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Table of Contents

Lead Story

What sparks stellar innovation? Five leaders' perspectives

News

Industry Update

CFPB criticism grows

Android Pay gains pre-launch mojo

FCC declares Robo-geddon

Strong response to massive breach of federal workers' PII

Features

Entering the omnichannel age

Vanguard mobile shopper behaviors exposed

Views

Insider's report on payments: EMV and the law of unintended consequences

Patti Murphy
ProScribes Inc.

The ISO and portfolio market that wasn't supposed to be

Adam Hark
MerchantPortfolios.com

Education

Street SmartsSM:
Let's waste some money

Jeffrey I. Shavitz
Affinity Solutions Inc.

When was the last time you inventoried your tools?

Jeff Fortney
Clearent LLC

The one man show: Strategic business planning

John Tucker
1st Capital Loans LLC

Three ways small businesses can avoid being hacked

Scott Nelson
ProPay Inc.

10 things to consider before selling your residuals

Richard A. Sachs
TouchSuite

Company Profile

dealsnapt

New Products

Simplified, processor neutral digital money

Quisk
Quisk Inc.

Revealing competitive ranking, potential gaps

Digital Gap Analysis
One Million Acts of Education

Inspiration

Non-headache meditation

Departments

Readers Speak

Resource Guide

Datebook

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The Green Sheet Online Edition

July 13, 2015  •  Issue 15:07:01

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The ISO and portfolio market that wasn't supposed to be

By Adam Hark

In the world of ISO and bankcard portfolio sales, the turning of the year is historically an active time for mergers and acquisitions, as many owners set out to chart the future course of their businesses. The basic questions many owners ask at this time are whether to exit or whether to invest in growth. If investing in growth, the question then becomes whether that investment requires the monetization of their merchant portfolio assets.

In my line of work, I spend much of my time consulting with business owners about these very questions. I endeavor to offer guidance by way of thoughtfully working through their decision-making process and prognosticating about market dynamics that will be in play for them if and when they do make their decisions. Much of this means predicting where ISO and portfolio valuations will be in the next 12 months.

And so it was, in January 2015 I found myself advising clients on these very issues, assessing what I believed to be (at the time) the catalysts that would push ISO and portfolio valuations higher or lower in the coming year.

An informed analysis

After much musing (and if you live in the Northeast like I do, you know there was plenty of time for musing this past winter), I identified what I believed to be the two primary catalysts for ISO and portfolio valuations in 2015:

  1. Low interest rates: The continuation of historically low interest rates suggested there would still be lots of inexpensive money available to finance ISO and portfolio acquisitions. On balance, this would be a net boon to valuations, as "cheap" money makes growth through acquisition a viable pathway (as compared to organic growth through a company's extant sales channel); this financial vitality often brings new buyers into the marketplace with the net effects of increased demand and higher valuations.

    Additionally, lower interest rates would mean that buyers could borrow greater amounts of money, thus allowing them to pay more for acquisitions (in nominal dollars) than they could otherwise, also lending itself to increased valuations.

  2. EMV compliance deadline: With the Europay, MasterCard and Visa (EMV) compliance deadline looming in October 2015, the race was on for ISO owners to get their merchants switched into updated, compliant terminals and POS systems. This I foresaw (and I still see) as a big drag on ISO and portfolio valuations because it injects a new perceived aspect of risk for buyers acquiring these types of properties.

    Why? One of the fundamental premises of valuation is that the greater the inherent risk of an acquisition, the greater the return on capital the buyer will require, and therefore, the less a buyer will be willing to pay. The risk associated with the EMV compliance deadline would manifest itself in owners' portfolio attrition numbers.

    Think of it this way: one of the golden rules in the merchant acquiring business is don't disturb the merchants. When an ISO or agent disrupts a merchant's business, in this case to explain why they need to switch their equipment or re-program their POS system, it creates a situation where the merchant may ask him or herself, "When was the last time I shopped my merchant services?" If the merchant acts on this, it opens the door for competitors to gain the merchant account, and the loss of that merchant manifests itself in a spike in an acquirer's portfolio attrition.

A reasonable prediction

Having spent much time evaluating my two drivers of valuation for 2015, I came to the following conclusion: merchant portfolio and ISO valuations would come down. The argument? In these post Great Recession times, historically low interest rates are nothing new. Though I stood by my assertion that low interest rates would ultimately increase market demand and allow for buyers to pay more for acquisitions, I just couldn't ignore what I believed would be the negative effects of the EMV deadline.

Extrapolated out, the switch to EMV would result in a spike, or the risk of a spike, in an ISO or agent owner's portfolio attrition. I knew that buyers would begin to assess the percentage of merchants who were EMV compliant in any potential portfolio or ISO acquisition and quantify the risk associated with that percentage in their valuation modeling. As such, the net effect of the two catalysts would be a downward pressure on valuations.

A happy mistake

And here we are, six months into the year 2015, in the midst of the greatest seller's market and highest merchant portfolio and ISO valuations since the pre-recession highs ended in the first quarter of 2008.

So what happened? How did we get here? Demand for growth is quite simply extraordinary, and buyers are paying big premiums to lift their top line revenue through the acquisition of both static portfolios and ISOs with high production sales channels. The EMV conversion factor exists, but has not weighed on valuations nearly as much as predicted, or at least not enough to outweigh the demand. Portfolio and ISO properties processing through Total System Services Inc. and First Data Corp. are in particularly high demand, and are fetching record high valuations. Additionally, there has been an unprecedented expansion of the types of buyers seeking merchant processing properties. The powerful confluence of payments and technology in recent years, by way of software-based business management solutions, has brought a new class of non-payments industry buyers into the fray, looking to capture the additional revenue stream afforded by transactional payment processing.

A prediction for the rest of the year

I'm not making one. This red-hot market is keeping me way too busy for that. However, I'll leave you with this little nugget of tried-and-true wisdom: nothing lasts forever. If you are thinking about an exit, or monetizing your portfolio so you can invest the money back into your business, you will be the beneficiary of some extraordinarily good timing.

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 adam@merchantportfolios.com or 617-340-8779.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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