty.

Ken Boodie, the co-founder of Horizon, used to joke that the most dangerous place in America was the parking lot during the grand opening of a new business because of all the ISOs pulling into the parking lot at the same time trying to get in the door first to lease a credit card terminal.

How many of these 700,000 to 1.3 million transitioning merchant "opportunities" are candidates for a high-commission equipment lease? Are there enough to support 10,762 or 26,000 "feet on the street?" If the average sales professional needs to earn $75,000 to pay his expenses and live a reasonable lifestyle, then these 10,762 to 26,000 sales reps need to earn an aggregate total of $807 million to $1.95 billion dollars - just to average $75,000 of income. It appears that only about $200 million of that is coming from recurring residual payments or sales salaries.

That means that 607,000 to 1.75 million equipment sales with an average commission per merchant of $1,000 must be generated to support the "feet on the street" under the equipment leasing sales model. Clearly, high-priced equipment leases aren't carrying the day any longer - especially with the largest microticket lessor exiting the business because of incredible losses on fraudulent leases!

Most veteran salespeople know that the days of earning a $2,500 or a $1,000 equipment commission selling a $350 set of equipment are mostly in the past. In fact, the days of earning a $600 commission for selling a vanilla terminal are also coming to an end. Companies such as First Data that have covered the up-front costs of selling non-affinity merchants through ISOs are on a certain price-compression collision course, which I will lay out in Part III of this article.

The old days of the acquiring business are coming to an end, and the new thinkers are taking over the industry in the trenches while the guys with nothing to offer whine about price compression and excessive competition. That's what happens when your only "product" is trying to make your merchant believe that he is getting a lower price.

Today, there still might be enough na‹ve transitioning merchants to allow some ISOs and sales reps to make a living supplementing their $6,000 to $23,000 earnings from recurring residual revenues with fat equipment commissions. But as the nation's merchants (and sales reps) learn more and more about the real costs of interchange, transaction processing and credit card equipment, the ISOs hiring these reps are being forced to find ways for their sales reps to earn money in other ways.

Enter gift cards, payroll processing, prepaid cards, check truncation, time and attendance, integrated software applications, debit card issuance and a whole host of 21st-century integrated and related merchant products. The smart ISOs have learned to bundle other services and products into their service offerings to create revenue opportunities to support their sales organizations and their own companies as well as provide real value to their merchant customers.

A new day has dawned but, as always, a lot of folks are sleeping in! More to follow.

Bob Carr is the Founder, CEO and Chairman of Heartland Payment Systems, the nation's largest privately owned merchant acquirer and ninth largest overall, with annual revenues exceeding $300,000,000. Heartland was recognized by INC Magazine as the 57th fastest-growing private company in America and is one of the 10 largest INC 500 companies. Bob was a Founder and Vice President from 1988 to '90 of the Bankcard Services Association, which has since become the ETA.

To learn more about Heartland, visit www.hpsteammates.com or www.heartlandpaymentsystems.com, or e-mail Bob at Bob.Carr@e-hps.com.