New merchant services models build stronger relationships

Offering a merchant services program can be a way to build and deepen relationships with business customers—and new models bring more flexibility for community banks.

By Colleen Morrison

Community banking is in G. Scott McComb’s blood. His father founded central Ohio’s Heartland BancCorp in 1988, and some 30 years later, it is a $905 million-asset financial institution focused on the needs of its community. “Customer feedback still comes to my desk,” says McComb. “If you can react to customers’ problems and be attentive, community banks can move mountains.”

This “moving mountain” philosophy is what led McComb to invest in Heartland’s merchant services program 25 years ago.

“At the time, we really didn’t have the expertise to handle the internal merchant services program, but we felt it was important as a door opener to many small and medium-sized businesses,” says McComb. “We know it’s a very complicated business [that] contains some risks that should be left to the experts, so we focused on what we’re really good at—providing value to the customer—and found experts to support the program.” And according to Alan Nevels, senior vice president, card risk and merchant services at ICBA Bancard, this approach aligns with today’s merchant services programs. “The bank tends to be the pillar of the community,” he says. “A merchant services program becomes a larger relationship tool for mom-and-pop businesses in that community.”

And in today’s digital era, mom-and-pop businesses are looking for competitive solutions that allow them to do everything from take card payments on mobile devices to offer rewards programs, opening doors of opportunity for bank partners.

The small-business opportunity
With America’s 3.8 million microbusiness employers (firms with one to nine employees) making up 74.8 percent of all private-sector employers in 2016, how banks define “merchant” may need a shift in perspective.

“Coming from a bank, historically, merchant solutions were perceived to be a service you’d offer a midsized-to-large business; it wasn’t beneficial to offer them to a small business,” points out Tina Giorgio, president and CEO of ICBA Bancard. “But with the migration of payments to digital, it becomes an essential payments solution. For small businesses, the ability to swipe a card on their mobile device has become an essential piece of collecting payment. If you’re a community bank who’s not offering those solutions to your small businesses, you’re at a disadvantage.”

Beyond cards
Today’s merchant services programs go far beyond simple card acceptance. Providers like linked2pay, FIS and FiNet, Inc. offer comprehensive suites of products and services with customized credit, debit, check and gift card processing solutions, including e-commerce, virtual terminals and mobile processing—all uniquely tailored to the specific business needs of the community bank and its businesses.

“Don’t look at these programs with tunnel vision; look at the whole value-add,” advises Giorgio. “As a banker, it’s not just giving [business customers] a device; it’s about how I deliver those solutions. I want to become that advisor to say, ‘Not only can I do your loan, I can do your small-business point-of-sale, card processing, remote deposit capture, ACH, gift cards, etc.’ I become the one-stop-shop for all of their payments needs.”

In the past, many community banks shied away from merchant services programs because of risk, but in today’s market, varying models (see sidebar, below) allow banks to select programs that best meet their needs—and minimize liability.

From the traditional direct model, where the liability rests solely with the bank, emerged two options where the liability shifts to the provider: the agent model and the referral model.

In the agent model, the bank can be involved in the program implementation to the degree that syncs with its payments strategy.

In the referral model, the bank sells the product to its business clients, directing the customer to a trusted provider and keeping that liability with the provider.

Giorgio points out these alternative models negate the risk previously associated with these programs. “When you think about the risk and the fraud in the marketplace, as a community bank, it can be difficult to cover potential losses—but the agent model didn’t exist a few years ago. These new models are allowing you to compete with the large banks but not build the infrastructure. It’s a win for the community bank.”

Plus points
With the agent and referral models placing liability securely on the provider and offering revenue-share opportunities, banks reap the rewards of offering comprehensive programs without inherent risk or operational burdens. “I really don’t think there are any downfalls with this program,” says Chelsea Maggard, Bancard representative at American Bank and Trust Company, a $196 million-asset community bank in Opelousas, La. “Our customers appreciate that we are still able to provide them with customer service when they have problems instead of talking to someone they do not know.”

According to experts and current adopters alike, the question shouldn’t be if you’re going to offer a merchant services program but which program to offer. “It just takes a decision from the top to say, ‘We’re going to do this,’” says McComb. “Pick a model and do it as part of an overall payments strategy.”

Giorgio concurs. “Banks need to ask themselves, ‘Is this a gap that offers an opportunity to improve the overall client experience [that] the small business has with my institution?’”

Merchant services programs can also evolve as a bank’s customer base changes or staff knowledge grows. For example, Heartland Bank started very hands-off with a referral-only program, and as it grew savvier in the program, it decided it wanted to have a more customer-facing role and made changes accordingly.

“We’ve come into merchant services maturity,” says McComb. “We started with just a referral model and said, ‘Here’s where you go.’ As we got more sophisticated, we started taking on more of that sales and service responsibility so we could get immediate answers to the client and ensure a higher level of client service and satisfaction.”

When evaluating programs, community banks should shed previous biases and focus on the payments environment of today. More rigid, risk-infused infrastructures have given way to flexible, limited-liability models. Investment has gone from sizable costs around staffing and operations to small commitments of customer education and staff training. Revenue potential has grown through provider partnerships and expanded customer services.

These benefits aside, Nevels points out there’s really only one question a bank needs to answer when considering merchant services programs.

“The small business is going to get service some place,” he says. “Why not from their community bank?”

Three types of merchant services models

Direct model
In this model, the bank runs its own merchant services program and manages everything from fostering relationships to handling contracting and pricing. The bank is responsible for full operational and regulatory compliance, and holds the liability for the merchant and the portfolio.

Agent model
The agent model offers maximum flexibility. For example, a bank’s strategy may dictate that it retains a high level of customer-facing interaction, so it can determine the level of support and interaction the provider has with its customers. The provider then scales its level of support based on the contractual arrangement, offering a commensurate percentage revenue share. In addition, the provider holds the liability for the merchant and the portfolio.

Referral model
The referral approach is the least risky. It allows a bank to offer merchant services through a relationship with a provider. In this model, the bank functions in a sales role, turning its customer over to the provider for services. The bank’s contractual relationship with the provider includes a percentage-based revenue share, and the provider holds the liability.

“Every community bank who does not have a program may want to start with an agent or referral program,” says Tina Giorgio of ICBA Bancard. “There’s no downside. It doesn’t cost you anything to offer it. Whether you have one client or 10 clients, you’re benefiting.

—Colleen Morrison

For more information, visit icba.org/bancard.


Colleen Morrison is a writer in Virginia.

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