About two years ago, Birmingham, Ala.-based MLS Direct Network Inc. decided to become a full-fledged wholesale ISO instead of merely a retail ISO.
The result? Andy Pitts, the companys president, said he wasnt prepared for all the unexpected costsand headachesthat came along with the move.
Retail ISOs focus just on selling and servicing merchant card transaction accounts, while wholesale ISOs become officially registered with the card brands, take on back-office tasks, and assume responsibility for credit approval, risk mitigation and charge-back reporting.
While hes happy about the companys decision, he cautions other ISOs to look carefully before they leap to the wholesale ISO model. Everyone focuses on the underwriting risk and thats not necessarily the biggest issue ISOs face when going wholesale, according to Pitts. You have to really be unhappy with the retail system to want to do this because its a lot more work.
Sometimes ISOs see the wholesale world as a kind of Holy Grail, and it certainly does have its advantages in terms of control, brand identity and higher valuations. But significant drawbacks come into play for those that make the shift too soon or without adequate planning. The upfront costs for proper systems, staffing and technology can become hefty. And of course, without enough financial cushions a significant risk-event or two can cripple a business. For those reasons, ISOs should not take lightly the decision to switch from retail to wholesale.
You have to have a team in place, you have to have the equipment, you have to have years of experience. You have to know what you are doing to make that step, said Mark Dunn, president of Field Guide Enterprises LLC, a consulting firm based in Hartland, Wis., that advises ISOs, including those interested in making the transition.
There is no hard and fast rule about whens a good time to go wholesale. But ISOs can administer some basic self-diagnostic testsincluding size, experience, financial wherewithal and ability to withstand riskthat can help with the decision on whether it might be worth investigating further.
Size is of paramount importance, according to Dunn, who tells ISOs not to bother going wholesale unless they have more than 3,000 merchant accounts on board. For certain types of merchants, that number could be closer to 5,000, he said.
Also consider how much new business comes in monthly. Make sure to have enough volume to afford the additional costs. Again, theres no magic number, but Kevin Jones, president and chief executive of Anovia Payments, an ISO with headquarters in Irving, Texas, that chose the wholesale option, believes an ISO should be adding around 150 to 200 new merchants per month for it to make sense.
Its important to think about cash flow when weighing the decision. ISOs need money to pay for new technology, to beef up compliance and risk management staff, and to maintain an adequate reserve cushion. Unexpected costs arise, too. Weve spent well over $100,000 on the front-end integration. Thats something we had no idea was going to be there, said Pitts of MLS Direct.
According to Pitts, ISOs going wholesale should also budget about five thousand dollars a month for risk losses, about five thousand dollars for reporting fees and another five thousand dollars or so for fees they cant pass on to agents or merchants. If youre a small ISO I dont know how well youre going to come out being a wholesale ISO, he says.
Sometimes ISOs want to make the move because they think theyll earn more money, but theres no guarantee. Years ago, there were more pricing advantages for wholesale ISOs, but margins today have compressed. Its a misnomer to think youll make more money, said Pitts. That hasnt been true for MLS Direct.
Theres also a certain level of experience Dunn the consultant believes ISOs should have before taking the plunge into wholesale. Hes seen a number of players in the industry who have four to five years of experience and are attracted by the lure of owning their own bin, having portability and controlling as much of their destiny as possible. But he does his best to talk them down from the ledge.
Maybe you want to walk before you drive and maybe you want to drive 50 miles an hour before you get out in a Formula One racecar and try to do 160 miles an hour, which carries significant risk of crashing, flipping over and dying. There is an equivalent to that type of risk in owning a wholesale ISO, he said.
His caution is based on a situation he ran into several years back with a young, inexperienced entrepreneur whose wholesale ISO ended up running out of cash within three years. He didnt have a good sales engine in place before he got started, Dunn said. He did all of the technical work, but he ran out of money before he could ramp up his sales force and his selling ability.
ISOs also should carefully consider their ability to stomach risk before making the leap to wholesale. The question to ask is this: If you can get 80% of the overall revenue with no risk, is it worth it to get 90% of the overall revenue with full risk? Youre basically betting the farm on that 10%, said Jones of Anovia Payments.