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net static pool attrition runs on merchant portfolios consistently produce out- whereby a merchant acquirer proac-
puts for account/MID attrition that are 10 to 20 percent higher than the outputs tively removes these types of mer-
for net processing volume attrition on the same merchant portfolios. chants from its book of business and
creates guidance that will prevent
The takeaway from this data point is that for a majority of merchant acquir- it from boarding new ones in the
ers, there has occurred a natural sloughing off of low- to no-margin accounts future, the merchant acquirer has
from their portfolios. Much of those losses have been to the likes of Square, much to gain by way of profitability.
whose payment facilitator model is better suited to accommodate low-revenue
merchants. Accordingly, by implementing a portfolio rationalization initiative, Effects of timing
One drawback, albeit a temporary
one, to implementing a portfolio
rationalization process is when an
acquirer is preparing its book of
business for sale. A necessary con-
sequence of purging accounts from
an existing merchant portfolio is
that the process artificially increases
the rate of attrition on the book – a
primary driver of merchant port-
folio valuation. So it behooves all
merchant acquirers to be mindful of
their future objectives regarding an
exit or financing event, and the time-
lines thereof.

If an acquirer intends to go to mar-
ket in the offing, the acquirer would
be well served by documenting the
merchant accounts that were inten-
tionally purged so this information
can be verified by prospective buy-
ers. This in turn would allow buyers
to adjust or "normalize" the portfo-
lio's attrition numbers.

The other option, particularly if an
acquirer is working on a longer time
frame for an exit or financing event,
would be to effectuate the portfolio
rationalization process at least 18
months before going to market,
which would allow for normalized
year-over-year comps when running
attrition analyses, and flush out the
purged accounts long before they
would artificially, negatively affect
the attrition numbers, and ultimately
the merchant portfolio valuation.

Adam T. Hark is Managing Director of Preston
Todd Advisors. With over a decade of consult-
ing in the payments and financial technology
sectors, Adam advises clients on M&A, growth
strategy, exits, and business and portfolio
valuations. Adam T. Hark can be reached at
adam.hark@prestontoddadvisors.com or
617-340-8779.

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