gentlemanly expression of opposing views on free-terminal programs took an ironic twist at the Western States Acquirers' Association meeting Oct. 19, 2006. The opposition's overhead slide flashed briefly for Jared Isaacman's pro segment. It warned that free terminals spell doom and gloom for sales agents.

"Mine's not going to say 'economic disaster,'" declared Isaacman, Chief Executive Officer of United Bank Card Inc., referring to his own presentation.

Stu Rosenbaum, Chairman and Founder of U.S. Merchant Systems, and Isaacman attempted to answer the questions: Are free-terminal programs an inevitable method of last resort helping merchant level salespeople (MLSs) close deals? Or will they bring ruin on all salespeople by decimating a key source of their income?

"I think we're facing economic disaster with all this free equipment," said Rosenbaum. If the only way to compete in the market today is to give terminals away, "the industry needs a wakeup call."

Freebies in reserve

Free terminals are but another tool for MLSs, Isaacman said. "Free equipment in reserve is a strategy I like. If ... you can create enough value around the products and services you're selling, so that using a free terminal is not necessary, why would you do it? I wouldn't."

Isaacman founded UBC in 1999 and introduced free terminals in November 2004. In the past three years, UBC has grown 3,845%, largely due to the program.

The company took in $53.4 million in revenue in 2005. Prior to the program, UBC had reached a plateau, signing about 1,100 accounts per month. Within three months, it was boarding 2,500 merchants monthly.

The program has become an engine for delivering new third-party products and services to merchants. "I have a fear that if [we] don't embrace these new technologies quickly enough, and get it out to the merchants fast enough, we're going to lose those merchants a few years down the line," Isaacman said.

When UBC introduced free terminals, the real threat to the industry had already been posed by cheaper sources of terminals sold through eBay and online retailers, he said.

Since UBC launched its free-terminal program, many ISOs have followed suit, he said.

IRN Payment Systems, North American Bancard Inc., Total Merchant Services and Advanced Merchant Services have instituted free-terminal programs in recent years.

ISOs of UBC are free to make their own choices about whether to offer a free terminal. As "more ammo to the arsenal," free terminals are a way to entice merchants who are otherwise not interested in a new merchant service provider.

Counterpoint

"Is free really free? Or is it something you get today, but pay for later?" Rosenbaum asked.

He countered several common claims made in support of free equipment programs, such as whether they reduce merchant attrition: "Is it really the free terminal [that retains merchants], or is it the large exit fees?"

And lease gouging had already been addressed by the industry, he said. "That's what we have lease caps for."

When U.S. Merchant Systems faced the prospect of giving away equipment, Rosenbaum decided to hold the line: "I realized I would be robbing my sales agents of their revenue stream.

"The income from one lease could exceed the lifetime residuals from that merchant," he said. Free equipment programs are not good for ISOs either, he said. When anyone can give terminals away, it becomes a dysfunctional marketing plan. The practice brings the added hazard of drawing many unseasoned salespeople into the industry, Rosenbaum said.

Quoting from a statement by Jeff Rosenblatt, Chief Operating Officer for EVO Merchant Services, Rosenbaum said customers who get free terminals eventually realize the higher rates and fees may actually be costing them more than the terminal would have.

"This generates higher attrition, from our experience, and many more calls from unhappy merchants," Rosenblatt was quoted as saying.

Most merchants prefer buying terminals from professional sales agents rather than from unknown eBay vendors because they get a warranty, installation and support, Rosenbaum said.

He recommended that ISOs invest in thorough sales training to give MLSs the edge over the competition. "For agents, my suggestion is you focus on vertical markets. If a merchant can learn something from you, they are more likely to do business with you."