The New Outlets for Selling POS Terminals

  Back in the 1980s and well into the '90s independent sales organizations sold or leased at a premium hundreds of thousands of payment card terminals to small and mid-sized
  merchants. For ISOs, this traditional sales model represented an opportunity to make a healthy margin on a product they could purchase at a substantial discount off the manufacturer's suggested retail price.
  Many ISOs bought their terminals from resellers, companies that buy direct from manufacturers in bulk, well below list price. Garnering most of their revenues from hardware sales was a good business model for ISOs more
  interested in upfront sales than long-term residuals gained by servicing a merchant client. Indeed, many burgeoning card-acceptance markets, such as physicians' offices and family-style restaurants, had a tiny terminal base, if any at all, and represented a ripe opportunity for ISOs to sell point-of-sale terminals.
  But now, margins earned on terminal sales have narrowed considerably as the prices at which merchants can buy equipment have fallen precipitously. A major culprit in this turn of events is the increasing popularity of alternative
  sales channels, including Internet-based auction sites and wholesale clubs.
  Merchants can not only purchase new and refurbished POS terminals through these channels at a fraction of what they might pay an ISO or a processor, but in many cases they can purchase processing services too. The impact on terminal
  prices has been pronounced.
  New terminals that might retail for $300 to $400 on a stand-alone basis can be bought at auction on eBay Inc. for a third of the price or less, according to industry experts. Used terminals less than five years old can be had for $50
  or less.
  Merchants not inclined to buy online can still go to e-Bay to check prices on new and used terminals and use that information to negotiate a lower price with an ISO or processor.
  And offline, Wal-Mart Stores Inc.'s Sam's Club subsidiary and Costco Wholesale Corp. are making terminals available at the wholesale prices for which they are renowned.
  "Historically, markups on terminals were a big part of the spreads earned by ISOs," says Thomas Wimsett, president and chief executive of Iron Triangle Payment Systems, a Louisville, Ky.-based firm that invests in payment-industry
  companies. "Now it is getting tougher to earn those markups because merchants are finding lower-cost sales channels such as Sam's and eBay. A lot of small businesses are becoming more savvy when it comes to finding ways to source
  terminals."
  What enables merchants to buy terminals at such low prices is that many of the sellers on the Internet are out-of-business merchants that are liquidating their POS equipment or those ISOs willing to sell terminals at cost in
  the hope of landing a processing contract. The Internet and wholesale clubs are lower-cost distribution channels than traditional feet-on-the-street sales forces.
  While terminals can be bought on the cheap over the Internet, buyers do need to be cognizant that those using the Internet as their primary sales channel move in and out of the marketplace at will.
  "Sellers on the Internet tend to be brokers that offer equipment as they have it available," explains Vicki Conlee, vice president of equipment sales for Rocklin, Calif.-based TASQ Technology, a leading terminal reseller and a
  subsidiary of Greenwood Village, Colo.-based First Data Corp. "Auction sites and the Internet are an inexpensive way for them to move equipment that is not necessarily mainstream, but is still in demand."
  Conlee says she is aware of about 30 TASQ clients that turn around and resell their equipment on the Web, double the number a year ago.
  Trial And Erroe
  Older-model terminals, whether they are fresh out of the box or used, are a big reason why terminals can be bought so inexpensively on the Web. It is not uncommon to see a VeriFone Tranz 330 less than three years old sell for $15
  through eBay, according to industry experts. The depth of the discount for terminals sold online depends on the make and model.
  In more extreme cases, a terminal reseller looking to dump excess product or use low hardware prices to entice a merchant to buy processing services may set an opening auction bid at less than $1.
  It doesn't always work. Melville, N.Y.-based Federated Payment Systems, which sells terminals and processing services on eBay, has tried a similar strategy, only to abandon it. Federated has been selling terminals through
  eBay since late 2003.
  "Now we generally list starting prices for bids at what we want to get for the terminal," says Rich Williamson, director of Internet services for Federated. "It has been a
  lot of trial and error."
  That terminals can be purchased online at or below the seller's cost has prompted resellers in the physical world to lower their prices. TASQ's Conlee says the POS terminal has been transformed into a low-margin commodity, though she declines to disclose TASQ's financials. "The margins being made on terminals sold to merchants really depend on how much is being made on processing services," she says.
  But the largest terminal resellers have worked on thin margins for years, according to O.B. Rawls, president, North America, for Phoenix-based terminal maker Hypercom Corp. Last July, Hypercom closed its Horizon Group subsidiary,
  which was a leading terminal reseller, partly out of concern it was creating ill will among the resellers that purchased terminals directly from Hypercom, according to Rawls.
  To cement their ties with merchants, large resellers will offer services such as repair, merchant training on how to use the terminal, a help desk, and 24-hour replacement on an outsourcing basis.
  Despite their reputations as low-ballers, ISOs and resellers hawking terminals online loathe taking a loss on a straight terminal sale. To ensure they at least recover their costs at auction, some resellers set a reserve price, which is a minimum bid that must be met before a sale is
  finalized. Reserve prices tend not be published. Bidders, however, are informed when the reserve is met.
