Not all high net worth individuals started out that way; they’ve spent years building a business and career, slowly accumulating assets and wealth. Even though they have more items to insure and face different risks, they often don’t adjust their personal insurance to reflect their changing needs.
“They are so busy building a business, they often don’t take the time to adjust their coverage as their needs and circumstances have changed,” says Marc McTeague, president at SeibertKeck.
Most of these people would never go without necessary coverages on their business, but there can be major inadequacies with their personal insurance, he says.
Smart Business spoke with McTeague about where high net worth individuals need more or different types of insurance coverage.
What is the biggest area that high net worth individuals underinsure?
The biggest concern is liability. While it is upsetting to lose an expensive piece of jewelry, it generally will not ruin someone financially; a liability claim, however, can. With inadequate liability and/or umbrella coverage, one incident can affect the total wealth and earnings of an individual and their family.
If the individual sits on non-profit boards, or is involved with charity work, he or she needs to consider increasing his or her limits and supplementing coverage with an umbrella policy. If a non-profit is sued, it is common to name all the individual board members in the suit as well. Without the proper coverage, you could be footing the defense or judgment bill yourself.
For example: A high net worth individual sat on a youth athletic league’s board of directors, and a former coach sued all board members for improper dismissal. Thankfully he had a personal umbrella policy that covered him for liability resulting from unpaid or voluntary positions and paid for his entire defense.
Auto accidents are a common source of claims and can result in financial pain if you and your estate are not adequately covered. For example: An individual has a $1 million umbrella policy over a $250,000 per person liability limit with his automobile policy. Unfortunately, he or she had an accident in which a child was severely injured. The child’s care will more than likely exceed $5 million within 15 years; his or her estate, business and earnings will all be at risk to cover this situation.
What problems do you see with homeowner’s policies?
Homeowners policies come with limitations on certain items like fur, jewelry, fine arts and firearms. These provided limits are not usually adequate for high net worth individuals. As individuals gather wealth, they tend to gather expensive items that with a standard policy have a very limited amount of coverage. It is important to review these items with your insurance agent to be sure the items are properly and fully covered. Collectibles and rare or unique items often require a separate policy, known as an Inland Marine Policy.
Making sure the values on your homeowner’s policy are correct, and ensuring you use insurance products that are designed for higher risk, will be extremely important in the event of a claim.
How should household help be covered?
If household help, such as a gardener, nanny, cleaner etc., doesn’t come from an established company, you need to pay workers’ compensation. This will protect you in case they are injured in your home. If the employee comes through a service company, ask for proof of coverage with a workers’ compensation certificate. It is also important to inquire with the company about background checks for anyone coming to work in your home to make sure there’s compatibility, experience and no other issues. Your insurance agent will be able to assist you with determining if the company’s coverage will extend to the employee, or if you need to purchase your own policy for them.
A good agent will do a risk management audit, asking what you’ve got to protect and walking you through the different items you have to ensure there’s adequate coverage. By spending time with a qualified high net worth agent, you’ll know your assets and income are properly insured. ●
Marc McTeague is president of SeibertKeck, Best Hoovler McTeague. Reach him at (614) 246-7475 or firstname.lastname@example.org.
Insights Business Insurance is brought to you by SeibertKeck
Regulatory audits of retirement plans are on the rise — in number and scope — from both the Department of Labor (DOL) and the IRS.
“The DOL has hired hundreds of plan auditors and they are actively looking for violations. Trivial issues, or issues often overlooked in the past, are now being scrutinized during a regulatory audit,” says Mike Spickard, CEO and Chief Actuary at Tegrit Group. “The IRS or DOL will always find something during an audit; often, there are penalties, interest and some pain involved.”
Smart Business spoke with Spickard about avoiding regulatory audits, and what to do if that’s not possible.
Why has there been an uptick?
From the DOL’s perspective, the No. 1 trigger of a regulatory audit is a pattern of participant complaints. Additionally, the IRS and DOL have started to communicate with each other more frequently in the past four or five years. So, if the IRS tags you for an audit and auditors see problems within the DOL’s jurisdiction, you could be dealing with two audits.
