With competition stiff and margins tight in traditional lending and deposit products, many financial institutions are looking to small business products and services to increase their bottom lines.
Among the small business products and services are the traditional banking products like checking accounts, loans, etc. and increasingly, more non-traditional products and services like tax services, payroll processing and employer and employee retirement programs.
However, few banks, particularly community banks, have tapped another lucrative area of merchant services providing the hardware and software to enable merchants to accept credit cards, credit card processing, point-of-sale equipment sales, rental and service and other products and services provided by many ISOs, says Peyton S. Hunter, Vice President of Sales for Transaction Payment Systems, Moorestown, N.J.
"Eighty percent of small businesses accept credit cards for the payment of goods and services however, the offering of merchant services on websites is almost non-existent," Russell Werhlin, senior vice president, Speer & Associates, Inc., Atlanta, GA, said at BAI's recent Retail Delivery Conference. Not only were the services themselves lacking, Werhlin explained. Even those banks that offer merchant services did a poor job advising potential merchant customers of the services available.
Providing ISO-like services helps financial institutions become better partners with their local merchants a relationship that small business surveys indicate owners want from their financial service providers. The revenue opportunities are hard to quantify, but they certainly are there, Hunter said. Some banks that actually do participate in the merchant services market simply make money from referring merchants to financial institutions and processors who handle merchant accounts. However, those are one-time fees that can only be sustained by referring more and more merchants. Eventually, there are few or no merchants left to refer.
A better model for banks, according to Hunter, is for the banks to lease or rent the equipment to the merchant. Not only does the bank build recurring revenues, but also a portfolio of business that it can sell in part or in whole in the future if the need arises.
The smart banker will also use this relationship to cross-sell other products and services, further boosting the financial institution's revenues.
The first of these relationships is a checking account, from which the merchant will pay bank merchant services fees and to which he'll likely deposit credit card proceeds. If the bank sells the merchant account, this cross-sale is not possible and the bank may have no further relationship with the business, Hunter said.
Beyond the checking account, small businesses can also bring other deposit and loan accounts to the bank, as well as payroll, financial planning, business succession and a plethora of other accounts. The more merchant services and more traditional financial services the bank provides for the merchant, the less likely he is to take his business and the associated bank profits with him to another financial institution.
Many banks don't have the interest or the necessary infrastructure to adequately handle merchant services themselves, so they're happy to outsource nearly all of the business to third parties in exchange for a share of initial sales of equipment and services, as well as from residual income agrees Tim Rogers, Senior Vice President of Operations for TermNet Merchant Services, Inc., Atlanta, Ga.The amount of revenue a bank can produce from merchant services varies greatly, according to Hunter. The more work (e.g., processing), risk (e.g., chargebacks and other liabilities) the bank assumes and, the higher the number of merchant accounts, the higher the revenue for the financial institution.
An increasingly profitable area for banks and ISOs alike is in merchant gift cards, according to Rogers. The merchant or another entity sells the stored value card to the consumer, usually at some type of discount. This is better than paper gift certificates because the user doesn't get cash back that he can use at another store. Once he buys the stored value card, the merchant has the revenue in advance, sometimes long before the full value of the card is used. The theory is that the money is already spent.
The agent bank makes money when the card is originally issued and every time it is used. ISOs are also increasingly offering the cards, Rogers added. Loyalty cards work in a similar manner with "points" for various rewards stored on the cards. Merchants like the loyalty cards because they bring customers back to the store.