very ISO, no matter its size or years of industry experience, could use more money. At one end of the spectrum are ISOs new to the industry. These companies haven't had the time to create a substantial portfolio, and they could certainly benefit from increased capital to build their businesses. But, securing funding for a young business can be difficult.

At the other end of the spectrum are ISOs with substantial experience that would like to exit the industry and enjoy the fruits of their labor while they are still young. Maybe their retirement dreams include world travel or tropical beaches with festive umbrella cocktails. But, they can't retire on the assumption that their residual checks will continue in the same frequency and volume as they have in the past. They need capital that they can count on.

Calpian has a solution for both types of ISOs and any that fall in between. The company provides financing for ISOs that are actively selling merchant accounts. It offers residual buyouts for cash and creative financing and other programs to help ISOs and merchant level salespeople (MLSs) maximize their immediate and long-term earnings.

ISOs are free to choose how to spend the capital, but many use it to fund growth, structure a retirement plan or fund personal needs. "Our mission is to help ISOs grow and reach their full potential in the merchant services business by providing creative financing packages for them," said Harold Montgomery, Calpian's Chief Executive Officer.

Calpian is a wholly owned subsidiary of ART Holdings Inc. ART Holdings' other subsidiaries include a debit card processor (Cash Lane); a check verification and guarantee company (Checktronic); and a merchant services provider (Summix). It is out of Summix that Calpian was born.

"We acquired Checktronic in 1993, Cash Lane in 1998 and started Calpian's ISO sales in 1999," Montgomery said. "The need for an ISO bank really came from our own needs for financing and the lack of alternatives out there for us and ISOs in general."

Calpian has approximately 25,000 merchants nationwide processing $1.2 billion. For the last four years the company has grown at least 100% in terms of processing volume. From 2002 to 2003 it grew 210%, and the following year it processed more than $1.2 billion for more than 23,000 merchants, an increase of 106% from the prior year.

What better than an ISO?

Montgomery's experiences running an ISO helped him recognize the need for a company such as Calpian. "It was a direct evolution," he said. "Calpian's financing activities grew faster than Summix, and became much larger. I started the [ISO] business in 1987 and grew it slowly from there, selling one customer at a time. "We often struggled to make ends meet. We could never get financing."

Rather than passively accept the situation Montgomery decided to do something about it. "After years of that kind of struggle, we realized that other ISOs must have been having the same problems," he said. "So, instead of trying to change the banking world, we decided to start our own ISO finance business, and it's really taken off. ... Who better to finance an ISO than another ISO?"

Montgomery listed two issues that made the time right for Calpian: decreased profits on terminal sales and lack of portability of ISO portfolios.

Montgomery said that the days of making a healthy profit on a terminal sale are long gone. "We learned that the POS terminals were no longer profitable," he said. Merchants are beginning to expect the terminal for free, or at least figured into the cost of processing so that it seems free.

Although many businesses include the terminal cost in the processing and eventually recoup the money, it has to come out of someone's pocket initially, and it is usually the ISO's or MLS' pocket. While larger organizations can afford to outlay this money knowing that it will be recouped, smaller offices, or those just starting out have a more difficult time.

"We had to take the terminal out of the equation and still grow our business," he said. "[We] reasoned that if we had this problem then other players would as well, and that has turned out to be accurate. We meet many ISOs who have the exact problem where terminal profitability has collapsed. It has gone to zero, and sometimes negative. A free terminal is now a cost of the sale to the ISO."

Montgomery said today's ISO is not your father's ISO. Today, ISOs must make a decision: They can either choose to assume merchant risk and have "portable" merchants, i.e., accounts that they can move with them to different processors, or they can assume no risk but have no freedom to change processors.

"Since Calpian does not move merchants it acquires away from the existing platform, processors will approve a Calpian purchase of a no-risk, nonportable portfolio," he said. "A Calpian deal is a win-win-win. The ISO wins by getting financing and growing fast without merchant risk, the processor wins by keeping existing merchants and increasing merchant count, and Calpian wins. It works for everyone."

