Merchant account portfolios enable agents and Independent Sales Organizations (ISOs) to generate considerable residual income. As this happens, merchants can prosper by having multiple ways to accept customer payments.
In time, you may have a question that pops up in the minds of many in the merchant services industry, “How much is my portfolio worth?” Before answering this critical question, you must know the key metrics in effective portfolio valuation.
Valuing a portfolio can be complex and involve many factors. We’ll break down these vital metrics so buyers and portfolio owners can understand any portfolio’s worth deeply. Whether you’re optimizing a portfolio for the highest possible returns, the lowest risk, or anything else, knowing the metrics behind a valuation is critical.
Understanding key metrics in effective portfolio valuation is helpful now and imperative if you’re considering selling some or all of your portfolio. A clear understanding of these metrics lets portfolio owners make strategic adjustments to maximize profitability.
Continue reading to learn how total returns, volatility, operational efficiency metrics, and other metrics indicate how well your portfolio is doing.
Execution Metrics
Discussing key metrics in effective merchant portfolio valuation is impossible without mentioning execution-related metrics. This information is crucial to determine the day-to-day performance of your portfolio.
Chargeback Trends
Almost nothing has a greater negative impact on merchant services than chargebacks. This execution metric rises as customers dispute charges from a business, reversing a payment in the consumer’s favor.
If an evaluator sees high chargeback ratios within your portfolio, it could lessen its overall value. Typically, many chargebacks signal significant issues, including fraud risks or many unhappy customers.
Thankfully, payment processors and ISOs can work to lower chargeback rates. A few ways to accomplish this task include focusing on proper risk management and improved fraud detection. Lowering chargeback ratios can make a portfolio much more attractive to potential investors.
Implementing chargeback mitigation strategies, such as improved fraud detection tools, better customer service, and clear billing, is a great way to minimize chargebacks and keep your portfolio valuable.
Transaction Volumes
Another key metric in effective portfolio valuation involves transaction volumes. Ideally, potential buyers want to see portfolios with significant transaction volumes and upward trends. These characteristics help show that a portfolio is sustainable and growing.
Conversely, declining transaction totals can indicate that merchants are unsatisfied with your business. They may also signal that competitors are popping up and potentially winning over your customers.
Reviewing monthly and yearly transaction data can help you clearly understand this execution metric. This activity should provide a thorough understanding of your portfolio’s stability and profitability.
Keeping a close eye on transaction volumes provides insights into market fluctuations, seasonal trends, and other factors affecting purchases. Ideally, you’re looking for long-term growth and not inconsistent patterns. Consistently growing transaction volumes show strong merchant engagement.
Decline and Approval Rates
Buyers also look at a key metric in effective portfolio valuation that involves approved and declined transactions. Seeing many declined transactions can signify a significant merchant-related issue, including outdated payment processing equipment, fraud, or poor merchant practices. Any of these previously mentioned situations can hurt your portfolio’s residual income.
Portfolios with high approval rates show that merchants are performing well regarding their sales and how they process payments. Merchants with streamlined processing systems tend to have fewer issues with declined payments. Portfolios with low decline rates indicate a well-managed merchant network.
Operational Efficiency Metrics
Cost-effectiveness and scalability are two critical metrics that measure the operational efficiency aspect of portfolio management. The following metrics help potential buyers understand how much it will cost to maintain your portfolio.
Retention-Related Expenses
Retention is a key metric in an effective portfolio valuation for nearly any company—it measures how well a business creates and keeps loyal customers. It can also measure how long employees stay with a company. In this instance, it measures the ROI of your retention expenses.
If your portfolio’s metrics are impressive but come with expensive retention costs, this account collection might not be worth it for a buyer. Some of these costs would include free terminal paper, Free terminals and high maintenance merchants. On the other hand, a slightly underperforming portfolio may win over a buyer if they know it won’t require spending a lot to retain merchants.
For some, retention-related metrics are vital when determining whether a portfolio’s costs outweigh its benefits. Buyers want to see a portfolio that can keep retention expenses low while retaining as many merchants as possible.
Support Costs
Many aspects go into managing merchant portfolios successfully. They can include handling chargebacks, onboarding merchants, and providing customer service. Otherwise known as support costs, streamlined operations typically help keep support-related expenses low.
It’s always a plus if the costs of this operational efficiency metric stay as low as possible, meaning investors can enjoy high-profit margins. Thankfully, leveraging automation and other efficiency initiatives can reduce the need for manual labor while keeping customer satisfaction levels high.
Total Return and Other Key Financial Metrics
The cornerstone of key metrics in effective portfolio valuation involves finances. These metrics help buyers understand if they’re getting their money’s worth. Here’s how these metrics illuminate a portfolio’s growth potential and sustainability.
Total Return
A key metric in effective merchant portfolio valuation is its total return. It includes looking at a portfolio’s residuals, transaction fees, and similar aspects of its overall revenue stream. Because investors prioritize high returns, a merchant portfolio that brings in a lot of money will almost always entice them. If this financial metric points to low or decreasing overall returns, it could steer buyers away.
Annualized Return
This valuation aspect is similar to total returns. Instead, it focuses on how much profit a portfolio earns in one year. You may also hear it referred to as a Compound Annual Growth Rate (CAGR). It’s a key metric in effective merchant portfolio valuation because it compares investment holding periods equally. Looking at annualized returns is also a great way to measure year-over-year performance.
Merchant Attrition Rate
Attrition is a financial metric focused on when merchants leave your portfolio. Understandably, buyers prefer this metric to be as low as possible. Low rates indicate that agents and ISOs offer competitive rates and stellar merchant support. However, high attrition rates suggest revenue loss and difficulty managing merchant accounts.
The Effect of Volatility on Your Portfolio
It’s also vital for a buyer to measure how volatile a portfolio is. It measures fluctuations in a portfolio’s transaction volumes and merchant activity. A portfolio with high volatility can indicate a risky investment, something most want to avoid. However, less risk-averse investors might feel that a volatile portfolio is worth taking on.
As day-to-day operations continue, losing sight of the key metrics in effective portfolio valuation is easy. Thankfully, obtaining a portfolio valuation can solve this problem. What’s better than a professional portfolio valuation? Getting it for free.
Contact Velocity Funding to receive a 100% free portfolio valuation from our experts. We’ll help you understand how total returns, volatility, and other metrics impact your portfolio’s worth.
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Dean Caso is a Managing Partner at Velocity Funding, which he founded with this company’s other Managing Partner, David Caso, in 2006. Caso graduated in 1983 from Babson College with a Bachelor’s degree in Finance and Investments. With over 35 years of experience, Caso has acquired over 300 credit card processing portfolios. He has a superior eye for opportunity and an unwavering commitment to excellence. Caso’s leadership instills confidence, fosters innovation, and inspires those under his professional command. His decades of industry experience and proven track record of success continue to drive Velocity Funding’s growth and industry-leading presence.