How can plan sponsors avoid audits?
To prevent an audit, be an engaged plan sponsor. Know what’s going on with your plan and manage it as part of your corporate operations. Though a plan sponsor’s primary responsibility is running his or her business, it must be recognized that a retirement plan is both an asset and a liability, and needs to be managed as such.
Your plan must be amended if the law or your company changes. Everything needs to be up to date, and the plan administered pursuant to the terms of its document. At a minimum, have an annual review with all service providers, your recordkeeper, third-party administrator (TPA), financial advisors, etc., to ensure everyone is on the same page.
Further, it’s important to stay in tune with your employees. This enables you to deal with plan issues, real or perceived, before participants call the DOL.
What triggers a regulatory audit?
The IRS does not disclose how it selects plans for audits. Audits are partly random, but certain activities may raise flags, such as a late Form 5500 or negative publicity surrounding a troubled company. Certain Form 5500 responses also may trigger an audit. For example, one question on the form is: Did the plan have a fidelity bond in place throughout the plan year? A fidelity bond is required; a ‘no’ may indicate you don’t know what you’re doing, causing a response from the IRS.
What should you do if tapped for an audit?
When you get the initial audit notice, let all your service providers know. Often one service provider, usually the TPA, takes the lead. But it’s easier to respond if records are organized and information is readily available. Disorganization causes auditors to linger, which ultimately costs more.
The DOL or the IRS gives the sponsor, and its advisors, time to gather plan documents, amendments, payroll records, contribution reports, record-keeping reports, etc. Screen all necessary information, as well as any additional information that could be required later. Only give auditors what they ask for.
After the initial review, auditors decide if they want to do a deeper dive on specific issues, or expand the audit to additional years. If your service providers compare notes and plan, you can at least stay in step with the auditor, if not one step ahead.
Afterward, how can business owners thrive?
Pay attention to the audit findings, not only addressing problems throughout the audit, but also indications of future problems.
If you successfully defend an issue, the fact that an auditor challenged it is an opportunity to seek a better solution. For example, it was discovered during an audit that one small business mailed checks to its recordkeeper, delaying the deposit into participant accounts while the check was in transit. This delay isn’t necessarily a violation, but a better alternative would be an automated clearinghouse or wire transfer. Even in successful audits there are opportunities for improvement. ●
Mike Spickard is CEO, Chief Actuary at Tegrit Group. Reach him at (330) 644-2044 or email@example.com.
Insights Retirement Planning Services is brought to you by Tegrit Group
Your property manager offers not only convenience, but also cost stabilization and a link to finding creative ways to save money without sacrificing quality of service.
“A qualified property manager should be able to distinguish the needs of both the tenants and landlord to protect the asset — whether it’s office, industrial, retail or multi-family,” says Eliot Kijewski, SIOR, senior vice president at CRESCO.
Another benefit of having a professional property manager is that he or she serves as a singular point of contact for both the tenant and landlord, which allows the property owner to invest his or her time elsewhere.
“Our property management philosophy is to think like an owner to maximize asset value,” says Judy L. Simon, CPM, assistant vice president at Continental Realty.
Smart Business spoke with Kijewski and Simon about how to best utilize property management.
What services does a property manager typically provide?
Traditionally, a property manager’s duties fall under the categories of building operations, financial management and tenant relations. He or she helps keep costs consistent, using his or her contacts to shop out needed services, whether it’s snow removal, landscaping or cleaning services, to get the best price per square foot. The manager uses those same contacts to reach out to contractors and have them bid for tenant improvement work.
At the same time, the manager is a liaison between the tenant and landlord. Many tenants decide to move because poorly managed building issues interfere with their daily operations. An experienced property manager stops potential issues from becoming large problems, which helps with tenant retention. The property manager may be working for the landlord, but he or she must maintain a good relationship with the tenants.
