Flexible portfolio sale options

Founded in 2011 by a group of international investors, Royal Merchant Holdings LLC has moved in a somewhat contrary direction to that of the typical fledgling ISO. ISOs commonly grow slowly and organically, establishing a niche and boarding merchants one-by-one with the long-term view of selling a built-up portfolio.

By comparison, RMH leveraged its financial strength by immediately launching into acquisition mode - buying accounts and processing rights from outside entities, bringing them in-house and linking them with a single processor to produce an immediate economy of scale, according to RMH founder and Chief Executive Officer Nader Panahpour.

"We try to bring in as many portfolios as we can and roll them into one thing," Panahpour said. "We bring them into our business and apply our pricing scheme to keep costs low." He added that portfolio acquisitions continue to be the company's central aim, but the acquisitions made and partnerships forged have also helped lay the groundwork for strong product offerings.

Panahpour stated the company has "several hundred" software vendors, numerous value-added products, including cash advance, gift and loyalty, mobile payment, real-time bookkeeping, and fraud and Payment Card Industry Data Security Standard compliance programs and services. The company also boasts customer service that includes both in-house overseers and ISO managers on the outside who have remained connected to their accounts after a sale

According to Panahpour, the company's service representatives are available 24/7, and the company offers phone support in 15 languages. "We have successfully maintained a close relationship with the owners of portfolios we have purchased and are adequately staffed with seasoned veterans of the industry to maintain the utmost level of customer service, support and competitive leadership in the industry," Panahpour said. He pointed out that the company strives to provide both speedy and close-knit customer service, company executives commonly handle service calls, and partnered agents have the executives' cell phone numbers.

The beginning

The development of RMH has been largely characterized - and dictated - by outside activity. And thus far, it has acquired 1,100 merchants and sees about $11.5 million per month in processing, Panahpour said.

Panahpour was previously a majority shareholder at a telecommunications company and the founder of a real estate investment firm in London. He was drawn to the area of business lending and subsequently became interested in merchant services when some of his associates told him about the growing industry of merchant cash advance. Panahpour said that although cash advance is a product RMH offers, it wasn't precisely what he wanted to do when the concept was presented to him. And upon looking more closely at opportunities in the payments industry, he was enticed by the prospect of portfolio acquisition.

According to Panahpour, RMH's acquisitions run the gamut: from a single merchant account to an ISO's entire portfolio, from small companies to large ones, and from a "a few hundred thousand" dollars in portfolio transaction revenues a month to $6 million.

A sweet deal

Early on, RMH's acquisition activity was punctuated by its purchase of Stirling Payments Inc., based in Delray Beach, Fla. (Stirling has no connection with Sterling Payment Technologies LLC of Tampa, Fla.) The acquisition helped RMH expand its merchant portfolio and improve its economy of scale, leading to better pricing options for ISOs and their merchants, Panahpour said.

Through Merrick Bank, RMH also partnered with processing giant Total System Services Inc. (TSYS), which now processes payments for essentially all of the company's ISOs; some RMH merchants also process with First Data Corp., Panahpour said.

That processing arrangement has not only yielded RMH better processing rates, but it has also helped to streamline issues pertaining to service and troubleshooting, as most merchants connect back to a single processing entity, according to Panahpour. "As we acquire more and more accounts, we're able to negotiate better rates with our supplier," Panahpour said. "We benefit from a very good price structure, which is the result of our partnership with TSYS. Our transaction fees and authorization fees are all very competitive.

"We've also got over 50 different software integrations, are up to date on mobile payments and have integrations with the latest payment technologies. If a merchant wants any of that stuff, we're pretty nimble and capable of hooking up with any software POS integration they're looking for."

Tailored approaches

Though RMH has negotiated some major deals, the company values every one of its acquisitions, even the smallest ones, and it determines its approach based on the unique demands of each deal. "It's pretty much done on an ad hoc basis, where we try to get the best deal for the ISO and for our company," said Yoni Schwade, Managing Director of Business Development for RMH.

Depending on an ISO's business and financial picture and how it wishes to proceed with a portfolio sale, RMH has four distinct revenue-sharing plans for ISOs, each one tailored to particular needs.

1. Under the first arrangement, 51 percent of monthly revenue goes to the ISO, and the remaining 49 percent goes to RMH. Under this agreement, the ISO also gets $100 for every new merchant boarded.

2. The second arrangement is a tiered revenue-share program, based on per-merchant profitability. For ISOs whose merchants generate an average of fewer than $200 per month, the sales partner receives 55 percent of the revenue; RMH takes 45 percent. For ISOs whose merchants average between $200 and $500, the ISO receives 60 percent. ISOs whose merchants earn between $500 and $1,000 are entitled to 70 percent. Those whose merchants earn an average profit over $1,000 per month receive an 80/20 split.

3. The third arrangement is simply an upfront payment for merchant level salespeople who want to be paid immediately for their accounts. Rather than accruing an indefinite split, these agents receive a single bulk payment that's 25 times as large as the account's net profitability. In other words, RMH takes the monthly revenue generated by each merchant account sold and multiplies the aggregate by 25. That becomes the upfront payment for those accounts, which are thereby owned exclusively by RHM.

4. The final revenue share agreement is aimed at ISOs whose merchants process large volumes of sales at relatively slim margins, allowing them to base deals on merchant processing volumes instead of revenues. These splits are based on net processing fees - "basis points" - which typically represent 1 percent or 0.50 percent of the total processing volume.

ISOs with merchants processing an aggregate of $500,000 receive 51 percent of the net processing fees (For example, the net fees on $500,000 of processing might be one percent, or $5,000. The ISO would get 51 percent of that, or a little over $2,500.) Those processing between $500,000 and $1.5 million receive a 55/45 split. Those processing totals between $1.5 million and $2.5 million receive a 65/35 split, and ISOs with over $2.5 million in processing get 70 percent of the net fees generated.

(This information was current as of press time, but as with any type of financial dealings, the terms for new acquisitions could evolve over time.)

"Some agents like the percentage to be based on overall processing volume because the net revenue of a high volume could be a very low margin, where even a small percent of that total volume ... ends up being more money," Panahpour said.

He added that, by comparison, ISOs generating a smaller processing volume but earning a higher margin on their merchant accounts will likely opt for the first or third of the options RMH offers.

Growth spurred by sales

Of course, not every ISO owner wants to sell his or her entire business. According to Panahpour, some sell only a portion of their accounts as a way to expand. They use the capital yielded for things like hiring, marketing and equipment upgrades. Eventually, such ISOs commonly end up with more accounts than they had before the sale, Panahpour noted.

"There are two ISOs we're dealing with right now; both will probably sell about 15 percent of their volume," he said. "With that money, they can work on their marketing push to generate lots of accounts going forward, and he'll write those on an 80/20 split [with us]. ... Hopefully, going forward, those new accounts become profitable, and he can sell those as well."

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