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It is difficult to deny ISOs face a challenging U.S. market and shrinking residuals when looking at the facts: Core credit card processing in the U.S. domestic market is slowing down. Same-store year-over-year sales growth in terms of the percentage over last year's sales is now in the single digits and headed down. Debit and travel-and-entertainment card volume is growing as a percentage of merchant's sales. These lower-margin card types are cutting into ISO residuals at a fast pace. Per-merchant gross monthly residuals also are down and may not recover even as the domestic economy rebounds.
These facts illustrate that salespeople need a more-complex business model to sustain growth. The days of getting rich by cold-call selling into generalized markets may be behind us. The best way to counter these trends is to diversify into international markets, promote broader product offerings or target vertical segments that are more insulated. The purpose of this article is to explore some good ideas that I picked up at the Electronic Transactions Association's Strategic Leadership and Networking Forum in Chicago last month.
A Common Problem
What do merchant-level salespeople and health care professionals have in common? Perhaps more than most ISOs have realized. I learned at the forum that primary care physicians account for less than 7% of all health care practices in the United States. A primary care physician, who typically does not specialize in one medical area, will earn an average of $80,000 per year in an ever-declining margin business.
Most doctors do not go to years of school and then incur the debt of opening a medical practice to earn only $80,000 per year. This is why so many physicians specialize. A doctor that focuses on a single area can earn significantly more than a generalist.
Similarly, ISOs that specialize in a merchant vertical can maximize their revenue.
Payment professionals that specialize are finding their margins holding steadier than those that sell into general categories. Certain merchant segments are not experiencing a slowdown in same-store year-over-year credit card sales as other segments are. Government, education, utility and certain other vertical markets are relatively "bullet proof" to economic slowdowns.
These segments within our industry are growing faster even now in difficult times. ISOs and agents that focus on selling into verticals like these may find less margin pressure and easier retention.
Diversifying Product Offerings
Payment professionals need to offer a complex array of products to their core clients to diversify their dependence on card processing. Card processing no longer is the platform sale from which all other payment products emanate. For many sales professionals, card processing sits in the pole position in a sales presentation, like the number-one racecar waiting for the race to start. The presentation has changed from "increase sales by accepting card payments" and "accept card payments at a lower cost" to "look at the other services my offering brings to your company."
This sales-tactic evolution has led what used to be considered "follow-along products" to become central to the conversation. For example, in an environment where a salesperson sells an integrated software product with payment processing as part of the offering, the merchant decides to purchase the integration, and the payment processing goes a long for the ride. The sales professional needs to be supremely deft at covering the benefits of the integration, and the payment-processing service then becomes a secondary aspect to the sale.
This so called "check the box for payments" is a shift away from how our industry used to work. It was not too long ago, for example, that offering check conversion was an "add-on sale" to an existing card relationship. Check processing used to be the "check-the-box" sale.
In today's terms, if a sales professional is targeting a business-to-business vertical market, the agent may open the conversation with an electronic-check offering. This then becomes the core product that the prospect is considering. Later, as the sale progresses, the conversation may lead to whether the merchant is completely satisfied with the business's card offering. In this way, the electronic-check product becomes the core sale, and card processing the follow-after sale. Sales professionals either will adapt to the new selling strategies in these vertical segments or be left behind.
Augmenting Shrinking Residuals
The days of high residual guarantees are behind us and, to quote one presenter at the ETA forum, there is not any "compelling reason to assume that this could be undone." In fact, this presenter said that he "felt the resistance point may be around $25 per month per merchant in residual realized for an ISO." While I respect this presenter's opinion, it worries me that he also sees zero residual per month per merchant as a real possibility in the long term.
If it is true that the average residual per merchant has declined from $40 per month per merchant to something less than that, what will fill this void of profit? Every person I spoke to gave a unanimous answer.
All agreed that what used to be considered ancillary products are becoming core to sustaining the ISO's per-merchant profitability. The card-processing sale no longer can be counted on to build a business around. It is true that to make a compelling case for the effort and cost of acquisition required to generate $25 per month per merchant, on average a sales person must augment that per- merchant residual with other products.
To augment profitability in the vertical market, sales professionals must align the product offerings with the targeted customers. For example, when targeting education or government verticals, a salesperson must be prepared to discuss PIN-less debit. This is one of the fastest-growing areas of payments in those two verticals. By any measure PIN-less debit is a critical component of any sales conversation with educational or governmental institutions. By anticipating the needs of these verticals, agents can make sure they have the products that give them an edge.
Looking At International Markets
International markets are expanding card-acceptance rates far faster than the United States. It is clear that there is more opportunity for payment-processing profits in developing countries than exists domestically. How then can an ISO or agent capitalize on this?
Engaging in relationships in these countries will be expensive and time consuming for a smaller ISO or agent. The solution is to partner with a larger organization that already has paid the price to gain a foothold in foreign markets.
A good agreement with a partner will be well vetted and lead to additional contacts through the partner in the country where the prospective buyer wants to go.
Easy to find if you are looking in the right place. These opportunities might best be found by starting with your processing partner. Larger companies have started international expansion and have made inroads in foreign markets. This is a good way to diversify a portfolio and increase margins.
Surviving the recession of 2008 will depend on creative business solutions. Doing things the old way will result in marginal results. Payment professionals should be looking for newer ways to increase market share and margin. International payment processing growth still remains high. Product differentiation and vertical-market specialization are the hottest things in the acquiring space right now.
Matt Clyne is a senior vice president at Sage Payment Solutions. His e-mail is mclyne@sagepayments.com.
