Episode Transcript
[00:00:04] Speaker A: This is Payments Ground Game where we go under the operational hood of payments isos. Let's take a deep dive into the tactics you can use to strategically scale performance and your bottom line.
Welcome to another episode of Payments Ground Game. I'm Elena Smith. I'm here with my co host Kevin Smith.
And today we're going to do a little bit of an off the cuff episode. I just had a conversation with an ISV who was looking to monetize payments. So they're currently using a provider like Stripe and they were looking for a relationship with a provider so that they could start to monetize the payments as part of their software. And I was a little surprised at my conversation because they'd had a couple of conversations with other providers and shared the way those conversations went. And when I talked to them, they were ready to jump right into the pricing discussion, which we need to understand a lot about someone's business before we talk about how we're going to price that business. So I thought today Kevin and I could just walk through the process. If you have, if you are a new ISV to the space that's wanting to monetize payments, what are the things that you should be thinking about? What are the questions that you need to ask of the provider?
What kinds of questions should they be asking you? So I just wanted to talk through that a little bit in case this is something that's top of mind for you or if it's in a learning experience for you.
Let's walk through that process together.
[00:01:33] Speaker B: You know, I think it's interesting, Elena, because after you got off that call, you came right in here and you're like, wow, they wanted to talk price right away. And I, you know, the first thing that came to my mind was a, you know, who are they selling to? B, what are they selling them?
See how, what is their plan for boarding, you know, and what are they looking for their provider to do for them? I mean, is the provider going to provide? Are they just looking for somebody to give them mids and tids or are they looking for somebody to do everything? Risk monitoring, customer service? You know, there's so much more to that. And like you said, you know, I wouldn't even know where to start with a schedule. A really unless we understand some of those aspects.
[00:02:13] Speaker A: Yeah, we really need to understand the business model and the type of businesses that they'll serve. And that's a fairly easy question we can get answered on a quick intro call, but we also need to map out those processes. The business Processes of the payments piece, what parts are they going to own versus what parts will we own? And let's kind of talk through. Let's divvy that up a little bit and talk about possible scenarios of what that might look like. So just to give people a flavor of different scenarios where sometimes these ISVs are more involved in the payments process, other times they want to just hand it all off to us and we handle everything. So let's kind of just talk about the different scenarios so that they understand what's possible here.
[00:02:59] Speaker B: Best way to probably do that, Elena, is probably just start from the left side, as we say, from the cradle over all the way to the grave on the right side. And cradle being, you know, hey, how are they selling? What are they selling to whom?
And how are they looking for their boarding process, their, you know, underwriting process to work? Because that's the first thing that you want to address.
You know, are they. Do they have a web page that they're pushing traffic to? Do they want an automated underwriting process that is, you know, the customers are directed to a website and the. Then the customer goes through like a wizard, so to speak, to fill out the application, you know, how do they want. Are they equipped to do that? Are they not equipped to do that?
[00:03:45] Speaker A: I think when you're coming from an environment like Stripe, it's done in a certain way and you can only, you can only own so much of the process. So they just assume that maybe that's the way it's going to be done in another, you know, with a different kind of provider, in more of a legacy provider kind of situation, where they are able to monetize payments and they don't know that they can have involvement in this. But at the same time, they don't know what they don't know. So you can't just say, you know, I'm going to do the underwriting yet I have zero underwriting experience and I'm going to take ownership for this process.
There's a lot involved in the underwriting. So if you want to get involved in underwriting, then you would need to know the basics of what's required for underwriting.
[00:04:31] Speaker B: Well, and underwriting is going to be different. I mean, if we're talking about nail salons, okay, the underwriting for nail salons is completely different than the underwriting is going to be, say, for somebody that is doing online payments for debt collection or somebody that's doing some sort of online payment in a higher risk scenario.
[00:04:57] Speaker A: Travel some kind of food delivery?
[00:05:01] Speaker B: Absolutely. Yeah, Custom furniture, things like that.
So if we are talking and Most of these ISVs that we have talked to and we've interacted with are in these lower risk spaces such as nail salons or bridal shops or convenience stores or things such as that, you can wrap together a pretty cookie cutter product that they're going to deliver, I. E.
Every one of them is going to have the same price.
We don't know if that is. I mean, we can cookie cutter that and that can be much easier that way once you cookie cutter that piece of it, the pricing is the same for every single merchant. So you're not worried about, ooh, did I price this one wrong or did I price that one wrong? You work that pricing out in the beginning and every merchant has the same price. And what we found is the most successful ISVs that we run into do make that underwriting process very cookie cutter, I. E. They give the merchant one of three options for a price.
