What’s the next big thing in our business? This question is on everyone’s mind every day. Will it be a new technology? A new communication medium to the POS? Will it be a new interchange table, or a new class of merchants to sell to, like QSR’s?  Smart Cards?  Contactless payments? All these things are daily realities, and each of them is an important trend to watch. But, I don’t think that any of them is the next big thing.
    I think the next big thing in our business is free POS terminals. You’ve seen it already. Some large ISO’s have been giving away free POS terminals for months now. If one company does it, then that is an interesting bit of news. But what if others follow? What if a single event becomes a trend? Wait a second!  Am I really saying that in three years most super ISO’s will be giving POS terminals away – for free? Yes, that is exactly what I am saying. Have I lost my mind? I don’t think so. 
    Let me be clear about what I mean by ‘free’ POS terminals.  The programs I have seen provide the merchant with a POS terminal at no up-front cost. However, there is a monthly cost to having the terminal and a commitment period. Usually there is a rental payment and a time commitment, which essentially works like a low-cost lease. The key point here is that someone paid for the terminal and that someone is willing to wait for their money back over time instead of getting it now from a leasing company.
    How can this happen? To answer that, let’s take a step back and look at the history of our business.  We live in an industry characterized by one, single, overriding reality: falling unit volume prices for ISO services over time. Interchange may go up, but the spread over interchange which processors and ISO’s charge for their services goes down. This price markup, measured either as dollars per transaction or revenue dollars as a percentage of overall volume processed has been falling since the inception of the business. The rate of decline has varied over time, depending on market conditions, but the trend has always been down: relentlessly, unstoppably down.
    For years, processors and ISO’s made up for falling prices per unit volume because electronic payments consistently increased their market share of all payments faster than prices were falling. This natural growth meant that everyone’s revenue increased even while prices were falling at the same time. POS terminal profits could further obscure declines in per transaction profitability. When things got a little tight, fortunately, new transaction types or fees appeared which had a compensating margin with them. There was always a way to pull out another penny here or there. Sounds great, right?
    This is the world that most of us in the business grew up in. This high growth universe was one of the key factors that attracted most of us to the business in the first place. This was a world where you could always make the next sale by cutting price on the leading transaction type (the easiest selling technique ever devised) and still save the merchant enough dollars per month to pay for a lease on a new terminal.  The ISO got a healthy commission, the processor got a solid account and everyone was happy.
    Wake up Sleeping Beauty, those days are dying, and fast. Price cutting in our business has reached the point that there is nothing left to cut from processing rates. Merchants and street salespeople now evaluate deals based on even the most obscure price points.  Margins are wafer thin. What is the point of offering a merchant a better rate which will save him a grand total of $5 to $10 per month? I have had merchants turn down savings of $50 per month because the difference was not worth the switching hassles. That is not great news for anyone pursuing a price-cutting strategy.
    If your strategy is based on price cutting, and dropping the rate won’t work anymore, what does? Equipment costs are all that is left. But, over the last few years, equipment profit margins have steadily declined. The only thing to do here is drop the price to zero, (or even less, which I suspect will also happen).
    To whom are ISO’s giving the terminal?  The merchant or the sub ISO?  Giving the terminal to the merchant directly from the Super ISO is a subsidy to the merchant, and cuts the street level salesperson out of a key traditional profit opportunity. Giving the terminal to the sub ISO is a subsidy to the sub ISO which may restore his profits on terminals if he is able to sell it to a merchant.
    While that may happen, my bet is that before long, small ISO’s will pass this benefit along to the merchant in the form of a free or bargain-priced terminal just to get the business. 
    Once one super ISO does this and shows that it works then others will be compelled to follow. What was a single event will become a trend and a trend will become standard practice in a short time. Think razors and blades. This is the last frontier of price cutting, and it’s going to be ugly. Very big and very ugly, and probably very fast.
    Someone in the delivery chain has to bear the expense of the free terminal. While we all know that the person who ultimately pays the cost is the merchant, the issue for the near term is who finances it and how?  ISO’s used to view POS terminal sales as a way to generate cash fast through leasing. This trend turns that idea on its head – POS terminals will now cost someone $300+ every time one goes out the door. Multiply that number times the number of terminals you sell per month, and you can see the magnitude of the problem. What used to be a profit center of perhaps $500 per terminal, will quickly become a cost center of about $300+ per terminal – an $800 swing. Yikes!
    Instead of creating a positive cash flow each week from terminal sales, this program creates a negative cash flow in the short term until the merchant pays for the terminal over a 2-3 year period.
    ISO’s have a couple of options for dealing with this trend. One is to finance terminal purchases out of existing cash flow. For those who are large enough this make sense, even if it depresses short term profits. Or, ISO’s can raise cash through loans, equity injections, or asset sales to finance this new program. The nimble will handle the change well.
    Super ISO’s may be compelled to offer a free terminal program for their sub-ISO’s just so the sub-ISO’s can continue selling. Sub-ISO’s will be shopping hard to find the best deal in the market, as they always have.