Announcing: Sales Genie Program

Square’s platform for credit and debit card acceptance uses a mini square-shaped credit card reader that plugs into the headphone jack of a smart phone or electronic tablet, which it offers free to users of Apple Inc. iOS and Google Inc. Android devices.

To operate the service, users download an application and pay a flat fee of 2.75 percent for swiped transactions, and 3.5 percent plus 15 cents for keyed-in transactions, which Square deducts when transactions occur.

Brandes Elitch, Director of Partner Acquisitions for CrossCheck Inc., said that when the card is swiped through the Square device, it reads the data and converts it to an audio signal, which the phone’s microphone picks up and transmits to processors.

“They send it through the processor, and then it’s routed to Square’s software application on the iPhone,” he said. “The encrypted data is then transmitted using either Wi-Fi for the iPod Touch or 3G Internet to back-end servers, and then they communicate with the payment network to complete the transaction.”

Square doesn’t suit all merchants

“While it’s clear that that’s the correct approach right now, it’s certainly not a viable long-term approach, because there is enormous fraud in the payment system,” Elitch said. “The mag stripe is a vulnerable technology, which is why people are talking about migrating to what is called chip and PIN. It’s not entirely secure technology either; it can be hacked as well.”

However, chip and PIN adoption in the United States is not expected in the immediate future. “I’ve actually had discussions with Visa, and they have been consistently clear that it will take them five years to convert to chip and PIN, so that isn’t going to happen anytime soon,” Elitch said.

Elitch believes that in the interim, Square’s model will continue to serve certain types of merchants, particularly smaller merchants who operate in the person-to-person (P2P) sphere. “I don’t see it as a solution for top 200 retailers or POS for that matter,” he said.

Elitch also expects newer technologies to make inroads in both processing and security, including radio frequency identification, hardware security tokens and biometric authentication, among others.

Elitch also indicated that larger payment processors, such as Chase Paymentech Solutions LLC, which processed 18 billion transactions in 2009, may be better equipped to handle merchant support issues. “Maybe only 1 percent of those are going to come back with chargebacks, but 1 percent of 18 billion is a big number, and that requires a lot of people on the phone to deal with,” he said. In the Internet world, customer service is frequently lacking, he added.

Square defends its security

Concerned about potential security risks associated with use of the Square device, VeriFone Inc. Chief Executive Officer Douglas Bergeron issued an open letter on March 9, warning the industry and consumers of “a serious security flaw that Square has overlooked that places consumers in dire risk.” He cited flaws in Square’s hardware, which he said is “poorly constructed and lacks all ability to encrypt consumers’ data,” and this creates a window for skimmers.

In his letter, Bergeron stated that a skilled programmer can write an application that skims personal information from the device and that VeriFone “wrote an application in less than an hour that did exactly that.”

According to Paul Rasori, VeriFone Senior Vice President, Global Marketing, “Square disregards the core issue of encryption and acknowledges their devices have no layer of security to protect mag-stripe data on consumer credit cards,” he said. “They are deflecting responsibility and are solely relying on card issuers to protect consumers.”

In response to VeriFone’s accusations, Square’s Dorsey issued a letter to dispel allegations that the device is not secure.

“This not a fair or accurate claim, and it overlooks all of the protections already built into your credit card,” Dorsey stated. “Any technology – an encrypted card reader, phone camera, or plain old pen and paper – can be used to ‘skim’ or copy numbers from a credit card.

“Our partner, JP Morgan Chase, continually reviews, verifies and stands behind every aspect of our service, including our Square reader. And we are constantly improving the payment experience to enhance security. For instance, you can request an instant text message or email receipt delivered from our secure squareup.com server after every transaction.”

Despite the debate between Square and VeriFone over security issues, both companies appear to be faring well. VeriFone just posted a 27 percent year-over-year increase in net revenues for the first quarter of 2011.

“It’s a big world out there, so for some types of P2P transactions, where you don’t need Windows Mobile, and the person already has an iPhone, [and you have] a small merchant who doesn’t want to pay for hardware, it could be a viable device,” Elitch said.

Some are intimidated by the frequent changes to card company regulations. In response, they have elected to stick with what they know, which is selling solutions that have been proven over time to markets they know well. But the reality is that, in doing so, ISOs and MLSs are limiting their potential revenue streams.

A significant opportunity exists among organizations that have historically avoided card acceptance because of their slim operating margins (utility companies and auto leasing companies are good examples). These enterprises recognize that their customers are clamoring for card-based payment options, and they understand that if they cannot provide such options, their customers might seek providers that will better meet their needs.

