Two years earlier, the card associations announced that transactions over $50 which were processed with a point-of-sale system would get discounted pricing. Early POS systems were priced at $900, which the average merchant could not afford. But something happened in 1982: Verifone rocked the merchant world with a POS terminal that cost only $125, the ZON. This changed everything.
Now merchants could afford to take credit cards, but somebody had to physically come to their business and sell them the terminal, install it and train them how to use it. Almost overnight, millions of merchant locations had to be set up on the new POS devices, all of which plugged into a telephone line.
In those days, the largest banks were focused on the issuing side of the business, not the acquiring side. Nature abhors a vacuum, so non-banks stepped into the breach, and they hired armies of salespeople to walk the streets and call on merchants and install the new POS terminals. In those days, ISOs (independent sales organizations) could make some real money selling credit card processing.
Lifetime Residuals from CrossCheck
At the beginning, CrossCheck relied almost exclusively on these ISOs to bring us business. When the ISO salesperson installed the POS terminal, the merchant would ask if they had a check solution. CrossCheck was the preferred solution for many ISOs because we didn’t sell card processing ourselves (unlike a large check processing competitor) so were not competing with our own ISOs. The other feature was that we always paid residuals, unlike many other early entrants in this period, which has been described as the “Wild West” of the acquiring business.
In those days, ISOs couldn’t be too sure that their processor would continue to pay their residual for the life of the account, but they could at CrossCheck.
Back then we got almost all of our business from the ISOs who played a critical role in getting us started in payments. But along the way, things changed.
It’s fair to say that the debit card replaced checks for small dollar payments (the average value of a non-prepaid debit card is somewhere around $38 per recent Federal Reserve studies). Consumers increasingly signed up for recurring debits to pay many bills that they used to pay by mailing a check with the monthly statement to a lockbox. And consumers began to use credit cards more and more at point of sale. Through all of this, checks continued to provide a cost-effective means for merchants to accept large payments.
Checks Remain Relevant
This brings us to where we are today.
Now, CrossCheck is focused on a few key verticals where the merchant needs to take checks and needs a check guarantee provider for reasons we will explore here.
When ISOs are calling on these types of merchants to sell card processing, they should always ask how they handle check processing. Let’s look at a few examples.
Auto Dealerships Prefer Checks
Our core business today is new car dealers, also called “OEMs.” There are 17,000 new car dealers in the U.S. This is a very competitive business and margins have been compressed over the years. Today, an OEM might have a negative operating margin! They will make money on new car sales from the factory holdback which comes much later.
Generally, the typical OEM will make a gross profit of a bit more than $1,000 a car — not a good ROI when you consider that the average new car costs $35,000. They will make a higher margin on used cars, and will make most of their operating profit on what is called “Fixed Ops,” which is the parts and service operation.
Because of the margins, an OEM will not take a credit card payment for a full purchase, or any kind of purchase for more than a fraction of the total amount.
Why would they let consumers use a premium card to place a down payment on a purchase or a lease, or even a full purchase, when the 3% interchange would take a big bite out of their profitability?
Then there is the subject of demographics.
Many Americans are living paycheck to paycheck. About 40% of people using credit cards need to revolve their payments because they cannot pay off the balance in full each month. This is even true for about 20% of the people who make over $100,000 a year, the “wealthy hand to mouth.” When they buy a car, oftentimes they will qualify for the bank loan, but will need to make a down payment equaling a few thousand dollars. This can be problematic for many of them.
The CrossCheck Solution for Auto Dealerships
This is where CrossCheck gets the taillights over the curb. The dealer asks the consumer if they need an extra 30 days to come up with the money, and lets the consumer choose up to four dates and the amount of each check payment. The consumer does not apply for credit nor do they pay interest.
CrossCheck silently stands in the background and approves these checks to be deposited in the future (aka CrossCheck’s Multiple Check service), taking the risk of a bounced item for the dealer.
We also do the banking for the dealer, because the checks are run through the imagers we loan the dealer, so the dealer does not have to send someone to the bank or use an armored courier! This service is called Remote Deposit Capture (RDC).
Multiple Check and RDC are bundled in CrossCheck's Auto Industry RDC Solution (C.A.R.S.), a suite of check guarantee solutions that also includes Check on Delivery (to pre-approve check payments for delivered parts over the phone).
The CrossCheck Solution for Other Merchants
Car dealers are not the only merchants who prefer taking checks over cards. The interchange rate begins to matter to merchants when the amount of the transaction is above a thousand dollars. Then, it is the difference between paying $30 to take a card payment or $6 to accept a check.
There are about a dozen merchant category codes where this happens: building supply, furniture stores, and other places where the consumer absolutely must pay for something today, like funeral homes, dentists or veterinarians. These non-auto merchants use RDC in conjunction with Multiple Check. This package includes everything except Check on Delivery.
If you are calling on these merchants, be sure to ask how they are handling their checks now. Show the merchant that they will make more sales if they give consumers the option of having more time to pay for the purchase. This leads to a better margin, more revenue, and a better consumer experience for the merchant, all good reasons to use CrossCheck and sell one of our Check Guarantee services.
But there is still one more reason why checks are relevant to the ISO: we still pay lifetime residuals to ISOs for selling CrossCheck to merchants. This can be a pretty big residual payment if you sign a large dealer or multi-store dealership. It could pay your mortgage!
So, if you are an ISO, don’t forget to ask, “What are you doing for check guarantee now?” It will pay off for you and the merchant too.
Download our free guide to learn more about CrossCheck’s ISO program.