Has payment processing become a commodity? David Fish believes that in the current market, the answer is yes. He is Senior Analyst with Mercator Advisory Group and author of the report Business Models and Revenue Streams in Merchant Acquiring.
"As long as margins are compressed, your product offerings are going to look an awful lot like your competitors'," Fish said.
Statistics indicate that the industry is dominated by a handful of large players who, because of their market clout, may be able to offer lower prices than smaller competitors.
According to Fish, the top 10 acquirers process an estimated 85% of all bankcard transactions. He also noted there appears to be a resurgence of banks bringing merchant services operations in-house or forming joint ventures with acquiring operations.
"In one sense, full-service acquiring banks have always run the show," Fish said. "But because so many banks have outsourced their merchant acquiring, any time a financial institution has news about its proprietary acquiring operation, they get a lot of attention."
Banks like revenues generated from payment processing because they are not subjected to the same fluctuations as interest-based revenue. In-house operations also provide opportunities for more efficient, less costly transaction processing.
In addition, banks may be able to compete more effectively by providing "true next-day funding for merchants whose DDAs are also with the bank," Fish said. "And the more offerings a bank has in its arsenal, the more cross-sell opportunities it generates."
He added that acquirers generally compete on scale. "In theory, the larger your scale, the more you can afford to offer your products cheaply and make up the difference in volume," he said.
Smaller ISOs and merchant level salespeople (MLSs) don't have that option. So, what should they do as profit margins shrink and prices plummet?
According to Sam Caine, President of Card Payment Services Inc., not even one merchant bases purchase decisions solely on price. "The single most important factor in all business dealings is value, not price," Caine said.
Like Fish, Caine believes payment processing has become commoditized, but he said this is because too many ISOs and MLSs have trained merchants to view their services that way.
"Over the past decade, the average merchant has heard 'I can save you money on your credit card processing' dozens or hundreds of times," Caine said.
The solution, he said, is for enough ISOs and MLSs to "resist the temptation to compete on price and instead educate the merchant on the value they provide." Then payments professionals will be seen as valued business partners, not commodity vendors.
Jason Felts, Chief Executive Officer of Advanced Merchant Services Inc., agreed, saying "those that sell based on finding a value-added solution for their merchant, they will find price is no longer the sole obstacle."
James Anderson, a Professor of Marketing at Kellogg School of Management and author of Value Merchants: Demonstrating and Documenting Superior Value in Business Markets believes salespeople lose when they buckle under pressure to battle the price war.
"A sales team with a poor understanding of what is valuable to the customer and what makes their product superior turns them into value spendthrifts: those who lower the price to make the sale -- and leave money at the table," Anderson said.
Jeffrey Shavitz, Executive Vice President of Charge Card Systems Inc., said CCS trains its agents to realize they are not selling a commodity.
"A commodity is only a commodity if it is presented in that fashion," Shavitz said. "Price is one major component when 'selling' a new merchant. But selling a merchant is very different than just quoting a lower price."
Shavitz said selling involves understanding merchants' businesses, managing interchange, building trust in relationships, and demonstrating new features and benefits to include in merchants' programs.
Selling also entails service, which is a difficult asset to quantify when pitching a new prospect, but of enormous value should issues arise, Shavitz said.
Lenann McGookey Gardner, author of Got Sales?, said when people don't fully grasp the value being offered to them, they resort to asking about price. "It's the lowest-common-denominator dumb-o question anyone can ask about anything," she said.
After losing a sale or two to someone with a lower price, salespeople can start to believe their products are commodities, even when they are not, she added.
"A product comes with a package of services, warranties, assurances of various kinds that can cause the prospect to trust one salesperson more than another, and trust is key in selling today," she said. "We now know that from research."
According to Jeff Thull, CEO and President of Prime Resource Group, a sales and marketing consulting firm, problems cost money, but the financial burden of problems "is the best-kept secret in the selling world, and the most overlooked.
"The key to getting the customer's attention -- even when competing with major suppliers -- is to help them understand the cost of the problem," Thull said.
"When the salesperson can help the customer quantify the cost of their problem, not the cost of the solution ... they differentiate themselves among other providers," he added.
Voss Graham, author of The Three Games of Selling, and Senior Business Adviser for InnerActive Consulting, said 80% of all sales training is based on product knowledge.
"Salespeople go out and pound the customers with features until their eyes glaze over," Graham said. He noted that a more sophisticated (and more successful) approach is to:
"I've made sales calls where people were so happy to have a solution to their problem that they forgot to ask the price, and they had to call me the next day to see what to budget," Graham said. "The soft-selling skills are vitally important and often overlooked."
Anna Solomon, President of Fast Transact Inc., said too many ISOs are not educating their MLSs, and an uneducated MLS cannot sell value.
"So many educational opportunities are provided by the various associations at the regional and annual conferences," Solomon said. "Once an MLS values his own products and services he will be able to sell to the merchant."
Dee Karawadra, founder and CEO of Impact PaySystem, described an MLS who signed a 93-location deal and was expecting huge residuals. "But the margins were very slim at [a] .005 markup," Karawadra said. "He made less then $3,100 total profit before our split.
"The market is getting tougher, and MLSs/ISOs are going to have to find other products to lead with." Felts has a growing sales office in Texas that focuses exclusively on leading with a unique gift/loyalty program.
"They do not have any trouble picking up the bankcard sale because they've built so much value in the gift, loyalty and rewards program that bankcard falls into place very naturally and without the price-war," Felts said.
