What is a Reasonable Customer Acquisition Cost for Merchant Services?

What is a reasonable customer acquisition cost in the land of merchant services?

Well, like just about everything else in this world, it depends. But fortunately, with a little math, we can get closer to an answer for your specific situation.

First, you have to know your customer lifetime value. This is the amount you’ve earned for a single client over the course of your entire relationship with them. You can use averages here over a payments portfolio of business, but we’d highly recommend breaking these out based on similar merchant types since the margins can vary so widely.

You won’t earn the same amount on a restaurant client as you do on a B2B client, nor will you earn the same amount from a cash discount portfolio as you will an interchange plus one. The more specific you can get in your grouping, the more accurate you can be.

Now, subtract any direct costs of acquiring a single merchant account. If you always provide free equipment, use the typical amount you’d spend on a merchant in this type of portfolio. Again, more specific grouping leads to better results. A restaurant would need an expensive POS while a B2B client needs no equipment at all. If you provide an upfront signing bonus to agents, factor this in, too.

Next, we have to estimate what it costs us to support this business. We would recommend you come up with an operating expense % to apply. Take your operating expenses from your P&L and divide that total by your total residual income. Use amounts over an entire year to account for the cyclical nature of our business. Apply this percentage to the customer lifetime value.

For the sake of example:
Customer lifetime value: $2000 (100 months @ $20/month)
Upfront cost: $500 ($300 in equipment & $200 agent signing bonus)
Overhead applied: 10% ~ $200
Net: $1300

You could spend up to $1300 in customer acquisition costs and break-even, but let’s be real, no one wants to work for free. 

And we should also plan for a little wiggle room for the unknown and unexpected. 

So, a good starting point is 25-50% of this amount. Then you can adjust according to the trends and your comfort level.

Sometimes it can be hard to see money fly out the door on sales and marketing, but as long as you do the math and see positive ROI, you can increase your spend to drive more sales, and ultimately, more margin.

How to Identify Your Best Performing Portfolios

While you juggle payments relationships, are you trying to figure out which ones outperform the others in margin?

This can be a difficult task.

All things the same— business type, pricing, and Schedule A, you will still likely see consistent differences in margin between relationships.

There are legitimate reasons for this— card mix accepted by the merchant, method of acceptance, etc. And then there are illegitimate reasons. 🚨🚨🚨

So how can you tell one from the other?

Here’s where you can start:
💡If you’re getting summary level residual reporting from your provider, ask for more specifics— Interchange breakdown, assessment detail, etc. If they don’t have it or won’t give it to you, alarm bells should be going off. 🚩🚩🚩This is the most common place I’ve seen providers tweaking numbers for their own benefit.
💡Periodically recalculate the costs they’ve charged against your Schedule A to be sure they are accurately calculating them.
💡Compare merchant statements to the same items on your residuals— income, interchange, etc. to ensure accuracy.
💡Avoid relationships that offer a big front-end incentive. There’s a reason they’re willing to pay you upfront, and it’s not to your benefit.
💡Compare residual income as a percentage of billed fees on different providers every month to see where you’re outperforming others. It’s important that you’re comparing similar business types here. Review the data and watch for consistent trends.

Find a provider you can trust, but verify.

Many of our partners tell us that even though they think they have better pricing elsewhere, they see better margins with us. That is the power of transparency and accuracy.

Dig into the data and go get the income that’s yours.

What’s Considered a Fair Revenue Share in Merchant Services?

What is considered a fair revenue share on merchant residuals?

There’s no hard and fast formula. But consider revenue share a sliding scale that depends on these factors:

👉 The amount of training you need
👉 The amount of support the ISO provides to your merchants. A referral arrangement where you simply hand off leads will earn less than one where you provide ongoing service/support to merchants.
👉 The amount of liability the ISO is taking on your behalf. Low risk/card present payments portfolios have higher revenue shares than high risk ones.
👉 Your proximity to the processor. The closer you are to the party actually processing transactions, the more revenue share. If you’re an agent sending business to an ISO that sends it to another ISO, you’re getting a split of a split. There’s nothing wrong with this as they are likely providing support or resources not available to you closer to the processor. Just know where you stand and the parties involved.
👉 The number of freebies you receive. Getting free equipment? That’s fine, but understand it’s baked into the cost of your agreement.
👉 Access to proprietary software or technology.

What’s “fair?”
⚖️ The arrangement where both parties feel it is a mutually beneficial arrangement with potential for growth.

