17           T R AN S AC T I O N WORLD • JULY 2002

Business                Practices

                          by Harold Montgomery

   Over the last few months, in talking with industry players,
I increasingly hear that it’s tough to keep salespeople. The typical
salesman – especially new ones - can’t seem to sell enough termi-
nals at the right price to make enough money given other job
opportunities they may have. In short, they can’t make as good a
living in our business as they can elsewhere. Depending on the
market, even experienced salespeople are having trouble making
their numbers work. And no wonder, for ISO’s, the current
trends at work in the industry are tough:

   Terminal sales are slowing
   The major terminal manufacturers are reporting slower sales
growth. This means the market is maturing – and fast. While
there are high hopes for new technologies which might invigorate
terminal sales, biometrics and smart cards are still far in the
future. Even new services like POS check truncation or gift/loyal-
ty don’t have a terminal sales associated with them that provides a
large enough profit margin to the ISO to compete with a full
credit card set-up.

  Terminal prices falling
  Slowing growth means price competition. Also, manufacturers
are creating alternative, cheaper distribution channels for termi-
nals – a merchant can now buy a terminal at Sam’s Wholesale
Club and have his processor download it for much less than the
cost an ISO demands for the same services. As a result, ISO mar-
gins on terminal sales are dropping.

  New merchant creation is off
  Events of September 11 and a generally weaker economy com-
bined to make the last year a weak one for new retail merchants.
New merchants are the staple of many ISO marketing strategies,
and their decline creates a serious problem. Existing merchants
become more important to replace lost volumes of new mer-
chants. But existing merchants are more discriminating buyers
and have a longer sales cycle than new merchants. That again
means smaller profit margins on each sale.
  For ISO’s whose business plan is based on terminal sale profits,
this situation is not promising. How do you combat this situation?
There are four basic approaches -

     n Increase the value of your offering – Provide more
         service than the competition or distinguish yourself in some
         other way. Avoid cutting price.
     n   Specialize – develop an expertise that has value to a market
         segment. You can specialize by product type (wireless, ATM’s,
         etc.) or vertical customer type (those with special needs,
         restaurants, time or service sensitive customers, etc.).
     n   Move to less price sensitive/underserved markets – Often,
                             TR A N SA C TIO N W O R L D • J U LY 2002   18

      rural markets are underserved. Sam’s Club isn’t everywhere
      (yet.) Rural customers often don’t have overnight delivery
      services and so terminal failures are a bigger issue for them.
  n   Exit the business - Nothing lasts forever, including the ISO
      opportunity. Depending on your market, your age, and
      other opportunities you may have, it might be time to con-
      sider your opportunities to liquidate. If you choose to step
      out of the business, there are two ways – sell your portfolio
      for cash or stock in another company.

   Most ISO’s these days have portfolios they built with major
super-ISO’s (NOVA, Retriever, IRN, On Line Data, etc.) or
directly with processors like FDC, NDC, NPC, etc. In most cases
these days, ISO’s don’t own the merchant and don’t take the
risk. In the good old days of merchant portfolio sales, prices
ranged up to 48x monthly gross margin (revenues minus inter-
change and assessments). That was when the buyer could move
the merchant processing relationship to his platform to achieve
meaningful economies of scale. Today, when the ISO does not
own the merchant, the buyer has to abide by the contract the
seller has with the super-ISO or processor – there are no
economies of scale in that situation. Prices are typically a lot
   The good news is that you can actually sell such a portfolio.
Many ISO’s think that their super-ISO or processor is the only
market for such portfolios, but that is not the case. Often the
super-ISO prefers not to buy the portfolio for a variety of rea-
sons, and will consent to a transfer to a new owner. The new
owner assumes the same responsibilities which the seller had
under the contract. My company has bought many portfolios in
just this way.
   There are two ways to get paid in a sale – cash or stock. Cash is
easy to think about – the portfolio goes to another owner, and
you get cash. This transaction is typically treated as ordinary
income for tax purposes but you should check with your tax
   Stock is more tricky. Is the stock publicly traded? If so, is there
a market for it – a strong float and plenty of buyers? Will you
have a “lock-up” provision that might prevent you from selling
for a period of time – up to two years? Stock transactions are also
more complex when it comes to taxes. They may create short
term tax liabilities without creating the cash you need to pay the
taxes. Get with a professional advisor to carefully consider tax
treatment of any sale transaction.
   Stock may have some advantages, however. Taking stock for
your portfolio will allow you to join in the longer term future of
the company and benefit from any growth they experience. You
may see a rising stock price and an expanding multiple of earn-
ings for the stock over time. It’s possible to make more money
through price appreciation than you did actually building the
portfolio. Caution: stocks also go down! Make sure you believe in
the leadership and the story of the team you are joining.
Confidence and trust in their leadership will be the most impor-
tant factors in making this decision.       n

Harold Montgomery is the CEO of Calpian, Inc. an ISO in
Dallas, Texas, providing merchant acquiting, check guaran-
tee and debit processing services. You can contact Harold at
800.589.1173 or p o r t f o l i o @ c a l p i a n . c o m

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