Payment Processing Demystified

The world of electronic payment processing is a cluttered one, because as a few experts put it, it's filled with people trying to profit from transactions at the POS (point of sale). Not only that, with the advent of electronic check conversion, stores can electronically process many forms of payment these days, including debit, credit, gift cards - and checks. No matter how it's described, the payment processing party includes MSPs (merchant service providers), ISOs (independent service [sometimes sales] organizations), MAs (merchant acquirers), banks, and credit card companies. And, although it might seem like VARs aren't on the guest list, truth be told, there's a seat saved for you. All you have to do is find it.

A Few Words About MSPs And ISOs
If you're confused about the role acronyms play in electronic payment transactions, you're not alone. The already fuzzy picture isn't made any clearer by the loose nature by which players in the industry define themselves. Many retailers have no idea who is getting a chunk of the transaction fees they pay. In the past, merchants (i.e. retailers) would set up electronic credit, debit, and check acceptance accounts directly with banks. This service being one of many products banks offered, it would often receive less than acceptable attention, at least from the merchant's point of view. Often, it would take six or more weeks for banks to activate merchant accounts. ISOs, MSPs, and MAs recognized this pain point and began to offer products and services that not only sped up the process, but also provided an opportunity to grab a piece of the retailer's transaction fees.

ISOs expedite the creation of merchant accounts at the banks, setting up and managing the relationship between the banks and the merchants. Beyond expediting setup, however, ISOs may also actively seek merchants to pitch. Consequently, ISOs are sometimes called MAs. A merchant acquirer doesn't necessarily do anything more than act as a "headhunter" for the merchant's bank, however. Basically, MSPs are companies that facilitate electronic payment processing between a merchant and a bank, similar to the way an Internet service provider facilitates access to the Internet. To add to the confusion, ISOs, MAs, and MSPs can fall under more than one category. For example, an MSP that actively pursues merchants, sets up accounts with banks, and manages electronic payment processing for a retailer can technically be classified as an ISO, an MSP, and an MA.

Because of the confusion surrounding your place at the table (what's an MSP again???), you might be wondering if it's worth the hassle to get involved. Or, maybe you've heard that by the time all the party goers have feasted, the chunk of cake left over isn't worth working for. As hard as it is to believe, the fact is you could increase your profits if you got in on a piece of the action. In case you aren't convinced, here's a look at a couple of the myths surrounding the VAR's role in electronic payment processing and how industry experts refute them.

Myth: Payment Processing Isn't Profitable For VARs
Electronic payment software developer Bill Pittman, president of Rich Solutions (Redmond, WA), explicitly targets POS software developers (e.g. Squirrel, MICROS) to integrate his product with their software. Then, VARs who resell that developer's product don't have to go to an MSP to integrate an electronic payment processing software add-on. All VARs need to do is to set up an account with a bank (perhaps through an ISO). "VARs can charge their customers whatever they want as an activation fee for the service. Then we both make money on a transaction by transaction basis," Pittman says.

Chris Brundage, sales and marketing director at check conversion software developer Global eTelecom (Destin, FL), says his company's strategy with its electronic check conversion product is to enlist VARs as ISOs. "A VAR acting as an ISO would sign up the merchant with a bank for the check conversion service. If a bank charges 1% per transaction, for instance, we would charge the ISO a 1.5% buy rate, and the ISO could charge the client 2%, making half a percent for all of that business for the lifetime of the account," says Brundage.

Although the VAR-as-ISO role sounds simple, becoming an ISO involves a lot of back end knowledge of the banking relationship. ISOs must be prepared to answer questions from merchants like, "When will I get the money from these transactions?" and "How is this account set up?"

Just as a VAR can step in as an ISO, it can become an MA or an MSP, or all of the above. Establishing yourself in the role of service provider could help knock down the cost barrier that might stand in the way of your end user's acceptance of electronic payment processing.

Myth: Electronic Check Conversion Isn't Proven
Electronic payment processing party goers need to deal with more than just plastic. Checks have gone high-tech, too. But the bleeding edge of electronic check conversion has come and gone. Brundage says electronic check conversion has not only proven itself in mom-and-pop retail stores, it's gaining acceptance at large retailers. "National multilane chains were hesitant to adopt the technology in the past because they weren't sure electronic check conversion would work for them, and they were concerned about the rules of NACHA [National Automated Clearing House Association] being in place," Brundage explains. He says the technology and the governing body are on the same page now, and as a result there are more successful pilot programs rolling out in national retail chains.

Part of Global eTelecom's strategy for penetrating large national retailers is tapping into you, the VAR. To Brundage, that strategy only makes sense. "VARs who are hurt by falling hardware margins need something to differentiate themselves," he says.

Myth: The Only Way To Profit Is To Do It All Myself
If you go the route of establishing yourself as an ISO, MA, or MSP, you gain more control of your customer's POS. But many VARs would just as soon stick to what they know best - installing and servicing front end POS hardware and software - and let someone else worry about the back end of electronic payment processing. For these VARs, there's the partner approach, promoted by Heartland Payment Systems, Inc. (Scottsdale, AZ). "We employ a network of 400 sales and service people around the country who partner with VARs to offer our product," says Senior VP Sanford Brown, who heads up the VAR effort for Heartland. "We notice that VARs get frustrated by merchants asking them to reprogram their POS to accommodate credit card processors who offer cut rates. It's tough for a VAR to make any money on that," he says. Therefore, Heartland tries to establish relationships with VARs who will maintain the company's presence in the installation. Brown says Heartland sales people and VARs work together in a "referral partner" relationship. "Heartland employees manage the paperwork and service, the VAR manages the programming at the POS and makes a percentage of our income on the back side."

Brown says the partner approach works to the VAR's advantage when the customer needs service, as well. "Sometimes, if a client is having issues with the POS system and can't get in touch with the VAR, they'll often call our sales guy. Our sales guy will instantly track the VAR down to solve the problem," says Brown. He claims the partner approach gives the VAR an extra level of service. "If either one of us leaves the customer unhappy, we work together to make it right or we both lose."

Electronic payment processing is a relatively new phenomenon that employs constantly changing technologies and a growing number of players. The old adage that there's an exception to every rule becomes all the truer when the rules are as ambiguous as they are in your approach to selling electronic payment processing. The fact is, you have many options, and exploring them carefully might save your customer money and help you earn it at the same time.