Homework assignment:
📝 Check your existing agreements to be sure you’re earning revenue share on every item billed. This is a common margin buster for sales agents/offices.

Streamline Merchant Onboarding

What is one of the worst habits we see in merchant services?  Rekeying application data over and over.

Why is this so bad? We’ll get to that in a second, but first let’s cover how it happens.

Agent collects information from the small business in the field.
Agent submits to their ISO.
ISO keys into their own CRM.
ISO keys into their processing relationship as well as any additional services like gateways.

This is:
❌ Inefficient
❌ Prone to error
❌ Often not very secure. Personal identifiable information is included here.

When is the last time you revisited your application process to eliminate redundancy and human error? Here are some tools you might deploy to tighten it up:
🔨API between interfacing applications, both internal and external, to eliminate rekeying.
🪚 Online application so that the merchant enters their own information, which feeds to your internal systems
🪛Data filters and rules to ensure validity of information collected (for example, routing number is 9 digits with valid check digit)

Yes, these things take time to implement but you’ll see a positive ROI shortly thereafter.

Plus, if you’ve ever boarded an account only to have the merchant’s first deposit bounce due to someone miskeying the account number, you might be highly motivated to make a change. That’s not exactly the best first impression.

How to Choose New Processing Relationships

When you’re shopping for a new home to place your merchant services business, what exactly should you be looking for?

There’s a long list of considerations. And not every provider will check every box in the same way.

So it’s important that you set priorities and try to find the provider that most closely meets your most important criteria.

For example, if you’re looking for lots of training and support, you’re probably going to have to sacrifice some revenue share compared to another provider that doesn’t do this.

One of the most important things you can do? Make sure their goals align with your goals.

☑️ Are they looking to exit in the near future?
☑️ In what ways are they reinvesting in their own business?
☑️ How do their partners/agents fit into the picture and what value do they place on them?

When Vendors Don’t Deliver: How to Navigate Issues

As merchant services professionals, we’ve all found ourselves in this very uncomfortable position: a vendor isn’t delivering, and we’re left holding the bag.

Here’s the thing about payments… we all want to be in control of our service delivery and destiny.

But we need processors, POS devices, gateways, security/compliance services, and an ever-changing combination of other providers to fill in the gaps and help us deliver what we hope is a seamless experience for our merchants.

Sometimes those things break. Or fall short of service levels.

Yet the merchants come to us. They bang on our doors demanding answers. As they should— often this affects their cash flow, the very lifeline of their business.

It can put us in what feels like a very helpless position. But here are some constructive tips to help you weather the storm:

✔️ Communicate clearly with your merchants and vendor. Share enough information, but not so much that it’s overwhelming or irrelevant. Tell your merchants how this affects them. Tell your vendor how this is impacting you and your merchants without being whiny. This is an art form, practice makes perfect.
✔️ Take responsibility. Even though this is not “your” issue it has now become your issue. Pointing fingers not only does you no good, but it says something about you (and it’s not good.)
✔️ Keep your cool. Losing your composure on an innocent bystander employee of a vendor will get you nowhere.
✔️ Hold vendors accountable, respectfully. Ask these kinds of questions: “Do you have a timeline for resolution?” “May I expect an update by the close of business today?” “Do you have any suggested workarounds, even if temporary?”
✔️ Offer to help your vendor. Often we are uniquely positioned to provide insight that can potentially expedite resolution. It’s amazing how this small gesture can change the dynamic of a big problem.
✔️ Reach out and collaborate with others facing the same challenge. Not because misery loves company, instead so that you can brainstorm and share potential workarounds.
✔️ See this as an opportunity to know exactly who you’re doing business with: how does the vendor act when it’s not smooth sailing? Are they owning the issue by getting in front of it? Or taking a nothing-to-see-here approach?
If the vendor is a repeat offender and never takes ownership, it might be time to find a new one.

It’s not a matter of if you will find yourself in this situation, but when. How you handle it can have a big impact on the outcome.

Secrets of Building a Successful ISO: Don’t Forget the Customers You Already Have

This is a mistake we see ISOs and agents make repeatedly: they spend more time focusing on new sales rather than supporting existing merchants.

As a result, they feel the ongoing burn of merchant services churn. With typical attrition rates hovering around 20%, that number can be almost impossible to overcome, even by the very best payments sales force.

What can you do about it?

