By Adam Hark
The merchant acquiring industry is evolving at a blistering rate, pivoting away from the traditional model, in which the core product and service offering is just payment processing, and hurtling towards a model where comprehensive, end-to-end business management solutions, usually offered as software-as-a-service (SaaS) platforms, rule the day.
Let me be blunt: the traditional merchant acquiring model has crossed the event-horizon and is well on its way toward non-viability. As such, when parties approach me about acquiring a card processing portfolio, the first question I always ask them is, why?
I ask this because nothing is more important in designing a successful portfolio acquisition strategy than clearly understanding the client's objective with the acquisition. And given that the acquiring industry is undergoing convulsionary change, it stands to reason that past drivers for merchant portfolio acquisitions aren't necessarily guides for market activity today.
So what's driving the interest in portfolio acquisitions right now? What strategies are being employed? Let's take a look at three of the most common scenarios in today's marketplace.
An effective way for acquirers to liberate themselves from the ever-increasing underwriting rigidity of the major processors and sponsor banks is to control underwriting internally. They can achieve this by acquiring a full liability processing agreement; the deal is typically structured as a portfolio acquisition with an assignment and assumption of the seller's processing contract.
With years and years of margin compression eating into merchant acquirer bottom lines, many have turned to higher risk businesses with healthier spreads – higher risk (not true high risk, which requires a high risk processor) inevitably comes with the sponsor bank headaches concerning the breaching of the card networks' acceptable chargeback-to-transaction ratios.
As such, if an ISO is pushing the acceptable chargeback thresholds of MasterCard Worldwide and Visa Inc., the merchant acquirer needs to dilute its higher risk transactions with lower risk merchant transactions, and the acquisition of a low risk merchant portfolio solves this problem.
The "new world order" in merchant acquiring has ISOs expanding their product and service offerings to include value-added business management solutions that allow them to maintain better merchant retention and lift growth by leveraging vertical-specific technology solutions.
Though this new model has already been proven successful through organic means, a merchant acquirer that wants to truly accelerate its growth will look to acquire a portfolio, in which the existing merchant base (by way of SIC or MCC) is complementary to its technology offering, and cross sell into that merchant base.
What I appreciate most about the preceding strategies is that they all make sense. There's an undeniable logic to the acquisition strategies because each strategy is constructed after the objective of the acquisition has been determined. As a direct result, there's a high probability of a successful outcome. And thus, the key to a successful portfolio acquisition strategy is to work backward from the desired outcome.
That being said, the execution of these strategies isn't nearly as easy as it may appear, especially as it relates to the identification of the target acquisitions, but execution is another story altogether.
Adam Hark is co-founder of MerchantPortfolios.com, a dba of Preston Todd Advisors Inc. With over a decade of experience in the payments industry, Adam specializes in mergers and acquisitions, growth and exit strategies, and asset and enterprise valuation for payment processing and payment technology companies. He can be reached at email@example.com or 617-340-8779.
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