The Green Sheet Online Edition
December 26, 2011 • Issue 11:12:02
How much does the processor affect portfolio value?
I was wondering if you could help answer a question. I thought you may be able to offer an independent, objective opinion. Assuming the merchants within a merchant portfolio are of the same quality and number, would there be a difference in pricing a merchant portfolio if the merchant lies with First Data versus Elavon or any other acquiring bank?
I plan to make a move. One gentleman said that Elavon portfolios price better than First Data. It is hard to find evidence. Could you let me know when you have a moment?
Independent Sales Rep
Since we are not involved in portfolio valuation, we referred your question to Adam Hark, Principal and Managing Partner at MerchantPortfolios.com. He graciously provided the following answer:
The short answer is absolutely yes, processors affect portfolio pricing! (But the reason is probably counterintuitive.)
For example, does a First Data portfolio, with the exact same internal attributes as a portfolio from another processor _ in terms of account composition (card present versus card not present), industry concentration (SIC/MCC), revenue concentration (a subset of the account contributes an inordinate amount of revenue to the total monthly revenue), risk concentration (the number of merchant accounts in the portfolio), merchant contract length, cancellation fee, basis point mark-up, sales channel (direct, agent or referral), and revenue attrition _ command the same valuation in the marketplace as a portfolio from another processor? Answer: no, it's higher.
I assume that doesn't help you out much. But what you need is the explanation as to why. Well, if we're making the assumption that all the internal attributes of both portfolios above are the same (and we are), what accounts for the higher valuation? Answer: portability and market demand. There are very few processors domestically from which an ISO or member service provider (MSP) can procure true portability. The operational definition for true portability which I'm using is this:
The ISO or MSP owner has an ownership interest in the merchant contracts themselves and can therefore migrate, "port," those merchants over to another processor of that owner's choice, or port them over to a buyer's contract with the same processor. Either of these options allows the buyer to accomplish two strategic value ads _ the ability (the right) to sell the portfolio's purchaser's products and/or services into that particular book of business and the ability for that portfolio's purchaser to benefit from a better buy rate (as buy rates are often a function of the number of transactions a given portfolio produces a month), as once the merchant contracts are ported over to the buyer's contract, the transactions from the acquired portfolio are additive.
The second component is simply market demand. Relatively speaking, in the United States, First Data ISOs are orders of magnitude greater in frequency than ISOs of other processors. Therefore, probability theory dictates (and this bears out in reality) that there are far more First Data portfolio buyers out there than buyers for portfolios from any other processors. The larger market therefore creates greater demand for these types of opportunities.
Thank you for sending in the question, Lee. And thank you, Adam, for this informative answer.
Squaring off with Biff
Biff Matthews' letter, "Thoughts on Visa and Square," in The Green Sheet's Nov. 14, 2011, issue was over the top. Visa Inc. is a strategic, not a financial investor. Of course, Visa has "a Square agenda beyond their investment." It's a commercial retail payment card network. Visa aims to expand network acceptance by facilitating millions of small and casual merchants accepting payment cards on mobile phones, increasing network value for all participants, and thereby Visa's enterprise value, which is what management is supposed to do. Square, Intuit's GoPayment and other mobile-phone card-acceptance services further that end.
Visa's paramount objective is not - and shouldn't be _ eliminating or minimizing fraud, but rather, taking a holistic view to maximize total network value delivered. That entails balancing fraud-reduction efforts with cardholder and merchant convenience and expanding network reach. Matthews' outrageous, hyperbolic comment that Visa "turns a blind eye to the rape of the merchant much like the Catholic Church turned a blind eye to the Holocaust" ... is [an unfit comparison that constitutes an inappropriate line of] discussion for The Green Sheet.
As for the contention merchants are being raped, merchants choose to accept Visa through Square or more traditional providers of card acceptance because they believe it enhances their profitability. Nobody is holding a knife to their throats. Voluntary commercial transactions occur when both parties by their compass are getting value.
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