Why You Shouldn’t Overlook Selling Merchant ProcessingJanuary 4, 2016 | By: John Tucker
Prior to daily fixed payment business loans, there was the traditional merchant cash advance (MCA). The MCA, being the only option, required merchants to tie their need for working capital to that of their merchant accounts, either directly or indirectly, through the use of either split-funding or a lockbox account.
DIRECT OR INDIRECT?
Split-funding is a direct method that requires the merchant to convert their merchant account over to a chosen Independent Sales Organization (ISO), you could also refer to the ISO as a Merchant Service Provider (MSP). The MCA company contracts with an ISO/MSP who then manages the flow of the merchant’s daily credit card processing volume. A percentage is withheld and forwarded to the buyer of those receivables.
The lockbox is an indirect method to manage the flow of funds. Rather than withhold funds from the ISO/MSP, a separate FDIC insured account is established on the side for all credit card processing receipts to settle into initially, with a percentage of that volume going to the buyer and the remaining amount “swept” into the merchant’s operating account.
Nevertheless, whether directly or indirectly, the merchant account of the business owner was the foundation of the MCA approval and facilitation. Because many MCA companies also offer alternative business loans today with fixed payments, a lot of the new broker entrants do not believe that learning about the field of merchant processing is as important today as it was years ago. However, I disagree with this notion, as the purpose of our industry is the long term relationship with the client, and in many ways the traditional MCA product provides more “benefits and value” to the merchant over time than today’s business loan. Just as new broker entrants get to know all about the MCA, they should also get to know all about merchant processing.
OVER TIME, CAN THE MCA BE THE BETTER CHOICE?
The alternative business loan requires no merchant account conversion as it doesn’t tie the merchant account to the facilitation of the working capital transaction. With these loans, a percentage of gross revenues are approved with fixed terms up to 36 months on daily or weekly payments. The main benefit of this product over the MCA is the awareness of payment frequency and quantity upfront, thus, enabling the merchant to better allocate their cash flow.
However, while the traditional merchant cash advance requires the tie-in of the merchant account, there’s no fixed terms nor fixed payments as it correlates with the merchant’s sales cycle, where they deliver more during busy times, less during slow times.
When selling the merchant the long term aspects of the MCA, why not seek to get their MCA funded using the split-funding method rather than a lockbox? Doing so would provide an additional revenue stream within your client portfolio. To properly seek out this opportunity and be able to consult, convince and convert the merchant over to your MCA firm’s ISO/MSP Partner, you want to fully understand what merchant processing is all about.
WHAT IS MERCHANT PROCESSING?
A merchant account is an unsecured line of credit provided to a business from a registered ISO/MSP. The credit line enables the business to benefit from accepting Visa and MasterCard (V/MC) along with other major bankcards from their customer base, to experience the benefits of acceptance which includes better fraud management, higher average tickets, customer loyalty due to convenience, and more. V/MC are just registered card brands that manage a group of banks called “member banks”, which are banks apart of a listing of V/MC bank associations. The member banks pay V/MC dues and assessments to market their brands. You have different types of member banks, you have the Issuing Banks and then you have the ISO/MSP along with the Sponsoring Banks.
The Issuing Banks issue credit cards with credit limits to consumers after they meet credit criteria. On the processing side, you have the registered ISO/MSP and Sponsor Banks, which approve a merchant for a merchant account and process payments through a front-end authorization network, then settles them through a back-end network.
During the processing of a credit card transaction, there’s a couple of different fees that are charged. Interchange is one of the fees charged, which is how the Issuing Banks are paid. These are wholesale prices for every type of card that a merchant could potentially run at the point of sale, with new interchange pricing charts released in April and October of every year. The ISO/MSPs are paid when they mark-up interchange as well as through fees such as an annual fee, statement fee and batch fee.
WHY IS MERCHANT PROCESSING A UNSECURED LINE OF CREDIT?
The merchant account is indeed an unsecured line of credit, because when a merchant’s customer runs an order on their credit card for $500, the merchant would rather have that entire $500 upfront rather than waiting for the customer to pay off their credit card balance in full, which could potentially take years. As a result, the ISO/MSP deposits the amount in their bank account within 48 hours rather than having the merchant wait until their customer pays their credit card balance in full.
Now, if the merchant’s customer initiates a chargeback of the $500 transaction and the merchant loses the case, the $500 would have to be refunded by the merchant plus the costs of the chargeback which includes a chargeback fee and retrieval fee. If the ISO/MSP goes to get the $500 from the merchant and there’s no money in their account (let’s say the merchant has gone out of business), then the ISO/MSP who underwrote the merchant account is on the hook for the charge.
WHY SHOULD YOU SELL MERCHANT PROCESSING?
When using split funding for a merchant cash advance deal, if you switch over their processing to an ISO/MSP that your MCA firm currently split funds with, you are looking at collecting the long term residuals from the processing and the compensation from future merchant cash advance renewals. In addition, split funding is much more efficient than using a lockbox, as a lockbox usually adds 1-2 business days to the settlement process for everyone involved. Withsplit funding, the merchant can continue to receive their processing deposits as normal.
There are different types of payment processing technologies depending on what the merchant needs, if they need a stand-alone solution then that’s available in the form of a landline terminal, wireless terminal, computer software or virtual terminal. If the merchant needs a comprehensive solution then that’s also available in the form of point-of-sale systems or operational management technologies, both of which integrate merchant processing into the system and other operational aspects such as accounting, payroll, human resources, etc.
Why not just have the merchant switch over their processing to an ISO/MSP that your MCA firm currently split funds with, and collect recurring merchant processing residuals along with recurring income from merchant cash advance renewals? After all, recurring income is the lifeblood of our business.Last modified: January 4, 2016
John Tucker is Managing Member of 1st Capital Loans LLC, as well as an M.B.A. graduate and holder of three bachelor's degrees in Accounting, Business Management and Journalism. Tucker has nearly 9 years of professional experience in Commercial Finance and B2B Sales. Connect with Tucker on LinkedIn by clicking (here), or contact Tucker at Tucker@1stCapitalLoans.com or at 586-480-2140.