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February 10, 2021TSG Press

Beneath the Surface: The Ebbs and Flows of the Merchant Portfolio Flywheel

By Josh Istas, AIM Director at TSG

An Acquiring Merchant Portfolio, like the surface of the sea, may seem calm and steady at times, but there are many forces and undercurrents at play beneath the surface. For example, revenue rates may increase, decrease or maintain year-over-year, just like the ebbs and flows of open water, but what is driving these changes?

Even when revenue rates are flat year-over-year (YOY), there are still churning undercurrents that, without a deeper dive, are not superficially apparent. The AIM team at TSG has developed the Merchant Portfolio Flywheel concept to illustrate the mechanics and movement influencing changes in portfolio profitability.

Every unique merchant within a merchant acquiring portfolio will go through three phases of the merchant lifecycle: New, Retained, and Attrited. 

New Merchants (The Growth Engine)

  • The impact of New Merchants added to a portfolio is influenced by effective sales strategies, offerings, and overall cost of acceptance (or price)
  • Typically, New Merchants are added to a portfolio at favorable, competitive rates
  • Lower, favorable rates from the New Merchant population represent a negative force adversely impacting surface revenue rates

Retained Merchants (The Base Portfolio)

  • Retained Merchants are typically repriced during rate reviews in either the spring and/or fall
  • Rate reviews may increase or decrease a merchant’s cost of acceptance but, on aggregate, merchant net revenue rates increase 8.6% YoY. 
  • Pricing actions and rate reviews have a positive impact on surface revenue rates
  • Rate reviews do not apply to all merchants, for example, under Cost Plus or Interchange Plus pricing models or for term-locked merchant pricing. 

Attrited Merchants (Portfolio Losses)

  • Attrited Merchants typically exit a portfolio, due to churn or going out of business, at a higher rate due to repricing actions over a merchant’s life within a portfolio
  • For example, Attrited Merchant net revenue rates are 50% higher than newly boarded merchant rates
  • The differential represents the significance of merchant rate changes throughout the merchant lifecycle compared to competitive pricing of New Merchants added to a portfolio
  • The loss of merchants with higher rates, like New Merchants, is also a negative force adversely impacting surface revenue rates

In order to maintain revenue rates, a unique strategy should be considered for each phase of a merchant lifecycle.

  • Go-to-Market and Sales Strategy (New Merchants)
    • Are you competing on price alone?
    • Are you leaving money on the table?
    • Do you account for regional market differences?
    • What value-added services, software, or hardware differentiate an offering?
    • Is there a strategy to achieve target margins, merchant count, or volume growth?
  • Re-Pricing Strategy (Retained Merchants)
    • What is the strategy for maintaining or increasing margins on a base portfolio?
    • Are rate reviews strategic or blanketed across the portfolio?
    • Do pricing actions impact core processing alone or are account-related fees considered?
    • What does the merchant communication process look like?
  • Retention Strategy (Attrited Merchants)
    • Are there analytics in place to review merchant performance and identify signals for merchants at risk of attrition?
    • Is there a merchant outreach program? 
    • Is the merchant outreach strategy high touch or low touch?
    • What is the managed account strategy?

Undercurrents within a portfolio are not always controllable, but strategic initiatives focusing on the phases of a merchant portfolio lifecycle can be effective in maintaining revenue rates YOY.  The Merchant Portfolio Flywheel, like the currents of the sea, is perpetual and the nature of acquiring portfolio management.

Through the use of AIM, TSG can help you understand and manage the undercurrents within your portfolio. Learn more and set up a demo with the team today!

Motion Illustration by Freepik Storyset

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