By George Sarantopoulos
Access One Group
The idea of building a credit card portfolio for sale is not new. And knowing - before setting merchant account acquisition goals - what the approximate value of a portfolio would be, say, in three years would be enlightening.
I have been involved with several processors and ISOs during my more than 10 years in the industry. Until recently, I frowned upon companies that promote themselves as or are derided by competitors as building their portfolios with the primary intent of eventually selling.
Who builds to sell? Only those who do not think they will make it in the industry, right? That's the message you get when you talk to industry insiders. The prevailing attitude seems to be, Who cares about liquidity as long as I get my residual payments on time?
Recently, I have changed my mind. I now realize liquidity is good for our industry, and the concept of building to sell is not so bad.
Liquidity itself refers to a business' ability to meet its payment obligations by possessing cash or assets that are easily converted into cash. Liquidity ensures that an ISO is attractive to both outside investors and merchant level salespeople (MLSs). It also ensures that a company can meet debt obligations and be deemed financially safe.
This is essential to the growth of any bankcard ISO or processor because ISOs live for the continuation of the payment of residuals and the eventual sale of their portfolios.
Liquidity could also bring needed transparency to the portfolio market: Based on portfolio purchases, we would have a better understanding through knowing years ahead of time what one's individual portfolio is likely to be worth when the time comes that we want to sell. Eliminating the guesswork involved in estimating the future value of portfolios would enable MLSs to plan ahead better.
Perhaps the banks, investment funds or the private sector could set up a type of residual exchange for the purpose of buying and selling portfolios. It's not so far fetched - markets today trade commodities, debt obligations and carbon credits, for example.
If you think about it, pig farmers know more about the valuation of the commodity they are raising than ISOs know about the value of the merchant portfolios they are building year after year.
Transparency in the market could allow ISOs to negotiate better deals and help them understand that the processor they write deals with needs money to run operations, make a decent profit and continue to pay residuals.
Today we see large portfolios being sold for a multiple of 40 to 60 times their average monthly residual streams, and MLSs' merchant accounts, which make up part of those portfolios, are typically paid a much smaller discounted multiple of their residuals when sold.
Transparency in the market would allow MLSs to know the true value of an organization and understand if they are getting a fair shake on a sale down the line. Building into one's contract a clause stating that a portfolio would have, within a determined number of years, a certain multiple value based on market conditions would help attract and keep new professionals in our industry.
George Sarantopoulos is the Director of Marketing of the Access One Group in New York and an Independent Consultant. George welcomes feedback from sales professionals in the marketplace. He can be reached at email@example.com.
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