IMGCAP(1)]
This story appears in the Nov. 26, 2008, issue of ISO&Agent Weekly.
If payment terminals made the "cha-ching" sound of a cash register, many merchants might have noticed quieter stores in recent weeks. And that is not a good situation for the ISOs that work with these merchants.
As banks fail or receive colossal bailout packages from the government and consumer spending recoils, some ISOs find themselves performing triage on ailing merchants, while others are examining their merchant portfolios to determine which clients might next need remedial aid.
Still, some ISOs find the business conditions an opportune time to scout acquisition targets.
Whether merchants are existing or new clients, ISOs are prodding them for more-detailed information about their payment transactions and business models, says Henry Helgeson, president and co-CEO of Merchant Warehouse Inc., a Boston-based ISO.
"We're going to have to scrutinize merchants that have been in good standing for years, but it may require a little bit extra scrutiny than we would normally give in good economic times," Helgeson tells ISO&Agent Weekly. ISOs' incomes are affected when merchants see reduced consumer spending, especially if the merchant provides a luxury-driven product or service. Anything with a future-delivery service, such as subscriptions, bridal shops or cabinetmakers, face increased risk, Helgeson says.
If spending drops enough and the merchant goes out of business, the ISO not only faces losing the merchant's business, but it also must contend with scores of charge-backs from goods bought in advance but not yet delivered.
Outlook For December
Merchant Warehouse has not experienced an immediate impact from this fall's economic turmoil, Helgeson says.
Though he is waiting for detailed data about September and October transactions, Helgeson sees a greater uncertainty for December.
"There's a lot of fear out there about what this December is going to look like," he says.
U.S. consumers this year will spend $470.4 billion on holiday purchases, a 2.2% increase from $460.1 billion spent during the 2007 holiday season, according to the National Retail Federation. That rate is below the 10-year average holiday sales-growth rate of 4.4%, the federation says.
The holiday season is particularly intriguing to Marcelo Paladini, CEO of Cynergy Data LLC, a New York-based ISO. Paladini is monitoring merchant revenue this year as more consumers switch off their luxury-item purchasing and buy only what they need.
"That basically translates into less revenue on a monthly and annual basis," Paladini says.
Aside from dealing with that issue, ISOs also face merchants that want more value from their contracts, he says.
"Merchants aren't just looking for a cheaper terminal," Paladini says. "They will be looking for benefits," effectively discarding the solitary reliance on the lowest-price argument to close deals with merchants.
"It's not just to give the merchant a cheaper price, but to give them one more benefit," he says. "That combination allows the merchant to achieve more with less."
Reviewing Transaction Data
Essential to helping ISOs understand how their merchants are performing is having transaction data, says Rick Pylant, president of CoCard Merchant Services, a Decatur, Ga.-based ISO.
Transaction data overlaying demographic and geographic information yields valuable insight about merchants, Pylant says. The results can help show how merchants in a certain region are performing or whether smaller transactions are common to all merchants or just to certain categories, he explains.
Fortunately, CoCard has a significant number of merchants that sell products and services consumers need instead of want, such as medical offices and repair shops, Pylant says. Still, CoCard will monitor transaction activity.
The larger risk, or opportunity depending on an ISO's performance, is that current economic conditions make this a ripe time for acquisitions.
Some ISOs may find all the lines of credit at their disposal may be a burden should revenue drop and they find it more difficult to make the installment payments, Merchant Warehouse's Helgeson says. Should that happen, the ISO could become an acquisition target.
"Then the question becomes, 'Can anybody buy [that ISO] right now?'" he says.
Now is not the ideal time for an ISO to discover it may be in financial peril. "It may be a little late if one hasn't planned in advance," Helgeson says.
With credit markets tight, an ISO that needs to revise its debt structure likely will encounter a banker even more intent on securing a return on the deal than six months ago.
Such pressures may get more ISOs, or banks with smaller merchant portfolios, more willing to sell, Helgeson says. "Lots of ISOs are pressed to sell," he says. "There are probably more sellers than buyers."
The conflict for the smaller ISOs is that their executives may not want to discard their business plans. "But they may need a partner just to survive," Cynergy Data's Paladini says.
