Merchant Portfolio Sales & Valuation: The Four Faces of Attrition

Looking at bankcard portfolio attrition from the perspective of accounts, transactions, revenue, and charge volume

When most merchant portfolio owners think about attrition, they typically focus on the attrition relating to lost merchant accounts. While it is true that merchant account attrition is an important facet of bankcard portfolio valuation, a portfolio owner must realize that a proper analysis of bankcard portfolio attrition is not limited to merchant accounts alone.

Attrition, as defined in merchant portfolio valuations, is the rate of loss as a percentage of the total merchant portfolio, as measured over a discrete period of time. The rate of attrition also assumes no growth (meaning no additional, newly written accounts and attendant revenues, etc.) from the start of the time period for which the attrition is being calculated. Notice, this basic definition is not exclusive to merchant accounts. Merchant account attrition, as mentioned above, often draws the most attention from portfolio owners, and rightfully so, as understanding how quickly a merchant portfolio is shedding accounts gives a great deal of insight into the ability of a portfolio to retain its capacity to generate revenue.

But, what merchant account attrition doesn’t elucidate is the productive capacity (the ability of an account to generate revenue) of the individual attritted accounts. To fully understand the effect of account attrition on the portfolio we must look at the attrition of three other portfolio factors: revenue, number of transactions, and charge volume. When looking at all four of these attributes together, a bankcard portfolio’s attrition can be put into proper perspective.

Imagine two merchant portfolios, Portfolio A and Portfolio B. Each with the same number of merchant accounts, revenue, number of transactions, and charge volume. Now imagine that the attrition rates for Portfolio A and Portfolio B calculated over a 12 month period are as follows:

Which portfolio had the better year? Which merchant portfolio will a buyer assign a higher valuation to? Looking solely at account attrition, the choice would be Portfolio B. Portfolio A lost 24% of its accounts over the year, while Portfolio B only lost 13%. However, the three other measures of attrition tell a different story. Portfolio B lost more revenue, transactions, and charge volume than Portfolio A, despite losing fewer accounts. By taking these additional perspectives of attrition we are able to make better sense of account attrition. In the above example, a bankcard portfolio owner could easily be misled by only viewing account attrition.

In Portfolio A, it appears as if the year was extremely bad. But after looking at the other attrition metrics, we see that performance was better than the account attrition would indicate. The accounts lost were not substantial revenue, transactions, or charge volume drivers for the portfolio. Portfolio B appears as if it had a good year, however, upon further inspection, revenues, transactions, and charge volume all attrited at a much higher rate than account attrition would indicate. The accounts lost in Portfolio B were highly productive, comprising a large portion of the portfolio’s revenue, transactions, and charge volume.

As is evidenced by the above example, merchant account attrition, when examined on its own, is limited in its ability to accurately show the performance of a merchant portfolio over time. Only by fully understanding the application of attrition to other portfolio factors can merchant portfolio owners get the full picture of how merchant account loss affects their bottom line and portfolio strength.