'd like to share a story with you about my first day in the credit card processing business. It's funny, but this day (and what turned out to be my first year in this business) had less to do with credit card processing and bankcard acquiring and more to do with the business of leasing POS terminals.

Almost a decade ago, I responded to a sales recruiting ad in "USA Today." The company advertised promised a six-figure income selling a business service. After several years of selling long distance services to business customers this offer sounded pretty good, so I made the call.

This company was an ISO/MSP, and it required new sales reps to come to the corporate office in Cleveland for training. So, I hopped on a plane. In Cleveland, the trainer explained how we would make tons of money by leasing terminals, which, in those days, consisted of a Tranz 330, a Tranz 330 with a 250 printer or a Tranz 460. For an extra $10 a month, the merchant could even have a PIN pad.

Here's what the sales pitch to Mr. First-day-in-the-bankcard-business (that was me) consisted of:

"You can buy these terminals wholesale from the ISO/MSP for $250 - $400. You can pay us a $125 application fee, and you can lease POS terminals to merchants for $59 - $99/month (48-month leases) and earn $1,000 - $1,500 upfront on each deal. Now go get 'em!"

And the sales pitch to a merchant (who didn't currently accept credit cards):

"Hello, Mr. Merchant. How much more business could you do if you accepted credit cards? $1,000 per month? $500 per month? (Write down the merchant's answer). What is your gross profit margin? 40%? 35%? 30%? (Write this answer down, too).

"Well, if you accepted credit cards, you could earn another (insert the correct amount after multiplying the sales volume by the gross profit margin).

"For example, as you said, you could sell another $1,000 a month if you accepted credit cards and your margins are 35%. That means you'll earn another $350. The cost to get set up and running with this credit card machine and the service needed to accept all major credit cards (Visa, MasterCard, AmEx, Discover) is $59 - $99 per month, depending on the personal credit for your lease and the type of terminal.

"Even after factoring in the cost for the terminal, you will earn another $300 per month. And, even if we lower our sales figures 50% to $500 per month, you'll still earn $150 more.

"Anyway you look at it, this is a money making proposition that won't cost you anything. You'll start making more money the minute you start using and promoting the use of credit card acceptance at your business."

If the merchant showed any skepticism, you'd break out some statistics from Visa and MasterCard about increased amounts of business from accepting credit cards. Selling bankcard services was still at the stage where business owners needed to be convinced that they should accept credit cards at their businesses.

The other funny thing was that the presentation on the processing fees (discount rates, per item fees, other fees, etc.) was glossed over. They told us to sell a certain set of rates and fees and, in return, we'd get paid $5 per merchant per month.

During this "training" session, I actually asked, "How much money is there in the processing fees? It doesn't seem like you guys are making any money here." That's when they told us there wasn't much money to be made in the processing fees.

And then I did what I tell everyone not to do: I signed a contract that permitted this company to stop paying my residual commissions the minute I stopped doing business with them.

At that time, I wasn't sure how much money there was in the bankcard business, and this technicality didn't seem very important. Thankfully, we've come a long way from those days.

The bankcard processing business has witnessed great transformations in the past decade. Residual income not important? Boy, has that changed. So has the POS equipment leasing business.

These days, no one has a business plan centered around upfront money on sales and leases of equipment. Income from leasing may still be a part of an MLS's income and business plan but should not be the major component.

So where is leasing headed in 2004? In the past, MLSs could make a living on leasing. Today, word on the street is that they can't. Rather, they're selling at cost and relying on residual income.

Is leasing still a viable service for MLSs? What is its true value proposition? Is equipment becoming obsolete? How has leasing changed in the past few years? What types of equipment are being leased? What are the price points? What kinds of credit mix rations do MLSs need to maintain to stay in good standing with their leasing provider?

To get answers to some of these questions, I sought the expertise of two leading industry professionals in the leasing arena, Lee Ladd, President/CEO of LADCO Leasing, and Tom McCarthy, Executive Vice President of Lease Finance Group (LFG), a division of CIT.

"Without a doubt!" Ladd responded when I asked him if leasing is still viable for MLSs. "It's not only viable, it's a necessity. Without POS leasing as part of the POS history there probably would not be MLSs as we know them today. Leasing has been the life blood of the industry."

