Strategies seem to go in and out of fashion in the merchant-acquiring business, like any other business, and agent banking is one of those strategies that the pendulum of conventional wisdom has swung against in recent years.

Agent banking is the business of signing up (mostly) community banks to wholesale relationships and using them as distribution channels to sign up and serve merchants. Some acquirers look at the rate of consolidation among banks (the total number of which declined 29% from 1990 to 1998) and conclude that agent banking is a buggy whip business with little long-term play. Certainly mergers and acquisitions are in many respects occurring at a faster rate among community banks than regional banks, and many acquirers focused on agents have lost their share of customers due to acquisitions.

Some acquirers view managing agents as an expensive alternative to signing up merchants directly. However, the agent-banking business may have many other fundamentals, making it more attractive than the conventional wisdom says.

First Annapolis Consulting recently completed a telephone survey of community banks that offer credit card acquiring as an agent of a larger player. We spoke with 68 banks, with a median asset size between $100 million and $150 million and five years' experience as agent of the same acquirer partner. The median agent in our study also offered issuing products through the same partner.

The market itself is highly fragmented, with no acquirer registering more than a 5% share of the banks participating, and a total of 25 acquirers named in the survey. No one acquirer has a dominant market position in this particular part of the business.

Though the median agent was still with the same acquirer it had been processing with for five years, the agents in our study had left or switched acquirers at just below a 10% annual rate (excluding attrition caused by mergers and acquisitions). This attrition rate is quite favorable compared to prevailing merchant attrition rates, which even for well-managed acquirers tend to be in the mid-teens.

Part of the lower attrition profile may simply be inertia or loyalty among agents, but another explanation is simply that acquirers are not calling on agent banks frequently. Fully 90% of the agents in our survey had received fewer than three sales calls from an acquirer in the past year. This contrasts with merchants; in previous First Annapolis research, 40% of merchants were called on by acquirers at least once every two weeks.

Of the agent banks that had switched acquirers, about 47% cited service-related issues, and only 27% mentioned pricing-related reasons. When asked to list their primary needs in the relationship, they ranked competitive pricing fourth behind good help-desk support, effective chargeback processing, and efficient terminal deployment support. The No. 1 complaint agents logged against their current acquirer was poor response time from customer service.

One participant complained, "We didn't even know who our representative was in our old relationship." Another said, "We fell through the cracks at our old relationship." The happy agents had similar themes, with opposite points of view. "We're interested in good service, where we just give their name and that is it. (Our acquirer) keeps us out of the process."

About 58% of the agent banks we spoke to used one organization for both issuing and acquiring services. The issuing relationship was also organized in an agent structure. Nearly 21% used an issuer unaffiliated with their acquiring partner, and 21% did not offer issuing services. More than 60% of the agent banks who used the same partner for issuing and acquiring cited convenience as the reason.

No doubt the agent-banking business is a niche within acquiring, and the downside caused by mergers and acquisitions is a continuing weakness in the business model. However, agent banks appear to be relatively loyal, on average, and highly motivated by the good service a specialized acquirer may be able to provide. The market has no dominant, entrenched player who has "cracked the code" on how to compete in agent banking.

In fact, the competitiveness of the segment as measured by price sensitivity and the amount of competitive sales activity is arguably less intense than in other parts of the merchant acquiring industry. Finally, a material proportion of agent banks appear predisposed to buy multiple products from their provider, although we did not probe beyond card-related products. Though it is difficult to be too conclusive with this type of review, perhaps it is time for the pendulum to swing again.

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