Strategic Reasons For Acquiring Merchant Portfolios: Cross Selling
There are many value propositions to acquiring a merchant portfolio. If you’re already in the merchant processing space, accretive revenues and transactions are the most obvious. However, for many business savvy entrepreneurs there exists the notion that if they find a merchant portfolio with a material concentration of merchants in an industry for which they already provide existing products and services to, there’s the potential to create additional value by acquiring that merchant portfolio, and being able to cross sell, or “back door” their products or services into that existing, and industry related merchant base.
For example, if one owned a supply company whose primary product offering was commercial kitchen appliances for restaurants, intuitively it would be reasonable to explore the possibility of acquiring a merchant processing portfolio which was comprised of restaurants. If acquired, the buyer could then cross sell their core business offering into that book of business. (Worthy of note here is that this strategy could be applied in reverse, whereby a merchant processor (ISO or MSP) with a merchant portfolio comprised mainly of restaurants may want to acquire a restaurant supply company to cross sell merchant processing).
But in reality, is this a viable strategy?
It can be if you understand the bankcard industry and the prerequisites for making a merchant portfolio acquisition. In advising buyers looking to implement this strategy, I find myself first having to explain one of the most basic concepts relative to making these acquisitions: understanding the difference between a merchant portfolio and a merchant processing residual. The only way to acquire the rights to cross sell a product or service into a merchant processing book of business is to acquire an ownership interest in the merchant contracts themselves; (i.e. the contract the merchant signs with their merchant acquirer for providing the merchant with electronic payment processing services). This can only be done if the buyer acquires a merchant portfolio. This cannot be done if the buyer is acquiring a merchant processing residual derived from a merchant portfolio. In that case, the buyer is only acquiring the right to the revenue stream from that book of business. Furthermore, the buyer has no right to manage, service, or contact the merchants, never mind the ability to sell their product or service to them. Therefore, for the strategic acquirer looking to employ a cross selling strategy, acquiring a merchant processing residual is not a viable option, even if the merchants in the book of business are a perfect match. They need to find themselves a merchant portfolio.
Though the preceding sheds light on the type of acquisition one would need to make to employ a viable cross selling strategy, it doesn’t tell us much about the second element of the acquisition which one would need to understand and implement to make the cross selling strategy viable: the logistical component of the acquisition.
Acquiring a merchant portfolio requires a lot more from a buyer than acquiring a merchant processing residual stream, where the only prerequisite for the buyer is the buyer’s ability to write a check. Acquiring a merchant portfolio is much more involved. Mainly, when acquiring a merchant portfolio, where an ownership interest in the merchant contracts is being conveyed to the buyer (the same ownership interest which vests the buyer with those very rights to cross sell into that portfolio), the merchants are being moved from the seller’s processing platform and relationship to the buyers processing platform and relationship. (Just an FYI, that movement of the merchants is where the term portability comes from-i.e. the merchants and the merchant contracts respectively are being ported from the seller to the buyer). So clearly we can see that the prerequisites for the buyer to consummate a transaction of this nature involves a lot more than just being able to write the check. Logistically, the buyer must be a registered ISO/MSP with Visa and MasterCard respectively, and moreover, have a direct processing relationship already in place.
So here’s the skinny…If you’re interested in a strategic play in the merchant processing space, and looking to acquire a book of business which you can cross sell your products and or services into, in order to effectuate a viable and actionable plan, you need to know the ins and outs of the space; the nature of the types of acquisitions and the logistical issues that need to be addressed prior to making those acquisitions.
My advice… Make sure you engage a qualified payments industry consultant to work with you on this type of acquisition strategy.