ebate about free terminals has raged in the industry for years. And it is highly polarized. Having argued both sides of the issue, I feel I can provide a balanced perspective.

This article does not address the economics of free terminals for processors. It focuses on how, where and why you, as merchant level salespeople (MLSs), can use free-terminal programs to your advantage.

Some people are convinced free terminals will ruin the MLS business. That may or may not be true. But free terminals are here to stay.

So, if you sell retail accounts, you either jump on board with free terminals, or you position yourself to compete against agents who already push them.

Many opponents claim merchants pay for so-called free terminals in hidden or inflated fees. It is true that no acquirer is going to give away terminals to lose money. But, many acquirers are no longer requiring annual fees, application fees or premium rates.

They do require a monthly minimum processing volume, but that is merely to protect processors and MLSs from low-volume merchants taking undue advantage of free terminals.

Important distinctions

Before I delve further into this discussion, free terminal needs to be defined. When using this term, most people in our industry actually mean free terminal placement, which affords a merchant use of a terminal free of charge.

The merchant does not purchase, lease or rent the terminal, and the processor or acquirer providing the terminal retains title to it.

When the merchant discontinues processing through the processor or acquirer, the terminal must be returned, or the merchant will be charged for it. Since the merchant is not paying for the terminal, the MLS does not profit from the terminal placement.

Generally, processors offer an upfront cash bonus program to help offset the loss of terminal revenue for MLSs.

Recently, several third-party processors have introduced an interesting variation. In this scenario a terminal is given to an agent.

The agent can then sell, lease or rent it to a merchant and pocket all of the revenue generated. In this case the title transfers to the agent, who can then retain title or transfer it to the merchant or leasing company.

Since the agent's cost for the terminal is zero, all revenue from the sale, lease or rental belongs to the agent. Usually, MLSs receive no upfront cash bonus with this option.

Big decisions

This brings us to the crossroads. You have four options:

• Use free terminal placement.
• Purchase and then resell or lease terminals.
• Reprogram existing terminals.
• Get free-to-agent terminals to resell.

Which way do you want to go? Fortunately, you can make an independent decision for each account. You don't have to commit to one strategy.

It makes good business sense to have all four options available. That way, you can do whichever makes you the most money, case by case. You also stand a better chance of walking out with a sale.

Higher income

You can start the sales process by offering to reprogram a merchant's terminal. If you can close this deal, you can still potentially collect an upfront bonus or write the business in a way that gives you a higher split (but no free terminal).

During the sale you may discover the merchant needs or wants a new terminal. You can then shift to selling a new terminal. Decide if you want to purchase and resell the terminal or take free equipment from the processor and sell or lease it to the merchant. Base this decision on which option makes you more money.

As an example, let's assume free terminal placement with this merchant would qualify you for a $200 upfront bonus. That's nice. But if you sell the merchant a free (to you) terminal for $300, you forfeit the bonus and make $300. This is $100 more than the upfront bonus. Seems like a good deal, right?

However, if you purchase a terminal and sell it for more than $100 over your cost, you make more money.

For example, if you are able to mark up the terminal $150 over your $300 purchase cost, you pocket $350 immediately: the $150 over cost from the terminal sale and the $200 upfront bonus. In this case, the last option makes you the most money.

With each deal, you need to know which route will put the most cash in your hands. If a merchant wants a new terminal, but is unwilling to purchase it, you can either lose the sale or fall back on a free terminal placement program.

You likely will collect an upfront bonus with such a placement, and you will, of course, earn the residuals from this account. Use free terminal placement as a good last-resort strategy.

Compelling reasons

MLSs should have full sets of arrows in their quivers. However, some will need free-terminal programs more than others. First, free-terminal programs only appeal to smaller businesses and are generally only available for retail merchants.

Second, I highly recommend that less-experienced agents use free-terminal programs initially. It is easier to sell merchant accounts using free terminal placements. That is a fact of life.

So, if you are still learning the business, go the easy route. As you gain more experience, move into selling or leasing terminals when it will make you more money.

If you target new retail businesses, it's prudent to have a free-terminal program in your pocket. Most new businesses need terminals.

You may still start out by trying to sell or lease equipment, but most new businesses are cash-strapped and very attracted to free terminal placement.

You may be able to write a merchant account at a higher rate using a free-terminal program. If free POS equipment is important to a merchant, the rate is secondary (within reason), and you may make more money over the term of the contract using free terminal placement.

Wireless prospects are another good reason to have a free-terminal program that includes free wireless equipment.

Many merchants in the service industry are keying in transactions, paying higher rates and suffering higher losses from chargebacks and declined transactions.

The main reason these merchants have not yet embraced wireless is simply the cost of the terminals. Without a free wireless terminal up your sleeve, you have no sale; with it, you do.

Smart business

Finally, if you are losing business to competitors who offer free terminals, why not join the fray and provide them, when necessary, to close deals? If you are not yet losing many deals to free terminals, it's only a matter of time before you will be.

A number of industry veterans claim, "I don't need free terminals because I can always sell the merchant a terminal." In some cases this may be true, but I guarantee that even the most seasoned veteran loses some deals to free terminals and sometimes slashes margins to undercut free-terminal offers from competitors.

Free terminals have already penetrated the retail sphere. As an MLS you need to decide if you are going to offer them and, if so, when.

If you approach a prospect with free-terminal options in your pocket, you can maximize your profit in each account and walk away with more deals.

Use free terminals, but use them wisely. Free terminals are not ruining the MLS business; they are just transforming it.

Ken Boekhaus is Vice President, Marketing and Business Development for Electronic Exchange Systems, a national provider of merchant processing solutions. Founded in 1991, EXS offers ISO partner programs, innovative pricing, a complete product line, monthly phone/Web-based training and quarterly seminars. For more information, visit EXS' Web site at www.exsprocessing.com or e-mail Boekhaus at kenb@exsprocessing.com . EXS is a registered ISO/MSP for HSBC Bank USA, N.A.