Attracting new merchant relationships

ISOs are perfectly positioned to help these organizations give their customers what they want. And while the traditional model may not always work for these merchants, there are alternatives that will.

The primary reason many organizations resist accepting card payments is cost. As mentioned in the preceding section, because of their operating margins, many enterprises simply cannot absorb the processing costs associated with card acceptance. For a utility company with margins of only 10 percent, a processing cost of 2.5 percent yields an impact on it pretax income of 25 percent, which makes traditional card acceptance difficult to justify.

These same merchants also have reservations about accepting card payments because they are not able to surcharge and lack the expertise to offer a convenience-fee model.

Overcoming hurdles

On the regulatory side, many merchants are unclear regarding the specifics of Visa Inc., MasterCard Worldwide and Discover Financial Services business rules, as well as the Payment Card Industry (PCI) standards. Thus, they are dissuaded from accepting card payments by the cost of compliance.

What these organizations need to recognize – and more importantly, what ISOs and MLSs who take the time to become educated can help them realize – is that, in providing more payment options to customers, they will benefit from an increased revenue stream.

Cutting costs

Significant cost savings can be realized simply by accepting electronic payments versus paper checks. In keeping with the utility company example, these companies spend, on average, $7 to $11 per year, per customer, to process paper checks. Processing the same bills electronically through a third-party alternative model costs them nothing. That’s right, nothing.

Multiply that savings across hundreds of thousands or even millions of customers, and it adds up quickly to a substantial number. Additionally, as a result of more payment options made available to customers, merchants benefit from the reduction in the number of delinquent payments and defaults.

Staying competitive

As payment consultants, ISOs and MLSs must clearly communicate with merchants that there is a legitimate risk that they will be left behind as their competitors in the industry learn about alternative payment methods and start accepting card payments.

It all boils down to honest pricing and understanding the industry well enough to make an educated decision about offering the right solution. ISOs and MLSs have an immediate opportunity to take advantage of this. By acting as payment consultants to their merchants, they can explore untapped markets more successfully and generate revenue gains for themselves. The key is to be able to present the right product, operate it transparently and ensure it is compliant with card industry rules.

A significant opportunity exists today in offering merchants nontraditional solutions because many merchants recognize the growing need to provide card acceptance and want someone to guide them through the process. Payment professionals who recognize this, and take the time to foster these relationships, stand to benefit greatly.

I also very much appreciate fellow community members. I hope that regardless of whether you agreed with me, you believed I represented all viewpoints and correctly captured the ideas in the quotes posted.

The Green Sheet was generous enough to do an Industry Leader story on me for publication in issue 05:08:02 on Aug. 22, 2005. Since this is my last Street Smarts article, I want to update you on how my career has subsequently unfolded.

A startling takeover

Our country and industry have been through tumult since 2008. My situation has changed radically since then and inspired many of the topics in this column. As you may recall, the parent company of my employer, Humboldt Merchant Services (owned by the First National Bank of Nevada), was shuttered by the Federal Deposit Insurance Corp. in July 2008.

Because Humboldt was a stand-alone company and not purchased by the successor bank, we were owned by and worked for the FDIC for more than three months. This was extremely difficult and humbling. It was early in the financial crisis, and although over 300 bank failures have occurred since then, we felt like we were the only ones suffering this consequence.

Many decisions were dictated to us by FDIC policy while we provided due diligence material to potential buyers. The other managers and I instructed and calmed staff, attended to myriad questions from buyers, and navigated the FDIC’s rules and management style.

I was elated and gratified when Humboldt was purchased by Moneris Solutions Inc. in November. Moneris purchased nearly the entire organization, which provided jobs for all staff members and continued support for all sales contractors.

Over the next 18 months, I worked to maintain sales levels, drive new business and integrate Humboldt Merchant Services into Moneris. I came to understand and appreciate how a successful larger organization makes decisions and competes within our industry. Moneris was fair to all former Humboldt employees, and I have maintained friendships with a number of the people I met at that time.

I also learned, however, that my skills are better suited for a smaller organization. Consequently, I left Moneris in March 2010 to join a startup organization.

A new venture

Scott Bartlett and Steve Kimberling had started an ISO, Eureka Payments LLC, early in 2010. With an alteration of the business plan, I decided to take the leap and join a cash-starved startup. The three of us were the entire company. It was a liberating, yet trying experience.

Though I founded Humboldt Merchant Services in 1993, it was a part of a larger organization, Humboldt Bank. We had the parent company’s support for facilities, procurement, budgeting and, more importantly, funding.

