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Post-pandemic ISO But what do attrition key performance indicators tell us
today? The answer is, not much. Year-over-year analysis
valuation drivers of merchant portfolio accounts, transactions, volume and
residuals suffer from the base-effect created by a year-
long, paradigm shifting event.

By Anthony Malatesta Just as March 2019 over March 2020 attrition numbers were
Wellesly Hills Financial meaningless, so are March 2020 over March 2021 numbers.
Merger and acquisition activity for payment processors, In both instances, attrition, which has historically reflected
merchant acquirers, ISOs and large merchant level the performance and quality of an ISO, now reflects no
salesperson/agent offices is picking up after the such thing. Merchant acquirer business performance was
extraordinary business challenges of this past year. For directly impacted by lockdowns, shutdowns and every
the select few whose business models cater to higher risk other negative consequence precipitated by the virus.
and online merchants, the uptick in M&A activity is a Though attrition was once a primary driver of merchant
continuation of the past year. processor valuation, at this point in time, it's a secondary
or tertiary factor at best.
However, for the majority of merchant acquirers catering to Geography
brick-and-mortar merchants, business fundamentals have
substantially improved and are once again attracting the Pre-pandemic, the geographic location of an ISO's
attention of investors. Private equity investors are seeking merchant base was at best a valuation side-note. With
larger platforms, and a wide-spectrum of strategics are the exception of very specific instances—like a strategic
seeking smaller ISOs for cross-selling opportunities and looking to acquire a merchant base in a specific area for
growth through high-output sales channels. servicing reasons or expansion— geography has played a
minor role in influencing merchant acquirer valuations.
Along with the uptick in M&A activity come the inevitable
questions surrounding ISO valuations. What's the floor? That has now changed. There has been, and continues to
Where's the ceiling? Are merchant acquirers trading on be, a correlation between warmer climates and an earlier
multiples of EBITDA or multiples of merchant portfolio and broader reopening of the economy. This is likely due
residual income? to a combination of political and scientific reasons, and
it creates a positive bias for merchant acquirers with a
These are all relevant inquiries, and fortunately, the merchant base in the southern United States. Alternatively,
healthy numbers of transactions being closed provide there exists a negative bias towards payment processors
insight into the current thought processes of investors. whose merchant base is primarily in the northern United
However, lest we forget the extraordinary pandemic year States.
behind us, the better questions to ask have much more
to do with the specific drivers of valuations than the The takeaway ought to be that geography—at least for
valuations themselves. now— is a top-tier driver of ISO valuation. As vaccinations
continue, I'd expect geography to once again diminish in
importance. But, if we fail to reach herd immunity before
next fall, and pockets of the country continue to struggle
with containing the virus, geography will remain very
much in play.

Industry type: SIC/MCC
Remember the game King of the Mountain? If attrition
was King of the Mountain before the pandemic—in terms
of determining merchant acquirer valuations—then
merchant industry type is King of the Mountain now. The
pandemic crushed brick-and-mortar businesses, leaving
consumers no choice but to purchase online.

For the same reason, ISOs whose merchant base was
predominantly brick-and-mortar fared poorly, and their
competitors who catered to online merchants received a
benefit. However, as the economy reopens and momentum
shifts back toward brick-and-mortar businesses, the
Attrition merchant acquirers who serve them will profit by
Historically, past attrition has provided meaningful extension. This dynamic puts an ISO's merchant base, in
guidance for projecting future attrition within a portfolio. regards to its industry composition, front-and-center as a
top driver of valuation.
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