Agent Compensation In an Age of POS System Developers

 

Paying sales agents can be trickier for ISOs when sharing revenue with POS system developers, but it doesn’t have to be.

How to divvy up the money is a critical question when independent sales organizations and acquirers are courting business-management and point-of-sale systems developers as new customer-acquisition channels.

Just how do these new entrants affect the compensation of sales agents, still a primary distribution channel for many ISOs?

The answer is, it depends.

Sales agents primarily, and traditionally, earn their compensation from residual income, that recurring slice of the fees assessed by ISOs and acquirers on credit and debit card transactions merchants accept.

Whether that slice is divided between the sales agent and the POS system developer, or the developer’s share comes out of the revenue flowing to the ISO or acquirer, depends on a variety of factors.

‘Bread And Butter’

For example, agent compensation at First American Payments Systems LP, a Fort Worth, Texas-based ISO, is handled as it is at many other ISOs and acquirers, says John Newton, vice president of sales for the strategic partner channel. “Revenue share is primarily the bread and butter of the agent world,” says Newton.

But although the POS system developer channel, which includes independent software vendors and value-added resellers, has been around for a while, it’s now growing in importance, Newton says.

With this newer channel involved, compensation can be handled in a couple of ways, says Newton. One is based on the installation and use of on-premises equipment, where revenue is shared. That is the conventional model, he says.

The other model applies to software-as-a-service, or cloud-based, POS services. This model comes into play when the ISO or processor has referral deals with VARs, Newton says. In exchange for these leads, he says, the agent typically relinquishes some of his revenue.

And even in instances where an agent might bring a software provider to a processor, agents might see a dip in their compensation, he says, but they end up with more in the long run because of the commitment they’ve made to the software company.

First American has seen a mix of models. “We have a number of sales offices that bring opportunities to the table,” Newton says. “In many cases we may not have visibility into what the ISV makes out of the deal. In some cases, the ISV is happy making their software fees. But, in most cases, the agent is giving up something to maintain that relationship.”

‘New World of Commerce’

At iPayment Inc., how residuals are split between agents and ISVs and VARs is generally left up to the agent that brings the software company to iPayment, says Greg Cohen, president of the New York City-based payments company.

That can be important because many agents are finding themselves cut out completely when a merchant uses a cloud- or tablet-based POS system that has been sold directly to the merchant. Merchants like these systems because they offer applications beyond payments, such as online marketing and business-management tools. But that makes it difficult for a payments-only sales agent to compete, Cohen says.

Additionally, large ISOs and processors like Mercury Payment Systems, PayPros, and Cayan (formerly Merchant Warehouse) offer comparable services directly to software vendors. “Agents are looking for new ways to compete in the new world of commerce,” Cohen says.

Concurrently, all of iPayment’s channel partners are demanding more payout, he says. They want more compensation for bringing the merchant to the company.

But that puts pressure on profit margins, which leads to developing new products outside of payments that can help increase the sums earned from merchants, making revenue-sharing easier to do, Cohen says.

‘A Tailored Program’

Total Merchant Services, a Woodland Hills, Calif.-based ISO, launched its Groovv tablet-based POS system in 2014 to help its sales agents compete. It pays a $200 upfront bonus when the merchant account is approved, and later it pays a multiple based on the merchant’s profitability, along with the ongoing residual payment, says Jeff Broudy, vice president of sales.

With Groovv, TMS is trying to provide a more sophisticated product to merchants that can help them better understand their inventories and their customers, Broudy says. “Compensation and price is our end value,” Broudy says. “The more value you can provide, the more price you can charge. That drives compensation.”

Revenue from Groovv, in addition to transaction processing, comes from charging for the ability to create and manage online offer campaigns and other services.

Now, if a sales agent brings in a merchant connected to a POS system developer, the compensation package is slightly different, he says. If a developer is involved and also gets compensation, then TMS will work with the sales partner to figure out the compensation for the agent and the developer. “We will come up with more of a tailored program,” Broudy says.

In that scenario, it’s critical that the deal’s pricing structure be understood by all parties, he says. “What’s important is that we understand how pricing is set up for the end user, and what percent of the revenue does the developer expect to get,” Broudy says.

In an example, a developer may want to integrate payments and nothing else, and may be happy with a lower percentage of the revenue share than others.

As for where that shared portion comes from, Broudy says a sales agent may be willing to give up a portion of her revenue “because they often gain more merchants through one relationship and the attrition rate is usually much lower.”

Pay for Performance

The overall trend with the revenue share itself, often called splits because the profit is split between the acquirer and the sales agent, appears to be stable. The industry probably peaked a couple of years ago when offers included 100% of the revenue and thousands in upfront bonuses, says First American’s Newton. “There was a lot of market-share grabbing going on at the time,” he says.

Broudy also says that revenue splits are stable. “Those that have fair programs, you get to a point where you can only pay so much,” he says. Those paying “too much” should provoke some skepticism from agents. “The fact is we all have the same pricing when it comes to interchange and that’s our biggest cost,” Broudy says.

At Rocky Mountain Merchant Services, a Lisle, Ill.-based ISO that started as an ATM-management company in 1999 and 10 years later added card processing services, there is a trend of more bonus money and a willingness to take a lower split, says Dale Dentlinger, president.

“They can go with little to no bonuses and get 70% to 75% residuals, but most are willing to take the bonus,” Dentlinger says. Four to five years ago, more wanted a higher split.

That behavior is echoed, in part, at First American, where many of the newer agents look for the upfront bonus, Newton says. “Experienced agents are probably looking more toward the residual upside.”

However the revenue is shared, those sales agents who incorporate POS systems into their sales portfolios will benefit. “Many agents are trying to move to this model of going out and sourcing software and integrated solutions,” Newton says. “The agents in the field today that are focused on price and selling hardware solutions are not going anywhere. The ones looking to improve their margins or the number of merchants they bring on board are the ones moving into this software and integrated solution model.”

That’s what iPayment’s Cohen says is happening, too. Agents are going to want bundles of services to offer merchants, and that means they’ll want options from their ISOs and acquirers. “They will still push on us for greater pieces of the economics,” Cohen says. “In reality, if they’re selling three or five products, even at slightly lower margins, it’s a better relationship.”

But agent compensation, considering what’s happening now with the growing adoption of POS systems, may soon change. “The one thing that sticks out for me is it may start to be a little more pay-for-performance based,” says TMS’s Broudy. That will mean “everyone’s incentive is to grow. We may look at those that grow faster or that grow more profitable [and] we will share some upside.”

That compares with traditional card-processing services, which are stuck with single-digit growth, making it much more challenging to share the revenue. “If you come across a partner that can grow your channel in double digits or in a channel with merchants that have lower attrition rates, an ISO will pay more for that,” Broudy says. “But it will be based on performance.”

‘More Pie’

Selling POS systems is just one of the first changes for merchant services, says Newton. “There’s going to be more and more waves [of new products], but they are going to be specialized,” he says. “The days of bringing a generic retail application and hardware to market are fairly short.” There’s just too much expense to develop and manufacture that product, he says.

Instead, the future will be a retail tablet-based POS system that specializes in pizza delivery or other niche markets where [sales agents] can use their expertise to penetrate the market, Newton says. “The generic POS systems are going to end up being pushed down to the smallest of the small merchants.”

As that happens, the expectation is that somehow the revenue pie will grow despite, as Cohen says, merchants always wanting lower rates and sales agents wanting more for the efforts. Like Newton, Cohen says specialization will be critical to ensuring sales agents get their fair share of the revenue.

“Everybody wins when there’s more pie,” Newton says.