The easiest and best place to start is choosing a processing partner that addresses these support areas well:
👉 Access to right-fit products & solutions for the types of merchants you serve. What are the pain points your merchants experience, and who has the solutions that best address them?
👉 Access to a self-service reporting platform that is easy to use and accurate.
👉 Transparency delivered, not just talked about. If there’s an issue that affects merchants, do they own it or do they use the complexity of payments to hide behind it? When you want to dig deeper into the data for your merchants, do you have that information available?
👉 Customer service requests like refunds and banking updates are handled efficiently.

The customers you already have are your most powerful form of advertising– testimonials, which can lead to a steady referral source. What are you doing to nurture those relationships and convert them to referrals?

The old adage is true ~ if you’re not growing, you’re dying. But don’t focus so much on bringing new business through the front door that you fail to see the back door swinging wide open.

Secrets of Building a Successful ISO: Don’t Spread Yourself Too Thin

Don’t spread yourself too thin across too many processing relationships.

It is nearly impossible to have only one payment processing relationship. One might be your only source for petro, another might be your only best option for high risk, while yet another might have your favorite solution for retail card-present business.

ISOs usually find themselves in a situation with multiple processing relationships because they’re trying to be everything to everyone. They want to sell into every opportunity that they walk into.

But ISOs should try to minimize these relationships down to a select few.

Why?
➡️ When ISOs spread themselves too thin across several relationships, they usually don’t have leverage in any of them.
➡️ They spend too much time managing merchants across several platforms, leading to inefficiency
➡️ They spend too much time learning the ins and outs and supporting each of these processor platforms.
➡️ They spend too much time consolidating residual downlines across several relationships. Yes, there are tools to help manage this, but they can be expensive and the more relationships, the more complicated you make this activity.
➡️ They significantly reduce the value of their business if their ultimate goal is to sell.

Diversity isn’t a bad thing when it comes to processing relationships.

After all, we’ve all seen a merchant services portfolio go downhill fast after an acquisition, a sponsor bank program that’s gone sour, or some other major event that puts a portfolio at risk.

But diversification is a balancing act. ISOs should find their niche, establish solid processing relationships that meet the needs of that niche, invest in making the processes with them more efficient, and then nurture those relationships.

Secrets of Building a Successful ISO: Integrity Has a Rightful Place in the Most Successful Payments Companies

Integrity has a rightful place in the most successful payments companies.

Success and operating with integrity aren’t mutually exclusive in merchant services.

We don’t know how the idea of anything contrary to this started, but it’s time to reverse it.

✨ We can do things the right way and be richly rewarded. Bring your own definition of rich, whether it’s financial, surrounded by great people, building a legacy, work/life balance, etc.
✨ We can opt out of using the complexity of payments to our advantage, and instead, work transparently and honestly.
✨ We can stop trying to make a quick buck via hidden, dishonest nickels and dimes (mega processors that try to recoup acquisition costs in this way, I’m talking to you.)
✨ We can lead by sharing knowledge instead of hoarding it.
✨ We can be honest stewards of the lifeline of funds for the businesses we serve.

Payments people who have figured this out are truly living the dream.

The right way is THE way.

Secrets of Building a Successful ISO: Know Your Numbers

Secret # 4 to building an ISO that will stand the test of time: Know your numbers.

One of the key activities to managing a successful payments portfolio is to track its performance with meaningful KPI’s.

✔️ First, set your strategic, financial, and operational goals.
✔️ Identify the KPI’s that align with your goals.
✔️ Set up a system to collect, calculate, and review regularly.

Here are a few ideas to get you started:
• First the obvious – processing volume, active merchant count, revenue billed, etc. If these baseline numbers aren’t correct, nothing else will be. START WITH GOOD NUMBERS! Then be consistent in the way that you measure.
• Profitability by merchant so that you can easily identify under- and over-performers
• Month over month margin change for the overall portfolio
• Average merchant life
• Average lifetime value of merchants
• Net revenue / gross revenue ratio (how well are you managing your expenses as your revenue grows? If you’re scaling well, this ratio should be increasing)
• Net margin loss – average margin of deals lost vs. average margin of deals being boarded
• Losses as a percentage of revenue (are you taking too much or too little risk?)
• Overall chargeback ratios

Operational:
• Calls/Inbound customer service inquiries per day
• Average call time / response time
• Call hold times, average and longest
• Number of customer service inquiries per rep per day
• Client satisfaction level whether your clients are merchants, agents, or other ISOs
• Underwriting timeframe from application submission to MID issue.

As you track these, you’ll see the trends– the most important of which is that improvement in your operational metrics leads to success with the financial ones.