As featured in this month’s issue of ISO & Agent – eProdigy’s CEO David Rubin gives his take on the unique opportunity ISOs have to cross sell alternative financing.
In the ever-dynamic world of financing and payments, there’s a great new opportunity for ISOs to cross-sell their merchant clients and significantly expand revenue streams as a result. All without having to find new clients.
With the looming fraud liability shift taking effect in October 2015, independent merchants will want to be EMV (chip card) enabled. Even as they’re engaging with their clients on EMV conversion, ISOs have a great opportunity to turn the conversation to merchant cash advances (MCAs).
For those ISOs not already familiar with these financing vehicles, MCAs have been around for 17 years. Simply explained, a merchant cash advance is a short-term advance of funds against a business’s receivables. A fixed debit, or in the case of some companies, a percentage, is taken directly off each sale daily or weekly. The merchant cash advance industry has mushroomed and is booming, mainly because bank lending criteria became so tight after the Great Recession that very few small businesses have been able to qualify for bank loans. If the virtual disappearance of bank lending to small businesses was the impetus that gave birth to this new category of lending, what made it possible to actualize and accelerate so fast, was the existing infrastructure that provided for a split between the various parties in the credit card money flow, between acquiring bank, merchant bank, credit card and processor.
Since the 2008 crash, and subsequent credit crunch, a lot more players have come into the alternative payments and lending space, and the industry has grown exponentially, from $500 million five years ago to an estimated $5 billion industry in 2014. ISOs, with their roots in the credit card processing industry, have been a big part of this explosive growth, acting as the alternative lending industry’s agency arm in selling merchant cash advances and making deals
that enable merchants and other small business people to get financed even as they service these clients with their POS and processing needs. And again, it all started with the split.
There’s a very compelling reason for ISOs not already involved with MCAs to get themselves up to speed on this business. In the case of processing-specialized ISOs, the average income stream from processing an account ranges from $50 to $70 a month of residual revenue.
MCAs can add a significant amount to an ISO’s bottom line, both in the form of lump sum payments and residuals. For example, by selling a $100,000 cash advance, the ISO could realize $8,000-10,000 in revenue up front. An additional income stream becomes possible when 50 to 60 percent of the MCA has been paid off and it becomes eligible for renewal: those
renewal fees will go to the ISO, as well. Selling MCAs opens up a whole new realm of income for the ISO, in denominations larger than income streams from processing.
Sound good? Well, if you’re an ISO who isn’t dealing with cash advances, you might want to consider familiarizing yourself with this part of the industry and learning how to sell these
products. And right now is the perfect time to start, because you’ll be proactively contacting merchants about their EMV upgrade needs anyway. While you’re helping them price and
install their new POS and software upgrades, you can ask them in the course of that conversation if they have an immediate need for ready cash. Then let them know how MCAs
When you’d most likely guide a client toward an MCA is when the client needs money, and needs it fast. As the ISO, you’re able to offer the client fast capital with limited documentation,
even against a potential background of poor credit. There are few if any other channels through which the merchant could access this kind of instant infusion. There are some peer-to-peer crowdfunding platforms, focused mainly on the A- and B-paper buckets of clientele. However, MCAs cover A- through D-paper markets, to get capital to a business very quickly – sometimes in just a day or two.
For you as the ISO, this is a perfect time to expand your knowledge of the industry while adding to your existing income streams. If you don’t already know the nuances of the business, you’ll want to become knowledgeable about the circumstances where an MCA is the most expedient financing vehicle, which companies only advance to A-credit businesses, which ones finance B through D, what the term times are, what the rates are, and so on. And because you’re already talking about EMV with your clients, the door is wide open
with this natural cross-selling opportunity.
Reprinted from ISO & Agent magazine.