Property owners should have at least 50,000 square feet of space for property management to be cost-effective. Then, you can tailor the services you want your property manager to deliver.
Beyond hiring contractors and dealing with tenants, how else can the property manager assist?
A quality property manager will help maximize how your dollars are spent by providing cost savings without losing quality. For example, a manager can help you decide where, or if, you should offer an extra service or two to make the property more attractive to tenants, such as move-in assistance or security. The manager also can find savings through energy management or sustainability programs, which benefit both the landlord and tenants.
He or she can help establish contracts with vendors, whether that’s purchasing carpet, salt, landscaping material, etc., as well as assist with capital budgeting. For instance, beyond getting three quotes for a roof repair, the manager can help you decide if you want a total replacement, patching, or to replace different sections each year, in which case you can allocate funds for each stage of the project rather than write one large check.
Does a property manager have a role in lease negotiations?
Not really, although property managers can assist with lease administration and reporting. However, it’s important to remember if a property is not managed well, it drives off prospective tenants. If they pull into a parking lot full of chuckholes that hasn’t recently been seal coated or stripped, they will assume their space is going to get the same poor attention.
The saying goes: The first impression is the only impression you get. Your property manager helps with that first impression. The manager may not have a direct impact on pricing and lease negotiations, but many times the property manager will hear about expansion/renewal needs during routine tenant visits. Their experience with and understanding of the building will also help you during negotiations. ●
CRESCO and Continental Realty have joined to offer full-service property management in the Cleveland market.
Insights Real Estate is brought to you by CRESCO
Networking is key to growth when it comes to business development. Women business owners, however, face unique challenges, especially in a rapidly growing, male-dominated energy industry.
In a recent survey conducted by First Commonwealth Bank® and Campos Inc. of 125 local women-led businesses, more than 47 percent of respondents said business development was their greatest need.
“Based on this percentage, it shows that there is a significant opportunity for women to better understand how to network and successfully grow their businesses through these unique relationships,” says Megan A. White, Vice President and Regional Manager at First Commonwealth Bank.
Smart Business spoke with White about how women in business, particularly within the energy industry, can tackle business development.
What challenges do women face with developing their businesses?
In the same Campos survey, 67 percent of respondents said they seek business advice and guidance from peers and colleagues.
However, the challenge for many women is that they do not know who to network with for business advice beyond their peers and colleagues, and sometimes need help getting outside of their industry. When they expand to other industries, such as education, finance or government, it helps them build a solid network and creates many opportunities for developing their business.
How can women build networks that become their center of influence?
One way to create a networking system to benefit your business is to reach out to business professionals — your banker, attorney and accountant — who each have networks that you can plug into.
People often have tunnel vision, thinking a banker only does loans and deposits, but a good banker who wants to see your business grow and succeed can help with all your business needs, and connects you to community leaders or business owners.
A banker, along with the network of other professionals, can open doors, make introductions and be your strongest advocate.
With the energy industry’s growth, what’s important for women to understand about business development in this arena?
According to Rigzone, which provides oil and gas industry news and information, in the first quarter of this year, more women than men entered the oil and gas industry. Locally, many women operate in leadership positions within the manufacturing and service industries related to oil and gas. People may think of the energy industry as male-dominated, but it’s an avenue for women to build leadership roles and own companies within the industry.
Like many, when I first started to develop contacts within the energy industry, as a woman I thought there might be hurdles to overcome. However, in general, everybody within the industry is very welcoming, which helps you learn the network, and a lot of women already operate within the space.
Women shouldn’t hold back, assuming they may have a hard time, when they actually have a skewed perception of the industry. It’s also short-sighted to assume their company may not tie into the energy industry because they’re just thinking of the wells, pads and drilling. That’s not really looking at what the industry can do, or what your business can do for the industry.
Is there still a ‘boy’s club’ mentality in the energy industry?
Not as much. We do have a lot of room to grow, quite frankly, but there are women’s organizations that help with that. For example, the Women’s Energy Network, which was primarily Texas-oriented, formed an Appalachia chapter in 2011 that focuses on Pennsylvania, Ohio and West Virginia.
