By Adam T. Hark
Preston Todd Advisors
As the acquiring industry continues to reinvent itself, birthing a variety of new, technology-centric business models to better serve the demands of today's merchants, many long-time merchant level salespeople (MLSs) face increased pressure to decide how best to position their companies for future success. The velocity of the acquiring industry's reinvention has forced many agents to re-evaluate whether to continue as agents or register directly with Mastercard and Visa as ISOs.
As the potential for a business is oft measured by sustainability, growth and value creation, 2017 will be a determinative year for many MLSs who will be forced to reconcile themselves to one of these two pathways forward.
Knowing when to make the transition from agent to full-fledged ISO has always been a challenge in the payments industry. Historically, the drivers for switching from MLS to ISO status have largely been attributable to two factors, one short term and more tactical, and the other, long term and strategic.
The short-term, tactical driver, which has traditionally yielded an immediate upside to an agent has been the larger revenue share that comes with ISO status. In the long term, and more strategic sense, the transition from MLS to ISO ensures that the owner/operator will have an ownership interest in the merchant contracts themselves, thus owning an actual portfolio, not just a residual stream (which is all agents own). This will increase enterprise valuation and pave the road for a more successful exit or financing event in the future.
However, the calculi of making the agent to ISO transition have changed. All MLSs need to understand that today's merchant acquiring industry has never been further removed from the payment transaction: the value proposition to today's merchant is no longer the ability to process payments, at least not in and of itself, but rather how those payments are processed (quickly, securely, and across in-store, mobile, and web based user interfaces), and what technologies those payments are packaged with (new schema like omnichannel and end-to-end business management solutions) which deliver value to the merchant that far exceeds that of payment processing alone.
Thus, it follows that for many MLSs, 2017 is going to be a year to commit to either maintaining their agent status or pivoting to the ISO model. I recommend that all MLSs undergo a process of self-assessment and introspection with the objective of best positioning their respective companies for a prosperous future. To assist in this, I've created a primer of the arguments for each.
If you are new to merchant acquiring, maintain your agent status. It's always better to learn a new business when you have access to the resources of an experienced operator who can guide you through the challenges of the industry and help get you back on your feet when you make mistakes.
And all MLSs, new and experienced, benefit from strong ISO partners who possess experienced customer service, tech support, EMV (Europay, Mastercard and Visa) compliance expertise, sophisticated sales strategies, pricing guidance, marketing resources, and in some cases, access to growth capital.
Additionally, maintaining your agent status on a nonexclusive basis, where you can have relationships with multiple ISOs, allows you to cost-effectively access many types of value-added technology that would be too expensive to procure and employ yourself.
Capturing a greater share of the value chain, and thereby not giving up a substantial portion of revenue to another ISO for all of your hard work, is reason number one to transition to ISO status. Of almost equal importance, and value, is the greater ownership interest in the merchant relationship that comes with being an ISO.
One reason this is significant is that it grants you the right to sell additional revenue-producing products and services to your merchant base – something you're not generally allowed to do as an MLS because the ISO you write for most likely enjoys that contractual right and governs what you can and cannot do with its merchants.
Being an ISO also allows you to avail yourself of higher quality channel partners because you have more revenue to share with resellers. One of the hottest trends in the payments industry over the last three years has been ISOs becoming the exclusive payment providers to integrated software vendors (ISVs) by setting up the ISVs as agent resellers beneath them.
If you find the previous reasons insufficiently compelling, becoming an ISO all but guarantees your company will command a greater valuation than an MLS or agent office ever could. Strategic acquirers and private equity groups aren't interested in acquiring residual streams, which is the only asset agents have to sell. These entities want to acquire high-growth organizations that own the end-user, or merchant relationship.From a valuation perspective, whether exiting or refinancing, being an ISO makes a huge difference. Thus, if you're playing for the long term, the ISO route makes more sense.
In every industry, entrepreneurs should always be mindful of creating value in, and for, their companies. As such, savvy owner/operators should always play for the long term. Your big exit or growth initiative will inevitably be directly tied to the worth of your business.
For MLSs, the stakes are high in 2017. The payments industry is rapidly changing and appears to be transitioning from a payments-only model toward a broad-based technology model. I believe in the future, traditional acquirers will become professional consultants who advise business owners on all of their operational and sales-related needs and become true experts in a broad swath of technology-based business management solutions.
So here's my advice to all agents for 2017: if you're a new player in the space, remain an MLS and learn the ups and downs of the payments industry with the help of a strong, experienced ISO partner. Avail yourself of multiple ISO relationships, which will expose you to myriad new technologies that today's merchants will expect from their payment providers.
At a certain point, you will be comfortable with your ability to service, sell and advise your clients on everything from basic payment processing to new payment schemes, data security compliance and integrated software based business management solutions. You will be able to provide our merchants with everything an ISO can. But don't make the transition to ISO just yet. There's one more thing.
If, in conjunction with the above, you have also developed operational expertise, are generating meaningful year-over-year top-line and bottom-line growth, and have successfully penetrated specific verticals where your knowledge and expertise have given you a leg up on the competition, then, and only then, should you make the move. So don't go into 2017 without a plan. The most valuable properties in the payments industry are owned by operators who took the time to plot out sound strategic pathways, knew the benchmarks they needed to achieve and pulled the trigger at the right times. If when confronted with high stakes strategic decisions, you always play for the long term, you should be just fine.
Adam T. Hark is co-founder of Preston Todd Advisors. With over a decade of experience in payments, and financial technologies, Adam advises clients in M&A, growth strategy, exits, and business and portfolio valuations. Adam T. Hark can be reached at email@example.com or 617-340-8779.
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