With Eureka, the three of us were responsible for every aspect of the business. The first step was reworking the business plan so it would attract investors to provide us funding for our operational and marketing expenses until our residuals could sustain us.

We developed strategic marketing plans to pursue three niches:

Mobile merchants
Hard-to-place card-not-present merchants
Merchants situated in and around Humboldt County, Calif.
Necessary agreements

Next we undertook the legal work to develop our employee, operating and subscription agreements.

The employment agreement provides for each of us to earn a specific salary for a set period in return for x percent ownership in the company. We structured the contract to protect each of us from being ousted inappropriately, while simultaneously protecting the company by making our ownership contingent upon active participation at a certain performance level for a specified time.

The operating agreement details the relationships and rights of both outside investors and managing owners. This is a most complex document. It sets forth tax treatment of both losses and earnings, outlines the duties of the managing owners and restricts actions that could harm outside investors. Changes in corporate structure require a super-majority to protect all parties.

Finally, the subscription agreement is signed by the outside investors in exchange for shares in the company. In addition to explaining what they obtain for their investment, it also, in detail, explains risk factors we know of or hypothecate. The document accompanied our financial forecast, which we assembled along with our business plan.

Ideal investors

Because of our advance preparation, obtaining the needed investment was surprisingly easy. We had targets and only approached individuals who would not consider the investment to be significant. We also wanted fewer than five individuals so we would be able to meet with our investors easily.

Finally, we wanted individuals who could assist our business by helping with our strategy or by providing us leads. Fortunately, two long-time associates came through and have been the perfect outside investors. They understand the industry yet do not care to manage our business; they trust us with their investment.

While obtaining investors, we also launched our marketing efforts. To do this, I had to learn the business from an entirely different perspective. While I had sold to merchants directly earlier in my career, it had been over a decade since I had programmed terminals.

Completing an application, selling services, preparing comparative analyses and conducting sales calls were easy. Learning to program terminals and demonstrate gateways was more difficult.

New challenges

Relearning the various terminal functions and then installing them was, at times, intimidating. But the more often I did it, the easier it became. My partners and I divided other duties such as information technology, procurement, product evaluation, finance, contract review and administration.

One obstacle we encountered was finding the right processing partners. Because of our market niches, we needed processing partners who were willing to accept accounts that do not meet traditional acceptance criteria, but who would also afford us the security of a sound processing bank and a fair contract.

We reviewed dozens of contracts and became an ISO for two well-capitalized banks. Doing so allows us to market and build our own brand. Given the spate of shuttered banks, we sought financial stability over higher residual payouts.

My business partners and I have complementary skills and have divided our responsibilities to maximize our efforts. I pursue leads from industry professionals who need assistance placing their business.

I am thankful I have been able to leverage my contacts and experience to develop a niche to help fuel this company. Since our company’s founding, our country has lost 7.5 million jobs. We are thankful to have moved offices to accommodate an additional staff member. A fifth joined us in March; a sixth will come aboard in April.

Continued involvement

I remain encouraged by our industry but am fearful of the Durbin Amendment’s impact. Should it be implemented as proposed, despite what may be a very short-term lift in earnings, this will be terrible for our industry. Issuing banks will discourage card usage, and margins for check card transactions will fall below what we are seeing on PIN debit.

Although we will lose the competition from industry innovators, on the debit side, we will see a corresponding and radical decrease in our margins. Banks will push volume to credit products and discourage debit usage. We shall see how this plays out, but this could radically alter our future strategy and growth.

My time interacting on the MLS Forum has been invaluable. Although I was successful in past jobs, I would have been even more so with the information I now possess. I look forward to being a participant in the forum and to reading Street Smarts articles written by Bill Pirtle. Bill is an industry author and resident expert. I have come to know him through the forum and know he will do a great job of carrying forward the Street Smarts tradition.

I’ll close my last article with the now-familiar slogan that arose when I joined Eureka Payments. We all had too many things to do and difficulty prioritizing. It remains as apt now as it was then: when in doubt, sell something.

How can you make change less intimidating for your merchant prospects? How can you encourage them to leave the safe familiarity of their old ways of doing things and sign with your service or use your equipment?