Women in the energy industry are being proactive. They want to get together to form a team and network within themselves, as well as being able to work together to become an industry force.
Business is still very much relationship driven. Yes, you need to have a competitive product and know what you’re doing in your industry. But in order to grow with other companies in your market area, it’s important to understand what each industry is doing and how you can work with others, or create something that makes your market stronger. ●
Call (800) 711-BANK (2265) or visit fcbanking.com/womenfirst for resources specific to women in business, local events and more.
Insights Wealth Management is brought to you by First Commonwealth Bank
A letter of intent, memorandum of understanding or term sheet — all essentially the same — is intended to be a nonbinding expression of the parties’ intended business transaction, creating a framework for putting a deal together.
It’s useful for a merger, acquisition or other combination, stock purchase, joint venture, real estate sale or lease, purchase or licensing agreement, or business contract.
Business owners usually aren’t in the business of doing deals, so it’s better to address the salient, material business points upfront in a simple, understandable way, says Peter J. Smith, a member at Semanoff Ormsby Greenberg & Torchia, LLC.
“The last thing you want is to go through an entire negotiation, do your due diligence, get your financing and then find out there’s an issue that becomes a deal killer,” he says. “You’ve now spent tens of thousands of dollars in time and expense on a deal that doesn’t, or won’t, close.”
Smart Business spoke with Smith about why using a letter of intent makes sense.
What is the purpose of a letter of intent?
It allows the parties to see if there is a basis for, and to document as a preliminary matter, the terms of a deal before expending time, energy and money. It’s better to determine if you can reach an agreement on the basic framework before you and your organization spend significant time, plus out-of-pocket expenses for attorneys, accountants, inspections, application fees, appraisals, travel and more.
The letter of intent also lays the groundwork for the transaction, including areas businesspeople don’t consider at first like non-competes, non-solicitations or indemnification. If it is sufficiently detailed and anticipates all major points, a letter of intent limits future negotiation, surprises and issues that could derail the deal, making the transaction more efficient and likely to close smoothly.
How detailed should a letter of intent be?
Unless there is a specific reason not to, a letter of intent should be as detailed as possible. The more you can include, the less there is to argue about later.
Sometimes business owners want a quick, one-page agreement that doesn’t get too hung up on the details. However, parties tend to be more agreeable and reasonable at the letter of intent stage. Plus, in my experience, the more detailed the letter of intent, the more likely the transaction is to close. Letters of intent also help minimize the ‘difficult lawyer’ problem, when counsel wants to continually negotiate the deal or make so many changes that the deal doesn’t come to fruition.
How can you negotiate important points if you have only done limited due diligence?
You can ask for the information upfront to resolve the issue, which is probably the best solution. If this is not practical, use a range or formula, or you can raise an issue, but leave the details for after due diligence.
What good is a letter of intent if it’s not binding?
Though not legally binding, a letter of intent has a psychological impact. It memorializes the understanding of the parties, and most people don’t want to be seen as breaking their commitments. Parties should sign a letter of intent, even if there are no binding provisions, solely for the emotional effect.
Nevertheless, a letter of intent often contains binding provisions such as confidentiality, no shop, non-solicitation of employees or customers, good faith negotiations or best efforts. It may provide a timeline for deposits, break-up fees or other provisions that become binding over time.
A letter of intent also can be provided to third parties to evidence the parties’ commitment and terms of the deal, perhaps in support of financing applications, approvals, etc.
In addition, you may not want to read a 30-page agreement, line-by-line, that is full of legalese. That’s why you pay a lawyer. With a letter of intent in place, counsel can say, ‘Yes, the agreement says the same thing as the letter of intent, and here are the five additional things you need to know.’ A detailed letter of intent helps you understand the deal better and results in a smoother, more cost-efficient transaction. ●
Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC
The employee benefit procurement process, sometimes called marketing, has changed little over the past 25 years. This continues to frustrate many organizations looking for transparency, and potential cost savings, when procuring life, disability stop loss, dental, vision or pharmacy benefit management coverage.
