Business Practices

by Harold Montgomery

   Over the last few months, in talking with industry players, I increasingly hear that it's tough to keep salespeople. The typical salesman � especially new ones - can't seem to sell enough terminals at the right price to make enough money given other job opportunities they may have. In short, they can't make as good a living in our business as they can elsewhere. Depending on the market, even experienced salespeople are having trouble making their numbers work. And no wonder, for ISO's, the current trends at work in the industry are tough:

Terminal sales are slowing

   The major terminal manufacturers are reporting slower sales growth. This means the market is maturing � and fast. While there are high hopes for new technologies which might invigorate terminal sales, biometrics and smart cards are still far in the future. Even new services like POS check truncation or gift/loyalty don't have a terminal sales associated with them that provides a large enough profit margin to the ISO to compete with a full credit card set-up.

Terminal prices falling

   Slowing growth means price competition. Also, manufacturers are creating alternative, cheaper distribution channels for terminals � a merchant can now buy a terminal at Sam's Wholesale Club and have his processor download it for much less than the cost an ISO demands for the same services. As a result, ISO margins on terminal sales are dropping.

New merchant creation is off

   Events of September 11 and a generally weaker economy combined to make the last year a weak one for new retail merchants. New merchants are the staple of many ISO marketing strategies, and their decline creates a serious problem. Existing merchants become more important to replace lost volumes of new merchants. But existing merchants are more discriminating buyers and have a longer sales cycle than new merchants. That again means smaller profit margins on each sale.
   For ISO's whose business plan is based on terminal sale profits, this situation is not promising. How do you combat this situation? There are four basic approaches -

  • Increase the value of your offering � Provide more service than the competition or distinguish yourself in some other way. Avoid cutting price.
  • Specialize � develop an expertise that has value to a market segment. You can specialize by product type (wireless, ATM's, etc.) or vertical customer type (those with special needs,restaurants, time or service sensitive customers, etc.).
  • Move to less price sensitive/underserved markets � Often, rural markets are underserved. Sam's Club isn't everywhere (yet.) Rural customers often don't have overnight delivery services and so terminal failures are a bigger issue for them.
  • Exit the business - Nothing lasts forever, including the ISO opportunity. Depending on your market, your age, and other opportunities you may have, it might be time to consider your opportunities to liquidate. If you choose to step out of the business, there are two ways � sell your portfolio for cash or stock in another company.

   Most ISO's these days have portfolios they built with major super-ISO's (NOVA, Retriever, IRN, On Line Data, etc.) or directly with processors like FDC, NDC, NPC, etc. In most cases these days, ISO's don't own the merchant and don't take the risk. In the good old days of merchant portfolio sales, prices ranged up to 48x monthly gross margin (revenues minus interchange and assessments). That was when the buyer could move the merchant processing relationship to his platform to achieve meaningful economies of scale. Today, when the ISO does not own the merchant, the buyer has to abide by the contract the seller has with the super-ISO or processor � there are no economies of scale in that situation. Prices are typically a lot lower.
   The good news is that you can actually sell such a portfolio. Many ISO's think that their super-ISO or processor is the only market for such portfolios, but that is not the case. Often the super-ISO prefers not to buy the portfolio for a variety of reasons, and will consent to a transfer to a new owner. The new owner assumes the same responsibilities which the seller had under the contract. My company has bought many portfolios in just this way.
   There are two ways to get paid in a sale � cash or stock. Cash is easy to think about � the portfolio goes to another owner, and you get cash. This transaction is typically treated as ordinary income for tax purposes but you should check with your tax advisor.
   Stock is more tricky. Is the stock publicly traded? If so, is there a market for it � a strong float and plenty of buyers? Will you have a "lock-up" provision that might prevent you from selling for a period of time � up to two years? Stock transactions are also more complex when it comes to taxes. They may create short term tax liabilities without creating the cash you need to pay the taxes. Get with a professional advisor to carefully consider tax treatment of any sale transaction.
   Stock may have some advantages, however. Taking stock for your portfolio will allow you to join in the longer term future of the company and benefit from any growth they experience. You may see a rising stock price and an expanding multiple of earnings for the stock over time. It's possible to make more money through price appreciation than you did actually building the portfolio. Caution: stocks also go down! Make sure you believe in the leadership and the story of the team you are joining. Confidence and trust in their leadership will be the most important factors in making this decision.