It's important for ISOs to offer outstanding service to their merchants because business owners who are seeking strictly the lowest price can almost always find a better deal based on price alone.
The merchants who are technically savvy enough to install and fix their own equipment can go through warehouse stores like Costco to purchase private label equipment, with merchant services provided through Nova, a program that has been in existence for five years. Sam's, another warehouse store, provides a similar program.
The Costco-Nova program had its beginnings in the mid-1990s when Verifone attempted to sell its equipment through the warehouse store. ISOs quickly complained because their prices were being severely undercut and they didn't have the financial wherewithal to compete with the warehouse merchant. The pilot program was discontinued after only a few months.
The current Costco-Nova program doesn't produce that type of uncompetitive situation, according to Pamela Joseph, Senior Executive Vice President, Nova Information Systems.
"If it did that, we wouldn't have the program," Joseph explained. "We wouldn't want to cannibalize our MSPs (Merchant Service Providers, ie ISOs). They are very important to us."
There are a couple of different reasons private-labeled products and services can be offered through Costco and through MSPs without hurting either, Joseph said.
First, there are certain types of small business owners who feel comfortable with technology and can handle set up and maintenance of the terminals.
These owners tend to shop via catalogues or the Internet, and sometimes go to warehouse stores, office supply chains, etc., for the best deals on supplies and can often integrate new technology with legacy systems (when feasible). These owners usually hook up their own phones, computers and other systems with little or no outside assistance, Joseph said.
Costco business customers can receive basic merchant services by purchasing a basic membership. By purchasing the more expensive executive membership for a $100 annual fee, Costco business customers receive payment and processing services as well as motoring club and other benefits, and the ability to buy merchandise at wholesale, some of which businesses turn around and sell to consumers at higher retail prices.
Despite the potential benefits of lower prices and fees, many small business owners spend too much of their time actually running their businesses and don't have the time or necessary expertise to become involved with payment and processing minutia.
Most of these owners don't consider themselves technologists, so they'll buy these products and services when they are "sold". These owners want to work with salespeople who can provide advice as well as products and services. Therefore, Joseph said, many of these merchants won't circumvent the MSP by going to the warehouse store.
Additionally, the merchants pay higher rates than the MSPs. In other words, they are not paying the same price as the MSP, giving the MSP a chance to markup products and services in order to earn a profit.
If the merchant buys directly from Costco, he will pay:
- 1.53 percent, plus 21 cents per swiped VISA and MasterCard transaction
- 2.01 percent for mail order or phone order merchants plus 28¢ per VISA and MasterCard transaction
- The $5.95 monthly statement fee is waived Executive Members
- The one-time $25 application fee is waived for Executive Members (who pay $100 for a variety of services)
Merchants offering goods and services over the Internet or through mail order can also take advantage of the Costco-Nova relationship. The merchant can benefit from real-time processing, without any gateway fees. There is no equipment to buy or software to install.
The merchant's fees from an MSP for transactions at a retail location, through mail order, phone and the Internet will vary depending on the individual provider.
So, if price were the only consideration for the merchant seeking credit card, debit card and other payment processing products and services, the MSP/ISO would be hard pressed to compete with the warehouse stores.
Another consideration for MSPs/ISOs and merchants when considering the warehouse club option is the increasing complexity of POS equipment. Merchants, particularly those with multiple POS terminals and multiple locations, rely more on dependable equipment than ever before. Equipment failures mean more expensive processing via paper transactions if the merchant indeed keeps "knuckle-busters" for emergencies.
However, as the POS equipment becomes more complex, there are more potential causes of failure. Network connections between terminals and servers are common trouble spots. Seventy-five percent of the equipment failures in networked environments failures are due to configuration settings.
Another way to minimize those problems is to stick with reliable vendors and to avoid selling equipment from different vendors to the same merchants. Equipment from different vendors, even when seemingly very similar, usually won't communicate as easily with servers as the same number of terminals from a single vendor.
The MSP/ISO can check with the technology vendor's help desk to find out how long it takes to get service and to get questions answered. Rather than taking the vendor's word on quick turnaround, the MSP/ISO should make a few trial calls to the company's help desk about potential terminal problems and solutions.
Even with the best equipment, there will be occasional failures. It's at these times the ISO can make or break its relationship with a merchant. If the ISO's service is little more than an answering machine that takes messages with days before return calls, the merchant will end the relationship as soon as the contract permits. If, on the other hand, the ISO quickly responds to a merchant's equipment problems and speeds along equipment repair or replacement, the ISO strengthens the relationship. That type of service means more than price to numerous merchants. The merchant who goes to the wholesale club needs to replace the equipment himself.
Providing excellent service includes not only servicing equipment in the event of failures but also staying in touch with merchants to make sure they receive and install any software patches as they become available. Maintaining this communications link not only helps keep the merchant's equipment running now, it strengthens the relationship for future up-sells.