Ladd sees the value proposition of leasing as somewhat one-sided. "Where could you get a 1985 Oldsmobile financed for five times the blue book value?" he said. "Only at a POS lessor! Not only do we lease antiquated equipment, we do it for many times the cost."

Ladd is quick to point out he's not complaining since each lease company makes its own policy. His bottom line is that the POS lessor provides a service that does not exist in any other industry. Does he see equipment becoming obsolete? His answer is true politics.

"Yes and no," he said. "We still see leases for 330's and 250's every month, but we are also seeing substantially more of the newer lines from the major companies."

Ladd acknowledged the leasing industry has changed. He believes that as the quality of the ISO/MSP has improved, so has the quality of the lease business. "The incidence of fraud and gross misrepresentation has reduced in recent times," he said. "We are no longer seeing lease requests for 48 x $139.00 on XLs.

"For the most part our business has been pretty static. We did not get involved in any of the business opportunity, computer, virtual terminal or software leases when they were the hot ticket for leasing. Our constant has been to do a lot of good deals for a few good people."

In regards to advising MLSs on how to be successful when it comes to leasing, Ladd recommends looking to the bigger providers for product. "I would suggest selecting a major lessor that will have no problem funding your leases when times get tough," he said.

"Treat your lessor like a partner in your business. Be aware of your portfolio performance and be available to assist your partner when the inevitable dispute with your customer takes place."

Ladd also predicts substantial opportunity for equipment upgrades in 2004. "As new equipment becomes available and more marketing takes place to sell smart cards, check conversion and other new processing products, existing lessees will be prime for upgrade conversions," he said.

"It will be a great opportunity for the well managed ISO that has good contact with his existing lease and processing customer base. Those that give good customer service will prosper." LFG's Tom McCarthy also sees leasing as a viable service for MLSs, especially if they deal with merchants with limited capital that need equipment. McCarthy believes leasing can offer those types of merchants very favorable terms.

He also believes that as ISOs build a larger merchant base and begin to reap the rewards of residual proceeds, the emphasis on the large upfront commissions for leases becomes less of a necessity. Consequently, the lease is still a very valuable commodity for MLSs.

"I think the true value to MLSs is when they provide a service and pricing to the merchant that is competitive," McCarthy said.

"The key is to retain the merchant. Disclosure, pricing and service are the secrets. Retain the merchant, and you'll retain processing residuals...and a leasing company will be more than willing to fund as much business as you can provide."

When asked if he sees equipment becoming obsolete, McCarthy responded with insight from years of experience. "Over the years there have been improvements in equipment, but the basic functionality is still pretty much the same," he said.

"There has been more development and improvement in the software application, but the basic card swipe terminal is still very similar to the terminal of 10 years ago. Memory has increased (for higher volume merchants) and additional track readers have been added to read additional data added to the magnetic strip."

From a provider's perspective, McCarthy said he has not witnessed too many significant changes in the leasing marketplace. "Leasing in the POS market has not changed that much over the years," he said.

"Although, the percentage of leases to merchants boarded has declined. Payment caps have also declined over the years. What has remained constant in leasing are delinquencies and defaults."

McCarthy has very clear advice for the MLS looking for success in leasing: "Be reasonable with your expectations of your leasing company. The leasing company will be successful if it can get a fair return on the leases submitted for funding.

"If delinquencies and charge offs are higher than industry standards, then the leasing company is not making a fair return on the leases. Make sure that the merchant understands that they are leasing equipment. Do not try to bundle everything together and hide the fact that he is paying to lease the equipment."

McCarthy said MLSs and leasing companies will continue to work together in 2004. "The POS leasing market is still controlled by a few leasing companies that have been around for many years," he said.

"It's a capital intensive industry that needs to be managed with good systems and good personnel. Managing the risks and defaults is the key to survival. The partnership that forms when an MLS and a leasing company start doing business together will thrive when they work together to satisfy the merchant."

Since the voice of the MLS is vital to any industry-centric discussion, I posted the following on The Green Sheet Online's MLS Forum:

"How has the business of leasing equipment changed for you? What are the biggest challenges you face in leasing? What is the value proposition for MLSs in regards to leasing?"