"It's often said that if you secure your portfolio on price alone, you are so much more likely to lose it for the exact same reason: a better deal," he added.
Steve Norell, President of U.S. Merchant Services, said that the ever-decreasing margins on processing have led him to focus more on his company's remote deposit capture product.
"The way things are going with credit cards, you have to have something else in your pocket," Norell said. "If a merchant is using our remote deposit capture, I would give away the credit cards.
"I would not be a bit surprised if in the not too distant future, credit cards become a loss leader. We are practically there now."
Gary Yen of Money Tree Merchant Services said a lot depends on whether you're targeting pricing or flawless service. "Wholesale rates are all similar for the ISO or MLS," he said. "It's how they package their deals that seems to make a difference."
Yen advised all ISOs and MLSs to offer added value, catering to whatever benefits a given merchant, whether it's gift and loyalty cards, or introducing them to IP processing to cut approval time.
He noted that anyone can offer merchants reasonable rates without misleading them to think they're getting the deal of the century.
"I offer an honest solution to their processing needs," Yen said. "I get referrals all the time from past merchants, and 98% of them never questioned my quoted rate or take it to shop around."
Fish believes the industry's focus should be on what inherent value can still be wrung out of card acceptance.
"There's a lot of payment information that has yet to be leveraged," he said. "This I think would help to satisfy the outcry from the merchant community and put balance back into the perception of interchange's economics."
Fish noted that recent innovations have focused on making the payment experience more rewarding for consumers.
However, the original values associated with accepting bankcards at the POS (boosting sales or quicker payment, for example) are no longer good enough for some merchants; they feel as though it costs too much.
"The larger payments industry needs to concentrate on making electronic payments more valuable to all parties involved, especially merchants, and acquirers have the best position to act as merchant advocate," Fish said.
Solomon said ISOs and MLSs are vital to the industry and, without their help, merchants wouldn't know about the multitude of options they have.
MLSs help merchants "find solutions that build their business, through value-added products such as gift/loyalty cards, Check 21 -- even fitting them with the proper terminal, POS system or payment gateway solution," she said.
Add in a quality ISO to process the paperwork, provide the risk and underwriting, and manage the account, and the infrastructure for a healthy industry is there, she added.
Caine said if a rep sells a low rate only and never services the account, the merchant's costs could be much higher than those of a rep with a higher rate who provides added value and service.
"Let's say the merchant has a problem with their terminal, resulting in the loss of five sales and two hours of telephone time to resolve the issue," Caine said.
"That will cost the merchant far more than the cost differential between the low-cost rep and the high-value rep."
Solomon said merchants already understand the value of our industry's products and services. "It is the MLSs and ISOs who in their short-term visions have been willing to overlook what that value is," she said.
She noted that it is not difficult to give away products and services and receive an upfront bonus ranging from $200 to $2,000.
"If you write 10 deals a month that's $2,000 to $20,000 a month," she said. "Who cares about residuals and building a portfolio? Is this good for the merchants?"
Solomon's answer is no. "The lure of quick money and big bucks is very tempting for an MLS," she said. "There are hundreds on the street, harassing merchants daily to switch their services to save them even more money."
She believes the accounts such MLSs write have "about as much meat on their bones" as Hollywood starlets. "The pressure from their industry to be slim is making them extremely unhealthy," she said.
Fish agreed. Recruitment has generally employed slick marketing that plays on agents' "baser desires to 'get rich quick,' or a gimmicky twist on the value-added programs designed more to entice merchants into quick deals, such as 'free' equipment or merchant finance, than truly meet their business needs."
Fish believes these are the symptoms of an industry "desperate for something new, something beyond competition based primarily on price."
In GS Online's MLS Forum, Caine suggested trying the following technique "next time a merchant says that all that matters to him/her is getting the lowest price." He has used it to great effect:
Address the merchant by name and then say, 'We do offer another alternative to our high-quality, high-service payment processing backed by our company in conjunction with (name the major bank or processor).
'It's called Spike's Processing and Towing Service, and the rates are lower than anything you've ever seen.
'In fact, they can process all of your transactions for only $0.25 each total, no extra fees, no hidden fees. Do you want that service?'
Then, keep quiet and wait for the merchant to ask, 'What's the catch?' or 'That seems too low.' Then say, 'Well, of course at those rates they can't afford the high-quality services that we typically provide.
'Transactions may take a few minutes to complete, and sometimes your funds are delayed a week or two, but you'll always get paid. Usually.
'And they don't have customer service reps, so Spike's mother in law is the only one handling calls, and she's in jail right now, so you'd have to leave a message with the dog at her single-wide if you need service. But of course, it is cheaper.'
"The bottom line is there always needs to be a reason your price is higher," Caine added. "You cannot make a sale if you believe the service you're offering is the same as the service being offered at [interchange] and $0.04."
Graham advised ISOs and MLSs to cultivate a particular market. "The smaller and more specialized your niche, the greater your probability of making a sale," he said.
He noted that specializing in a vertical market can help agents understand customers' needs faster and build a robust referral network.
"Cheaper prices are easy to find and don't inspire the trust that people want before they refer a friend or colleague," he said. "Referrals happen when your customer trusts you and thinks that you understand what they need."
Felts said that restaurant merchants who have just invested in software solutions such as Micros and Aloha need their POS devices to work. And a lot more than price is on their minds.
"Yes, they want fair rates and fees," he said. "However, they also want dependable and reliable service that correctly integrates with the solution they've just invested in."
That's where a factor that cannot be commoditized comes in: the reliable, resilient feet on the street.
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