Where Do You Fit?
People call me that are new to the industry saying that want to start “selling” and tell me that they want to sign up directly with Visa and MasterCard or they want to sign up directly with a sponsoring bank. As many of you know, that is not the way it works. Below I will outline the various levels at which someone can enter our industry and the characteristics of each type of relationship.
The easiest and cheapest way to start out as a sales person in our industry is to work as an unregistered sales agent. To be a sales agent in our industry, there are really no particular requirements and you do not have to make any particular financial commitments. All you have to do is pick from one of the hundreds of different agent programs out there, sign an agent agreement and start selling. But what type of agent program should you choose?
I tend to divide agent programs into two broad groups: The first type of agent program provides perks but typically in return for those perks you end out getting less in the way of residuals. By perks I mean things like free equipment to the merchants and bonuses paid to the sales agent. There are many types of bonus programs that pay a flat bonus per merchant, larger bonuses for the more the merchant processes and also bonuses based on placing a block of merchants.
Like most things in life though, these perks come at a price and that price is reduced residual payments. In these types of programs, the profit splits are lower at anywhere from 50-65% or so, than you would be able to get as a sales agent in a program that does not have these perks. And, many times, in these programs the ISO will not be sharing many of the fees charged to the merchants. This serves to further reduce the compensation to about half that of what you could expect with a program without these upfront payments. Many people though need the upfront bonus to pay for things like lead acquisition costs they cannot finance themselves, so these types of perk programs continue to thrive.
The other category of agent program is the “residuals based” program that focuses mainly on paying residuals to their sales agents. These programs do not offer bonuses or other incentives but instead provide a sales agent with the maximum amount of residual compensation one can earn at this level. These programs will typically pay from 70 to 80% of the residuals to the sales agents with some programs paying even more if certain production levels are met. In addition, the best programs will split on all revenue derived from the merchants, including things like PCI fees.
Agent programs where the ISO or processor pays the sales agent a percentage of all the revenue streams derived from the merchants are becoming less and less common. That is because most ISOs now are levying more and more fees and keep more, if not all of these fees for themselves. These fees for things like PCI compliance, PCI non-compliance, regulatory fees and the whole list of new fees commonly are not shared with the sales agents at the same percentage as other income. Sales agents need to understand what fees they are sharing. It is usually the most critical part of being able to compare different agent programs to determine which one really pays the best.
The last step in the agent program tiers is moving up to become a registered agent. As a sales agent, you can register with Visa and MasterCard by paying a fee and filling out some documents. The main reason to do this is to allow you to market under your own brand name and also to have sales agents working under you. Technically when you do this you become a registered independent sales organization commonly called an “ISO”. But at this level to me, in most cases, you are really just a registered agent since you are still operating under the same sales agent agreement you had before you became registered.
No Risk ISO:
The next tier above a sales agent is the no risk ISO. By that I mean a registered ISO that generally does not take any risk for merchant losses such as chargebacks and ACH rejects. For this level of commitment you have to pay registration fees to Visa and MasterCard. In addition, you have to guarantee the processor that the processor is going to make a certain amount of money from you on a monthly or annual basis. So, people that start or move up to this level usually are experienced sales agents or companies coming into the industry with some kind of substantive financial backing.
The main benefit to being a no-risk ISO is that you generally get paid 100% of the profits after a certain set of buy rates, for all the revenue derived from the merchants that you originate. As with the example of the sales agents above, fee based income is changing that and you must be very vigilant in determining what parts of the revenue derived from the merchants you may be missing out on. Part of the reason for that change is there are very few companies offering this type of program any more so the competition for no risk ISOs has dropped.
This level is generally suited for larger sales organizations that want to focus on sales and marketing, while making as much in residuals as they can. These companies generally make the choice because they do not want to deal with all the other things like underwriting and risk monitoring that would take their focus away from sales. In addition, they like to become a no risk ISO because sales prices for selling portfolios at this level can be nearly double what they are for selling the typical sales agent portfolio.
About the highest tier most aspire to in our industry is becoming a full risk ISO. By that I mean an independent sales organization that takes all risk for merchant losses. Along with that responsibility generally comes the duty to underwrite the merchant accounts and also to provide ongoing monitoring of transactions to minimize fraud. This necessitates a whole operation of underwriters, risk monitors, customer service personnel and all the associated hardware and software to run the operation. In addition, the risk ISO needs to put up reserves of cash with the sponsoring bank to pay for any merchant losses that may occur.
As a result, to properly set up such an operation, one is looking to have a least a few million dollars to do it properly. So for the most part, as you can imagine, this level is not for a startup type of enterprise. And even if you wanted to, most processors will not want you to start at this level. Operating a full service ISO requires industry experience and unless you have it, they most likely won’t let you in the door.
So there is the lay of the land in the bankcard industry. Now it is just a question of what tier you want to start at as you enter into the business. Evaluate where you want to fit into the picture and start selling!
The information contained herein is for informational purposes only and should not be relied upon in reaching a conclusion in a particular area. The legal principles discussed herein were accurate at the time this article was authored but are subject to change. Please consult an attorney before making a decision using only the information provided in this article.