Formal Requests for Proposals (RFP) may travel by email, but the underlying process is the same; insurance carriers simply send an image of the paper proposal that they would have dropped off years prior. The interpretation, presentation and, most importantly, negotiations haven’t changed, says Matthew R. Huttlin, vice president in the Employee Benefits Division at ECBM.
Almost a decade ago, a major insurance scandal in New York uncovered bid-rigging and anti-competitive activity within the opaque procurement process.
“The industry agreed to reform and become more transparent, which they did to some extent, but procurement activity remains a bit of a ‘black box’ process that continues today,” Huttlin says.
Smart Business spoke with Huttlin about the future of employee benefits procurement — a reverse auction.
What problems still exist today?
The process is clearly still antiquated and fraught with opportunities for mistakes. Business owners often negotiate without solid documentation. Broker/consultants, as well as their clients, continue to see proposal mistakes, missed deadlines, inaccurate proposals and presentation revisions.
Also, insurance carriers market to their strengths, as opposed to conforming to client requirements, which may lead to misinformation, more work, mistakes and increased costs.
How can business owners better obtain employee benefit coverage lines?
An online version of a reverse auction, or Dutch auction, cuts to the heart of the problem by introducing technology to the process while maintaining the business owner’s control of the outcome. This type of auction works opposite of a normal auction — instead of bidding up the price of an item, the auction bids the price down.
What are the benefits of this method?
This process is:
- Prescriptive — RFPs are standardized, specifying the client requirements. Carriers respond using pre-determined plan specifications.
- Efficient — Carriers get complete, consistent data on which to act with agreed upon timelines.
- Transparent — Clients receive documentation on every step from the initial offers to the final pricing.
- Effective — The online system delivers the RFP to more markets, garnering more accurate quotes that are immediately posted for analysis.
How exactly does this reverse auction work?
There are four phases to the procurement. In the RFP development/submission phase, the RFP is placed on a secure website under a standardized format and peer reviewed to ensure accuracy. Once released, carriers are notified to go to the website to obtain all of the relevant information to prepare their proposal.
During the technical evaluation/initial-pricing phase, carriers post proposals into the system for evaluation. The broker/consultant reviews the vendor confirmations and deviations to the requested scope of services, confirming plan design features, alternatives and administrative capabilities. The carrier also posts its initial pricing.
Then, all carriers receive feedback as to their ranking by their initial pricing in the financial evaluation/secondary-pricing phase. Actual rates aren’t shared. Over the course of a set period, usually two days, carriers can revise their pricing offers. Every time a new offer is submitted, all carriers are notified of the new ranking order.
Once the financial evaluation is complete, clients review the detailed results in the evaluation/selection phase. This review can include finalist presentations, site visits, etc. The client maintains full control over the selection process. Business owners aren’t required to select the lowest bid, but rather the carrier that best fits their requirements.
This high-tech approach is an efficient and effective way to handle procurement that provides accurate, transparent and documented results while driving prices down in a timely fashion. ●
For more information about risk management, visit ECBM's blog.
Insights Risk Management is brought to you by ECBM
If you have three qualified job candidates with equal experience who interviewed well, how do you choose? Ask yourself how the new hire will fit in — will they enhance or disrupt your current team? The culture is critical anytime there is a personnel change, whether hiring, promoting or planning for succession.
“If you put a tiger in a group of lambs, what’s going to happen?” says Ricci M. Victorio, CSP, CPCC, ACC, managing partner at Mosaic Family Business Center. “Tigers need to prowl on their own. They aren’t usually good team players.”
Smart Business spoke with Victorio about the importance of “casting” people in the right roles to magnify their strengths.
What’s key to know about personality traits?
There are five basic traits most personality assessment tools use to define how people naturally perform. Each trait has two opposite styles with a midline where people are more flexible or adaptable. They are:
- Dominance. Is the person more control-oriented, competitive and ambitious; or a team player who prefers collaboration?
