CrossCheck Blog

CrossCheck Blog

Check Processing & Payments Information

Stayin’ Alive: Managing Financial Risk and Margin in Auto Racing

Posted by Brandes Elitch | Fri, Nov 21, 2014 @ 10:59 AM

1955 w196rAre ISOs facing “creative destruction” or a Golden Age? Formula One racing may provide a clue.

Most industries construct a sustainable business model for their members.  These can vary enormously depending on the amount of capital needed, the debt that can be supported, the size of office or retail infrastructure, and the product development and management costs.  But no matter what, over time new products and methods inevitably arise which render them obsolete and ultimately unsustainable, causing them to fall victim to what economists call the “creative destruction” inherent in capitalism. 

Since I am a car collector, I tend to gravitate to anything with four wheels.  Recently, I had a chance to look at the business model for Formula One automobile racing.  Most Americans seem to pay more attention to NASCAR than Formula One, so a little explaining might be in order.  Formula One is a primarily European series for single seat racecars, which has its roots in competitive racing in the 1930’s.  Back then, there were few rules if any.  In 1946 an organizing body based in Paris called the FIA wrote rules to standardize things and try to make a more level playing field.  A World Driver’s Championship started in 1950, awarded on points for the most wins during the season, typically of 20 races.  During the fifties and sixties, often called the Golden Age of Motor Racing, racing was very dangerous and most drivers were either killed or severely injured after a few seasons.   The cars and drivers were quite different from one another, unlike today where it all seems quite the same, at least to me.

Looking Cool While Losing Money

ScreenHunter 01 Nov. 21 10.52People say that the cost model for running a Formula One team is unsustainable.  A “low-end” budget is $100 million, and teams like Ferrari and Mercedes might spend $200-500 million to compete.  Since all finances are private, this is just a guess.  The financial payouts to the teams from sponsorship and the governing body cannot cover costs.  In the 64 years of the sport, 153 teams have failed.  This is an average of 2.39 teams failing each season.  From 2004-2014, only four teams have survived! Only one team (yes, Ferrari) has competed every single year.  I get upset when I have to spend a thousand dollars on one of my cars, so I cannot imagine having to spend $100 million per car to compete in a 16 car grid!

The financial structure seems unfair: there is no budget cap for teams, and customer cars are not allowed.  There are windfall payments and there is an unjust structuring of payments.  The selection process to be one of the teams is questionable.  The agenda can be both financial and sporting for a team, and it is not always rational, which shouldn’t surprise anybody.  In fact, in October 2014, two Formula One teams, Caterham and Marussia, were placed in the British form of bankruptcy, called “administration.” 

ISOs’ Golden Age

Managing financial margin may not be a top priority for a Formula One team, but it is for Independent Sales Organizations selling payment services.  Just like Formula One, there was a Golden Age for ISO’s, which happened with the card associations moved from knuckle busters to electronic ticket capture (ETC) for cardswipe.  Overnight, someone had to call on every medium and large business in the country and set them up on ETC.

Today, there are 11 million terminals out there, and each one of them was installed by an ISO who knocked on their door, demonstrated the product, installed it, and trained the users. This wasn’t as easy as you might think because large retailers had multiple stores and terminals per store, and just sorting out the telecommunications infrastructure necessary for on-line, real-time authorization at every terminal was pretty daunting. 

In those early days, ISO’s got to charge a monthly lease rate for the terminals and sell the lease paper, which was a very profitable operation.  On top of that, an ISO might get ten or twenty basis points, or more, out of every transaction. 

All this changed when ISO’s gravitated to so-called “free terminals” for their merchants.  About the same time, margins compressed to the point where the ISO might make 5 basis points on a transaction.  And to top it off, there was eventually some degree of market saturation, where most merchants that needed a terminal already had one. 

Creative Destruction or Creative Growth

Gold Bullion BarsSome people believe that we are about to enter another Golden Age for ISO’s, because all of those 11 million terminals out there need to be replaced with new terminals that can handle Chip and signature cards.  But I am not so sure. 

There is tremendous competition in the terminal market.  Even some terminal manufacturers have lost money recently.  Merchants are suspicious of interchange based fees and will compare pricing carefully when choosing a new payment processor.  Since your ISO revenue is based on these components, you will want to plan your calls carefully to make sure you are calling on merchants who will actually create meaningful revenue for you and your company. 

There is one area where you can still provide a product that your merchant needs and ensure a meaningful commission for your office, and that is check guarantee. 

CrossCheck pays a ten percent lifetime residual to an ISO for bringing us a signed merchant contract, for as long as that merchant uses our services.  If you bring us a multi-store car dealer, a chain of vet stores, a large building supply chain, or a variety of other merchants, you will get a very impressive commission every month.  

Equally important, you will be doing the right thing for your merchants, who may not know that this service is available, or may be using a vendor who is declining a lot of checks or not paying claims. 

CrossCheck has paid residuals to the ISO community for over thirty one years, and if you focus on the target market, it can be a profitable use of your time.  In fact, there’s a pretty good chance it will pay your mortgage, well, unless you live in Beverly Hills or La Jolla!

So while some businesses have seen their revenue models erode (Vroom, Vroom), selling CrossCheck is still a sound business practice for your ISO!

       check services, ongoing residuals, check processing        ISOs Insider's Guide

Topics: Brandes Elitch, Independent Sales Organization (ISO)

Written by Brandes Elitch

Brandes Elitch is Director of Partner Acquisition for CrossCheck Inc. A certified cash manager and accredited ACH professional, he garnered a Master of Business Administration from New York University and a Juris Doctor from Santa Clara University.