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.

Scenario #1

Driver for portfolio acquisition: Underwriting guidelines have become too rigorous, to the point where too many quality merchants are being rejected by the major processors and sponsor banks for ISO’s to sustain organic growth.

Payment consultant comments and strategy: An effective way for acquirers to liberate themselves from the ever increasing underwriting rigidity of the major processors and sponsor banks is to control underwriting internally. They can achieve this by acquiring a full liability processing agreement; the deal is typically structured as a portfolio acquisition with an assignment and assumption of the seller’s processing contract.

Scenario #2

Driver for portfolio acquisition: Acquirer is seeking to dilute BIN chargeback ratio from existing higher risk merchant base with lower risk transactions from retail SMB business.

Payment consultant comments and strategy: With years and years of margin compression eating into merchant acquirer bottom lines, many have turned to higher risk business with healthier spreads. Higher risk (not true high risk which requires a high risk processor) inevitably comes with the sponsor bank headaches concerning the breaching of the card networks’ acceptable chargeback-to-transaction ratios. As such, if an ISO is pushing the acceptable chargeback thresholds of MasterCard and Visa, the merchant acquirer needs to dilute its higher risk clicks with lower risk merchant transactions, and the acquisition of a low risk merchant portfolio solves this problem.

Scenario #3

Driver for portfolio acquisition: Acquirer that has successfully made the pivot away from its traditional core offering of transaction processing, and towards selling value added technology products and services, needs to acquire specific merchant account types (SIC/MCCs) to cross sell its technology to.

Payment consultant comments and strategy: The “new world order” in merchant acquiring has ISOs expanding their product and services offering to include value added business management solutions which allow them to maintain better merchant retention and lift growth by leveraging vertical specific technology solutions. Though this new model has already been proven successful through organic means, a merchant acquirer that wants to really accelerate its growth will look to acquire a portfolio where the existing merchant base, by way of SIC/MCC, is complementary to its technology offering, and cross sell into that merchant base.

Takeaway

What I appreciate most about the preceding strategies is that they all make sense. There’s an undeniable logic to the acquisition strategies because each strategy is constructed after the goal/objective of the acquisition has been determined; as a direct result, there’s a high probability of a successful outcome. And thus the key to a successful portfolio acquisition strategy is to work backwards from the desired outcome. That being said, the execution of these strategies isn’t nearly as easy as it may appear, especially as it relates to the identification of the target acquisitions, but execution is another story altogether.
Adam T. Hark is Co-Founder of Preston Todd Advisors d/b/a MerchantPortfolios.com. With over a decade of experience in payments, payments technology, and FinTech, Adam advises clients in growth strategies, exits, M&A and valuations. Adam T. Hark can be reached at adam@merchantportfolios.com , adam.hark@prestontoddadvisors.com , or 617-340-8779.