[00:06:04] Speaker A: Yes, it's A, B or C. And you lead them down one of those paths and you don't deviate from that. You don't let somebody haggle you over. Well, I want a lower statement fee or something like that. It's this package, this package or that package, and that's it.
[00:06:18] Speaker B: And in return for that, you get our super sweet software, whatever that is, that's generally going to be, you know, customized around that type of plan business. And like I said, our most successful ones are the ones that make that pretty much cookie cutter with, you know, the option being, hey, if you want to use our service and our, you know, you're going to use our credit card processing, this is the three options. And quite honestly, they have a much easier sales cycle doing that.
[00:06:44] Speaker A: Yes. And they can really streamline that operation because they set up, you know, three different processes basically. Well, three, you know, one process with three variations essentially, where the only variation is price.
[00:06:57] Speaker B: So I think, you know, that's, we get past that first hurdle, but I think that's very important that we talk about those things early on because I mean, one of the most expensive pieces we have in the process of a life cycle of a merchant is the onboarding underwriting process that's got, you know, the cost associated with that has to be, you know, recovered over time. It's generally not recovered up front. It's generally recovered over time in the margin the processor sees on their side.
And the easier, less operationally intensive that underwriting process is, the less expensive that onboarding is and the less, you know, recovery From a margin perspective, the processor is going to see on their side.
[00:07:41] Speaker A: Agreed. And we were talking about pricing before. Understand we're talking about pricing on the merchant side.
And one of the really important things to figure out the pricing is we have to analyze the card mix and the methods for acceptance. We have to know what it's going to cost us to accept cards before we do something like go out and offer a flat rate pricing structure of one and a quarter percent and I don't know, five cents and we end up just losing money hand over fist. When we offer something like that, we have to know or have an idea of how much it's going to cost us before we can say the pricing scheme that we're going to share with our merchants.
[00:08:24] Speaker B: And I would say that's a very good point. The other thing that needs to be considered, and I know that we're seeing it less and less and less, you know, is PIN debit. Is there going to be PIN debit involved in this? Are you planning on having PIN debit? Because with PIN debit, you know, now we're talking about we have to get encryption keys, we have to get encrypted devices, et cetera. Once again, added cost in our boarding process that's associated with these merchants. I will have to say I am excited to see that we are seeing less of these that are wanting to do PIN debit. They're wanting to stay more in the traditional card mix.
Less with PIN debit.
[00:09:01] Speaker A: Yeah, PIN debit can just be such a beast because of all the. It used to be, you know, notoriously. Well, not notoriously, but famously. I guess everybody's excited about the low prices of PIN debit, but it's really not always that way because there is now all of the networks are charging these participation fees, annual fees.
They're really tacking on a lot of cost to debit that might not come through on interchange, but it's the extras that really get you. And even on interchange on some of these, the smaller bank, the unregulated. Yes. The non regulated options where they can charge whatever they want to. They are charging whatever they want to because it's linked to some kind of fancy software where they're trying to recuperate the cost and the interchange rates can be high. So it's not what it used to be. So I'm glad to see that as well.
[00:09:52] Speaker B: Well, not to get on my political hot box, but I will get up here and yell and scream, well done, Durbin amendment, well done.
[00:09:59] Speaker A: He's finally retiring thank goodness.
The other thing that I want to cover is if we're having a conversation with an isv, we really need to understand any exposure to liability. It also that we were talking about future delivery and higher risk business earlier. Why do we care about that? Well, we care because our potential for financial loss goes up.
And so when I talk about exposure to liability, are we going to incur that liability? Are they going to incur that liability? Who's going to be responsible if we can't cover a financial loss?
And so you can't have a conversation about what pricing is going to look like. Not merchant pricing, but pricing. Between us as a provider in this isv, we can't have that conversation until we understand who's going to have the liability.
[00:10:53] Speaker B: Well, do they have any understanding of merchant risk? Do they have any understanding of how that works? Do they have any. You know, and some of them do. Some of them actually do, but most do not. Most of them, when you talk about risk, they don't understand where the risk lies. They think, you know, hey, look, somebody's there, they've used a card, they made a payment, there's no risk there.
There's always risk associated with transactions. It's not just a chargeback, but you also have cardholders perpetrating cardholder fraud going in there and with the intent of buying something and then turning around and charging it back and saying that they didn't get delivery or that the service wasn't as promised or something along those lines. Chargebacks are not always caused by the merchant.
[00:11:40] Speaker A: Another thing that came up in this conversation with this ISV is hardware. And they were primarily online right now and they were wanting to develop their own pos and they were, you know, really seriously going down the path.
