Now or later? When sales agents sign up a merchant for transaction services, they can choose the immediate gratification of an upfront bonus or wait for the delayed pleasure of residual payments.
Both approaches have their charm, but for new agents, some combination of the two often works best.
In any event, making the choice requires sorting out immediate financial needs and long-term goals.
It’s important for agents to choose their compensation carefully because that choice has such a large impact on their long-term income, says Michael Hass, president of Priority Payment Systems PDX of Portland, Ore.
When Hass started signing up merchants as a merchant level salesperson, he had a choice between a 70%-30% split with no upfront payment and a 50%-50% split with an upfront payment. Because he needed the money, he took the 50%-50% split and a $200 upfront bonus on one account, he says. A year later, he analyzed the results.
“When I went back twelve months later and looked at if I had not taken that upfront and gone with the 70%-30% split over time, I saw that I had missed out on just over $3,600 in residual income over the course of that first year, and that account lasted three years,” he says. “So just do the math. That was a loss of $10,000 to me on that account for the sake of taking a small $200 upfront bonus.”
Unless agents have a pressing need for immediate cash, they are better off choosing a pure residual, Hass say. He also notes that it’s important to understand what the ISO includes in the split.
“The last thing an MLS or agent wants is, three months down the road, to find out that instead of getting a 75%-25% split, it’s actually more like a 50%-50% split or a 60%-40% split because certain revenue points are not being shared back to the MLS,” he says.
To avoid such revelations, agents should carefully review their agreements, Hass advises. If some elements of the agreement seem unclear, consult with an industry lawyer, he urges.
“Now, will ISOs alter their agreement? Probably not, but at least they’ve been counseled properly on what the pros and cons of that agreement are and that would be very important so that they know what their situation is,” Hass says.
Agents also should analyze ISOs’ long-term goals because those offering high residual splits may have intentions that differ from the agent’s, he maintains.
“You see ISOs out there that advertise extremely high residual splits,” Hass says. “Well, why is that? There’s got to be a catch because they’re not operating on 0% margin or 5% or 10% margin. They would go out of business.”
Those ISOs may acquire as many merchant accounts as possible and then sell off the portfolio, he says.
That’s why agents should exercise caution when they consider working with ISOs that offer extremely high splits, says Brian Clopp, Owner of Processing Consultants of Princeton, N.J., and Los Angeles. Clopp also is starting an ISO called One World Payments.
If an ISO is offers a 100% split, the agent should find out exactly what that means, Clopp advises. They may base the split on a high cost per transaction. A lower split on a lower cost per transaction could yield higher residuals for the agent, he says.
He also believes an ISO’s potential longevity means more than the split. He estimates that ISOs need at least 25% of revenue to cover their costs and that agent splits over 65% leave no room for the ISO to invest in research and development or merchant retention.
“If you’re an agent,” Clopp asks, “do you want your ISO to make nothing? Because if your ISO is making nothing, what do they get out of the deal? Why do they care about your merchant? If your ISO is making nothing, their end goal is probably going to be to sell.”
The number of ISOs planning to sell their portfolios is increasing with the introduction of mobile wallets and disruptive technology like Square, he says.
“I think that the ISOs that will survive are going to be the ones that invest in their own technology developments,” Clopp predicts. “I tell agents that if you’re at a 75% margin of the cost, there’s no way your ISO has any money left for research and development, so they’re probably not there for longevity.”