- Communication. Is the person more persuasive and energized by people; or reserved, preferring one-on-one conversation?
- Procedural. Is the person more process-driven, organized and a good listener who needs time to make decisions; or flexible, creative and enjoys spontaneity?
- Organization. Is the person more detail-oriented, wanting things done correctly; or strategic, big picture and concept-oriented?
- Logic. Is the person more analytical, or intuitive when making decisions?
It’s interesting to note that leadership styles are determined by whichever trait is the highest. Many corporations recast CEOs depending on the stage of growth. A start-up could need an innovative, confident leader to make swift decisions and take calculated risks, while a more mature company might need a road builder or process-oriented leader to maintain the business.
How useful are personality assessments?
The surveys measure self-perception — how people see themselves and how they perceive the expectations of others. When hiring, you can’t rely solely on this feedback; it’s just one part of your vetting process. Also, results are dynamic and change as people evolve and their environment changes.
Personality assessments help create a baseline for understanding who we are and what we are experiencing. For example, in a demanding sales environment, you can increase success by looking for high communicators who are energized by personal interaction and adaptable. They need to be go-getters who can think on their feet and close the deal. Most assessments provide questions that offer greater insight during the interview.
What are signs your workforce isn’t gelling?
If you hire a high-dominant, low-extrovert manager to lead a collaborative team that is accustomed to brainstorming, the indirect ‘teller’ style of the new manager will be perceived as unfriendly and bossy. Team members will feel less valued, become disenfranchised and frustrated, leading to increased tension, absences or resignations. It is important to consider the desired behavioral attributes each position requires for optimum results, such as having outgoing, creative problem-solvers in people-oriented positions, and detail and process-orientated caretakers for more analytical roles.
How can you better understand your own behavior and management style?
Self-awareness is the first step in self-management. If you know you tend to make decisions hastily, never make an important decision without sleeping on it.
You also might struggle without knowing why you are feeling drained, stressed or anxious. In one case, an executive was proud of her open-door policy, but was feeling unsatisfied. She learned that it was causing her significant energy drain. She discovered that as a process-oriented, reserved communicator, it was more energizing to limit open-door interruptions to certain times.
Every personality is valuable and dynamic. It’s a matter of finding the right role that suits who you are and being able to adapt successfully to the world around you. ●
Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners Inc.
Private equity firms use capital, usually committed by large institutions, to invest in different companies. Often their investments are riskier companies at the start-up stage, so the returns can be quite large if these businesses become successful.
Recently, a sub-category of private equity, listed private equities (LPEs), traded on the stock exchange, are gaining popularity in the U.S.
“Until now, the whole section of private equity, from a small investor’s point of view, wasn’t accessible. With this emerging trend of LPEs, every investor, including the smaller players or individual investors, can invest a portion of their wealth into private equity and get that exposure,” says Sinan Goktan, Ph.D., assistant professor of finance in the College of Business and Economics at California State University, East Bay.
Smart Business spoke with Goktan about how LPEs work, and the performances of companies backed by LPEs versus traditional private equity firms.
Why are LPEs growing?
When anyone is able to purchase shares in an LPE firm, gaining exposure to the private equity market, investors can further diversify their financial portfolios. This new asset class is drawing capital into the private equity market from a new investor group and the flow of capital is continuous (since the firm is listed), unlike the traditional private equity capital that has a typical investment horizon of eight to 10 years. Eventually, a traditional private equity fund needs to be exited and new capital needs to be raised, which can be costly. The appeal of access to public markets as a continuous source of capital is leading more private equity firms, especially the larger ones, to list themselves. At the same time, LPE investments are more flexible and liquid than unlisted private equity.
Although LPEs are more established in European financial markets, particularly London, some big U.S. firms are Blackstone, KKR and The Carlyle Group.
How are LPEs different than unlisted private equity firms?
