How to Increase the Value of Your Merchant Portfolio?

A “Merchant Portfolio,” also known as a bankcard portfolio, refers to a compilation of business accounts that accept credit or debit card payments. In this article, we will understand the ways to increase the value of your merchant portfolio.

Any business that receives payments through credit or debit cards, whether through online transactions or in-person card payments, is commonly referred to as a merchant by payment processors and payment ISOs (independent sales organizations acting as intermediaries between payment processors and merchants).

As a payment processor or ISO expands its operations, it refers to its collective merchant accounts that conduct transactions through their services as their Merchant Portfolio. For agents and other individuals involved in this industry, the monthly revenue generated from their Merchant Portfolio is often termed a “residual” or “merchant residual.” This residual income is derived from the ongoing processing activities of the merchants within their portfolio.

What Refers to a Healthy Merchant Portfolio?

A robust and healthy Merchant Portfolio boasts diversity in terms of the types of businesses it comprises. It should encompass a variety of industries and businesses that rely on software to streamline their daily operations and payment processes. This diversity may encompass brick-and-mortar retail establishments, restaurants, business-to-business enterprises, online or e-commerce stores, and businesses with a specialized market focus.

In addition to this diversity, a strong portfolio should also feature a segment of service-oriented businesses. This category might include computer repair services, home contractors, as well as healthcare professionals such as doctors, massage therapists, or counselors. The presence of such diverse businesses is of utmost importance for the overall health and resilience of a Merchant Portfolio.

Types of Portfolios

Active vs. Inactive Accounts in a Merchant Portfolio

A Merchant Portfolio can comprise both “active” and “inactive” accounts. Here’s what these terms mean:

• Active accounts are those that engage in consistent business transactions. These accounts regularly process payments, indicating ongoing commercial activity.
• Inactive accounts, on the other hand, are typically associated with seasonal businesses or businesses with periodic activity.
• Seasonal businesses are operational only during specific times of the year. For example, a Christmas tree lot or a golf course might be open only during particular seasons.
• Periodic businesses conduct transactions intermittently, only when specific occasions arise. An example could be an artist who accepts payments upon completing a commissioned artwork.

Merchant Residual Portfolio

The ownership of residual rights to each merchant account comes with contractual agreements that dictate compensation based on sales and service terms and conditions. The value of these rights is assessed by considering the collective 12-month average revenue from all accounts.

Service and Management of Merchant Portfolio

Effective service and management of each account play a crucial role in enhancing a portfolio’s value. The attrition rate, which measures the rate at which accounts are lost, is a key factor in valuation. A higher attrition rate typically results in a lower portfolio value.

Valuation Methodology

The valuation of a Merchant Portfolio hinges on historical performance and economic conditions during the analyzed period. Economic fluctuations can impact sales volumes and merchant attrition rates. A weakening economy may lead to decreased sales and more business closures, negatively affecting valuation.

Portfolio Valuations

Valuations involve an in-depth review of residual data to assess the fair market value of the portfolio. This data allows for the analysis of various criteria and trends, comparing them to industry averages and market conditions to determine portfolio values.

Easy Strategies to Increase the Value of Your Merchant Portfolio

For Retained Merchants

Here are some strategies to enhance the growth of retained merchants:

• Implement pricing strategies that make sense for your business. It can help you keep existing merchants and attract new ones.
• After a merchant starts using your services, offer them additional value-added services. It can help grow the earnings.
• Make pricing adjustments based on specific goals. It includes optimizing prices or identifying merchants that may be causing losses.
• Remember that setting the same prices for all merchants might not work well for everyone. It could hurt your efforts to retain merchants.
• Keep an eye on interchange rates. Managing these rates effectively can help your merchant growth.
• Stay updated with card brand regulations, and adjust your merchant pricing accordingly.

