During the past two decades, we’ve gone from a check writing and cash society to one that increasingly pays for goods and services with the swipe of a card. The average person gives little thought to what happens after their card is swiped, but their action initiates a most complex process involving several parties. First, the information is transmitted by a processor on behalf of the sponsor, who actually handles the funds and assumes the risk of the transaction. The sponsor takes a fee (commonly known as a discount) for their services and credits the merchant (the seller of the goods or services) with the net funds. If the consumer disputes the transaction, the merchant is charged back for that amount, unless they can prove otherwise. Chargebacks are the key to merchant processing, for business practices that result in large amounts of chargebacks can create financial risk for the sponsor.
Banking regulation has become more pervasive during the past few years, a change that’s made the merchant processing arena more volatile and put a squeeze on some industries, including timeshare. “The regulatory environment is starting to catch up with merchant processing,” said Peter Moody of Equiant Financial Services, one of the leading third party receivable servicers for the timeshare industry. “With the emphasis on ‘Know Your Customer’ (a section of the U.S. Patriot Act), the boarding time for merchant accounts is getting longer and longer.”
A second change to the regulatory arena is the new Consumer Finance Protection Bureau, which has issued lists of industries, often very general and sweeping, that banks should avoid. “They think they’re helping the banks and protecting consumers,” said Mike Fox of Group ISO Merchant Services, a company that has been underwriting their merchants for their banking partners since 1984, “but they don’t know the industries. There are bad apples in every field, and it’s our job to underwrite and manage the risk effectively in order to avoid those companies. Blacklisting an entire industry doesn’t make sense.”
Some banks have taken the path of least resistance by establishing merchant policies banning all companies in certain fields. One of the largest U.S. banks recently placed timeshare on its list of proscribed industries. Colebrook has occasionally faced similar issues with its banking partners. One bank was about to extend a warehouse line to us until they discovered that, under their loan policies, timeshare was a “prohibited” product type. They liked our business model and they liked us, so they amended the classification. Imagine our joy when we were upgraded to “undesirable.” The same mind set is taking hold in merchant processing. “We have to educate bankers about the timeshare business model,” said Moody, “and the difference between chargebacks at the point of sale and those related to the collection of receivables.”
Timeshare merchant processing falls into three main transaction types. The first, and most problematic, are down payments and “cash” sales. Virtually all timeshare sales are subject to a rescission period, typically three to seven days. Rescissions generally run from 15-25%, and if a credit card is processed at the point of sale, it must be reversed if the customer elects to cancel. “It’s best to put the charge through after the sale is final,” said Fox. “Even though a rescission is classified as a refund rather than a chargeback, some banks are starting to take a hard look at refunds. They might ask why there are so many. Are the customers dissatisfied? Is there a problem with the sales process?”
The second processing component is the charges for goods and services at resort amenities such as restaurants, gift shops, lounges, etc., which is similar to the activity of non-resort retail establishments. The third leg of the stool is the collection of the timeshare receivables portfolio and annual HOA assessments, for which, according to Moody, chargebacks are negligible.
In Equiant’s portfolio, 38% of payments are made by ACH from a deposit account, 27% by credit card authorizations, 22% through a lockbox (typically checks) and 13% are self-initiated ACH or credit card transactions. “Our clients’ collective chargeback rate on credit card transactions is 0.1%,” Moody said, “and if there’s a chargeback we can usually challenge it successfully, because there’s a signed note and credit card authorization on file.” Moody said that some of the bankers’ misperceptions may be related to their confusing the timeshare industry with travel clubs, which have less regulation and have been more problematic, or lumping them in with other segments of the travel industry.
Larry Gildersleeve of Gildersleeve Partners agrees. Larry has been in the timeshare industry since 1980, working for large public companies like Hilton, Wyndham, and Trendwest. When Trendwest was sold several years ago, Gildersleeve thought about the areas in which he might use his 30 years of experience to provide critical services to the timeshare industry. “I was looking for problems I could solve,” he said, “and merchant processing was clearly a problem. Whenever I talked to a bank about timeshare, they always compared it to the cruise ship industry, when all those people cancelled their cruise reservations after 9/11. I have to explain to them that timeshare is nothing like that.”
Both Gildersleeve and Moody said that timeshare companies operated by hotel brands have experienced little difficulty, since they can use the hotel affiliation to maintain strong processing relationships. The CEO of one of the large branded timeshare companies was astonished at the increase in his discount when the timeshare operation was spun off from the parent company. Even though the timeshare segment had excellent history, they were treated differently once separated from the hotel portion of the company.
Steve LaMantia of Outfield Marketing has seen his discount and reserves grow in recent months, despite what he says is an excellent record with chargebacks over the 13 years he’s been in business. “Steve is one of my best customers,” said Fox, who works closely with Outfield on their merchant processing. “His chargebacks are very low, and I’m always picking his brain to find out what he does so I can pass it along to my other customers.”
“Ninety-eight percent of our chargebacks,” LaMantia said, “are people who don’t recognize the name, because we sell for third parties. Once we contact them, we straighten it out and everything’s fine.” He’s troubled by the high level of reserves, which are holdbacks designed to protect the sponsor bank from chargebacks. Reserves represent cash LaMantia can’t use in his business. “It’s really tough when your business is growing,” he said, “because the reserve that’s released now is based upon a percentage of sales from six months ago, while the money being withheld is based on this month’s sales. It can really put a strain on cash flow.”
LaMantia said that, given the instability in the merchant processing field, he works with three different agents so that he is not reliant on just one. “You should have at least two processors,” said Moody. Fox agreed. “It only costs about $20 a month to keep a relationship open,” he said, “and it’s essential to have more than one processor, because you never know when a bank will suddenly change its policy.”
Gildersleeve assists developers who can benefit from pooled resources. “I can place almost any company,” he said, “but sometimes it can be very challenging. It’s particularly difficult for a foreign company, because of the difference in laws, and even more difficult if they transact business in a foreign currency.”
“When companies look at merchant costs,” he said, “most of them focus on the discount rate, because that’s the most obvious charge. But you have to look at all the fees and charges, because they increase the overall cost. Many times I can strip out those other fees. You also have to look at the reasonableness of the reserve. I was working with one large company that had a seven figure reserve. With their balance sheet, they shouldn’t have had to put up any reserves. My goal is to lower the costs and fees and either lower or eliminate the reserve.”
Fox has some advice for timeshare entities looking for merchant processing services. “They tell the banks to know their customer,” he said, “and a customer should also know their bank. What is their credit policy? Are you going to have a relationship, or are they just going to fill out the forms and never talk to you again? Make sure you’re getting someone with knowledge of your business, be sure to have some money in the bank, and provide full disclosure on all aspects of your business.”
That’s good advice, and a positive ending for an article on a topic that has become a concern for the timeshare industry. A significant part of the recent pressure is political, and the American Resort Development Association (ARDA) is working in Washington to see that the industry’s concerns are heard. At this point, developers have processing, and third party servicers like Equiant see no concern on their end, but the issue is one that developers are much more aware of today than they were five years ago. Stay tuned to the Chronicle for updates at colebrookfinancial.com/newsletters/.