Buying & Selling Merchant Processing Residuals: Assessing the Agent/MLS Risk
For over 25 years now the merchant acquiring space has been seen by industry players and outside investors alike as fertile grounds for deploying capital. At first blush, the notion of investing money in an asset class characterized by the generation of a predictable, recurring revenue stream seems like a no brainer for any experienced investor. It has the perception of a low risk proposition, right?
Well, like every other asset class under the sun, merchant portfolios and merchant residuals have their own unique risks associated with them. For investors and acquirers of these types of bankcard properties, understanding these risks is essential. As one of the primary objectives of this blog is to identify and explore these associated risks on behalf of buyers and sellers alike, let me address one that is often overlooked: the nature of the agent/merchant relationship.
Assessing the agent/merchant relationship doesn’t typically show up on a buyer’s to-do list, neither is it something that most sellers consider before going to market. For most, the value of a merchant portfolio or merchant residual opportunity is thought of mainly from the perspective of the data which speaks to the opportunities’ performance over time. This data can be found in the merchant level detail residual reports. But even if the data suggests that the opportunity is a prime investment, to not know and understand the answer to the following question would be folly: Who/what entity has the primary relationship with the merchants in the book?
If I’m buying a merchant portfolio or residual, and it’s the agent that has the primary relationship with the merchant (primary relationship meaning the person who not only wrote the account, but serves as the 1st line of customer service), I’d better make sure to structure a deal so that that agent is incentivized to continue to manage those accounts after I acquire that residual stream. This tactic mitigates the very real risk of accounts dropping off the roll (attrition) after the residual or portfolio is acquired because the person that the merchant trusts, and expects to be there when they need assistance, suddenly disappears. The merchant’s relationship with their agent is one of the most powerful drivers in the merchant’s decision as to who gets their processing business. So for buyers, addressing this needs to be a top priority for any deal.
As a seller, you need to understand that your merchant portfolio or residual has greater value to a would-be buyer if you’re willing to agree to continue to service and manage the accounts you’re selling.
To illustrate the importance of the agent/merchant relationship more clearly, think about this parallel in the insurance industry. In the insurance industry, they also have agents (called “producers”) who build portfolios (called “books of business”), and like the bankcard industry, these books of business are bought and sold. In fact, just like the bankcard industry, there’s a healthy marketplace of buyers and sellers for these types of opportunities. But here’s the interesting difference between the two: in the insurance industry, there is NO market for acquiring the book’s revenue stream unless the agent’s commitment to continue to service the accounts on behalf of the buyer is also part of the deal.
Here’s the takeaway: In the insurance industry, the account’s relationship with the agent is everything. It’s either part of the deal or there is no deal. That’s how important the relationship is. Fortunately, in the bankcard space, the agent/merchant relationship isn’t everything, but its importance can’t be underestimated. It can be a substantial liability if not addressed properly and can add substantial value to both buyer and seller if it is.