First, demystify

For many people, resistance to change stems from a fear of the unknown. When thinking about updating their transaction processing capabilities, merchants might wonder:

What, exactly, will happen if I switch to a new POS system?
What new services will I be able to offer as a result?
Will my customers see a positive difference if I upgrade?
What benefits will I see?
Is anyone in my area using the system I’m interested in?
What kind of training will I have to invest in?
How much will my checkout procedures change?
Will I have to buy new supplies?
Many merchants have questions like these on their minds. It is your job to answer them – even if your prospects never verbalize them. Be thorough; use specifics; cite details; ask questions. Make sure nothing goes unanswered.

Second, clarify

Remember, because your service or equipment is new to your prospects, its virtues can be hard for them to grasp initially – no matter how detailed your presentation is. And the more full-featured the product, the more intimidating the thought of being left alone with it is.

Your product or service can open merchants’ eyes and build their hopes for improved business, but to build the type of confidence that motivates people to change, you must make it absolutely clear what your product or service is or does. For example, clarify the following for a new terminal:

Exactly what the terminal does
Exactly how it will be set up
Exactly when it will be up and ready
Exactly how the merchant’s interface will be affected
Exactly what benefits the merchant will see (quieter printer, wireless capability, and so forth)
Which keystrokes do what
What kind of upgrades are available or needed
What kind of security is available
What kind of paper is used
What customizable features are available
And don’t forget to have your prospect do some clarifying, too. Ask at different points in the sales process exactly what the merchant needs and wants. More things are likely to come to light when you ask a second or third time. You can’t meet a customer’s needs if you aren’t certain what they are.

Third, compare

Once you’ve taken the unknowns out of the buying decision, compare your prospect’s current situation to the improved environment that would result if he or she signed with you. When given the complete picture, your prospect will see that your offerings are superior – and that will motivate your potential customer to make changes that will enhance your bottom line.

Roger Entner, Senior Vice President of Telecom Practice at The Nielsen Co., estimates that by the end of 2011 smart phones will overtake standard wireless phones in the United States. With so many people obtaining smart phones, half the battle of mobile payment integration is already complete.

Many merchants now believe they no longer need to lease or purchase terminals, sign long-term contracts and pay a monthly fee for the privilege of processing electronic payments. And they are finding solutions through nontraditional payment providers. Using free software downloaded via the Internet, merchants can accept credit cards anywhere in the world as long as their phones have data connections.

Payment professionals need not cede this expanding arena to alternative mobile payment providers that lack meaningful, personal relationships with merchants. ISOs can offer free software and hardware that allow smart phones to accept card payments – and at highly competitive rates. It’s time for all ISOs to investigate how to add mobile payment acceptance to their product offerings. Adding them to the mix of proven payment options and value-added services will provide better service to merchants.

The question of security

Some may doubt the security of mobile processing. The key is for smart phones serving as card terminals to employ encrypted swipe solutions. Data encryption employs algorithmic schemes that transform plain text into cipher text, which is unreadable to unauthorized parties. Also, to be PCI compliant, merchants must never store card information on mobile phones. When mobile payment hardware employs encryption, data flowing from the swipe device to the phone is already encrypted, and the encrypted information is sent from the phone to the secure payment gateway for processing.

The merchant then receives a confirmation that the card number is good and the charge has been processed through an encrypted connection. Consumers’ worries are also allayed by mobile processing because their credit cards never leave their sight, and no credit card imprints or receipts remain on merchants’ premises.

Pluses of mobile solutions

Here are five reasons mobile solutions are strong:

Increased merchant sales: All types of industries are switching to mobile processing. Customers don’t always carry cash, and offering another, on-the-spot payment option increases sales, especially when the method is more convenient than cash.
Portability: Merchants can accept credit cards anywhere they do business and from any location on the sales floor. There is no reason to transport hardware or spend thousands of dollars on additional terminals to add mobile payment functionality.
Secure transactions: Data is transmitted securely. Mobile processing can even cut back on fraud. For example, merchants can lose checks or cash when on the road, and checks can bounce. Also, check processing typically requires that multiple individuals handle sensitive consumer information. Not so with mobile payments.
Fast processing: It is extremely fast to set up a mobile account. Funds are also transferred quickly to the merchant’s bank – instantly or within a few days.
Low cost: Some mobile credit card processing services do not have contracts, termination fees or monthly minimums. Some payment apps may be free to download but have a monthly fee of $5 because the swipe device used is hardware encrypted. However, mobile processing is significantly less costly than traditional payment solutions overall.
It makes sense for payment professionals to become well-acquainted with mobile payment options and to learn how to help merchants integrate them with other payment products and services. This will foster greater merchant satisfaction and lead to stickier relationships in the end.

