By Ken Musante
Eureka Payments LLC
Editor's Note: This is the first in a two-part series on leasing. The second installment will be published in The Green Sheet, Jan. 25, 2011, issue 11:01:02. In addition, responses to this topic were still coming in when this article was submitted. To view the latest comments, visit the "Street Smarts Article - Will Leasing Make a Comeback?" thread on GS Online's MLS Forum.
GS Online MLS Forum member IONPS stated, "Never talk religion, politics or terminal leasing in polite company." With that in mind, I obtained permission from MAKETELINC (Samuel A. Silver of Make-Tel Inc.) to reword a forum post he made regarding leasing. I appreciate both the question and all those who participated in the discussion it sparked.
This topic was also timely, as I had just encountered a merchant who had a very low rate yet was stuck in a lease for $37 per month. The lease started at $29, but after tax and monthly maintenance, it was up to $37.
Here is my abridged version of MAKETELINC's post: "Margins are getting thinner and thinner. Will agents start giving away the processing at cost and selling a lease to make $1,000 at sign up? Upfront money, directly from an independent source, is very attractive. What say you?"
A spirited discussion ensued on the MLS Forum. CCGUY started us off. "Leasing will make a comeback if the Super ISOs stop giving the terminals away," he wrote. "Then terminals on eBay would make a comeback too. ... Why lease when you can buy? ... Merchants want what they see. ... If they see a lot of postcards and ads for free terminals, that is what they want. ... If it is not advertised, then merchants will get the status quo." RHENDRIX76 responded, "If a business owner wants a terminal, they could search Google, and see a lot of results for free terminals. They will also see a lot of terminals for free on eBay.
"So leasing is a very tough sell today as long as this type of advertising exists today on Google and eBay, as well as Costco and now on Staples' website. When I did a search on Google for "credit card terminals" the No. 1 result was Staples selling credit card terminals ... [Staples] also has a link to set up a merchant account. ... This is making it even harder to lease equipment."
STEVE NORELL disagreed with this assessment. "Leasing is alive and well ... if you are the bank," he stated. "By that I mean when a merchant goes to open a checking account, they get solicited for a merchant account.
"The merchant rep shows up and sells him on the package, and since he [the new accounts representative] wants to make more money than the paltry salary they get from the bank, they sell a lease.
"The merchant buys into the pitch because he is from the bank. The term "bank" carries with it a false sense of a seal of approval. BofA, PNC, BankAtlantic, SunTrust, BBT, Fifth Third - all use this method."
Steve made an excellent point. I shouldn't be surprised anymore, but the number of bankers that have specific and high monthly lease quotas is shocking. The banks push their own leasing contracts more than most other acquirers.
In a later post, STEVE NORELL added that the "truth is that a good MLS can spin it [the sales presentation] any way he wants in order to get the lease. All the math in the world is not going to make a difference to a merchant that is trying to get his biz opened.
"He has bigger fish to fry. I feel that as long as the lease rate is fair, and included in the lease is a warranty on the terminal and possibly free paper, then go with leases.
"I don't think that it is any surprise that many ISOs only pay their MLSs if they sell a lease, so guess what the MLS does? He figures out a way to sell a lease. If the only way you are going to make a dime is to sell a lease, then hook or by crook you will get that merchant to take a lease."
MARINESTEBAN provided another reason for the continuation of leases. "[A]ny company that hires W2 employees will push more leases than ISOs with 1099s. The reason is that they need to cover salaries, and leases are the easiest, fastest way to do it. ... My take is that I don't see anything wrong with leases as long as the [terms and conditions] are fully disclosed.
"Now, to stir the pot, let me ask you guys this: How frequently do you read and hear complaints of banks and W2-based ISOs regarding fraudulent ISOs? I bet not frequently, because these two have more liability with merchants, and unlike other companies they will be willing to hear what the merchant says and will be more likely to work on a resolution should a complaint arise.
"Of course there are cases of unhappy customers out there; let's not be na‹ve. But they are the least, not the norm."
In a separate post MARINEESTABAN added, "As you already noticed, leasing is a sensitive subject because many people abused that practice, but that does not imply that everybody leasing terminals [is harming] the merchants.
"Leasing is good if you know what to do and if you know how to build value around it. There are several benefits for merchants leasing equipment that very often are not mentioned, and therefore you are selling on price."
