Residuals are a standard form of payments revenue for ISOs and sales agents, but the weak economy, decreased transaction volumes and margin compression are making it more difficult for individuals to subsist on residual income alone. As some agents’ residuals grow tenuous, more salespeople are expressing interest in up-front revenue to bolster their incomes.
“Current revenue splits” have changed as agents negotiate different deals in response to the difficult market and try “to make ends meet,” says Steve Eazell, director of national sales and marketing at Secure Payment Systems, a San Diego-based merchant-service provider.
Residuals are a portion of the transaction fee that represents revenue for ISOs and sales agents. Agents typically begin receiving residual income from accounts after merchants begin accepting card transactions and processors have settled these transactions with merchants.
Agent residual splits historically have fluctuated with the market and with which entity—the ISO or the agent—holds the most leverage during contract negotiations, observers note. The market may swing toward 80/20 splits one year and 70/30 the next, says Cook. The agent typically receives the larger portion of the split.
A new agent may receive a 50/50 revenue split, while seasoned agents may receive an 80/20 split, says Ryan O’Connor, president and CEO at Velocity Payments LLC, a Boulder, Colo.-based merchant-service provider.
Unfortunately, not all agents fully understand the details surrounding their residual splits because not all ISOs calculate residuals in the same way.
Residuals have “been a methodology for a long time to reward agents” with income, says Joyce Cook, president and CEO of International CyberTrans, a Brentwood, Tenn.-based merchant-service provider.
The method makes “business sense” and benefits all parties because everyone shares a percentage of what is earned, she says. However, “the economy and same-store sales are down. Therefore, commissions are down, revenue is down,” says Cook. Because of this, some agents may require an upfront “cash infusion along the way,” she says.
With up-front revenue, agents may receive a bonus or a portion of anticipated transaction revenue when they initially sign a merchant contract. Up-front revenue also can come from agents selling certain products, such as terminal leases or cash advances.
Overall, “the splits are less than they were a year ago,” and “pricing models are changing,” says Don Smith, chief with Practical Business Concepts LLC, an Omaha, Neb.-based provider of merger and acquisition and management consulting services in the financial industry.
Margin compression is affecting how ISOs pay their agents and the portion of residuals they give them, says Michael A. Peters, senior vice president of independent sales services at Dallas-based TransFirst LLC. “The margin compression is affecting how we price and pay on deals,” says Peters. “It is affecting residual splits.”
The weak market and decreased transaction volumes are making it more difficult for agents to thrive on residual income alone. As they turn to up-front revenue opportunities, a close look at their ISOs’ contracts can help identify ways to leverage the biggest buck.
