Previously seen in Green Sheet
We’ve all heard about the race to the bottom. Is it my imagination, or is history repeating itself? It was bad enough to see desperate agents driving down processing pricing. But now it looks like the race to zero doesn’t stop there. These desperados have gone from giving merchants a deal of a lifetime to paying them to take these deals off their hands.
How can we let this happen? I set out to collect opinions on this trend. I spoke to sources at the 22nd annual Southeast Acquirers Association conference. While not all of my sources wanted to go on record, their passionate responses and colorful language showed clear unhappiness about this new trend.
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Jaron Rice, founder and CEO of Magothy Payments, made good points. He spoke about agents who voluntarily split their residual payments with merchants. “If your agents are paying merchants for their accounts, they’re not selling,” he said. “Giving merchants any kind of rebate for merchant services is utterly absurd.”
Rice also pointed out the tax liabilities this upside-down model creates. He suggested people aren’t considering the long-term implications. For example, merchant fees are a business expense. They come out of your top-line revenue. That’s deductible revenue for business owners.
“Getting that Money back creates a tax liability,” he added. And if you’re getting that money back under the table, what does that say about your ISO business partner’s integrity?
Reflecting on his ISO business, Rice said Magothy Payments reports referral partner rebates and bonuses. This is legally required for partner payouts over $600 per year. A payments attorney, speaking off the record, agreed. Kickbacks have legal and tax implications. They are not ethical.
“This is dirty,” said someone else who asked to remain anonymous. “It’s not professional to give away your own hard-earned residuals, and it makes our industry look bad.”
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In 1998, when I started in this business, leasing was huge. It was the main way to make money. We offered 12-month or 24-month leases. We avoided the high-priced 48-month leases with their big monthly payments. But ISOs started selling equipment outright. Then they began giving it away. We then pivoted to selling used and refurbished POS equipment to stay competitive.
Then big integrated POS systems became huge business. They too became “free.” This isn’t really free if you read the fine print. It’s more of a subscription service, like hardware- or software-as-a-service.
Today’s merchants expect low entry costs and low monthly fees. This applies to their hardware, software, and POS systems. Technology changes fast. No one wants to be stuck with obsolete equipment.
Any merchant stuck with end-of-life or non-compliant POS would be reluctant to buy hardware outright. They’d also hesitate to buy once-and-done software and be responsible for compliance and Security patches. It makes sense to pay a small monthly fee. Then you never have to worry about that stuff.
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One of my favorite books is “Who Moved My Cheese?” by Spencer Johnson and Kenneth Blanchard. It made some good points. The authors realized most people fear change. They created a story about mice in a maze. This illustrated an effective strategy for dealing with change. It showed that in a rapidly changing world or industry, your attitude matters most.
Johnson describes the book as a simple parable for dealing with change. “Cheese” is a metaphor for whatever you want in life or business. The “maze” is where you look for it. “In the story, the characters are faced with unexpected change,” he wrote in the introduction. “Eventually, one of them deals with it successfully, and writes what he learns from his experience on the Maze walls.”
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When you see the handwriting on the wall, he added, you can discover how to deal with change. This helps you overcome your fears. You can then see change as a way of gaining something better.
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It looks like the race to the bottom is hitting historic new lows. I want to thank the payments industry leaders for sharing their perspectives on this disturbing new trend. To Rice’s point, any merchant level salespeople giving away residuals aren’t selling. They’re paying merchants to help meet quotas. I agree with others who called this practice dirty. It puts merchant services in the same class as payday lenders and credit repair service providers. This not only makes us look bad, it makes us look like a bunch of scammers.
Our industry prides itself on self-regulation. Let’s tackle this issue head-on before regulators take it out of our hands. It’s no wonder why merchants run to PayPal, Square, Stripe, Toast, and others. At least these companies offer transparent pricing.
Let’s focus on selling value and service. Give business owners the best possible pricing. Remember why you got into this business, if you can. Let’s get back to basics before it’s too late.
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The “race to zero” describes a trend where merchant service providers, especially desperate agents, continually drive down processing fees. It has progressed to the point where some agents are now reportedly paying merchants to secure their accounts, moving beyond offering services for free.
 Industry Experts like Jaron Rice (Magothy Payments) argue this practice is “absurd” and unethical. It suggests agents aren’t “selling” but rather paying to meet quotas. It also creates complex tax liabilities for merchants receiving these rebates and reflects poorly on the integrity of the ISO business partner.
Yes. Merchant fees are typically deductible business expenses. Receiving a rebate means that money comes back, which can create a tax liability for the merchant. An anonymous payments attorney also stated that such kickbacks are unethical and have legal implications.
The industry shifted from long-term leasing to outright equipment sales, then to equipment being “given away” (often as part of subscription services like hardware-as-a-service). Today, merchants expect low entry costs and low monthly fees for hardware and software, preferring to avoid being stuck with obsolete or non-compliant equipment and associated security responsibilities.
 The book emphasizes adapting to change. It uses “cheese” as a metaphor for what you want in business and the “maze” as where you look for it. The lesson is to overcome fear, embrace change, and see it as an opportunity for better outcomes, rather than resisting new market realities.
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