Here are some of the responses I received: "Today, more merchants are buying equipment for cash, and some merchants go on the Internet to price out equipment. It's more important than ever to offer value-added services to get a good price for a terminal even if it's for cash instead of a lease...

"As an MLS, you need to sell other value-added products along with your terminal to be successful and to get the price up, i.e. a terminal and a check imager, gift cards, PIN pad or free check recovery.

"Think up things to bring up the value of what your selling and then the price is high enough to lease. To get leases you need to be creative" -cc guy

"I use two different providers and get great service from both. I use two so I will not have all my eggs in one basket...I do 10 or more equipment deals a month and not more than three leases a month on average.

"I make about 40% more money when I lease, so there is the value. When I sell cash it's lower profit, and when I sell a lease it's a great deal more." - bankcardrep1

"I used to lease a Zon and a printer for $59.95: 'the good 'ole days.' Now you're lucky to get $39.95 out of a 2085-plus. The biggest challenge I face is keeping the credit mix, merchants that are afraid of a 48-month lease, getting verifications done on sales made over the phone or the Internet (face-to-face has never been a problem) and leasing Internet solutions.

"I see leasing as a means for agents to put a little money in their pocket on the front end. It's a great concept: You can get paid up front and keep the long term residuals." -SalesAMS

"We have not leased a terminal in years for the following reasons:

1) It's very hard to justify the cost of a lease to a merchant. When you can buy an entire computer today for $500, how can you justify a simple credit card terminal costing several thousand dollars on a lease? 2) The paperwork required by the leasing companies is more work than it's worth. 3) If the merchant prefers a small monthly payment, we offer our own rental program. This builds long term revenue." -ecom

"...the idea is you are leasing the whole package...'what good is a refrigerator if it has no electricity?' We lease the fridge and supply 'enhanced' electricity to make our package a better value. Moving forward, I see true enhanced lease opportunities as:

1. 90-day instant credit;
2. gift/loyalty, phone card;
3. medical.

"I also see the opportunity for leasing in cash advance scenarios. If a business is going to switch processors to get a high interest loan, they must sign a lease of some sort or a long-term processing agreement of some sort...if the bad credit will fly." -Adam Friedman

Ten years ago, there was no easy place for a merchant to purchase a terminal. Today, a merchant can go online to ebay.com or other Web sites and purchase a terminal right off the Internet with no obligation to set up service.

They can buy the terminal online or even purchase a terminal at a wholesale club such as Costco. I do not think that leasing of lower end or older machines is really viable. Instead, I believe the best use for leasing right now would be for one of the newer generation-multi-application terminals.

Based on the comments posted to the MLS Forum, it appears that salespeople are looking to maintain long-term relationships with quality leasing companies. Today, MLSs value their relationship with their leasing provider. They care about their "credit mix." They are not leasing to bad credit guarantors.

MLSs would rather sell or rent a terminal to the D/E credit grade guarantors and are clearly looking out for the best interests of their leasing partner.

The bottom line is that leasing terminals is a good means to an end. Unlike years ago, it's not our primary business and should not be the main focus of your business plan. Leasing will help you close deals, and will earn you extra upfront money.

You just need to use it to implement your real business plan-building a stable group of processing merchants that provide you with recurring revenue every month.

Look for my next post on the MLS Forum. Your opinions and support of "Street Smarts" is invaluable. Please send your feedback on this and any other issue to streetsmarts@totalmerchantservices.com.

"Life consists not in holding good cards but in playing those you hold well." - Josh Billings

See you next time where the rubber meets the road.

Ed Freedman is founder and President/CEO of Total Merchant Services, one of the fastest-growing credit card merchant account acquirers in the nation. Ed is the driving force behind all business development activity as well as the execution of Total Merchant Services' marketing plan, including recruiting and training independent sales offices and establishing strategic alliance partnerships with leading vendors, so that Total Merchant Services can provide its customers with the highest quality and most reliable services available.

To learn more about Total Merchant Services, visit the Web site at www.totalmerchantservices.com. To learn more about partnering with Total Merchant Services, visit www.upfrontandresiduals.com or contact Ed directly at ed@totalmerchantservices.com.