Are First Data Portfolios Worth More Than Portfolios With Other Processors?
I was recently asked to answer this question on behalf of a subscriber to The GreenSheet. Here’s my answer…
Assuming we are comparing apples to apples, the short answer would be yes. (but the reason is probably counter intuitive).
For example, does a First Data (FDR) portfolio, with the exact same internal attributes as a portfolio from another processor in terms of account composition (card present versus card not present), industry concentration (SIC/MCC), revenue concentration (a subset of account contributes in inordinate amount of revenue to the total monthly revenue), risk concentration (the number of merchant accounts in the portfolio), merchant contract length, cancellation fee, basis point mark-up, sales channel (direct, agent, or referral), and revenue attrition command the same valuation in the marketplace as a portfolio from another processor? The answer is in most cases NO.
I assume that doesn’t help you out much. But what you need is the explanation as to why. Well, if we’re making the assumption that all the internal attributes of both portfolios above are the same (and we are), what accounts for the higher valuation? Answer: portability and market demand.
There are very few processors domestically from whom an ISO or MSP can procure true portability (FDR is one of 4 that we typically see). The operational definition of true portability which I’m using is this: the ISO or MSP owner has an ownership interest in the merchant contracts themselves, and can therefore migrate “port” those merchants over to another processor of a buyer’s choice, or “roll” the merchants over to a buyer’s processing agreement with the same processor, either of which allow the buyer to accomplish two strategic value ads; 1) the ability (the right) to sell the buyer’s products and/or services into that particular book of business, and 2) the ability for that portfolio’s purchaser to benefit from a better buy rate (as buy rates are often a function of the number of transactions a given portfolio produces a month) as once the merchant contracts are rolled over to the buyer’s processing agreement, the transactions from the acquired portfolio are additive.
The second component is simply market demand. Relativity speaking, in the USA, FDR ISO’s are orders of magnitude greater in number than ISO’s of other processors. Therefore, probability theory dictates (and this bears out in reality) that there are far more FDR portfolio buyers out there than for any other portfolio from any other processor. The larger market therefore creates greater demand for these types of opportunities, and the greater demand creates an upward pressure on valuation.