Calpian also realized that tightening payment industry margins have caused ISOs to have a new set of financing needs. Bank financing and venture capital funding are difficult and expensive to obtain and often come with strings attached or a loss of control.

"ISOs who wish to remain in the industry and grow their businesses often face the dire choice of losing control by selling or merging with a larger acquirer," Montgomery said. "Calpian keeps them in control.

"Our philosophy is that no one knows the ISO business better than the ISO, and they should be in the driver's seat."

Growing up as an ISO

Since Calpian grew out of an ISO, it understands ISOs' needs. "We consider ourselves a resource for ISOs," Montgomery said. "We grew up as an ISO; we've been doing this for 19 years."

Calpian understands that ISOs need a program that is fast and can be customized to best meet each ISO's needs. That's why it provides financing for ISOs in any stage of development: start up, growth or exit. Calpian also works to capitalize residual streams as soon as possible. "If we receive the necessary data on a Monday, we can have funding on a Friday," Montgomery said.

Calpian has completed more than 70 deals, but it has looked at many, many more. That is because it offers ISOs a free portfolio analysis. "Sometimes we find that a deal doesn't make sense for either party, and that is fine," Montgomery said. "At least they know where they stand and what the alternatives are. Every businessperson needs to understand his or her full range of options, and Calpian is one they should know about.

"Above all, you have to have financing which is reliable," he continued. "I know so many ISOs, myself included, who just want a workable financial resource without a lot of changes or conditions and a partner who is reliable and does what they say they are going to do. In my own experience, I made so many bank presentations and went to so many meetings and never got the loan.

"That's not how we do it at Calpian. You want strong support from your financial partner, not a lot of problems or even lawsuits down the road."

Customized programs

Calpian offers innovative programs, such as Wealthbuilder and NorthStar. "We started by just buying residuals in 1999," Montgomery said. "That worked really well for us and the sellers. But it quickly became clear to us that many ISOs needed financing to grow. So we started doing more creative transactions to assist ISOs needing growth capital."

Wealthbuilder is for ISOs that are building their organization or in a growth phase and don't have any immediate plans for retirement. Instead, these ISOs have a long-term vision for the future.

WeathBuilder allows ISOs to sell a portion of their residual base for cash, and then, as they acquire new merchants, receive upfront payment for the residuals they would have earned over time.

This provides ISOs with monthly cash to use for investment capital or offset operating costs. Also, in many cases, ISOs receive a bonus balloon payment at the end of an agreed upon time period. This type of financing is unique in that business ownership and independence remain in the ISO's hands.

NorthStar was created for seasoned acquiring industry veterans with a three-, five-, seven- or 10-year window toward a financially secure retirement. ISOs set their own financial goal and timeframe, and Calpian helps them determine what they need to do for the next three to 10 years to make that goal a reality.

Calpian reports that most ISOs in this group are proven industry producers with a solid sales track record that know they can produce the specified amount of residuals each month, and therefore have a high degree of confidence in their plans.

With Wealthbuilder, ISOs can choose to keep some merchants and build residuals or sell some or all of them to Calpian. "We have some ISOs who sell us enough merchants to cover all their monthly costs," Montgomery said. "They keep the rest of their monthly merchant production, building their residual stream that way. Basically, they are getting their residual stream for free." None of Calpian's programs require an obligation from the ISO. "With Calpian on their team, ISOs can go out and do what they are good at, which is sell, sell, sell, and still be taken care of at end of day," Montgomery said. "Calpian is there for them if they need it, but we don't require them to work for us or anything like that. ISOs work with Calpian because they want to, not because they're forced to.

"Today, more than ever, financial resources are key," he said. "If you don't have that, it is a risky path to tread. ISOs need to understand their options.

"There have been tremendous business changes in the past five years, and there will be more in the next two years. The economics of the industry are more difficult now. ISOs can look at Calpian as a flexible financial resource, to fund their business, or even as a life insurance policy."