SLICK STREETMAN provided insight into the genesis of leases and, with the dawn of the Europay/MasterCard/Visa terminal in the United States, a reason leases may again be more widely used.
"[B]anks invented the idea of leasing credit card equipment," he wrote. "At one time, about 30-some-odd years ago, if a merchant wanted to accept credit cards, he had to go through a local bank.
"There was no such thing as an ISO or MSP, and all transactions were done via the ole knuckle buster, the receipts deposited into the bank, and the merchant got paid about twice a month.
"Then along came the electronic age and the birth of credit card terminals. This was a monumental task to the bank - to get the paperwork done and the logistics involved in getting all of these contraptions hooked up and running in a gazillion different businesses in a timely fashion. ... They came up with the idea of [leasing]."
K-WAGS provided a more recent perspective, but ended his comments with a reason leasing could make a comeback that other forum members hadn't yet addressed. "[I] have been in this biz for over six years, and leasing must have already been done before I entered.
"Do I think that it will make a comeback? No, not for me since it was never there. I have never in six years leased a terminal to a merchant or had one that was interested in leasing. I have always either sold the merchant a terminal or placed one for the merchant.
"For merchants that want that free terminal placement, I look at this as a retention tool. I've had several merchants over the years on a placement program that get quotes from other companies.
"They call me to see if I will match the lowball quote, and I always ask if the other company is going to provide them with a terminal. They always say, no, that they would have to buy some expensive terminal from them in order to get those rates. I offer them the same deal, and they usually decide to stay right where they are.
"In conclusion, I think that the leasing of terminals is dead, but leasing of POS systems is alive and well."
SLICK STREETMAN also suggested that leasing has its proper place in the industry. He posted, "If a business needs an expensive POS system or maybe terminals, PIN pads [or] check imagers for multiple checkout lanes, a lease, in some cases, at a reasonable payment can make good business sense. Someone that would lease a little nail salon a terminal (especially $59/48) should be hung on the highest tree."
LADERA BUSINESS SOLUTIONS provided yet another perspective. "I see no real advantage to leasing," LADERA wrote. "There obviously is none for the merchant. A rent-to-own does the same thing. The only advantage to a sales rep is you get a percentage of the total sale upfront, and you do not have to do the collecting of the monthly cost.
"If you do the rent-to-own yourself, you get to keep 100 percent of the revenue. Plus you can make adjustments on the fly. For example, in the middle of a lease, the merchant's husband gets sick so the lady has to close the store. The lease company, by all rights, should still be paid the remainder of the lease.
"With a rent-to-own program, I contact the merchant, stop the rent-to-own charges and pick up the terminal. I have a happy merchant that, when she reopens, calls me. "So, a rent-to-own program administered and controlled by you is infinitely better than a leasing program."
JMATHIS believes that leasing is an option, but the salesperson ultimately chooses the options to present. "Leasing will not make a comeback as long as the people selling merchant services do not believe in them," JMATHIS stated.
"All too often I hear sales reps making the decision for the business owner and either not offering a lease, telling them not to lease or, in most cases, giving away the farm and becoming that order taker with 'free terminal.'
"With our company, leasing is not dead; however, it has dropped dramatically in recent years. About 10 percent of our accounts have leases. The kicker here is that you must [have the correct commission plan to ensure the lease prices are reasonable].
"There are benefits to both leasing and buying. A big benefit to leasing is that a business owner can write off the full value of the lease as an expense; however, if they buy the terminal, they must depreciate the value of that terminal first."
The last comment opened the door to a discussion of the mathematical differences among leasing and other options.
JPFEYCHE was brave enough to offer advice on this, with the disclaimer that merchant level salespeople (MLSs) should consult a tax advisor. "With a capital/finance lease, the lessee can write off the entire lease amount (up to $500,000 in 2010 versus $250,000 normally) under IRS Section 179 in the same year rather than depreciating its cost over time," JPFEYCHE wrote. I am not a tax professional either, but it appears the IRS.gov site supports JPFEYCHE's comments. In the second installment of this two-part series, I'll provide a quote from IRS.gov, as well as further commentary on costs and other aspects of leasing from MLS Forum members.
Until then, when in doubt, sell something.
Ken Musante is President of Eureka Payments LLC. Contact him by phone at 707-476-0573 or by email at a href="mailto:kenm@eurekapayments.com">kenm@eurekapayments.com. For more information, visit www.eurekapayments.com.
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