Why Big Merchants Don’t Like Cash Discounting

There are a growing number of ISOs in our industry who are selling cash discounting exclusively.  They are excited about it and making lots of money.

Big Advantage

Their one big advantage is the small amount of training needed for agents.  Agents only need one line:  “We don’t charge credit card processing fees.  There is only a ____ monthly charge.”

This is a brilliant strategy in many ways. 

• Get agents going faster
• Generate leads faster
• Very streamlined process

Problem Emerging

However, there is one problem emerging for these ISOs:  the average margin on these merchant accounts is very low. 

Two things quickly become apparent in cash discounting versus traditional portfolios.

1. The margin on cash discounting deals is 3-4 times as high as traditional. This is awesome! 

 There is 150 basis points mark up on the cash discounting portfolio, while only 30-40 basis points on the traditional.  Obviously, the ISOs want to sell cash discounting! 

2. Although the basis point margin on cash discounting IS significantly higher than traditional, the attrition rate on the traditional portfolio is significantly lower than cash discounting.

There’s one important reason for that:  small merchants go out of business!

The Dichotomy

Everyone knows I AM a big fan of cash discounting.  And I DO maintain that cash discounting is great for the customer.

But business owners who are hyper concerned about customer experience are less likely to agree with cash discounting. 

Merchants who easily agree to charge more money to customers using credit cards are usually smaller and more likely to go out of business.  Those numbers are playing out in portfolios I’ve seen.

The average volume on the cash discounting side is significantly lower than the traditional side.  That means larger, more successful businesses are likely to stay in business and are less likely to go with cash discounting.

Bigger accounts are those

• where basis points of markup are only 20-30 versus 150.
• doing $150,000 per month versus $8,000 to $12,000 per month.
• who will still be in business in ten years versus the smaller one which will go out of business the next year.

Missed Opportunities

That makes a big problem when agents are only trained to sell cash discounting.  The advantages of bigger accounts are being completely missed!

• REASONS BIG MERCHANTS DON’T LIKE CASH DISCOUNTING

#1.  Technology.  How will they implement cash discounting?  These well-established businesses already have a complex POS which may not offer the options needed for cash discounting.

Different Pitch

Implementing cash discounting is more confusing for them.  The cut-n-dry pitch, “We will eliminate processing fees,” won’t work here.  Rather, agents need a “We’ll increase your revenue which will help offset the fees,” pitch.

#2.  Rigid pricing restraints.  ISOs selling only cash discounting have very rigid pricing restraints.  There’s usually a CFO or Controller for the merchant with larger accounts. 

CFOs or Controllers won’t be willing to pay an ISO 3.99% instead of implementing the program themselves.  They would feel the ISO is unnecessary.

#3.  Compliance.  The large merchant will have an attorney.  Just like most CEO’s with whom I talk in consulting (and like most of the rest of us), the attorney will be confused when delving into cash discounting.  It IS confusing; it changes often!  Attorneys will advise merchants to avoid the risk and wait a while.

Valid Reasons

So, there are several valid reasons why larger merchants may not like cash discounting. 

The odds of selling cash discounting to a large merchant are much less than to a smaller one.  Although you’re making plenty of money with cash discounting, there may be a way to tap into the larger market, too.

 HOW TO TAP INTO THE LARGER MARKET. 

Leverage your salespeople who are selling only cash discounting for two purposes – 

• sell cash discounting to smaller merchants or anyone wanting it.
• collect statements for larger merchants who aren’t interested in cash discounting.

Give the agents enough training to enable an intelligent conversation with merchants.  Understanding the industry and competitors with which you work is always a good idea!

Powerful Pitch

Teach agents to use this pitch after a merchant says “no.”

“I totally understand where you’re coming from.  Here’s the thing – we are experts at implementing these programs.  I think you’d agree this might be an interesting opportunity down the road?  When surcharging is national, you may want to implement a program like this.  So, here’s what I’d like to do.  I’d like to explore starting a relationship with you on the traditional side.  We can look at your statement and minimize your costs right now.  Then, later, if and when passing costs to your consumers makes sense for you, we’ll be ready to help.  I’d love a copy of your statement for our team to do a complete statement analysis.  We’ll give you an unbeatable rate just to have that relationship with you.”

That is a powerful pitch which will work one out of ten times.  Right now, you’re getting zero.

Profit Down the Road

Train those 15, 20, or 100 agents who are selling only cash discounting to send one statement a month from larger accounts.  An inside salesperson or someone local could go back and sell them.

As things progress in the industry, the larger deals may become very profitable.  The actual cash margin doesn’t differ greatly from cash discounting due to a much higher volume.  The basis points of markup is higher and attrition is massively lower.

Food for Thought

Think of expanding to lead generation by leveraging agents on larger deals.  Increase the average volume of merchant accounts and help long term with attrition by selling larger, well-established businesses.