Page 41 - gs260602

Insights and Expertise

sidual splits, rather than low upfront and high resid- directly translates into higher valuation when the time
ual. This reduces the long-term cost embedded in the comes to sell or finance.
portfolio while still giving agents an attractive total
earning opportunity on every deal. 6. Processor relationship diversity
The final major valuation driver is the ISO's relationship
The ISOs that approach agent compensation as a portfolio with its acquiring processors and sponsor banks.
strategy, not just a recruiting tool, will find themselves
with meaningfully more flexibility and higher valuations ISOs that maintain relationships with multiple processors—
when a capital event arrives. for example, both Fiserv and TSYS platforms—carry lower
5. Technology entrenchment: The stickiness factor structural risk than those dependent on a single processor.
If one processor terminates the relationship, raises fees
One of the most overlooked—and most powerful—drivers or imposes new restrictions, the ISO with multiple
of portfolio valuation is the technology that has been relationships can migrate merchants to an alternative
placed with the merchant. platform. The ISO with a single relationship has no
fallback.
There is a fundamental difference between a merchant
who was given a free terminal or a lightweight card reader In the current regulatory environment, this risk is not
and a merchant who has invested in a full point-of-sale theoretical. We have directly observed situations where an
system that runs their entire operation. The first merchant ISO's primary sponsor bank came under federal regulatory
can be moved by any competitor with a better rate and a action—specifically an FDIC consent order targeting
new terminal. The second merchant is entrenched. They its ISO program—creating immediate uncertainty for
are running their accounting, inventory management, every ISO in that bank's portfolio. ISOs with alternative
marketing, employee scheduling, ticketing, customer processor relationships were able to continue operating;
loyalty programs and reporting through that POS system. those without were left scrambling.

Switching processors means switching their entire Multi-processor structures are viewed as a valuation
business infrastructure, and very few merchants are positive by sophisticated buyers and lenders. They
willing to do that over a marginal pricing difference. demonstrate operational maturity, reduce concentration
risk and provide business continuity in an environment
ISOs and agents that consistently place full POS where processor and banking relationships are subject to
systems—and ensure those merchants are actively using increasing regulatory scrutiny.
the technology beyond basic payment processing—
build portfolios with significantly lower attrition and For a buyer, processor diversity also affects integration
significantly higher valuations. The ability to demonstrate planning. Acquiring a portfolio that runs across
that your merchants are deeply integrated into the multiple platforms gives the buyer optionality—they can
technology you sold them is one of the clearest signals of consolidate merchants onto their preferred processor over
portfolio durability that a buyer or lender can evaluate. time, or maintain the diversification as a risk management
strategy.
Conversely, portfolios built primarily on free terminal
placements or basic processing-only setups carry A single-processor portfolio, by contrast, creates a binary
inherently higher churn risk. Those merchants have no dependency: if anything goes wrong with that one
switching cost. If a competitor offers a lower rate or a better relationship, the entire acquired asset is at risk. Buyers
signing bonus, the merchant can move with virtually no price this accordingly—either through a lower multiple
friction. Buyers recognize this immediately and price it or by structuring a larger earnout to protect against the
into their offer. downside.

From a buyer's perspective, technology entrenchment Part 2 of this series will explore how real-world portfolio
is one of the strongest predictors of future retention. A transactions are structured and valued today—from
portfolio where 60 percent to 70 percent of merchants run-off and go-forward deals to aggregation premiums,
are running integrated POS systems is a fundamentally earnouts and institutional buyer expectations.
different asset than one where the same percentage are George Csahiouni is the managing principal of Tripoli Advisors, a pay-
processing on free-placed terminals—even if the current ments industry advisory and capital markets firm based in Scottsdale,
residual income is identical. The first portfolio has a built- Arizona. With 20 years of experience in the merchant acquiring industry
in retention moat. The second is one aggressive competitor
away from significant attrition. and involvement in over $1 billion in transactions and analysis, George
advises ISOs, fintech platforms and institutional investors on portfolio
For ISO owners, the takeaway is clear: selling a quality strategy, operational optimization and capital markets. For more infor-
technology product and ensuring merchants adopt it fully mation, visit tripoliadvisors.com. Contact George via LinkedIn at linke-
is not just a sales strategy; it is a portfolio strategy that din.com/in/george-csahiouni.

41