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ISOs can attain higher profits and face fewer competitors by targeting existing merchants instead of solely seeking business from start-up merchants, according to some ISOs. This tactic, however, can cause ISOs to miss opportunities to work with start-up merchants that may develop into successful businesses and become profitable for ISOs, other observers note.
The important difference between a start-up merchant and an existing merchant is that the existing merchant has its business established, says Erik Verryden,
president of National Processing Solutions Inc., a Phoenix-based ISO. Existing merchants have a processing-volume history that ISOs can use to estimate their potential revenue from the merchant. ISOs can gauge the revenue they will earn from existing merchants "because you know how much they will make you up front," says Verryden.
Elite Merchant Solutions focuses "almost solely" on converting existing merchants because it is "the most-profitable" method, agrees Justin Milneister, president of the North Hollywood, Calif.-based ISO. "With new merchants, you are just guessing" about what the processing volume and what the revenue for the ISO will be, he says.
Existing merchants also are less likely than start-up merchants to go out of business, and existing merchants typically have "more capital to purchase extra services like gift cards or to upgrade equipment," says Milneister.
Competition Over Start-Ups
ISOs face an increased level of competition for business when they target start-ups instead of existing merchants, observers say. "I see more competition with brand new start-up businesses than anything," says Verryden. Start-up merchants are "bombarded" with offers for free equipment and low rates, he says.
Many ISOs also use the same new-business leads to find start-up merchants, which increases the likelihood of competition, Verryden says.
"The problem with new businesses and new-business lists is everyone is tapping those," agrees Tom Stone, chief operating officer of Vision Payment Solutions, a Portland, Maine-based ISO. "It is not uncommon for a new merchant to have 100 inquiries before they open their doors," he says.
Existing merchants that accept card payments also get calls and marketing materials from ISOs, but the competition is not as intense, says Verryden. "A lot of times [existing merchants] will ignore [ISOs] because they already take cards," he says.
Some Benefit To New Merchants
While there is heavy competition to win start-up merchants' business among ISOs and trepidation that the new businesses may fail, ISOs and their agents should not dismiss fledgling retailers, says Jamie Savant, a partner with The Strawhecker Group, a Omaha, Neb.-based management-consulting firm.
"I encourage agents and ISOs to continue to look at the new-merchant model," says Savant. "You don't know who the next diamond in the rough will be," he says. Savant suggests ISOs give new merchants a chance to grow while monitoring their risk assessments.
It is beneficial for agents to sign up merchants, whether they are existing or start-up businesses, "because they are putting money into their pockets in the long run," says Verryden.
Milneister, however, does not Believe Elite Merchant Solutions is missing opportunities to sign contracts with start-up merchants whose processing volumes may take off. "It's the same reason I don't bet on the long shot at the horse track," he says. "You will consistently lose to get the one long shot."
