How Merchant Services Can Restore Non-Interest Revenue Mike Halford is the senior VP of merchant sales for Security Card Services. He is primarily responsible for designing, building and managing our referral and agent partnerships across the country. His long experience lies in not only merchant sales, but in helping community and regional banks build programs that thrive through retention. I. Why merchant services (and why now)? Few go into banking with the primary goal of becoming sales people. But, times have changed. There has been a cultural shift in the competitive landscape of the banking industry. Financial services firms are moving from an operational focus to more of a sales culture. This is particularly true of community and regional banks. In an environment of new regulations and shrinking fees, it s not enough to rely solely on loan revenue. Banks are placing more emphasis on other non-interest products, such as merchant services programs, to pick up the slack. To do so, they turn to companies like Security Card Services. As more banks embrace merchant services, they re finding that these programs are anything but easy money. However, done right, merchant services can make a huge difference on the bottom line and culture of your bank. Here are some lessons I ve learned over decades of helping community and regional banks build merchant services programs that endure. Are these programs about the merchant or the money? This is a defining question that arose from a conversation with one of our bank partners. With the hopes of improving the customer care component of their program, this bank had walked away from a long-term vendor relationship. In the short run, this bank stood to lose a large number of merchant accounts. It was a moment of high risk for the program director. You can imagine the stress on the entire organization. So, trying to be a good partner, I asked the program director, For your merchant services program to be considered successful, what is more important to the bank, the merchant or the money? The obvious answer is that both are important. Without revenue, no one will be in business for long. However, when it comes to merchant services programs, resist the tendency to focus too much on pricing and margin at the front end of the merchant relationship. After all, you have to get the opportunity to manage the relationship before you can actually build revenue. 1
In the long term, it pays to take a consultative approach to your merchants. Your merchants must trust that you can take care of their needs. Building that trust takes time. Of course, you should have a robust suite of technology products. Reliability is critical as well. Proper management, consistent communication with your merchants these are the keys to fostering retention. The banks that value the merchant will do these things well; and the money will follow. One of the cold, hard realities of these programs is that most merchants have no idea who processes their card transactions. The vast majority of merchants don t even know that their bank offers the service. All they know is that they signed an application and money has been deposited in their account ever since. As long as the money is flowing and the equipment is working reliably, merchants happily go about their business. Until, of course, their payment terminal goes down... Merchant services and the typical bank For most banks, merchant services programs have historically been an afterthought at best and a burden at worst. Merchant services programs are difficult products to manage. They require a high level of service. Many banks find it easier not to offer these programs to begin with, at least not proactively. The risk of a poorly run, but successfully promoted, merchant services program is the potential to hurt relationships with valuable commercial accounts. Loan revenue is at stake! Today, however, customers are more likely to pay with credit or debit cards than cash. Banks are now seeing this opportunity in a new light. We find that the typical bank sells merchant services to 4% - 8% of its commercial DDA accounts. The average merchant services portfolio accounts for roughly one percent of a bank s revenue. We believe that any community bank can take advantage of merchant services to not just retain existing customers but grow the relationship by cross selling loans and other offerings. The community bank advantage: service Service is the key. That s the historical advantage community banks have held a deeper commitment to serving the needs of their customers. By contrast, larger financial institutions have a more transactional mindset; it s harder for them to customize their programs. Without that service advantage, most community banks probably wouldn t exist today. For the community bank, merchant services can provide this same kind of advantage. It s a flexible product that can be adapted to the culture of your bank. 2
II. What I ve learned: the keys to a successful program Commitment The first key is total commitment to merchant services as a line of business. No one person can make a merchant services program successful; it requires commitment at every level, from senior management to branch personnel. For those in charge of the program, the first responsibility is to communicate the commitment of senior management to everyone throughout the bank. Everyone needs to understand that the merchant services program is a priority. This is particularly true at the branch level, because that is what it will take to create the referral volume you need to succeed. Accountability (and transparency) Accountability is at the heart of a successful merchant services program. Building a culture of accountability requires a few simple but important things. First, everyone has to understand the importance of merchant services to the future of the bank. It s important that even people outside of the merchant services department feel a sense of ownership over the program. That means giving people outside of the department an opportunity for input into how the program will be designed and delivered. People are more willing to accept the challenges that they help define. Most people want to do a good job. They want their work to matter. And when they understand the effects their actions have on others, most people will do the right thing. Having transparency in terms of roles is a bit like living in a glass house. That sort of transparency helps create accountability among team members (and encourages people to resist the urge to point fingers). This will afford everyone the access they need to see what s going on, on a daily basis, so that they might adjust or ask questions to help improve the overall effectiveness of the program from a holistic perspective. Transparency in reporting program performance is paramount. We find that a lot of banks don t know what goes on within their program outside of the residual report that they get once a month. That report, while vital, doesn t include nearly enough information to effectively manage your program. As we said earlier, merchant services comes with some baggage. A culture of transparency will better acknowledge and address issues as they arise. Banks that do this well can deal with problems before they become a full-blown crisis. 3
