Common Ground
IN-HOUSE VS.
OUTSOURCE
Terminal
Management Services

by Gregory C. Cohen

   Every time a merchant account is sold, a team is assigned to deliver a merchant a new (or reprogram the existing) point-of-sale terminal or system and deliver the appropriate start-up materials. In the Acquiring business, these functions fall under the category of Terminal Management Services (TMS) and include the following:

  • Pulling Downloads (directly into a terminal or remotely)
  • Kitting (welcome kits, reference guides, decals, etc.)
  • PIN Pad Encryption
  • Deployment (shipping terminals, kits and supplies)
  • Inventory Management
  • Merchant Training (scheduling merchant training and installation)
  • Replacing Defective Equipment (swaps)

   Performing all of these functions efficiently is no easy task. Many Acquirers outsource some or all of these services in order to focus on their core competencies. Others chose to perform these functions in-house, claiming they can respond to the needs of their customers (merchants and agents) more effectively. How can you make the decision that is right for your organization?
   In my opinion, the greatest cost of TMS is managing the entire process. An organization must have an experienced management team to oversee inventory, purchasing, deployment, training, etc., as well as a computerized system to manage the entire process and report back to customers and management. Both the systems and individuals used to manage this process require expertise and often come with a hefty price tag. Second, the cost of carrying inventory must be weighed against the other uses of that cash. Smaller Acquirers purchase inventory with cash while larger ones might have lines of credit, but no matter how you buy that inventory, there is a cost for items sitting on shelves. Not to mention, if you buy too much or the wrong equipment you may be forced to sell below cost just to move those items out of inventory. Most Acquirers want as much cash flow as possible in order to drive their sales engines, therefore the inventory carrying costs must be managed effectively. Third, no matter how well you manage the process, certain pieces of equipment, supplies, etc. will just seem to disappear. Depending on the quantity, these “vanishing” costs known as shrinkage can be significant. Finally, taking resources away from your core competencies can be your most overlooked cost. Organizations can generally do a few things very well and certain schools of thought teach us to focus on those few things and find ways to outsource everything else. Most Acquirers have only a few exceptional managers. If they are busy focusing on TMS, they are not focusing on sales, risk management, retention and other core competencies of the organization. This cost is very difficult to quantify, but must be strongly weighted when considering your TMS program.
   Despite the hurdles, many Acquirers continue to provide a large portion of their TMS in-house. The two most compelling reasons for this are control and cost. Acquirers who have an in-house TMS program believe that if they can pull directly from their own inventories, fulfill orders immediately without involving a third party, and make changes and alterations to orders on the fly, they can provide better service to merchants, partners, and sales people. In addition, they feel they can bring products to market much faster if they house their own inventory and do not wait on a third party to stock the newest “ground-breaking” product. In addition, when Acquirers purchase equipment directly from the manufacturer, they can generally get a better price than purchasing from a distributor. They do not need to pay the mark-up from the third party for their deployment services as these manual services are where the third party TMS companies make the majority of their profit.
   I have noticed a trend in our industry. When sales organizations first get started they often provide TMS services in-house. The sales office is only installing a few merchants a week and the process is easy to manage and control. As these organizations grow, managing all the TMS functions becomes difficult, time consuming, and a management nightmare. At this point, the ISO will generally outsource these services in order to focus on their core competencies. A year or two later, however, the principal of the ISO will look at his monthly bill to the third party TMS company and proclaim it’s time to bring these functions in-house. The ISO will then develop systems and management to handle the majority of these functions to save money. As the ISO continues to mature and determine what functions it can easily handle and which it cannot, the organization finds a happy medium between handling TMS services they become proficient in and outsourcing those that remain difficult. You will find that financial institutions look at TMS much differently than the ISOs. Most chose to outsource these functions from day one. Tying up cash on non-core processes works in opposition to the mentality of a bank. Those funds could be better spent on loans and other banking services, earning the bank significant returns even if outsourcing costs a few extra dollars.
   Where is your organization in its TMS evolution? TMS are complex and as your company grows your needs will change. These services can make or break your company in the eyes of your sales people and your merchants. Continue to review your TMS policy annually and tweak it as necessary. There is no set answer to what is best. My advice is to find your comfort zone regarding TMS and never lose focus on your core competencies.