The staple profit stream of the ISO business since it was invented has
been profits on POS terminals. Originally, merchants paid cash upfront
for terminals like the Verifone Zon Jr. Plus. Entrepreneurs who
understood leasing caught on and established small ticket leasing
companies to finance this purchase.
Companies like Lease Finance Group and Northern Leasing found a good
thing and rode it for years. Leasing allowed ISOs to increase margins
on terminal sales by masking the true cash profits they pocketed in a
low monthly payment - $69 per month sounded a lot better to a merchant
than cutting the ISO a check for $2,000. Nobody begrudged the leasing
companies their exceptional returns since their cash was the lifeblood
of most ISOs for at least the decade of the 1990’s.
Banks and processors empowered ISOs to put terminals on every retail
countertop in the U.S., and Card Associations backed them up with a
powerful proposition: Merchants switching from paper processing to
electronic draft capture could get a significantly lower processing
rate. Savings from that lower rate more than offset the terminal lease
cost. That was a powerful business proposition – and it worked well.
Perhaps too well.
As with any great business proposition with fat profit margins, it’s
only great for awhile. Then it becomes merely good, and after that,
well, not so good. ISOs did what they were supposed to do – they sold
terminals, millions of them.
So many, in fact, that a number of merchants I have encountered have
two! In the process, natural competition in the marketplace has driven
down terminal prices and profits. The chart below reflects what I have
seen unfold in our sales group.
Ten years ago, leases at $69 per month were commonplace. Today, it’s
$29, and with “free” terminal programs out there, the merchant’s
perceived cost is falling to zero. Will it go lower? I think so. After
all, it’s only money!
The chart below shows that, over the course of the last ten years, the
profit on a typical terminal sale has dropped 58%. The net yield after
equipment costs probably does not cover the average cost of a sale.
This is the key reason that refurbished terminals have become so
popular lately – they are cheaper, allowing the ISO to slow this margin
collapse for a while but not forever.
ISOs have been under pressure for years now to keep costs low while
fighting falling POS terminal prices. The industry may be near the end
of that fight as terminals become free.
Responding to this trend, ISOs have been looking for new product to
move through the sales pipeline to keep margins per sale intact. Gift
and loyalty cards, smart cards, check guarantee, debit, even copiers
and office supplies. For example, check recovery and guarantee services
have been packaged, repackaged, priced and re-priced into all kinds of
never before seen packages.
2006 could be the year in which we discover whether free terminal
programs survive, how they are financed, what the risks are, and
whether such programs create the desired results of increased market
share and profitability for the ISOs who adopted them. One thing is for
sure, though. What used to be the primary profit center for ISOs is now
a break even or a loss leader used as a means to get merchants. More
and more ISOs are being forced to focus on residuals as the primary
source of revenue in this industry.
At the same time, average residuals per merchant per month are also
falling. This means that just to hold steady, more and more merchants
are required.
These trends indicate that our industry will consolidate into fewer and
larger players. Back in October, Paymentech and Chase Merchant Services
announced their combination as a means to cut overhead. Others will
follow in 2006.
What’s emerging is a new model of the industry. Fewer, larger players
will appear and drive down costs. Small ISOs will have an increasingly
difficult time getting started. Smart, niche oriented ISOs who take
advantage of every opportunity will survive and prosper.
General Time
Period |
Monthly Lease
Payment |
Lease Term |
Funding to ISO(*) |
| Early 1990’s |
$69.00 |
48 |
$2,050 |
| Late 1990’s |
$49.00 |
48 |
$1,455 |
| Early 2000’s |
$29.00 |
48 |
$860 |
| * This amount is the grow yield from the lease, not including terminal costs, first and last
payment on lease, and costs of sales activites, such as salaries, mileage, etc. |
|
