While it seems natural that retention rates might decline after a merchant portfolio changes hands, purchasers have found ways of keeping losses to a minimum. What matters most is maintaining continuity so merchants have no reason to switch to another processor, sources suggest.
To keep the merchant experience seamless, investors from outside the industry tend to purchase more than just the accounts or the residuals. Instead, they buy an ISO’s entire business and retain most of the staff, says Dean Caso, president of Velocity Funding LLC, a Norwood, Mass.-based firm that purchases and services merchant accounts. That way, the merchants see virtually no changes.
When ISOs buy portfolios, they often keep the transition harmonious from one owner to another by persuading the seller to continue servicing the accounts, Caso says. Sellers often see the wisdom of continuing to call on their former merchants because those phone calls and visits can result in referrals to other merchants in need of services. Besides, if former accounts expand, those new locations are fair game for card-acceptance services, says Caso.
Sometimes an ISO buys a portfolio from its own agents, which naturally smoothes the transition, notes Henry Helgeson, co-CEO of Merchant Warehouse Inc., a Boston-based ISO. In those cases, statements look the same, and even the voices in the call center sound familiar.
Continuity may hinge on the size of the seller, notes Jamie Savant, a partner at the Strawhecker Group, an Omaha, Neb.-based management consulting company that has advised buyers or sellers in more than 50 transactions in the last three years.
Smaller ISOs may rely upon processors to service merchants, and the processors would continue to play that role if a portfolio changes hands, Savant says. In that case, merchants would see no changes in the look of the billing statements, the tone of voice at the call center or the policies on fees, he notes.
Larger ISOs often service accounts in-house, so a change of ownership could bring unwelcome shifts in customer-service routines, Savant notes.
“You would have a situation where there is higher attrition,” Savant says of purchasing accounts from a large ISO.
Buyers may head off a burst of attrition, however, by communicating early and often with the merchants in the portfolio, says David McSweeney, Merchant Warehouse vice president of merchant experience at Merchant Warehouse Inc.
Tell merchants about improvements the change of ownership will bring, but keep changes to a minimum and do not make too big an issue of them, McSweeney says.
When change has to occur, keep it behind the scenes, he advises. Build software code where merchants will not see it happening, for example, instead of showing up at a store to reprogram a terminal, McSweeney says.
The phrase “under the radar” describes the best approach to change during the transfer of ownership, he maintains.
While treating merchants carefully after buying a portfolio minimizes attrition, purchasers also prevent defections by doing the homework required to find the right portfolio to buy, sources agree.
That homework consists of finding out as much as possible about a prospective purchase, often with the help of a third party, says Savant.
“We do a deep dive to determine the makeup of a portfolio, evaluate the risk and consider where it is located geographically,” he says of his company’s efforts on behalf of clients.
A portfolio weighed down with Gulf Coast merchants might not fare well in a bad hurricane season, and a portfolio littered with high-risk retailers might run into trouble any time, Savant notes.
Buyers should beware if a small number of merchants account for most of a portfolio’s volume, Savant says. “If a portfolio has 1,000 merchants and four represent 80% of the volume, watch out,” he warns.
Evaluating the sales engine that created and serviced the portfolio helps determine value, Savant says. Meet the high producers among the sales staff and assess them personally, he urges clients.
Buyers also should read and digest contracts that underlie the portfolio, including agreements with merchants, agents and sponsoring banks, Savant notes.
Considering the portfolio’s profit potential makes sense, Savant advises. If it costs $500 to bring on an account that brings in $60 a month, that means a 10-month return, he says.
Attrition serves as an important measurement for portfolio evaluation, Savant continues. “The lower the attrition, the higher the value,” he says. “Attrition is the key.”
At Velocity Funding, Caso and his brother, David Caso, the company’s executive vice president, examine the attrition issue from as many angles as possible. The company picks up merchants only by buying portfolios and has no sales staff. That makes attrition even more of a concern than usual, Caso says.
But in any case, keeping attrition minimal makes sense, and purchasers have devised plenty of ways to achieve that goal.
A longer version of this article appears in the November-December print edition of ISO&Agent.
