Whether you’re new to merchant services or simply interested in learning more, one factor that entices many is the ability to earn residual income. Independent Sales Organizations (ISOs) and agents can generate sizable passive income in the merchant services industry. When companies accept debit and credit card payments, customers can buy products or services. At the same time, you earn residual income. Everyone benefits!
While that sounds appealing, there’s much more to understand about this type of residual income. Let Velocity Funding explain how residual income works and what influences its growth over time. Understanding the intricacies of residual income can help you maximize earnings and make more informed, portfolio-related decisions.
In this post, you’ll learn about:
- What merchant residual income is
- How residual income works
- Examples of residual income in the merchant services industry
- The vital role of merchant processing volume
- When you will receive residual payments
- Whether a residual buyout is the right move
What Is Merchant Residual Income?
Residual income in the merchant services world refers to commissions earned by an agent or ISO each time their clients process a transaction. Instead of a flat commission, ISOs and agents earn a percentage of each transaction’s associated fees. While a few transactions here and there won’t equal significant income, the money generated from numerous merchants can be a substantial sum in residuals each month or quarter.
How Merchant Residual Income Works
It takes seconds for a customer to swipe their card. However, there’s a lot more happening behind the scenes after this transaction. Here’s a closer look at how residual income works for all parties involved.
First, a merchant or retailer collaborates with an agent or ISO to accept credit card payments from customers. When a customer buys a product or service from a merchant, they pay fees in addition to the cost of what they purchase. Although most of the processing fees collected from the merchant go to the customers’ credit card’s issuing bank, some of these fees go to the agent or ISO partnered with the merchant.
As long as a merchant processes credit cards, an agent or ISO receives residual income.
What Is an Example of Merchant Residual Income?
- For our first example, imagine that you sign up a business named Barry’s Donuts for credit card processing. Per the agreement, Barry’s Donuts pays a flat 2.75% rate to accept credit card payments. Out of the 2.75%, 2.5% goes to the networks, issuing bank, processor and the other .25% goes to the agent.
After their first month of accepting credit card payments, Barry’s Donuts generates $20,000 in monthly credit card income. They pay a total of 2.75% of $20,000 which is $550.Out of the $550 the business pays in fees, $50 (0.25%) goes to the agent.
Is your business guaranteed to earn that same amount ($50) each month? No. Since your merchant residual income is based on clients, this amount can increase if clients make more sales. It will decrease if the performance of companies in your portfolio worsens.
The Role of Merchant Processing Volume
The residual income you earn as a merchant is tied to the processing volume of your merchant clients. In other words, you earn higher residuals when processing volume increases. That’s why some agents and ISO prioritize only high-volume merchants.
As another example, let’s compare the performance of two different agents. One agent specializes in signing on small companies to accept credit card payments. This small business has a monthly processing volume of $15,000. Another agent only signs on high-volume companies. Each of this agent’s retailer clients averages $150,000 in monthly merchant processing volume.
In this example, the agent or ISO working with companies that process $150,000 in monthly transactions would generate more merchant residual income than an ISO or agent with clients generating $15,000 in monthly processing volume.
It’s also worth noting that processing volume among merchants is rarely static. Some companies generate significantly more sales during certain times of the year than others. The success or lack thereof of advertising campaigns can also impact your residual income. Keeping a close eye on your portfolio’s trends can help you accurately forecast earnings and growth.
Understanding Residual Payments
When it comes to merchant residual income, there’s no subject more important than getting paid.
Typically, residual payments work by a processor charging a merchant. The process sets aside their portion and distributes the agent’s or ISO’s amount based on their pre-determined split. These splits vary based on a contract’s terms.
As an ISO or agent, it’s always a good idea to review your agreements regularly. This simple step ensures you’re up to date on payment schedules, reporting systems, and other vital factors.
Everything You Need to Know About Residual Buyouts
Earning merchant residual income is great. However, some merchants understandably would prefer or require a larger, lump-sum payment for some or all of their accounts. That’s where residual buyouts enter the picture.
Under this arrangement, a third party makes an offer to purchase a portion or all of your merchant services portfolio. It’s similar to cashing out the value of your portfolio all at once vs. waiting for its residual payments to continue.
There are many reasons to consider selling your portfolio, including:
- Paying for emergency expenses
- Gaining income for reinvesting
- Downsizing your business
- Exiting the merchant services industry
This type of buyout isn’t for everyone, but it can be attractive if you need new capital or need to exit this industry quickly. If you’re unsure about a complete buyout, partial portfolio buyouts can be worth considering.
Knowing your portfolio’s current worth and growth potential is essential if you’re considering a residual buyout. Velocity Funding can help whether you are ready to sell, unsure, or interested in determining the worth of your portfolio. Plus, it’s free! There’s nothing to lose. Click the button below to get started.
Helpful Tips to Maximize Your Merchant Residual Income
If you’re not earning as much in residuals as you’d like, there are several things to focus on. They include merchant processing volume, retention, and diversification.
Processing Volume
An effective way to increase your merchant residual income is by targeting merchants with higher processing volumes than your portfolio currently generates. As you acquire new merchant accounts that process more sales, you gain more residual income from more transactions taking place.
If you currently work with small companies, consider now as the time to begin approaching mid-sized or large companies. You may also have luck targeting newer industries. For example, e-commerce clients may generate much more income for your portfolio than a string of retail businesses in a small town.
Even a slight boost in merchant processing volume could bring sizable residual income increases.
Retention
Focusing on growth is vital. However, don’t let that focus hinder your ability to keep current merchants satisfied. Retaining merchants keeps profits rolling in every week, month, or quarter.
A few ways to retain these companies include:
- Providing stellar customer support, responding to questions and concerns fast
- Researching your industry to provide competitive pricing
- Reaching out to merchants proactively and regularly
Diversification
A major aspect of success as an agent or ISO involves balance. As you focus on retaining your best accounts, it is also essential to seek opportunities for branching out and diversification. For instance, having clients only in the restaurant industry could result in your portfolio (and merchant residual income) taking a significant hit if this sector experiences a downturn.
Merchant residual income is one of the most effective ways to generate recurring and sustainable revenue. Understanding how residual works, focusing on high-volume clients, retaining merchants, and adequate diversification can set any agent or ISO up for serious future success.
Dean Caso is a Managing Partner at Velocity Funding, which he founded with this company’s other Managing Partner, David Caso, in 2006. Caso graduated in 1983 from Babson College with a Bachelor’s degree in Finance and Investments. With over 35 years of experience, Caso has acquired over 300 credit card processing portfolios. He has a superior eye for opportunity and an unwavering commitment to excellence. Caso’s leadership instills confidence, fosters innovation, and inspires those under his professional command. His decades of industry experience and proven track record of success continue to drive Velocity Funding’s growth and industry-leading presence.