  "If we sell the terminal outright, we do it at cost so we don't lose money," says Federated's Williamson.
  If no one meets the reserve price the terminal is relisted on eBay or the company's Web site once the auction closes. Merchants also can purchase processing services through Federated's Web site.
  Web sites serve as a big lead generator for online terminal resellers. In many cases, terminal sellers on eBay will provide a link to their Web site on the auction page.
  They may also present the link as an online store within the eBay community. "It's an excellent way to get the phone to ring and generate leads for new clients," says Williamson.
  But when leads turn into sales of processing services, terminal prices often will drop to below cost, because the resellers can make up the difference on the residuals generated by the processing contract. Still, not all merchants surfing the Web for deals on POS terminals are looking for processing services. Many already have a processing contract, but want additional terminals at the
  best possible price.
  In many cases, the best price comes on a used terminal that can be refurbished. Merchants increasingly are picking up used terminals on eBay and elsewhere online and sending them to their processors for reprogramming and refurbishing. Terminals three to five years old, but which are in need of
  refurbishing, can be bought for between $50 and $110 online and refurbished for less than the cost of buying a comparable refurbished terminal from an ISO or processor.
  Some resellers will even buy online at this price themselves, refurbish the terminal and sell it to merchants for more than $100 over what they paid, according to Hypercom's Rawls. Refurbishing a terminal usually involves
  replacing the circuit boards and the box's outer cover. Many refurbished terminals come with a one-year warranty.
  "Merchants are just as happy with refurbished terminals as they are with a new terminal," says Chris Wiesner, president of National Ram Electronics, an Alpine N.Y.-based ISO that sells terminals through its Web site. "A lot of
  merchants looking to upgrade terminals know they can get a good price on a refurbished terminal and go online or to oking for a bargain."
  Still, cut-rate terminals are not necessarily a bargain for merchants. One frequent problem is that a terminal bought online and sent to a processor for refurbishing cannot always be reprogrammed to operate on the processor's network. Unless the processor refurbishing the terminal knows the previous software code programmed into the machine, the terminal remains locked and new software cannot be loaded.
  "We have merchant clients come to us that bought used terminals online that we cannot reprogram," says Steve Pavent, president of St. Petersburg, Fla.-based Business Payment Systems. "Merchants can buy a lot of terminals online on the cheap, but we've seen a lot of them thinking they had a great deal only to wind up not being able to use the terminal. The Internet is a great place for comparative information and low prices, but it's buyer beware."
  Merchants looking for an alternative sales channel that presents less risk are turning to wholesale clubs. Sam's Club has been selling POS terminals and processing services to members for more than five years. Sam's offers terminal
  buyers processing services through First Data Corp.'s First Data Merchant Services.
  Sam's Club markets the service to members though its Web site and in-store fliers. Customers can call a toll-free number to receive detailed information. No terminals are displayed in stores because of the space needed to display
  all the makes and models carried by FDMS.
  "We saw a big need for this type of service for our members," says Rita Seckington, member benefits manager for Sam's Club. "This is a very popular product and we are seeing an increase in sales."
  'Really Hurting'
  Sam's members generating an average ticket of less than $500 can receive a processing rate of 1.54% of the sale plus 20 cents for electronically uthorized, cardholder-present transactions. First Data also will waive its monthly service
  fee of $4.95. Although terminal prices are not disclosed in the sales brochure, Seckington says they reflect Sam's Club's pricing philosophy. Executives from FDMS were not available for comment.
  A spot check of ISOs and processors advertising their services online or through eBay showed some other competitive rates, too. Federated Payments, for example, offers a processing rate of 1.55% plus 15 cents for cardholder-present sales. Merchants are not charged an application fee or set-up fee, but are charged a $5 statement fee.
  Federated Payments, which sells under the name US Bank Card Center on eBay, offers processing fees as low as 1.49% plus 23 cents per transaction or 1.55% plus 15 cents per transaction for merchants with an average ticket of less
  than $100.
  Some terminal resellers using eBay will establish a different brand to create a point of differentiation from their traditional sales channels.
  The firm urges buyers to call a toll-free number to
  inquire about special prices for overstocked items. Many of the terminals US Bank Card Center sells on eBay come with a lifetime warranty.
  "Some bidders are looking for processing, others already have a processor," says Federated's Williamson. "We state in every auction description that the terminal needs processing. If we can land a processing contract in addition
  to selling the terminal, it means long-term revenues."
  Truth be told, long-term revenues have become the name of the game in the processing business. With terminal prices falling and merchants better educated about equipment costs, ISOs can no longer sustain themselves just on profits from terminal sales or leases.
  "It's getting harder and harder to make money on terminal sales because there is never going to be enough markup to survive," says Marty Blank, president of Automated Merchant Services, a Coral Springs, Fla.-based ISO. "Plus, we are seeing more merchants buy terminals online and ask us
  to just hook them up. That is really hurting the margins on
  equipment sales for ISOs."
  Some industry experts argue that the thinner margins being earned on terminal sales will benefit merchants in the long run by prompting independent sales organizations to focus on residuals earned through better service. In the
  meantime, merchants are sure to enjoy the reduction in terminal prices the Internet and wholesale clubs are fueling.
 

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