And my first recommendation for them is you probably need a consultant to help you navigate this. Certification of a POS is not to be taken lightly. And I don't think it's something that you want to navigate on your own. Kevin, I would love to hear your thoughts about this because this isn't something that we really do in house. We are, you know, we come well after that. Usually when ISVs approach us or a POS provider approaches us, they are already operating and processing and they're just looking for a new provider.
We don't really dabble in the certification process unless it's just directing them if they're wanting to certify to something new.
[00:12:38] Speaker B: Well, and there's two real basic ways to go down this road. One of them is a direct approach. So, for example, I'm going to certify directly to tsys on, you know, either the Sierra platform or one of the others. I'm going to go direct to a authorization provider to get my certification.
That generally is. I'm not going to say it's more difficult. It's not generally more difficult. It might be a little more time consuming in the long run though. Is that really in the best interest of that product? Because that product is then limited to that direct certification. The other route to go is to utilize a third party in between the product and the authorization center. What do I mean by that? Certifying to a gateway, certifying to like an NMI or an authorized.net or a fluidpay that generally is going to be a little bit more expensive. It's going to be a little bit faster because you're certifying with that gateway. And that gateway generally is going to have. Is going to be a quicker certification process.
It also comes with the ability if something happens and you need to move authorization providers, you're already certified to that gateway. So wherever that gateway in turn is certified beyond that is open to you.
So you're not just limited to one platform. On tcis, you could have multiple platforms on TSYS with one certification. You could also have that certification to first ada, you could have both. I mean, with that gateway, adding that piece in the middle is a little bit more expensive, but it is a faster, generally a faster certification and it generally offers you the comfort of if I have to pick everything up tomorrow and move it somewhere else, I can go somewhere else that that gateway is already certified to.
[00:14:30] Speaker A: Yeah, flexibility is huge here. And that's why I know it's. And especially when you're in startup mode, you don't really want to incur additional expense and have to bring in a consultant or an expert and, you know, pay someone for their time.
But I think in this example, it will pay dividends because they really can help you navigate to avoid potential pitfalls down the road. If you're new to, you know this completely, how do you know whether you should be certifying to TCIs or Fiserv or certifying to the gateway? A consultant is going to help you navigate those things and based on your specific situation, know what is the best path for you and what is the easiest path to positive net income? You know, if you're. All you're doing is spending right now.
[00:15:23] Speaker B: Agreed.
Well, I guess then after we've gone through this certification discussion, we've gone through the underwriting discussion. We've kind of tiptoed a little bit on the risk side.
You know, how about billing? How about merchant billing, merchant servicing, once the account is up and running.
Now, there are several different places you can go to.
There are several different providers that can provide you a similar service.
We call it taking the one predominant statement within the industry and putting your sticker on it.
That was one of the reasons we built out Pioneers. We wanted to be different.
Can the provider that you are going with implement special fees or special billing or special billing schemas for your isv? And what do I mean by that? Well, are you going to do a separate billing for your software service than the credit card processing? Or do you want to put those together into one bill? Can your service provider do that? What are the different options they have for you to do that? In other words, can they only let you bill a monthly fee of $99 a month for your software or do they have other ways for you to build in other items? That is, you want to build a per item cost or you want to bill a overall discount amount for your service.
What are the ways that you can bill your services through that provider? I think that's a really big question to ask because I think what's going to end up happening is you're going to find most can't do that.
[00:17:03] Speaker A: Yeah. And if your whole premise is software and you want it to be a single bill, that's a better merchant experience. If you're just sending one bill for everything, the processing and the software services, and you want to be able to customize those fees and put your name and label on it, and even the fee itself, you know, platform fee, whatever the name of your platform is on the statement, you're not going to be able to do that everywhere. And you're right. That's exactly why we built what we built so that we could have flexibility over billing because it's otherwise not very easy to accomplish.
[00:17:38] Speaker B: And that leads right into the customer service function. Are you know, you as an isv, do you have your own portal that your merchants are going to.
Is that portal interface or can it interface with the credit card processing? Can it not? Is that, does that mean we're going to have to drive customers to two different logins to two different portals for our service, for our, you know, how is that going to work?
How are we going to work with delivery of chargebacks? How are we going to work with delivery of chargeback responses?
You know, could that be another portal that our merchant has to log into or respond to. You know, these are all things from a customer service perspective that we need to understand as we move forward.
[00:18:20] Speaker A: And if it's a new ISV and they're newer, well, not new isv, but they're new to payments. These are things that are not on their radar or things that they're thinking about.
