By Ken Musante
Eureka Payments LLC
Harold Montgomery is the founder and Chief Executive Officer of Calpian Inc., a public company that gives ISOs cash in exchange for their residual portfolios. Calpian is traded via the OTC Bulletin Board under the symbol CLPI.OB.
I have had a chance to listen in on several of Montgomery's ISO presentations, and I remain impressed by his understanding of how to value certain aspects of a processor's contract.
One of the most important aspects with any business is having some sort of exit strategy. By considering that exit strategy upfront, you best position yourself for whatever the future holds.
I believe Montgomery is one of the few individuals who can advise payment professionals, at the outset, how to structure their businesses and to know what aspects of a processing contract are most important and which ones shouldn't be pressed as vigorously.
A. I started out working with a company that was a credit bureau and collection business for video rental stores back in 1987. We kept track of renters who did not return videotapes, and we collected them. The service was based on the VeriFone Zon Jr Plus.
Soon, the video stores were calling us asking if we could put credit and debit processing on the terminal, which of course is what the terminal was designed to do in the first place. So we became an ISO for Michigan National Bank. Linda Perry was our contact there and, of course, she went on to a great career at Visa.
Q. How are you able to offer competitive pricing, terms and timing?
A. Calpian is a public company, and as such, we believe that we are able to pay a higher valuation than a private company because we can structure our compensation in creative ways and offer consideration and opportunities that a privately held entity cannot.
We work with ISOs to determine their needs and work to structure a compensation package that meets those needs.
For example, as we have disclosed in our public filings with the SEC, we have recently structured a number of deals where we have issued a mixture of cash and our public company stock to the ISOs in exchange for their residual portfolios, which enabled us to provide the ISOs a longer-term asset-building vehicle as well as immediate cash.
We believe that the stock market values the payments business because of its strong and steady revenue. The underlying service provided is easily understood and all retailers need this service to conduct business, so the value of our stock is easy to explain to our investors.
Also, there are not many public investment opportunities within the payments industry. For those wanting to invest in our business, Calpian is one of only two pure choices.
Q. You're a public company - why?
A. We became a public company for two reasons:
Friends and family typically have limited access to capital, there are social issues involved with borrowing from friends and family, and many were already tapped out when the ISO started the business.
Public companies like Calpian generally have greater access to sources of capital and at lower rates than private companies. Bank lenders like the audited financials presented by a public company, and can provide them better lending rates and greater access to capital when it is needed.
2. Competitive portfolio pricing: Calpian's management team has been active in the ISO business for 25 years, and historically, like most of the ISOs in our industry, has had difficulty accessing capital. Since going public in 2010, Calpian has found greater access to affordable capital.
We've learned the business by being in the trenches and taking some hard knocks, and as a result, we believe that we know the ISO business like no one else.
Again, as a public entity, Calpian can structure creative acquisition options which allow the ISO to invest in both their own future and our future, while they continue to sell and run their businesses the way they always have.
They get the opportunity to be a part of something bigger than themselves without having to give up control, ownership or really changing anything about their business plans.
Q. Was there a 'light bulb' moment for you in the payments space?
A. Yes - twice actually. The first time was when we realized that our video store merchants needed processing services, and that made the revenue equation so much better for us. It was an additional service we could provide at very little cost.
The second was when we started out acquiring residuals from other ISOs about 10 years ago. That was the start of what Calpian is today. I never dreamed we would be a successful public company.
Q. You have been doing this a long time; how has the market changed?
A. The economy is worse for sure, and so it's harder and more expensive to access capital now than ever. Because Calpian is public, we have found that getting capital to invest is less of an issue for us. In the past, some ISOs were forced to sell their portfolios for a low value to get cash, but now we're able to pay them the true value of their portfolio and it's worked out great.
And we are able to close deals much more quickly than we typically see in the marketplace; our last deal closed in 10 days from start to finish.
Today, ISOs who partner with Calpian can structure creative acquisition options that not only can provide them with much-needed cash today, but upside potential and value in the future, which is like a safety net for them for the long term - think of it as a retirement plan - and no one else offers that.
From an ISO's perspective, margins are much slimmer and going down. There is a substitution going on of fee revenue for processing revenue. The overall industry revenue pie is shrinking and, as a result, somebody is giving up margin, whether it is the processor or the ISO or both.
This makes now a particularly good time to consider selling because over time the portfolio's value may go down. Although this may not be true, ISOs should consider diversifying to lock in existing value.
Q. What are your future business goals?
A. We are reaching out to ISOs across the country to work to increase the value of their portfolios and realize the wealth they deserve.
We believe that Calpian has a great future and we're really excited about the attention we're getting and the new ISO relationships it's leading to. Our goal is to help as many ISOs as we can, as the more that join us, the greater the revenue opportunity for us all. Calpian expects to be an owner of merchant residuals, not a selling entity to merchants. We believe the ISO is a great manager of merchant accounts and we do not wish to interfere with the relationship the ISO has with his merchant base. While we do contract directly with various processors, these entities perform the servicing on behalf of the merchants our ISOs work with.
Q. What changes do you see coming that are particularly good or bad for the industry?
A. There are trends both ways, I think. On the good side, there's lots of opportunity if you're well positioned in technology and specialized services. ... On the other hand, the trend toward lower and lower pricing on processing is worrisome.
The industry's response has been to adjust by increasing fees for IRS reporting and PCI compliance. So far that's worked, but fee revenue is not the same character as processing revenue and may well have a shorter life span to it.
Take PCI fees for example - what happens when EMV comes about? Could that reduce the merchant's acceptance of PCI fees?
The same goes for the IRS fees - some companies are imposing those fees even though the IRS has been clear that such fees are not acceptable. We're losing control of our pricing formula in the business with outside forces acting on the industry. It bothers me.
To provide full disclosure, I am a shareholder in Calpian. I believe individuals like Harold Montgomery and companies like Calpian are necessary in our industry. We are a maturing industry and, as entrepreneurs within our industry want to either retire or diversify, it is important that there continue to be an exit strategy.
Certainly Darrin Ginsberg of Super G Funding and David Daly of Cutter LLC also offer buyout alternatives. Harold's model offers the alternative of a publicly traded stock. This allows us to see on at least a quarterly basis through required disclosures the results of Calpian's efforts.
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