Episode Transcript
Elaina Smith [00:00:04]:
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. Hi, I'm Elainna Smith, and I'm here with Kevin Smith. We own a wholesale ISO Secure Bancard, which has led to us working with several agents and ISOs over the past several years. One of the biggest decisions they make in their ground game is choosing their processing relationships. But one of the common missteps we see is trying to juggle too many processing relationships.
Elaina Smith [00:00:41]:
Some people think it's better to spread their eggs across multiple baskets. Sometimes they think the more the better. Today we're going to talk about why that's not usually the best approach. But first, let's state the obvious. It's nearly impossible to have only one payment processing relationship. We recognize that one might be your source for certain types of high risk, while yet another might have your favorite solution for retail card present business. We're not suggesting you only work with one provider, but let's talk about how we end up with too many processing relationships in the first place. ISOs usually find themselves in a situation with multiple processing relationships because they're trying to be everything to everyone.
Elaina Smith [00:01:21]:
They want to sell into every opportunity that they walk into. They come into an opportunity where they don't have a setup on a processor that can board that kind of opportunity. And they think, why not just find another one to add? They don't do a great job of defining their niche. This is something we talk about a lot because it's very hard to automate and streamline if you have a lot of different processes. And let's just assume more processors that you're boarding to the more processes that you'll have, because each of them have their unique ways that you have to onboard with them. So ISOs should try to minimize these relationships down to a select few. In this episode of Payments Ground Game, we'll cover all the reasons why.
Elaina Smith [00:02:06]:
Okay, let's get into it. The first reason why ISOs and agents should narrow down their processing partners to a select few. Number one, when ISOs spread themselves too thin across several relationships, they usually don't have leverage in any of them. What are your thoughts about that, Kevin?
Kevin Smith [00:02:22]:
One of the things that we pride ourselves on here is relationship building relationships with our customers and helping them grow their portfolio. And you have to do that together. It has to be a give and take on both sides, but it has to be a commitment from both sides. And if there is no commitment, it's not a real relationship. So what you have is you have somebody that comes in that's putting deals. Two here, two here, two here, two here, two here. There's no commitment to anything. Then from a processor perspective, there's no commitment to them.
Kevin Smith [00:02:58]:
So really it makes it difficult to grow a relationship without that commitment. And when you're spreading yourself out too thin, that's exactly what you're doing. You're putting business everywhere, but you're committing to no one. And that really doesn't build any relationship in any one place.
Elaina Smith [00:03:13]:
Yeah, I think when we start a relationship with someone and bring a new partner on, there's this whole getting to know you phase where the only way we can really get to know each other is we run into different circumstances. So we run into a merchant that stops paying their fees, and then we need to talk about, okay, what do we need to do, how do we need to go about this? What's happening with this merchant? And we're not going to run into those things until we have some history together. So the more that you commit to a partner, if they're doing a great job for you, the more history you can build together, then I can predict what is going to be. If we find ourselves in a tough spot, how are you going to react when we get to that tough spot? I know we run into that an awful lot. And if we are working with someone and they show up when something hard happens, then we're willing to take a little more risk with them as we move on. But it's very hard to get to that place where you don't have that history and you don't have that trust to be able to take some leaps like that if you don't have that history.
Kevin Smith [00:04:18]:
Well, not to mention if you're putting things in different places each place. I refer to this like I do authorization centers and clearing centers and front ends and back ends and things like that. They all have problems. You have to decide which one has the problems that you can live with. And it's the same way when choosing a processing partner. They're all going to have issues. We have issues. They all have issues.
Kevin Smith [00:04:47]:
You have to decide which one is the one that has the issues that you're okay with. Then you've got to learn how that partner works. And if you're putting a couple of deals here and a couple of deals there, you're never going to learn the nuances, in and outs of how the process works and what's the best way to approach things. And if I'm going to go do this kind of deal, I know that I need the following or if I'm going to go do that kind of deal and I need a little help, who can I call? Without a relationship, you don't have those capabilities. And quite honestly, if you put two deals here, two deals there, two deals here, the processor is not really in a position where they're excited about talking to you either. All you've given them is a couple of deals, and you may have only given them a couple of deals over an extended period of time. That's not really exciting to them.
Elaina Smith [00:05:34]:
That's true. And then I think the other thing that we run into is that we will have a new partner that comes in with a very big ask right off the bat. Or they're, like you said, writing a couple of deals here, a couple of deals there, and perhaps on our side, there's some development that needs to take place to make that ask happen. It's very hard for us to commit to that. We're happy to do that if we can see the win on the other side of that and that it makes sense. But it's very hard for us to say yes to that unless we have some commitment from the other side. So that comes into play as well. If you need something a little bit out of the box that requires a little extra effort on our side, then we want to see a little extra effort on your side, too, to know that we're both vested in this and we're willing to stay the course and see this to fruition.
