In order to obtain as much business as possible with the lowest possible overhead, US banks use multiple sales channels. Some banks have inside sales forces that offer merchant services. In addition, banks sponsor the registration of Independent Sales Organizations (ISO) with the Card Associations. The ISO then solicits merchant accounts on behalf of the banks.
A merchant account, in its simplest sense, is a short term unsecured loan for a merchant. There are substantial risks involved. For example merchant can have high chargebacks which result in fines to the banks from the Card Associations. Or a merchant may go out of business or bankrupt and become unable to satisfy its obligations.
Some ISOs assume all or partial liability of risk for their merchant portfolio. That is, if the merchant defaults, the ISO is responsible for the financial shortfalls experienced by the bank. This gives the ISO more flexibility underwriting and risk management for its merchant portfolio. When assuming liability, the ISO must post large reserves with the bank as collateral against possible future losses.
The ISO recruits agents to sell merchant account services. Competition for agents is fierce among ISOs. Recruiting and keeping quality agents is a cut throat business ISO lure experienced agents with signing bonuses, production incentives, and other benefits.
Although there is no exact count, there are great many ISOs in the US. In turn, there are tens of thousands of agents calling on businesses. It’s not unusual for a business to be solicited by 3-4 sales agents per week.
The merchant account business is a mature industry in the US. Almost every retail business has a merchant account. Payment processing has become a commodity with each ISO offering essentially the same product to merchants.
ISOs and margins continue to be squeezed. ISOs solicit merchants with all kinds of freebies to induce them to change processors. For example, giving away free terminals is fast becoming the norm. Adding gift cards and other value added services at cost is another tactic designed to keep current merchant churn low and add new merchants to the portfolio.
Chris Miller has been in the payment processing industry for over 12 years.
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