From the April 2010 issue of ISO&Agent magazine.
Residuals are a standard form of payment revenue for ISOs and sales agents, but the weak economy, decreased transaction volume 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. "The economy is a huge factor."
Residuals are a portion of the transaction fee that represents revenue for ISOs and sales agents. Agents typically begin receiving residual income from an account after they begin processing transactions for a contracted merchant.
Unfortunately, not all agents fully understand the details surrounding their residual splits because not all ISOs calculate residuals in the same way. Before signing a contract, agents should scrutinize it to ensure they know exactly how they will be paid. Without close scrutiny, agents may lock themselves into payment contracts that benefit their employers more than themselves.
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 up front "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 when agents sell certain products, such as terminal leases or cash advances.
By negotiating payment contracts that include up-front revenue, agents can help stabilize their incomes during the difficult economy, insiders say.
"Negotiating is a huge part of any contract," and agents need to understand the amount of income each product they sell may bring to them and when, says Eazell. Not all sales representatives may fully understand what their costs are and what the revenue split is before signing a contract, he notes.
DECREASED REVENUE
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.
Overall, "the splits are less than they were a year ago," and "pricing models are changing," says Don Smith, chief at 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."
Indeed, many merchants want to decrease their payment card- acceptance costs, and that is driving reduced margins in the industry, says Diana Mehochko, president of First National Merchant Solutions LLC, an Omaha, Neb.-based processor. Some merchants even are opting out of card acceptance because it is an expense they no longer can afford, she says.
Transaction volumes also have decreased, and "volumes always impact any kind of profit or revenue split," says Donna Embry, senior vice president at Payment Alliance International, a Louisville, Ky.-based ISO.
Additionally, some agents struggle because it can be "three months down the road" from when the merchant signs the contract to when an agent begins receiving residual income, says Cook. It also can take an agent a long time to build a steady stream of residual-based income from multiple contracts, she notes.
Because of the multiple factors negatively impacting agents' income, some agents "are looking to up-front money and (placing) less emphasis on back-end residual money," Peters says.
UP-FRONT INCOME
Few agents can survive solely on residual income, says Peters. There are roughly "100 to 200 agents in business that can survive on their residual streams and don't need up-front money," he says.
International CyberTrans launched an up-front bonus program for its agents roughly six months ago, says Cook. Agents receive an up-front bonus when they sign a merchant based on the anticipated monthly revenue from the client.
"If we anticipate they will earn monthly revenue of $100," the agent will receive 50% of the amount up front, $50 in this example, and will receive the remaining portion after 90 days, Cook says.
If the monthly revenue only reaches $75, the agent only will receive $25 after 90 days. "We adjust the remaining balance due based on actual revenue," says Cook, adding the program has been a good agent-recruiting tool for the company.
More ISOs are offering "creative" payment programs to agents because some want to receive "lump sum" payments, notes Eazell. "As a salesperson, I need that money now. I may negotiate to get half my residual and the other half up front," he says.
VALUE-ADD PRODUCTS
Agents also can receive up-front income by selling certain value-added products to merchants, observers note.
"Value-added services are starting to increase again," says Eazell. "There's only so much [agents] can pull out of a merchant with credit card processing," he says, noting Secure Payment Systems is selling more terminal leases than the company has "in years."
Indeed, terminal leasing and cash advances are "rallying back," says O'Connor.
"Those revenue opportunities are starting to come back into the marketplace," so much so Velocity Payments has created an internal sales division to capitalize on it, O'Connor says. Increased numbers of cash-advance and leasing vendors also have been approaching the company, he adds.
The more value-added products and services an agent can sell to a merchant, the more income that agent can make from the account overall, insiders say. Additional products also may include prepaid cards or ATMs.
"It's sort of like launching all boats in the water," says Embry. Agents should sell products that complement transaction processing to ensure they are not dependent on one type of payment service for revenue, she says.
As agents sell value-added products to merchants, their revenue becomes more sustainable and less dependent on transaction-based revenue, agrees Smith.
An agent can increase his or her income by raising the value of a merchant account by attaching more products to it, says Embry. "Where an account might have been worth $10 [to an agent with one product attached to it], with two to three products it becomes a $30 relationship," she says. The additional services also can increase merchant retention and overall portfolio value, Embry adds.
Agents not diversifying their products and services "will become dinosaurs," she predicts.
CONTRACT NEGOTIATION
Both novice and seasoned sales agents can have difficulty understanding where they earn their revenue because not every ISO defines and pays residuals in the same way, note observers.
"There is a big divide out there as far as sales reps who know what they are getting and the ones that don't," says Eazell. "Sales reps may not completely understand what the real revenue split is."
Agents should pay close attention to the payment details included in their revenue splits, agrees O'Connor. "I get agents all the time saying 'so and so is offering an 80/20 split,' and I say, '80% of what?,'" he says.
Instead of a true revenue share, some ISOs may add on base fees and only share revenue with agents above those fees. "Agents sometimes overly focus on the percentage split without looking at the details," says O'Connor.
Successful agents take the time to learn exactly how they earn revenue off of an account, says Eazell, who suggests agents look closely at the merchant contract and their own contracts to better understand their revenue.
Some ISOs may charge merchants additional fees, such as those related to noncompliance with the Payment Card Industry Data Security Standard, yet sales agents may not earn any revenue from them, says Eazell.
Studying the merchant contract can help an agent see what the ISO is charging the merchant and the fees from which they are not receiving income.
"You need to cover your own tracks and be responsible for anything you sign," Eazell says. "It is very, very important that you recognize there is only one person responsible for how you get paid."
If after examining the contracts certain aspects do not sit well with an agent, the sales rep should communicate the concerns to the ISO before signing anything, advises Eazell. "If you read your contract and find something out of whack, bring it to their attention. They have been pushed back on it before, I guarantee," he says.
Ultimately, payment contracts are designed to "put money in the pocket of the person who wrote the contract," which means agents need to negotiate to ensure they receive a fair deal, says Eazell.
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.
