Card Swiping

Accounting software vendors see gold and green in credit card payments

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Can accounting software resellers find happiness steering clients to their payment processing services? Peyton Burch, the Houston-based COO of the Enterprise Resource Group, intends to find out. One of his firm's chief goals at Insights, the Sage Software conference held last month, was to find out if ERG should begin signing up its clients and prospects with Verus Financial Management, the credit and debit-card processing company that Sage acquired early this year.

"We have a number of clients that take credit cards. In fact, one of the real differentiators we have is that MAS 90 does an outstanding job of credit-card reconciliation," says Burch. "If we can switch them to Verus, we can get a perpetual cut of the fees."

Acquiring customers for payment processing services is not something that accounting software resellers have done in large numbers. But software vendors are increasingly involving their channels in referring merchants to their systems, if not actually signing the businesses up as new customers.

Partner Insights

Sage isn't the only vendor making the move. Intuit got into the business in 2004 with its purchase of the company whose services have become QuickBooks Merchant Services. Other companies that are involved include Synchronics, which was recently purchased by Radiant Systems. Cougar Mountain Software has also recently entered the market. All have different takes on how to profit from payment processing services.

Whatever the method, it seems certain that both accounting firms and software resellers will become more involved in the business of getting credit-card transactions from merchant to processor to the accounting system. They will be lured by the promise of a long-lasting share of the fees attached to these transactions.

The most ambitious plan is that of Sage Software CEO Ron Verni, who plans to enlist its VARs in the business of acquiring customers for Verus' services, which will be renamed, with Sage Payment Services the probable name.

In this complex business, the first step is acquiring business customers to use these services. Companies such as Verus have employed what are called Independent Sales Organizations to prospect for client companies.

Because ISOs get a cut of every transaction of companies they sign up, the business can produce mounting revenue.

"They [ISOs] are able to build up recurring revenue, and the value of the business grows beyond their own skill set," says Verni. "Some of these ISOs have built amazing businesses."

That means that ISOs have a far easier time selling their businesses when owners want to cash out than the owners of software reselling organizations usually do, Verni continues.

Sage Valued Verus Highly

The potential that Sage sees in this year's acquisition of Verus Financial Management is shown by the purchase price: Sage paid $325 million for Verus, which had about $64 million in revenue for 2005.

What the price got Sage was a customer base of 101,000 small and mid-sized merchants. The purchase price was more than five times Verus' annual revenue. The acquisition of software companies rarely hits two times revenue under the best circumstances. When Sage purchased Federal Liaison Services, a tax payment processing company, in 2004, it paid just under two times revenue. Sage reportedly balked at paying just under four times revenue for another financial software company a few years ago.

The 2005 Verus revenue was an increase of 26 percent over fiscal 2004's $51 million. The company was also highly profitable. It had about $21 million in operating profit before amortization and depreciation, three times the $7 million the year before.

Intuit got into the business with the October 2003 purchase of what it termed the membership interests of Innovative Merchant Services and the related Innovate Gateway Solutions for about $116.7 million in cash. Intuit does not disclose the results of its merchant services operations, which are included in its QuickBooks-related revenue. However, out of the purchase price, $98.4 million was recorded as goodwill.

And it's the possibility of such an annuity that intrigues ERG.

"We need to know more about the cost of converting to Verus, but the annuity is an exciting option for partners as we try to move to a more predictable income stream. With our client base, this could be very lucrative," says Burch.

The world of payment processing is complex, with stringent rules, layers of fees, and risk that must be assumed by someone when customers buy on credit. Besides providing point-of-sale authorization, Verus, for example, also validates the transaction, provides transaction settlement, and check conversion.

Once customers have signed up for the service, they must be "boarded," in the term used in the business. This means that the vendors ensure their systems are set up properly, and that they are authorized to use all parts of the system so results are properly made and credited.

"Then, once somebody is on board, it's a whole back-office experience," says Verni. And with such a complex system, what can go wrong often does. "Something always goes wrong with credit-card processing," Verni continues.

Meanwhile, as part of the settlement process, merchants get a statement that is as detailed, or more so, than many telephone bills. Just as with telephone bills, these may carry fees that merchants may not understand-and may not really owe.

Verus provides accounting for the charges so that merchants have a greater chance of avoiding paying for things they don't owe and simplifying the accounting. The company also ties together the variety of steps together in one place, says Verni.

Sage resellers will have the opportunity to become ISOs, with multiple levels at which they can participate, says Verni. They can also refer business to Verus, a name that will probably become Sage Payment Services.

This business is not completely new to Sage. It has been testing a similar process for the last two years.

"We had a test with a bank with Peachtree to get first-hand experience, and followed up with research," says Verni.

And in announcing the purchase of Verus, Sage noted the obvious appeal of the process business to people who use accounting software: the ability to link payment processing with financial software in order to eliminate dual data entry. Sage said it would integrate the services with its accounting software, although details have not yet been announced.

The Intuit Entry

While Intuit has no plans to turn its accounting customers and advisors into ISOs, it has been cultivating their role in referring businesses to use QuickBooks Merchant Services.

Accountants are being used similarly to the way Intuit uses the ProAdvisors to market its software products. It exposes them to the service and gives them incentives for using it.

"Accountants aren't acting as ISOs. They are advocates," says Dan Wernikoff, Intuit's director of product management services.

When an end user signs up with Intuit because of an accountant's referral, the end user gets better pricing. Intuit waives the first two months of fees and also waives the charge for set-up. Accountants who process their card payments through Intuit also have most monthly fees waived for the first year, although they do pay $9.95 per month for that period.

"That is extremely competitive," says Wernikoff, which is a phrase that Intuit applies to its range of charges.

Intuit has found that accountants do not want compensation for the referrals. They are very interested in getting their clients tools that work so that the numbers accountants receive are more accurate, properly reflecting payments received by the merchant and fees that it owes.

Intuit does have one major difference from most other processing service, says Wernikoff-it targets small businesses, while most other services are seeking customers with high volumes of transactions.

Small clients often get poor service, including being put on hold when they call for support. They appreciate Intuit's efforts and reward the company with loyalty.

"We know that once people use our service, they are not going to leave," says Wernikoff.

The POS Connection

It should not be surprising that companies who offer POS products are interested in the payment processing businesses. After all, many retail businesses survive on credit-card purchases.

Among the active vendors is Memphis, Tenn.-based Synchronics, a POS specialist that was purchased by Radiant Systems late in 2005. Synchronics has offered processing services in connection with its CounterPoint software since 1990.

"We began integrating things even more tightly five years ago as we began to see that all of the processors were going different directions," says Jeff Goldstein, president and founder of Synchronics.

The company built its own gateway to handle transactions so that it did not matter which credit card a merchant accepts. That has also meant Synchronics provides the technology infrastructure to support the processing, including redundant power supplies and leased lines into American Express and the other processors.

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