The Green Sheet Online Edition
March 09, 2015 • Issue 15:03:01
Paradigm shift on portfolio ownership
The merchant acquiring industry has been highly lucrative for the registered ISOs, payment processors and acquiring banks that sponsor them. (For the purposes of this article all three entities are hereinafter referred to collectively as acquirers.) Over the years, these acquirers have grown, either organically or through mergers and acquisitions. And there was a time when a portfolio sale would fetch multiples of 40 to 60. The secret was to simply grow the portfolio.
However, attrition has been and continues to be a serious drawback to maintaining a steady revenue flow. An industry average rate of 10 to 13 percent attrition is high and can inflict a serious financial dent in an acquirer's income. Despite that, as well as the fierce competition by such competent disruptors as Square Inc. and PayPal Inc., the traditional acquiring model still has the potential to generate serious cash either upon merchant portfolio sale or when obtaining a loan against the portfolio's revenue.
Non-registered merchant level salespeople (MLSs), both new and veteran, have had the opportunity to share in the wealth to some degree. It requires hard work and diligent planning on their part to grow a substantial portfolio of at least a few hundred, if not thousands, of merchants. But as a standard practice, acquirers have claimed ownership of portfolios and have typically written non-solicitation clauses into all agent agreements.
An ongoing problem in the electronic payments industry is that every acquirer promises the world, but unfortunately most, even some of the largest ones, do not deliver. Several of the most important reasons are as follows:
- An antiquated mentality of wanting to just process credit cards with no innovation and foresight into future
- Providing poor service to merchants and/or agents
- Organizational inefficiencies
- Inadequate staff training
- Making empty promises of providing new technologies and services with little or no investment in either
In addition, in many instances, acquirers have an unscrupulous policy of terminating agents for illegitimate reasons or before their monthly residuals are vested for life so as to increase the acquirers' own income. This, in particular, applies when there is employment "at will," which I discussed in my article titled "Insist on a balanced agent agreement," published in The Green Sheet on July 24, 2014 in issue 14:07:02.
Rationale for MLS portfolio ownership
I call now for a paradigm shift, one that requires thinking outside of the box. The new paradigm requires a major change in mindset. I believe the MLS who works strictly for residuals and is not motivated by upfront commissions and bonuses is the person who should own the portfolio. There are a few reasons why I think this is the right thing to do.
- It is true that acquirers invest in different resources to build a solid income, but it is the MLS who works so hard at the street level to bring in these deals. What many acquirers don't pay attention to is that nearly all merchants do not know or care about anyone other than their own long-time MLSs. Merchants move their processing relationships with their agents. The MLS-merchant relationship is the glue on the processing relationship. There is not enough value placed on this bottom, yet most important, relationship.
- Sadly, many acquirers massage the data before presenting the gross and net income to the MLS. For example, the true cost of an IP transaction may be less than one penny. But the cost presented to the MLS is often 2 to 4 cents. The difference is pocketed by the acquirer, which claims the true transaction cost is 2 to 4 cents.
This happens particularly when an ISO has substantial transaction volume, and thereby receives a volume discount on pricing from its processor or platform, and/or owns its own front-end network for obtaining authorization, which recoups its investment costs above a certain transaction volume threshold. In either case, as a result, the acquirer makes unshared revenue that continues to defray its operational costs. Thus, since there is no effective loss to the acquirer in the operational front, the acquirer cannot legitimately make the claim that it would lose money, other than future potential processing income, if the MLS were to decide to move the portfolio to another acquirer or processor.
- Acquirers promise to provide great service and speak of true, albeit independent, partnerships. The sad truth is that, notwithstanding the rhetoric to the contrary, most acquirers do not deliver on this promise, evidenced by the draconian terms in agent agreements that offer little to no protection to the MLS and could potentially stifle the MLS's growth.
Portfolio ownership by MLSs offers maximum protection to MLSs while ensuring that acquirers work most diligently in delivering on their end. There needs to be accountability for any misconduct or non-delivery by acquirers. The prospect of losing books of business with no recourse for an unscrupulous acquirer is the most effective stick.
Time for a shake-up
The only reason an MLS should lose ownership of a portfolio and the income derived from it is if it has been proven that the MLS has engaged in fraud. Such a clause in an agreement would offer the protection both acquirers and MLSs need. A mere allegation or assertion of fraud by either a merchant or an acquirer should not be used as an excuse for a declaration of a material breach and official termination claimed to be "with cause."
The payments industry has traveled on the same train and track for decades. It is time for a major shake-up. Changing conditions for working relationships is paramount. More important, however, is to know that change starts from within and with a willingness to let go of the usual process flow and flaws that slow down the moving train. This change recognizes the value that MLSs (particularly the veterans) have always played and for which they have not received the proper accolades.
Alex Nouri has been in the President of EFT Direct, an acquiring and consulting firm based in Ann Arbor, Michigan, since 2000. He is the author of two imminent books on the subjects of helping merchants select an acquirer as well as helping all echelons of transaction processing industry make better decisions and streamline their operations by becoming more efficient, reach greater profitability, and prepare for future. He can be reached at firstname.lastname@example.org and at (734) 477-7700.
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