Kevin Smith [00:06:23]:
Absolutely. One of the things that we see all the time, and one of the biggest mistakes I think ISOs make is when starting in a new relationship, the first thing they try to do is they try to go over to the shelf and pull off those seven deals that nobody else will take.
Elaina Smith [00:06:37]:
Oh, my gosh, yes. That drives me crazy. That's a very common problem that we have, and I don't understand that because when we talk about building trust with each other, you're giving us the garbage. You're giving us the stuff that's sitting out on the curb that you've already tried to place three other places and nobody would take it. Why do you want that to be your best and first impression with us? Because that makes us think something about you. Whether we like it or not, we're going to have some judgment about that.
Kevin Smith [00:07:08]:
Absolutely. You sit down and the first thing you turn in is these seven garbage deals. And the first thing we're thinking is, is this really all the business that you do? Is this the kind of business that you go after? This really isn't stuff that we want to be associated with. Why would you want us to think that you're associated with it? It's okay if you have one or two of those here and there, and we're working together and we've got a relationship, and we have one or two that come across and we work together to get those up because we understand there's large margin or there's something along those lines. But when we step out of the gate and you kind of say, hey, I've got all this dirty laundry. Can you clean this dirty laundry for me?
Elaina Smith [00:07:52]:
All on the MATCH list, or it's all identity theft, or there's some other reason that it prevents us from getting it up. I just don't understand why that would be the first thing that you would send over. So I think I think the big point here comes back to relationships. We're trying to build a relationship with whoever you're sending that business to, and just think about what you can do to nurture that relationship. If you're going to bring big asks, then you're going to have to give a little as well.
Kevin Smith [00:08:28]:
It's like when you're out dating and you start dating someone and you want to have a commitment with that person, but if that person's dating other people and going out with other people and having fun with other people, is that somebody that you're kind of interested in making a commitment to? Or are you going to wait for them to make a commitment so that you can have a real relationship? It's very similar.
Elaina Smith [00:08:50]:
Right. And it has to go both ways.
Kevin Smith [00:08:53]:
Absolutely.
Elaina Smith [00:08:54]:
Okay, let's move on to the next one. Number two, they spend too much time managing merchants across several platforms leading to inefficiency.
Kevin Smith [00:09:03]:
This is exactly what we spoke about a minute ago. If I'm putting a couple of deals here and a couple of deals there, I don't know what the nuances are about. The best way to get a deal up with a particular processor, because I haven't spent the time and I haven't invested in that relationship and figuring out how it works. I don't know who do I need to contact in regards to risk? I don't know who I need to contact in regards to "Is this terminal something that will work in this scenario?" So what you end up doing is you spend up a lot of time just spinning your wheels trying to figure out, okay, oh no, I got to go put it with processor b. Crap. Where's that application at? How do I fill that application out? What is it in particular that they need? I can't remember because I haven't put a deal with them for six months. I have to learn that process all over again.
Elaina Smith [00:09:47]:
Right. They all have different platforms, so that boarding process is going to be different. We're always talking about streamlining your processes. If you have five or six different processing relationships that you're boarding with, those are at least five or six different processes, and then all the nuances within each of those processing relationships. Also, they might have different products available. Then for merchant maintenance, once you have to manage merchants, once they're up in processing, every time that you have an issue with a merchant, okay, what relationship is it up on? Where do I go log in to see what happened with that batch? You're logging into all these different processing platforms, and it just leads to a lot of inefficiency. And I think the nature of our business is that, again, you're at least going to have to have two or three of those, I think is a reasonable number.
Elaina Smith [00:10:35]:
You're at least going to have to have more than one. But once you get over that five to six number, it gets a little out of control. And then now you have to have all this headcount to manage all these different processing relationships.
Kevin Smith [00:10:49]:
And I think one of the things that you're saying there is it's okay to have more than one, but to have ten or to have eight, or to have the mantra of I can place anything, anywhere, anytime. It gets back to the old adage, yes, you may have the capability to do that, yes, you may have the ability to put those things together, but are you efficient at any of them? Are you good at any of them?
Elaina Smith [00:11:18]:
Right. Okay, let's move on to number three. They spend too much time learning the ins and outs of supporting each of these processor platforms. I think we've talked about this a little bit, and like you said before, Kevin, everyone's going to have the things that they don't do well. No one does everything perfectly. That's just the fact. And so, like you said, with so many relationships, you're learning all those pros and cons and the things they can do, the things that they can't do. And you're spending so much time figuring out all those things that you're not figuring out what are the things that we can board and finding out the most efficient way to board those things well.
Kevin Smith [00:12:01]:
And from a customer service standpoint, once again, we keep harping on this and keep going over and over. Do you have a list of ten different 800 numbers? And you got to figure out which one you point your customer to. Is there 17 different logins to 17 different systems? And you got to remember which one you're supposed to look at for this particular merchant. It makes life extremely difficult.
Elaina Smith [00:12:23]:
Absolutely. Okay. Number four, they spend too much time consolidating residual downlines across several relationships. And I know there are tools to manage this, but they can be expensive. And the more relationships, the more complicated this activity becomes.