For example, merchant level salespeople (MLSs) may think of value as all the ways services and products go above and beyond conventional modes of credit card processing. Merchants may think of value in more simple terms like getting a good deal at a fair price.

The payments industry value chain is filled with novel innovations that enable sales professionals to differentiate themselves from competitors. Many organizations invest millions in training and development to ensure their sales teams can effectively explain a value proposition.

But top producing sales professionals don’t rely on canned presentations. They evaluate current operations and requirements and then propose a solution. This article presents five guidelines for selling value in the price-conscious merchant community.

1. Know your audience

Recent technical advances and growing public acceptance of gift cards make it easier than ever to create the right kind of gift card program for almost any merchant. But despite their popularity and ease of implementation, gift cards are not for everyone. Before you show your samples, make sure the solution is the right fit for the business.

Christian Murray, National Director of Business Development for Global eTelecom Inc., said, “Agents and MLSs must evaluate the merchant’s business model, demographics and current marketing initiatives in order to properly qualify and build value with merchants.

“Basing a presentation on these facts will greatly improve the merchant’s perception of the solutions and build confidence in the solutions being proposed.

“Selling out-of-the-box solutions is an ineffective strategy in today’s merchant environment. MLSs who focus on helping merchants launch programs geared to drive sales, rather than using [them] as tools to get bankcard deals, are more effective and successful in their efforts.”

Whenever you get a negative reaction to a value-added solution, try to identify and isolate the problem. Ask exactly what it is about the program or service that’s causing resistance. If you can’t overcome the objection, move on. The solution may not be right for that particular customer.

2. Show, don’t tell

Demonstrating a solution can make it more tangible to a prospect. There is no better way to explain a product’s ease of operation and all the accompanying bells and whistles than to just turn it on and show it.

Studies have shown that customers who touch and feel merchandise are a step closer to buying it. In an experiment involving a simple coffee mug, results showed that people who touched the mug became more attached to the product within the first 30 seconds of contact and were willing to pay a higher price for it. For more information, visit www.thaindian.com/newsportal/health/consumers-more-likely-to-buy-products-they-touch_100139641.html.

Eliminate barriers to the sale and dispel potential doubts by directly engaging prospective customers in the process. Don’t expect them to take your word for it. Let them swipe that card or “wand” that barcode for immediate proof of concept.

3. Provide excellent training

Training is a critical component of any new product introduction. This training could be provided by the MLS, the vendor, a relationship manager with expertise in training and development, or a third party specialist.

Depending on the complexity of the implementation, it could be a train-the-trainer process, or it could be staged in rotating shifts to accommodate the schedules of all employees who will interact with the program.

Beyond the obvious objective of helping the client become familiar with new equipment and processes, training presents an opportunity to overcome a natural resistance to change if the trainer is playful and interactive. Bring goody-bags and create a party atmosphere.

You’d be surprised by how much people appreciate company-branded pens or stress toys. Stage a mock graduation when the training is completed. These gestures will go a long way toward achieving a successful transition and ongoing good will.

4. Ask for and use testimonials

You may be lucky enough to have a client who wants to be the first to brave the uncharted territory of a product beta test. This kind of client deserves special recognition and deep discounts on the test products.

The client’s willingness to work through unexpected events and provide continual feedback will make your marketing team happy and could eventually lead to an early-adoption case study and testimonial.

Most clients want the assurance of a proven and established product or service. They want to hear from other happy customers and see some evidence of a healthy installed base. That’s why it’s so important to promote organic growth in new products and services through systematic testing, aggressive introductory offers and word-of-mouth campaigns in social media.

No one yet has the ability to predict if and when a particular solution will go viral, so it’s a good idea to have a backup plan that includes positive reviews and supportive customers.

5. Provide ongoing support and follow-up

As many of us have learned in our encounters with technology, the “use it or lose it” rule applies. After merchants are trained on new value-added solutions, it’s important to follow up and make sure that they remain happily involved and actually use the product or service.

Sometimes they will be too embarrassed to ask for retraining and, as a result, the gift cards, identity verification or any number of other useful services will not be used. Don’t let that happen. Routine follow-up calls by MLSs, relationship managers or customer support specialists will promote good will and keep customers engaged and productive.

Applied technology

Less is more when it comes to merchant-facing sales presentations. Questions work better than statements. Take the time to listen; observe comments and body language when merchants discuss their POS systems. Which of your company’s specific tools, logic, technology and services can be applied to improve or enhance the credit card processing experience?

Successful MLSs know value is not always in the cards; it’s in the way we collaborate with our merchants to solve problems and build better processing systems.