With card-processing margins under pressure, many ISOs and agents have begun to regard value-added services as a necessity. But which ones should they sell?
Cash-advance and gift and loyalty cards appear most popular, with mobile marketing emerging as a favorite, observers say.
But without strategic planning any value-added service can fall flat, they add.
“Almost any value-add, if you run the program right, can be lucrative,” says Curt Hensley, CEO of Impact Payments Recruiting, a Phoenix-based headhunter. “And if you run the program not so well, it can be kind of a bust.”
For some ISOs, that means going with time-tested standbys such as gift cards. For others, it means playing up niche products that few competitors offer.
Merchant cash advances have become a favorite among ISOs because they represent an easy way to secure a quick and sizeable revenue boost, observers say.
With merchant cash advances, the ISO lends merchants money up front through a cash-advance vendor. But unlike a bank loan that a business pays down monthly, the merchant repays the advance bit by bit through credit card sales. The tradeoff for merchants is that the markup on cash advances can be significantly higher than they would pay for a bank loan.
Often, cash-advance vendors pay ISOs an up-front percentage of every advance they sell. “You can actually make more on a merchant cash-advance deal than you do on credit card processing for the month,” Hensley says.
Process Pink Payments LLC offers agents a 50% to 80% up-front commission on merchant cash-advance sales, says Anthony Holder, president of the North Miami Beach, Fla.-based ISO. The payout for the ISO can amount to 10% of the principal for the advance, meaning an ISO would receive $10,000 on a $100,000 cash advance. Of that, the agent would earn a $5,000 to $8,000 cut.
In terms of revenue, merchant cash advances represent one of Process Pink’s two lead products, and mobile marketing is the other, Holder says.
Cash-advances have become particularly attractive to merchants because of the slow economic recovery and limited availability of bank financing, says Michael Gavin, vice president of third-party sales at Merchant Warehouse Inc., a Boston-based ISO. “Cash advances have stormed to the forefront of the value-added services people are trying to lead with,” he says.
Holder describes three types of merchants that want cash advances: Desperate businesses with a negative cash flow; victims of emergencies, such as floods or fires, with no time to wait for a bank loan; and entrepreneurs seeking money to market and expand.
The desperate merchants of the first category do not make the best customers, observers say. Although Holder acknowledges cash advances can be an expensive form of financing, he points to an ice cream retailer in Texas as one of Process Pink’s success stories. The merchant used a cash advance to expand from one location to eight.
“He’s netting $40,000 a month because of the businesses he has now, all financed by revolving a merchant cash advance,” Holder says.
Gift and loyalty cards represent another area ISOs point to as a revenue generator. “That’s probably No. 2 in my mind for a moneymaker,” Hensley says.
Gavin cites gift and loyalty as Merchant Warehouse’s two mainstays, with check-guarantee as the third. Merchants view the programs as an inexpensive marketing tool for their business.
ISOs also are looking to mobile marketing and other mobile payments services as the next potential revenue generator.