Both private equity types function similarly, except in how they raise capital. However, research with my co-authors Volkan Muslu and Erdem Ucar has shown that there’s a difference in how the companies they invest in perform in the long run.
When LPE-backed companies go public, they are more conservative and reliable in how they report earnings before and after the initial public offering (IPO) year. They also are timelier with recognizing losses. LPEs are subject to greater scrutiny by the SEC due to being listed in an exchange. Our results may be attributed to the higher reporting requirements of LPEs spilling over to the companies they are backing.
More reliable numbers mean more control and less risk for the investor. Traditionally, with unlisted private equity, potential new investors didn’t know much about private equity-backed companies’ progress until the IPO. The relatively timely and accurate financial information revealed by LPE firms has an impact in financial markets.
How else does the type of private equity backing affect an IPO?
Looking at the example of Facebook, if there’s lack of information, analysts will come up with wildly different price estimates. Because of their nature and the greater information content with the LPE-backed companies, the first day’s pricing is more accurate, which creates a lower initial return. Since companies revisit the financial markets repeatedly, they need to earn the trust of investors by providing accurate information in a timely manner to generate price stability.
What does your research suggest about increased disclosure requirements?
With passage of the Dodd-Frank Act, even unlisted private equity firms must file information with the SEC. Recent evidence suggests that investigators also are more likely to approach small private equity firms to ask for more information about their investments. Thus, the more opaque the private equity firm, the more information is required. Ultimately, the general trend is that investors are increasingly seeking more financial information before committing capital. Companies will either choose to reveal better quality information themselves, or the SEC will probably require them to reveal more information as needed. ●
Sinan Goktan, Ph.D., is an assistant professor of finance in the College of Business and Economics at California State University, East Bay. He teaches finance in the MBA Program. Reach him at (510) 885-3797 or firstname.lastname@example.org.
Insights Executive Education is brought to you by California State University, East Bay
Merchant services affect the majority of companies — more than 90 percent of online purchases use credit cards.
“If you’re not sure if merchant services is the right fit for your company, think about what your competitors are doing. If you don’t accept cards today, then prospective customers may be going to other businesses,” says Jan Mitrovich, manager for Treasury Management and Merchant Services at California Bank & Trust.
Smart Business spoke with Mitrovich about how to understand merchant processing services and costs, and when to talk to your banker about new solutions.
How do you know if your company is using merchant services correctly?
Every company should consider where it’s doing business and how it’s transacting with customers. Examine whether you are effectively leveraging all your channels for sales opportunities. You may have a storefront that does terminal credit card processing. However, other payment options, including Web-based and e-commerce, may be worth considering.
How much of you sales efforts need to be in the field, such as industry shows? A mobile solution can extend your customer outreach while providing convenience to your customers.
The merchant services environment is continually changing. There are varying degrees of complexity, from processing basic transactions through a card reader, to merchants that need multiple payment channels, gift and loyalty card programs, check verification services and more. Your merchant partner can help you better understand your options and select the right solutions for your business.
What’s important to know when getting a merchant account?
The processing transaction fee can turn off businesses, but they must consider the value proposition of expanding their customer base by accepting more transactions.
Depending upon the transaction type and how it is processed, fees will vary, which gets confusing. Merchant processors also don’t always present the statement information and pricing in the same fashion. It’s common for business owners to think a quoted rate is the all-in cost.
Be aware of hidden fees. For example, only some organizations do pass through pricing for the interchange fees. A discount rate doesn’t necessarily compare apples-to-apples, so a more important question is, ‘What is the cost of the service?’
You also need to understand and educate your employees on the associated responsibilities and risks as a merchant processor, such as protecting customers’ sensitive data. Validation of payment card industry compliance is an important step to ensure credit card data is being protected. Data breach coverage can protect merchants from the cost associated with a data breach, which can easily run $35,000 or more.
What additional factors help determine which provider is the best fit?
One differentiator is customer service. Banks typically have a higher level of customer service, like 24/7 call support, than independent sales organizations.