But these are the conversations that you should be having with your provider and asking them, show me how a merchant would respond to a chargeback, if they get one.
What will my involvement be in that, if any, do I need to participate in that process?
How will they obtain their merchant statement? What does that look like? How will they see their processing, processing activity? What kind of access and visibility do I have to all of the merchant activity that's within my portfolio asked to see these things. We're not ready to jump into a conversation about what revenue share we're going to split between us until we've had a lot of thorough conversations. There's a lot that you want to know what you're getting of services from this provider before you launch into how much money am I going to make? Because the amount of money you're going to make depends on the amount of services that you're providing and the amount of sales, leads and effort that you put into this, as well as the amount of effort on the other side of the payment provider side that's providing all those services for you and doing underwriting, risk, et cetera, holding, liability.
It really just depends on where all those responsibilities fall. And I think it's, I would say, irresponsible to launch right into a conversation about pricing right off the bat, before we even have an understanding of who's going to do what?
[00:19:57] Speaker B: Well, you got to remember a lot of these guys, once again, they're new to the space, they're trying to monetize payments. They're very excited about it. They see it going on in other areas or they see others doing it.
They don't know that they're, you know, about these conversations. A lot of that falls on us, you know, to slow them down and say, hey, look, let's kind of go through some of this stuff. Let's kind of make sure that we all understand where the responsibilities lie and where the responsibilities don't lie. You know, hey, what happens when a customer needs to do an ACH change? What happens when a customer needs to do a change to their address?
What happens when a customer decides that they are no longer an S Corp and they want to be an LLC or They want to incorporate, you know, what is the process for these things and these changes that need to take place. How is that handled?
[00:20:45] Speaker A: What happens when a merchant wants to run a transaction or decides to run one that is ten times their normal transaction size?
[00:20:54] Speaker B: Is it going to be our Risk department that reaches out to the merchant, or is it going to be you that's going, you know, you, the isv, that's going to reach out to the merchant, you know?
[00:21:02] Speaker A: Yes.
[00:21:03] Speaker B: Yeah. Because that'll cause conflict sometimes. You know, we have customers that absolutely, you know, they want everything to come through them. They don't want it to come from us. And that's fine. We have the capability to do that. But not everyone does. There's a lot of organizations out there that say, hey, look, I'm holding the risk. I'm talking to the merchant, you know, and they cut the ISV or they cut the ISO out completely because they say, I don't want you to get in the middle of that.
[00:21:30] Speaker A: Right. You really want to understand that relationship and what. Who's going to hold what role, basically?
And are we comfortable with that before we actually get into the relationship itself, what's doing business together?
[00:21:44] Speaker B: So with that being said, are we just offering out a flat 7525 to everybody?
[00:21:50] Speaker A: Well, the interesting thing is that when I had this conversation across the board, if I can share this across the board, everything that they were offered with anybody else that they had spoken to was 50. 50.
[00:22:07] Speaker B: Well, you know, what my saying is, I'll let you choose the split. You let me choose over what?
[00:22:13] Speaker A: Well, let's talk about that, because both of these things matter. So let's break this down between the Schedule A and then the revenue share, and let's talk about those two components. Like, we are completely new to payments. We don't know what these things are.
[00:22:29] Speaker B: Well, I think the first thing you know, we have to get back into the before when we start talking about these things, we have to understand what is our base that we're going, you know, that we're selling into.
What is their average ticket? What's their average monthly volume? That's going to tell us a lot of things. So if we have, you know, for example, we have a merchant that, you know, our merchant base has a $50 average ticket, and they do $20,000 a month. What does that turn out to be? How many transactions per merchant?
You know, that's a quick calculation that we're going to do. So all you do is say $20,000 divided by 50.
You know they're going to run 400 transactions a month.
So what is to your advantage getting a penny off a transaction and paying $1.50 more per month for a fixed fee? Well, you can do that math.
It's just simple math. And that's how you get into these things and deciding what things are important to you and what things are not. Hey, look, if none of your merchants or if you're in the damn business of selling shoes, you know, doing shoe stores, and your average merchant gets one chargeback a year, don't go argue over the chargeback fee. Nobody cares.
Let the processor win that one.
What you want to argue over is, you know, things like I just said, is it more advantageous for me to pay less for the per item and maybe a little bit more for merchant on file, or is it more advantageous for me to pay an extra penny per item on our authorization or clearing or something else to get $2 off, for example, on my merchant on file. What about pci?
You know, where does PCI fall? What type of terminal are they using?
What type of PCI service is provided?
