Rainy day ISOs

Unless payment professionals have been living under a rock for the past few months, all ISOs and merchant level salespeople (MLSs) are well aware of the economic downturn. So, in this period of belt tightening and cost consciousness, Henry Helgeson, President and co-Chief Executive Officer of Boston-based Merchant Warehouse, offers advice to ISOs and the feet on the street.

Helgeson believes the full effect of the economy hasn't hit the payments industry yet.

"We've got to start thinking about how we're going to get impacted by this other than just a slowdown in consumer spending," Helgeson said. "What's going to happen when we can't get the same amount of money out of our existing merchants? We're going to see a lot of fees being levied on merchants to make up for attrition in the form of merchant death or just less consumer spending. But can the ISO afford to eat this loss?

"And remember, if ISOs who are taking losses start cracking down on the merchants, that simply compounds the problem by throwing another straw on the camel's back on the merchant side."

Precaution

Helgeson warns that merchant insolvency is bound to rise in the next 12 to 18 months, which will mean higher loss rates for ISOs. As an industry, "we haven't quite started to crack down on underwriting yet, but it's something that I think all ISOs are going to have to look at," he said.

Helgeson feels ISOs must scrutinize their merchants engaged in future delivery, such as bridal shops and cabinet makers. Furthermore, the industry as a whole must tighten its policies to make sure "our exposure hasn't gone up as more and more merchants potentially become insolvent."

According to Helgeson, ISOs should set aside rainy day funds just in case.

"If you haven't put aside some cash you're left with very few options in a downturn," he said. "I've always told people they need at least a minimum of one month's residuals on their books, if not significantly more, and I mean cash reserves as well as the equity in their businesses."

An ISO that makes $5,000 a month in residuals should have at least $5,000 in the bank, he said. Similarly, an ISO with a monthly residual stream of $2 million should have an equal amount stashed away in an account.

Stay smart

Helgeson is not a doom-and-gloom pessimist. "I've always seen downturns as having the most opportunity," he said. But, in, general, it's a time for ISOs and MLSs to remain cautious, not only with merchant portfolios, but also in regard to costly marketing strategies and other expenditures.

Helgeson added, "Market analysts have predicted the slowdown to last as long as 18 months, so you need the reserves to weather that. And it would be nice to be here in a year-and-a-half, wouldn't it?"

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