In The Trenches
Build a House That You Want To Live In

by Steven Pavent

   I just got a very interesting view of our industry. I was speaking with Sam Chanin of Business Payment Systems, one of NPC's largest sales organizations. He made some comparisons of our industry to the real-estate business that makes great sense and can be of help to all of us.
   The first comparison is about the types of ISO's we get involved with is like building a house. If someone is building a house to sell the likelihood that they use the highest quality materials and then workmanship goes down. They'll probably cut some corners because they know that they'll be long gone before the house falls apart. The same is most probably true of an ISO or acquirer that is building a portfolio to sell. Like the homebuilder, the outside may look shiny and new, while cheap construction lurks under the service. On the other hand if you're building a house for you and your family to live in you're probably going to use the best materials and make sure that the work is done right. Just like an ISO that is planning to keep the business, so that it will be there for many years to come, will probably provide better overall service to its agents and merchants.
   Next: what's the most important thing in real estate? LOCATION, LOCATION, LOCATION! Where you are building a house is one of the most important decisions you can make. A home in New York City is worth much more than the same home in Ocala, FL. Just like with your merchant accounts; where you put them matters! Too often agents and smaller ISO's are lured by slightly better pricing, or slightly quicker approvals, but then the real-estate that their portfolio is built on ends up on the wrong side of town. Just ask yourself, would you pay more for a CMS portfolio or an NPC portfolio? Would you lend someone more money on a solid well built portfolio/house or one that is having issues and is built on a foundation of misled customers.
   Next, let's take the case of two brothers that each have a million dollars. One brother decides that he's going to build and sell buildings. So every six months he finishes a building and puts it up for sale. He sells his vacant buildings for a nice profit and does okay for himself. He earns about 20% each time he sells one, so in three years he doubles his money. Now let's take the other brother who builds an apartment building to develop and live in. He moves into the top floor and rents out the other apartments. Soon he adds on a parking garage, and vending and washing machines in the lobby, all generating more income. After three years this guy has a cash cow with massive positive cash flow and a property that is worth far more in profit than what his brother has earned building and selling six buildings. Our business is a lot like this example, you can take a buy rate program or an up front bonus program and you're a lot like the first brother. You may even make more money in the beginning. Or you can take a revenue sharing program and be more like the second brother doing far better in the long run.
   In our business, sending deals to a processor is just like putting tenants into apartments. If we put our tenants into well-maintained, well-built buildings they will stay longer and be worth far more. If the buildings we fill up are in good locations they will be worth far more.
   Here's the hard part. How can we tell the difference? There's really no formula for that, at least not one I've been able to perfect. However, you should look at the principals of your processors, have they sold prior companies? How is their compensation? Is it geared toward short- term gratification or long term value? What is the reputation of the principals?
   This whole discussion was brought on by something that just happened to us. We had been processing with a smaller processor located in Maine. We had good relationships with the ownership and management (or so we thought). We had solid contracts and promises from ownership. They recently and rapidly sold the company. In the final days management altered our residuals and ignored our requests for buyouts, our phone calls and emails. Luckily the new company stepped up to the plate and fixed the problems that they inherited. Even though they didn't know us from a box of rocks, they owned up to the agreements they bought. We got lucky because more often than not it's the agent that gets screwed. The favorite phrase of one of the top managers of the ISO that sold the portfolio still rings through my head: "If I don't have my integrity I don't have anything." Well it turned out that he must not have anything! Of course he and other top management have already started a NEW ISO. Maybe that's just one more land mine for the unsuspecting agent to step on!
   In the end, you have a choice of how you want your business in merchant services to be. Maybe you would rather have income today and work with a processor that will accept all your D & F business and that's okay, so long as you realize that your building on the bad side of town. Maybe you'd prefer to write A, B paper and wait a little longer for approvals, but put your building in downtown Manhattan? Either way, make an informed decision. As for us we're building a house to live in.