You also need to consider whether to lease or buy equipment. The industry is moving toward chip-enabled cards that will require companies to change equipment during the next few years. Take the time to understand your options and pricing structure, as well as if any equipment is proprietary.
Finally, cut-off times for transactions and settlements can be a game changer. Settlement time frames differ, anywhere from next day to 30 days, depending upon the vendor. If you want to improve cash flow, in some cases, you can process transactions up to midnight with next-day availability of those funds.
How should you review current services?
Take the time to review your merchant statements and pricing. If your business model or activity levels have changed, talk with your merchant representative. New services or tools may be available that can create processing efficiencies for your business. For example, card-present transactions are generally lower risk and thus cost less to process, while manually keyed transactions cost more. You could make internal changes to reduce the volume of keyed entry transactions or possibly process transactions through a lower-cost channel. ●
Jan Mitrovich is manager of Treasury Management and Merchant Services at California Bank & Trust.
Insights Banking & Finance is brought to you by California Bank & Trust
For-profit organizations use the theory of profit to strategize and lead. However, not-for-profits, like Woodbury University, operate under the theories of constraints and strength.
“With the theory of constraints, the idea is to review past performances, coupled with ongoing and future goals or expectations, to identify areas that may delay or stop you from reaching goals,” says Kenneth Jones, vice president for finance and administration and CFO at Woodbury University.
That goes along with the theory of strength, which relies on engaging your total community, including your customers, to help develop your strategic plan, he says. Stakeholders help you achieve your vision.
Smart Business spoke with Jones about putting customers first to build strong loyalty and enhance your value.
What can for-profit businesses learn from the theory of strength when strategizing?
All organizations, for-profit or not-for-profit, need a strategy map that defines their mission, values and where they are headed. However, it’s important to include all stakeholders in the process of inception, implementation and assessment.
The corporate world often develops a strategy map through modeling and the experience of employees, but they don’t look at the No. 1 objective, the customer. A customer’s perspective and feedback is essential. If you don’t involve them, you’re not going to see what they see and you’re not going to react to the environment as readily.
In the education world, we have to understand our customers, the students, to do an effective job and provide a better service. As educators get older, our students stay the same age, so educators must change teaching methods as needed. Educators need to scan the environment of each new class, keeping the same core while adapting the delivery.
In the corporate world, you can create efficiencies with your basic business practice, distribution center, administrative center, etc., but you absolutely need to have a focus on your customers and get them involved.
Beyond understanding customers, how can you help clients become part of your community?
If you have value in your company, people want to share what they have to help enhance that value. By including key vendors, clients or customers in your mission and strategic plan, you show them the value of their input. When you deliver the outcome, they see that their opinions matter. They are not an offset of the community, but part of it.
As part of the community, you want to take care of all your stakeholders. For example, when the Cal Grants were cut in 2012 and scholarships for low-income students were reduced, we knew how hard it would be for our students to succeed, so Woodbury issued vouchers to make up the difference.
As another example, Woodbury has a lot of first-generation college students on financial aid. We can reach out and ask for input on how to make everything more affordable, making students part of the process. This in turns leads to former students wanting to give back. They could start a scholarship, set up a writing center or help with counseling services. You can’t build loyalty when you create an environment where you absorb the profit and customers take the loss. Stick to your word and show customers the quality they subscribed to.
Under the theory of constraints, how do not-for-profits do more with fewer resources?
One high-level constraint may be affordability. From an administrative perspective, we can accomplish that by investing in technology to shorten our operating processes, increase automated processes and eliminate processing constraints, thereby reducing the processing cost of material and labor.
The purpose isn’t just to create revenue or improve the bottom line. You want to create efficiencies, and then redirect resources elsewhere by investing in areas of strength.
Also, you don’t want to acquire something that is a constraint on your operations right away, just because you want to diversify your product line. For example, we wouldn’t bring in a dentistry school at Woodbury just because we can acquire it. It has to fit within the strategic map of the institution. Bring in something that you’re strong at, which will be a prototype for the next development. ●
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