[00:24:18] Speaker A: So just to get back to the basics again, Kevin went through some of the things that are on the Schedule A, which is kind of our schedule of costs. So we need to care about authorization costs or not care. Like you said, sometimes we get, you know, we try to haggle over things that in the grand scheme of things, they don't really matter.
So we want to determine what's important for our portfolio and then apply the math. If we have processing history, we have a pretty good idea of what the math is going to look like for that portfolio. So you want to try to do that math and apply the schedule A to see what it's going to look like for your particular portfolio. So you've got the schedule, then everything that we've billed to the merchant and let's stop there because a lot of times everything that we've billed to the merchant is not always shared. As far as the revenue that's billed with what?
Come on.
Yes, I'm afraid you mean to tell.
[00:25:16] Speaker B: Me you billed my merchant $400, but we're only going to discuss revenue share on 200 of that $400. That's mind blowing. How does that happen?
[00:25:25] Speaker A: I know, it's crazy.
So it should be merchant fees billed minus our schedule a cost, and that is the net income that we apply our revenue share to. So if we're talking about 50%, I take half, the other person takes half. If we're talking about 9010.
They take 90, I take 10. Whatever the revenue share is, that's the way we divvy out that net income. But what happens is a lot of these providers bill things, but they don't share in that billing.
In my opinion, it should be that everything that's billed to the merchant is shared. You already have your costs, the schedule A costs, and we're netting those out. So anything that's in that net should be shared. But that's just not the reality, unfortunately. So that is something that you want to ask about. Are there any fees that get billed to my merchants that I don't get to participate in the revenue share in?
[00:26:22] Speaker B: Well, let's also not forget the one that we run into all the time.
Revenue share is above your cost.
If you build the merchant below your cost, there is no revenue share because there is no profit above your cost.
[00:26:40] Speaker A: And that's a big fat L, Kevin, because you just eat it.
It's unfortunate, but that's the way that it works.
[00:26:49] Speaker B: Well, listen, I know that we've talked about a lot of different things here. We've kind of bounced all over the board.
You know, I think Elena's advice is should be heated.
If you're new to the space, if you're talking about getting into the space, I know time, I know capital is at a premium.
Take the time to go spend.
Go spend a little of your capital and get a good consultant.
A good consultant is going to direct you into where are the places you should be certified, what you should be looking for in a Schedule A and a processing agreement, which we didn't even get into. The processing agreement in and of itself, that's a whole nother subject.
And they're going to point you in the right direction.
There's some damn good consultants that are out there in our industry, and unfortunately, I don't think people use them as often as they should.
[00:27:42] Speaker A: No, I would agree. And when you think about the lifetime value of what you stand to gain if you set this up well in the beginning, and you do it right in the beginning, and they help, you know, you know the difference between going between a 50, 50 spot split and a 75, 25 split or something like that, and also a great schedule and also certifying to the right processor and they save you the headache of certifying to the wrong processor, and then you have to completely redo it again. You will have a return on your investment. I think the other key thing that you need is a great payments attorney when you get to the point where you are going through an agreement with someone and you're ready to assign an agreement. Do not sign that agreement until you have an attorney that specializes in payments look at that agreement and make sure that they point anything out to you that you know they find concerning so that you can hash through those things before you are in an agreement with someone.
And finally, I would say just have as many conversations as you can with different providers. I think that's going to give you a really good sense of who's asking the right kinds of questions, who is listening about your business and trying to find out the way you're doing business, who is not trying to get you to sign immediately and actually trying to do their homework to make sure that we go down the path of understanding everything before we actually get into it together.
You will get a very good sense just talking to even three or four, but I would go beyond that. I would talk to four to six or something along those lines and just have conversations with people. Talk to other ISVs that are already doing something like this and see what their experience is. They'll probably have pitfalls to share that you might be able to avoid just by them sharing that experience. So just have as many conversations as you can. Do your homework. I think it's going to pay off in the end.
[00:29:38] Speaker B: Well, and with that being said, we're kind of. We put this together here. You know, it's.
We're getting ready to leave for the sea tomorrow, Elena and I, so we'll be there. If you're listening to this and you want to hunt us down, hunt us down. We've got a. We've got a great panel going on with Kate Root and Michael Cottrell talking about Ben's.
Hope you can come over and join and listen to us about that. It's kind of going to be our payments ground game live once again, if you re. If you listen to this, you want to, we're going to be there. We'll be there on Monday, Tuesday and Wednesday.
Feel free to grab either one of us if you see us walking around or shoot us a. Shoot us a LinkedIn invite or something along those lines and we more than happy to try and catch up and have a talk with you.
