Key Indicators Local Agents Can Use to Value Their Merchant Services Portfolios

A merchant services portfolio is a valuable asset, but one that can be challenging to put a precise value on. Many factors determine the value, and these can change quickly in response to trends and economic conditions. In this article, we’ll look at some of the most reliable indicators to come up with an accurate valuation of a portfolio.

The Importance of Knowing a Portfolio’s Value

It’s crucial to have an accurate idea of your portfolio’s worth for several reasons.

• Ensuring that the portfolio is profitable.
• Managing risk. If a portfolio contains high-risk merchants, you should implement risk mitigation techniques.
• You can get a fair price for the portfolio if you sell it. If you want to learn more about this option, research how to sell credit card processing account portfolios.

Signs of a Healthy Portfolio

Here are some of the primary indications that a portfolio is doing well and likely to perform well in the future.

• It performs as well as or better than comparable portfolios.
• It has a low rate of attrition.
• The year-over-year performance is improving. During difficult conditions, it may struggle, but it still performs comparatively well.
• The accounts are diversified.
• A majority of accounts are in industries considered low risk and low churn.

Metrics to Assess a Portfolio’s Value

Several key metrics need to be analyzed regularly to evaluate a portfolio. To track these factors, you need to analyze merchant statements periodically, which contain thorough information about the client’s transactions. The following are the most critical indicators to look at.

Transaction Volume

This is the total number of transactions a merchant processes over a specific period. Transaction volume varies significantly depending on the industry and the types of products or services being sold.

Revenue

The first metric to look at is monthly recurring revenue (MRR). Aside from the total revenue, a strong portfolio shows consistency and growth over time.

Attrition Rate

Attrition is an unwanted but unavoidable aspect of business. In the payments industry, attrition rates are higher than average, with about 20% of merchants switching providers every year. You have to measure two types of attrition. Account attrition refers to the number of accounts lost over a specific period. Revenue attrition is concerned with the actual revenue lost.

Diversification

Since it’s hard to predict consumer behavior and economic changes, the strongest portfolios have a variety of accounts. Having merchants in different industries means that a downturn in a particular sector won’t have an extreme effect on the whole portfolio. It’s also healthy to have businesses using various business models, such as e-commerce and brick-and-mortar stores.

Risk Factors

Merchants may be considered high risk for several reasons.

• The industry tends to have high chargeback rates.
• Businesses are subject to strict regulation.
• High transaction volumes or irregular sales patterns.
• The business has a history of financial instability or high chargebacks.

High-risk industries include subscription services, online gambling, adult entertainment, cannabis dispensaries, and e-commerce merchants selling items with high chargeback rates.

Trends Affecting the Economy and Industries

Many factors affect a portfolio, some outside the control of individual business owners. Examples include:

• New or proposed regulations that impact an industry.
• Technological innovations. For example, retail stores can suffer if more customers are buying products online. AI and automation tools can reduce the demand for certain products and services.
• The general condition of the economy. A recession or high inflation can mean people are not spending as freely.

Guidelines to Optimize a Portfolio

When you have an accurate idea of a portfolio’s value, you can better take steps to improve it.

Organize and Segment the Portfolio

Rather than grouping all accounts, it’s helpful to segment the portfolio into categories. Segmentation can be based on criteria such as transaction volume, risk factors, and industry. Grouping merchants helps you provide more customized service, identify potential risks, and better manage the portfolio going forward.

Implement Risk Mitigation Strategies

• Monitor merchants consistently to assess risk factors.
• Review transaction patterns to identify any drastic changes or irregularities.
• Use advanced fraud detection tools.
• Adjust fee structures for high-risk merchants.
• Maintain a healthy portfolio balance that includes stable and low-risk clients.

Be Adaptable

The economy, the payments industry, and individual merchants in a portfolio are in constant flux. It’s therefore essential to constantly adapt to current conditions. When possible, you also want to be proactive and anticipate likely upcoming changes. To do this, you need to stay up to date with industry trends, regulatory changes, and consumer behavior.

Get a Professional Valuation

Because merchant services portfolios can be complex and affected by so many factors, it’s not always a simple matter to estimate their value. It’s also time-consuming to gather all the essential metrics. A company that specializes in valuing portfolios can often provide a more accurate assessment than you could get on your own.

Stay Informed Regarding Your Portfolio’s Value

Whether you want to optimize your portfolio for the long term or you’re planning on selling it, you need to have a clear idea of its value. To get an accurate estimate, you need to analyze current metrics and look at factors such as growth over time, competition, attrition rates, and industry trends.