Kevin Smith [00:12:40]:
Well, not to mention every six months or so, there's a new assessment that's added by the card associations, or there's changes in interchange. And generally what happens every six months is each processor is changing how they're doing their residual format. So you're trying to keep up with not just one or two, you're trying to keep up with a multiplicity of changing formats from residual reporting. And even if you're using these tools that are out there, which there are some good ones out there that can take in multiple residual reports and combine them into one, you're always trying to chase it to make sure that everything's coming out correctly. Because when somebody changes a format on a residual report, you can't just import that into the system without making that change. And if it's a change to one or two, that's one thing. If it's a change to ten different ones, holy smokes. The next thing you know, it's taking you six weeks to get caught up on the residuals you owe from six weeks ago.
Elaina Smith [00:13:40]:
Yes, and I think the other thing here too is we always say trust but verify on residuals. And if you're getting them from so many different sources, it makes it almost impossible to be able to do that activity. You really need to be going back into these residuals and just a little gut check to make sure that the things that they should be sharing revenue on, they are simple things like the revenue billed on the statement. Is tha the revenue that you're seeing on your residual reports, do the expenses make sense? The interchange costs, the assessments, all of those things, whatever your Schedule A is that they're actually passing on that cost that's on your Schedule A and they haven't added anything in. Unfortunately, I see a lot and hear from a lot of agents that there's these additional basis points that get added on their cost and they're not aware because they're not recalculating or redoing the math. And I'm not saying that you should do that on every line item, on every merchant every month, but you do need to set some benchmarks and do some analysis so that you have an overall idea of where you expect it to be and where it actually lands.
Kevin Smith [00:14:50]:
There's some really easy ratios that you can utilize. And I'm not saying the ratios are not going to change month over month, but they should be relatively similar and relatively close. What is your ratio of interchange cost to processing volume? What is your ratio of billables for your gross billing? What is your ratio of net residual payout? What is your ratio of dues and assessments? Those should be relatively similar month over month. They're not going to be exactly the same, but they should be within two basis points from month to month. And if they're not, that's when you start looking in. And I always advise people the first thing you should do every month when you get your residuals is just randomly pick a merchant, go pull down their statement, go to that line item in your detail of your ISO residual and just quickly go across. Does the gross income match? Do the transactions match? Does the volume match? Do some of those basic checks. It doesn't take very long unless you have an enormous number of different residuals coming in, but it doesn't take that long.
Kevin Smith [00:16:04]:
It's really quick and easy, and it can really ease your mind.
Elaina Smith [00:16:08]:
Yeah, that's a very simple activity, and that can provide a lot of peace of mind to be sure that everything is being reported correctly. Okay, let's move on to number five. They significantly reduce the value of their business if their ultimate goal is to sell. So they're getting multiple income streams and maybe from, like we said, like nine or ten sources. What are your thoughts on that, Kevin?
Kevin Smith [00:16:32]:
It's always harder to sell eleven different items as one than it is to sell one item as one. So what I mean by that is, if you have eleven different contracts, you have eleven different residual streams, and you're trying to sell your company, each one of those residual streams has its own contract. Each contract has to be reviewed, researched, et cetera, by the purchaser. Every time you add an additional one in there, they're having to do additional research, they're having to do additional legal expense. And if you don't believe that that's coming out of your bottom line price, at the end of the day, you are absolutely nuts.
Elaina Smith [00:17:08]:
Absolutely. Yeah. That's part of the overhead of doing the deal. And I know you have a history of working in acquisitions before, so I know that you know this well.
Kevin Smith [00:17:18]:
It's always easy to make a purchase if there's one or two contracts to go through and make sure that there's non compete. What do the non compete say? Is there a first right of refusal? If you have ten different contracts and each contract has a first right of refusal, your whole deal could get lost because one through nine agreed to the first writer refusal and pass, and number ten does not. Now you've lost the whole deal over some small little residual piece that you had with somebody that you put a couple of deals with, or you end up taking that out of the purchase price and you get left with that after the acquisition.
Elaina Smith [00:17:59]:
Absolutely. Okay, so in closing, I think we all can agree that diversity isn't a bad thing when it comes to processing relationships. After all, we've seen merchant services portfolios go downhill fast after there's an acquisition, which is all too common in our industry, a sponsor bank program that something's gone wrong with, or some other major event that puts a portfolio at risk. So we do want to have a little bit of diversity, but we want to be selective in how we manage that diversity and narrow it down to a select few.
Kevin Smith [00:18:29]:
Yeah. All I can add there is track record, track record, track record, track record. Look at the track record of who you're doing business with that says so much. It'll tell you how have they handled things in the past, how have they handled things over the last several years, how have they handled their partners, et cetera.
Elaina Smith [00:18:53]:
That wraps up this episode of Payments Ground game. If you enjoyed this episode and you'd like to help support the show, please share it with others or leave a rating and review on your favorite podcast platform. Thanks again. We'll see you next time.
