Once upon a time, a merchant was a merchant was a merchant. The putative strategy in merchant acquiring was simple: board as many accounts as possible – big merchants, small merchants, low risk merchants, high risk merchants, and even new LLCs – basically any merchant with a checking account and an “open for business” sign. The rationale for this was straightforward: payments processing – transaction processing – produced real, actualizable revenue that made merchant acquiring a lucrative endeavor.
The value of operational expertise in the ISO world is skyrocketing, taking on new import as the business paradigm for merchant acquiring has transitioned away from transaction processing and toward delivering robust, all-encompassing, technology-based business management solutions for merchants.
As such, the fundamental nature of the ISO’s personnel makeup is changing as well. It’s no longer viable for an ISO to exist purely as a sales platform providing Level 1 support. Because the products and services that ISOs sell today are more expansive and sophisticated, the sales channel, support platform and ability to manage both all require a higher degree of business acumen.
It’s an exciting time for mergers and acquisitions (“M&A”) in financial technology (“fintech”). Buyers and sellers abound, the number of transactions continue to pile up, and “fintech” has become a sine qua non in the lexicon of every sentient private equity, venture capital, and strategic investor.
As the acquiring industry continues to rapidly reinvent itself, birthing a variety of new, technology-centric business models to better service the demands of the modern day merchant, many long time merchant level salespersons (“MLS’s”) and agents are faced with the increased pressure of having to decide how best to position their companies for a successful future. The sheer velocity of this “reinvention” of the acquiring industry has forced many agents to re-evaluate the upside of continuing their agent status versus registering directly with MasterCard and VISA and becoming an ISO. As a “successful future” for a business is oft measured by sustainability, growth, and value creation, 2017 will be a determinative year for many agents who will be forced to reconcile themselves to one or the other of these two pathways forward.
I recently had the opportunity to attend a Business Solutions Magazine sponsored conference for ISVs, VARs, and MSPs. Though not an owner/operator of the aforementioned business types, I do have a keen interest in the “goings on” of these businesses. I am a consultant and strategic advisor to payments and payments technology companies, and have been on a self-imposed mission to better understand the ISV, VAR, and MSP points of view on payments. Collectively, these business types have become the new darlings of the payments processing industry in its insatiable thirst to sustain growth (and arguably viability) through the value added products, services, and distribution, which ISVs, VARs, and MSPs bring to bear.
Throughout the years, an interesting phenomenon related to payments processing portfolio valuations has arisen: the fair market value of a merchant acquiring portfolio has, more often than not, been equal to or greater than the fair market value of the payments processing company, or enterprise itself. A review of Preston Todd Advisors’ proprietary database reveals that across the spectrum of ISOs with roughly 2,500 to 15,000 MIDs, approximately eight out of ten portfolios displayed this characteristic from 2008 through 2015.
The notion that a merchant portfolio asset can be worth more than the entirety of the company that built it is arguably counterintuitive – it doesn’t seem like that should be the case. After all, it’s human nature to intuit things this way: that a part of something cannot have a greater value than the whole. But when you take a closer look at the cost structure of a traditional ISO, the explanation as to why this phenomenon has historically proven true comes to light.
Full version of article originally published in The Green Sheet, 8.9.2016 Edition. Written by Adam T. Hark The future of payments processing is certain. Unless your notion of viability contemplates the continuity of a provincial, mom-and-pop, payments processing company, you are now an official member of the “new order” of merchant acquiring: providing merchants with end-to-end business management solutions or point of sale that also happens to integrate payments. As such, you’re now faced with the challenge of identifying which payments or financial technologies to “hitch your wagon” to. Allow me to share some insight into the rationale that drives this strategic decision and better positions your company for a prosperous future.
Original Article Posted to LinkedIn, Authored 7.28.2016 by Adam T. Hark, Managing Director, Preston Todd Advisors Committing yourself, your company, and your employees to a sell-side process can be stressful, distracting, frustrating, and ultimately disappointing if the desired outcome is not achieved – that your company is sold on agreeable business terms. Most owner/operators with quality properties – companies with healthy balance sheets, good EBITDA margins, consistent YOY, double digit top line growth, and interesting, proprietary products and services, especially by way of technologies, find themselves in the advantageous position of not ever having to actually transact, even if that’s their intended objective. These owner/operators always have the option not to sell and pull their property off the market. Thus, for many sellers of quality businesses, the outcome of a formal sell-side process isn’t always an actual sale.
Full version of article originally published in The Green Sheet, 6.27.2016 Edition. Written by Adam T. Hark My firm receives over a dozen inquiries every month from parties interested in acquiring merchant processing portfolios. I’m amazed by this level of interest. Why? The merchant acquiring industry is evolving at a blistering rate, pivoting away from the traditional model where the core product and service offering is just payments processing, and hurtling towards a model where comprehensive, end-to-end business management solutions, usually offered as 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 towards 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 there is nothing 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 what’s guiding the 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.
How Integrated POS and Infrastructure Technologies Lift Merchant Acquirer Valuations: Connecting the Dots
Full version of article originally published in The Green Sheet, 6.27.2016 Edition. Written by Adam T. Hark Theory has met reality in the merchant acquiring world. It’s no longer just an idea that there’s a ubiquitous convergence of technology and payments processing underway — it’s a fact. Before a merchant acquirer surrenders to this reality, however, and starts investigating which technologies may be worthwhile embracing, whether through acquisition, partnership, or development, it surely makes sense that an acquirer’s first inquiry should be, “what do these new technologies actually do for my platform?” The answer to this question, together with understanding the added value contribution, will pull back the curtain on how these technologies work to lift merchant acquirer valuations.