By Alex Nouri
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:
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.
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.
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.
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.
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 email@example.com and at (734) 477-7700.
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