For Attrited Merchants

Here are some ways to make attrited merchants grow better:

• Create programs and teams focused on keeping merchants happy and loyal. Reach out to them regularly.
• Make careful choices about pricing to help your merchants stay. But be sure to focus on specific pricing changes to avoid pushing them away.
• Avoid increasing prices for everyone at once. This can upset your merchants.
• Give merchants extra services that can make them want to stay and use your services more. This can also help you earn more money.

Tips for Implementing Effective Targeting and Segmentation Strategies

Segmenting and targeting merchants is a vital process for any merchant acquirer looking to enhance their portfolio performance, refine pricing and service offerings, and cultivate customer loyalty and retention. Let’s see the steps of creating and executing successful merchant segmentation and targeting strategies:

Know Your Objectives

It’s essential to identify your objectives before getting into the process. When managing your portfolio, you should always have a clear understanding of your portfolio. You should have a clear understanding of the end goal of your portfolio. Whether you are looking to get diverse market share, boost profitability, minimize risk, or just keep customer satisfaction the top priority. Here are some objectives that will serve as your starting point when selecting segmentation criteria:

• Industry
• Company Size
• Geographical Location
• Transaction Volume
• Preferred Payment Methods
• Customer Behavior

Scrutanize the Data

After establishing your objectives and criteria, the next step involves gathering and scrutinizing your data. After crunching in the data, you can have a comprehensive understanding of your existing and potential merchants. You can analyze and understand diverse data sources like:

• Own Transaction Records
• Market Research
• Customer Feedback
• Data from Third-party Providers

You can also employ analytical methods, such as descriptive, predictive, and prescriptive analytics. This can help you gain valuable insights into your merchant portfolio’s growth prospects.

Segmentation

Set up the merchant segments by categorizing them based on shared characteristics or distinctions. There are several segmentation approaches you can use, including:

• A priori (predefined)
• Post hoc (data-driven)
• A hybrid combination of both

It’s crucial to account for factors such as segment size, profitability, growth potential, competitive landscape, and regulatory considerations. Segment the analysis that is meaningful, measurable, accessible, and actionable for your business. In doing so, you’ll be better equipped to tailor your strategies for your Merchant Portfolio.

Target the Right Segment

After proper segmenting of the portfolio’s strategic focus, pinpoint your target segments that align with your needs. This process can be approached using various strategies. It depends on your market dynamics and competitive strengths. Options include undifferentiated targeting (a broad approach), differentiated targeting (addressing multiple segments), concentrated targeting (narrow focus on a specific segment), or customized targeting according to your vision of your Merchant Portfolio.

While making these decisions, it’s important to consider how your chosen targeting strategy impacts your existing portfolio, including:

• Pricing
• Product Offerings
• Overlapping

Determine the Right Valuation

Companies interested in purchasing merchant residual portfolios are willing to pay generously for these revenue streams. Large portfolios with minimal merchant attrition rates can command a price of up to 40 times the average monthly residuals generated from active accounts. Even smaller portfolios with average monthly residuals of $2,000-$3,000 or less can yield payouts ranging from 6 to 15 times the monthly residuals.

To determine these payouts, several factors come into play:

• Portfolio Size Matters: A portfolio that generates $3,000 in monthly residuals from numerous accounts will likely receive a higher multiple compared to one where only a few large accounts contribute to half of the monthly residual income.

• Larger Residual Streams Equal Bigger Payouts: Portfolios producing monthly residual streams between $10,000 and $40,000 should typically fetch at least 15 times their value. For portfolios averaging over $40,000, the valuation may involve additional factors like ongoing sales, referral networks, and technology. In favorable scenarios, payouts as high as 40 times the average monthly residuals are possible.

Conclusion

Merchant attrition significantly impacts portfolio valuation. A portfolio that lost 25% or more of its merchant accounts in the previous 12 months will likely receive a lower payout multiple. Conversely, a portfolio with an attrition rate of less than 10% will command a higher multiple.

It’s also possible to enhance payouts by structuring a deal where you receive part of the payment upfront and the rest over the next 36 months. This approach can result in a residual payout at the upper end of the multiple range, provided that attrition remains low.