Say a merchant who owns a restaurant has a terminal go down on a Saturday night. As long as that terminal is down, they can t accept card payments. That s a threat to their livelihood. While the bank may not be the one responsible, as far as the merchant is concerned, the bank is responsible. Banks need to know how to leverage technology to track and resolve these problems as quickly as possible. They need to know the good and the bad if you are going to protect your merchant relationships. Technology can provide that level of awareness across the entire organization, in a way that can be customized to fit your particular program with the access to information it needs. Understand the culture Every bank is different. Moreover, each bank is comprised of different cultures. Branches have different ways of doing things. Only by understanding the culture of a particular bank can one create a program that builds synergy between the bank and the merchant partner. Because the bank and the merchant provider are likely to go shoulder-to-shoulder into the market calling on merchants, they must share the same values and goals. The person selling merchant services needs to understand the goals, all the way down to the branch level if they want to drive referrals from a particular branch. They have to understand how each branch operates. A sound action plan and training A sound action plan is a good place to start for any bank selling merchant services. It s a playbook that details what do to do and when. It has to be systematic; otherwise it has the potential to become a huge mess. The action plan should be built based on conversations with everyone who has a vested interest in the success of the merchant program. Get their input in order to set timelines and expectations. Putting people in charge of some of these timelines that are important. It is also wise to allow for the ability to adjust as your program unfolds and circumstances change. Training is an ongoing process, of course. It s not something you do once and forget it. Even the most experienced salespeople need constant training on new products and services. Many sales partners could use help refining their selling techniques. One other reason an action plan is important: relationship managers in almost every bank are risk averse. They are hesitant to refer one of their clients to a merchant services salesperson because they don t want to put their overall relationship at risk with a salesperson they don t trust. This is probably the biggest roadblock to gaining new referrals at the branch level. 4
For any merchant sales representative, the first and foremost job is to earn the trust of the relationship managers at the branch. Just as they make their case to merchants, sales representatives have to prove to the branch that they understand the overall value of the merchant relationship and that they have a plan for both the initial sale and the long-term service of that relationship. If your sales force can t earn the relationship managers trust, they will have a hard time succeeding. The branches role in supporting a merchant services program Referral volume is the lifeblood of a merchant services program. Merchant services programs won t achieve growth without referral volume. The program s revenue goals will never be realized. The branch is crucial in supporting a merchant services program, because it is the front line for referral volume. It s vital that your program is active at the branch level. This will sound counterintuitive to most, but merchant services sales representatives can t spend all of their time pounding the pavement. Sales representatives need to start their day in one of the branches. They need to start there, making calls out to customers so that the branch can make a tangible connection with what the sales representative brings to merchants. III. Where to start? The answer to this question goes back to the first topic: What s more important, the merchant or the money? We believe that there is an opportunity in every customer. Even the commercial accounts that aren t profitable merchant services candidate might have large deposits and a need for other products. Even the largest of businesses started as a small business at some point. Every merchant has potential. You never know what other kind of products they re going to need as they grow. I would say sign as many as you can and take advantage of the opportunity to manage this relationship. Common traits of successful programs The most successful programs aren t looking for spikes and valleys alone. Instead, the program is a part of a normal sales process with every merchant. Successful programs also track their progress. They track referral volume, the quality of their referrals, closure rates, margins, retention everything. Data is a powerful driver of action. 5
They communicate effectively, especially to existing customers. It s obviously a lot easier to hang on to customers than it is to go out and find new ones. Common mistakes Poor communication is a killer, particularly in the beginning of a program. After that, the biggest mistakes usually arise from a lack of internal leadership. If those in charge won t embrace the needs of the merchant services provider or sales representatives, the program won t perform as well. A lack of access at the branch level puts the sales rep in an untenable position. Stand shoulder-to-shoulder with your merchant services provider Building a successful merchant services program takes a lot of work, considerable commitment and even more patience. No matter which merchant services provider you choose to partner with, we think it's important that you choose someone with the experience to lead across every aspect of the bank. Partner with someone who can bring a consultative approach and understands your culture. Your partner should obviously have a sales mentality. They also need to possess the financial resources and talent to build an effective sales structure. They also need to adhere to a strict service mentality, one that caters to the merchants relationship to drive program retention. But most importantly of all, the best merchant services provider understands the bank s unique culture. That way, they will be able to work as a natural extension of the bank. They will be able to stand shoulder-to-shoulder. If you are a referral bank who works with an outside merchant services provider, the sales person calling on merchants is, in essence, an employee of your bank. Their actions reflect on you. It s hard to overstate how important it is that the person fit the culture of your bank. A bad fit does more than hinder your merchant program; it can even threaten existing relationships. 6