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.”
If their ISOs don’t have merchant retention programs, agents should consider devoting 5% of their own revenue to one, Clopp says. Such programs can significantly reduce attrition, he says, which is why he is incorporating one into One World Payments.
Both Clopp and Hass advise agents to find out as much as they can about what their compensation will be if their ISO sells its portfolio so they’re prepared if that happens.
When considering compensation, however, it’s important for agents to weigh factors other than money, such as relationships with management and merchant support services, Clopp an Hass say
Others agree because lack of merchant support can cost agents money, says Jason Chan, director of recruiting for San Rafael, Calif.-based Central Payment.
“You do have to factor in the team and the support behind you because you may have this very lucrative compensation schedule, but if you have no good support internally, then your job is going to be a lot more challenging,”Chan says.
Poor merchant support could lead merchants to switch to another provider, he says, which would result in the agent losing those residual payments.
Moreover, a combination payment system helps meet agents’ short- and long-term financial need, Chan suggests.
Central Payment generally pays agents per-account commissions within 24 to 48 hours because quick payment motivates agents to continue signing up new accounts, he says.
The company avoids paying upfront-only bonuses because agents under those plans tend to sign accounts and then provide little or no service after the signing, Chan says.
Upfront-only payment plans can lead to merchant attrition, agrees Oleg Firer, executive chairman of Miami-based Unified Payments.
“If I’m just paying an upfront commission, there’s no incentive for an agent to service this merchant further or to even pick up the phone to the merchant, so the attrition rate will be significantly higher,” Firer says. “I like to provide a combination where there’s an incentive for the agent to continue to service and nurture the relationship.”
Because it can take more than a year to build up a residual stream that’s large enough to live on, upfront bonuses can give new agents the means to cover their acquisition costs, Firer says. Given the industry’s shift from terminal leasing, Firer says the upfront commissions are taking on more importance, he notes.
Agents also should consider those costs when determining the amount of the upfront payment they take, he says, advising they take only enough to cover acquisition costs.
“If I’m an agent and I know my acquisition cost, between the terminal I put out and the lead and everything, is $200 or $300, do not take $500,” Firer urges. “Take $200 or $300 because that’s going to cover your base and it’s not going to eat into the future residuals because the more you take upfront, the less of a stream you’re going to get.”
Acquisition costs are rising because competition is increasing, and that’s one more reason combination compensation plans work well for agents, Firer maintains.
But agents should study the merchants they’re going to pursue and use the information they gather to help them determine whether to choose a residual or upfront bonus.
“Some agents don’t realize that if they’re going after retailers that do say, $100,000 a month, the residual piece could be substantial enough the it could overshadow the upfront piece,” he says.
He notes new agents with significant savings or other sources of income may prefer residual-only payments but that most new agents are better off with a combination plan.
While agents ponder their options, ISOs are coping a trend toward higher splits for agents, Hass says. To make matters worse, the higher splits are combining with free equipment and upfront bonuses to force some ISOs to take on a large amount of debt, merge with other ISOs, sell their portfolios or go out of business, he contends.
So when Hass develops compensation plans for his agents, he tries to balance everyone’s needs.
“Every time that we develop a comp plan or roll out a new service, one of the first questions we ask is, ‘Does this compensation work for the agents, and does it work for us?’ he says. “We keep the agents in mind first because if the agent isn’t happy with the compensation, then there’s no business. But it has to work for us. We have to maintain our margins.”
Hass suggests agents compare ISOs before signing on with one to ensure they’re satisfied with every aspect of the working relationship. But don’t fail to think about the compensation, he urges..