Confluence of Trends Creating a “Golden Age” for Merchant Portfolios?

The allure of recurring revenue combined with low interest rates and investors prospecting for new assets are contributing to a potentially prosperous time for sellers of merchant portfolios. That’s the assessment from a presentation Tuesday at the Southeast Acquirers Association annual conference in New Orleans.

Also, the Electronic Transactions Association shared survey results that point to growth in payment-card acceptance.

Merchant portfolio sales are important because they can be a way to generate capital or provide an exit plan for some in the independent sales organization and acquiring industry.

Typically, merchant portfolios are valued based on a multiple of the net monthly processing revenue, according to MerchantPortfolios.com. Today, those multiples may range from 18-to-24 times revenue for a portfolio of more than $15,000 a month to $60,000 a month, says Lane Gordon, MerchantPortfolios.com managing director. A larger portfolio might fetch 24-to-28 times, he adds, with a cautionary note that many variables can affect the valuations.

For example, a portfolio with an average attrition rate of less than 15% that derives no more than 40% of its total revenue from the top 5% of merchants might yield a higher valuation than one not meeting those criteria, Gordon says.

The type of merchant also is critical, he says. “We are seeing particularly high valuations of specialty portfolios,” Gordon says, such as charitable giving.

It’s not just the merchants themselves that can have an impact of a portfolio’s value, says John Yarmy, senior vice president of ISO sales at processor Vantiv Corp. Factors like attrition, longevity of the merchant, and other services, such as cash advances and point-of-sale system use, can have a role. “All of those elements add value to your [portfolio] and will bring your residual higher,” Yarmy says.

Portfolio valuations are doing well because the payments business is growing and merchants that previously didn’t accept payment cards now do so, Gordon says. “The good news is innovators continue to find new verticals with little to no card penetration,” he says. Currently, rent payments, charitable giving, and mandated payments, like alimony, are opening up, he says. Though it may be difficult to tell if portfolio valuations are in a “golden age,” they are in “one of the most recent red-hot times,” Gordon says.

Also at SEAA, Jason Oxman, ETA chief executive, says that a recent ETA-Goldman Sachs survey of 64 ISOs found that 64% of them expect merchants’ payments volume to grow in 2015, compared with 40% who said that in 2014.

Oxman also says that merchant investment in POS systems—including integrated POS software and mobile POS services—jumped from 43% in 2014 to 61% in 2015.

And with the liability shift for EMV chip card transactions less than six months off, most merchants will not be prepared for the change. Beginning Oct. 1, the payments entity least prepared for EMV transactions assumes the liability for counterfeit card transactions. Oxman says only 45% of merchants will be EMV-enabled by the end of the year, presenting a unique opportunity to ISOs and acquirers.

In a separate ETA survey, consumers ranked payment card security, at 45%, at the top of what they want to see from merchants, Oxman says. Real-time rewards, at 14%, were the second most sought-after request.