From The Analysts




by Barry Davis

As an acquirer or ISO, how do you measure performance? For many ISOs, performance management seems to be a matter of maximizing revenues in order to maximize the purchase price of the business. So how do you know how you're really doing if you are set on staying in the merchant business longer than the end of the year? This "health quiz" will help ISOs gauge themselves against the industry on their portfolio's overall health. Questions will focus on six areas: sales productivity, revenue generation, expense control, profitability, merchant mix, merchant attrition, and risk management policies. So grab a pencil and a calculator, and let's get started! This quiz should take less than 60 minutes.

Note: Most questions apply to the last 12 months of operations.

General Portfolio Characteristics
1. Gross Visa/MasterCard sales volume $ ______
2. Gross Visa/MasterCard transactions ______
3. Credit and returned item volume $ ______
4. Credit and returned item transactions ______
5. Net sales volume (subtract line 3 from line 1) $ ______
6. Net transaction volume
(subtract line 4 from line 2) $ ______
Sales Productivity
7. Number of new merchants signed ______
8. Number of new merchants approved ______
9. Number of new merchants that activated ______
10. Average number of sales reps employed at any one time during past 12 months ______
11. Sales productivity (divide line 9 by line 10) ______

Revenue Generation 12. Net discount fees collected (factor in credits
and returned items) $ ______
13. Application fees collected $ ______
14. Annual fees $ ______
15. Authorization fees $ ______
16. Transaction fees $ ______
17. Downgrade fees $ ______
18. Other card type fees $ ______
19. Equipment revenue $ ______
20. Residual revenue
(typically primary source for ISOs) $ ______
21. Other revenue $ ______
22. Total revenue (sum of line 12 through line 21) $ ______
23. Total Interchange paid $ ______
24. Total dues & assessments $ ______
25. Residuals paid to ISOs and agents $ ______
26. Total net revenue (subtract the sum of line 23
through line 25 from line 22) $ ______
27. Net spread margin (divide line 26 by line 5) ____%

Expenses
28. Sales and marketing expenses $ ______
29. Front-end authorization and capture expenses $ ______
30. Back-end clearing & settlement expenses $ ______
31. Back-office expenses (include salaries and
expenses related to credit & underwriting,
customer service, help desk, finance, accounting,
reporting, dispute resolution, deployment, etc.) $ ______
32. Overhead
Management salaries $ ______
Office lease $ ______
Administrative $ ______
Furniture lease $ ______
Equipment lease $ ______
Other $______
Total overhead expense $ ______
33. Chargeback losses and other losses $ _____
34. Loss rate (divide line 33 by line 5) ____%
35. Total expenses (sum of line 29 through line 33) $ ______
36. Expense per transaction (divide line 35 by line 6) $ ______

Profitability
37. Pretax operating income
(subtract line 35 from line 26) $ ______
38. Return on net revenue (divide line 37 by line 26) ____%

Merchant Attrition
39. Number of active merchants 12 months ago ______
40. New merchants added during last 12 months ______
41. Total core merchants (sum of lines 39 and 40) ______
42. Closed merchants during last 12 months ______
43. Merchant attrition rate (divide line 42 by line 41) ____%

Merchant Mix (check most appropriate answer)
44 Your top 5 merchants make up over 25%
of your total volume. ______
45. Your top 10 merchants make up over 25% of your total volume. ______
46. Your top 15 merchants make up over 25% of your total volume. ______
47. Your top 25 merchants make up over 25% of your total volume. ______
Risk Management 48. Do you hold liability for merchant losses? Y N
49. Total merchant collateral held $ ______
50. Chargeback volume for last 6 months $ ______
51. Reserve ratio (divide line 49 by line 50) ____%
52. Do you utilize fraud monitoring? Y N
53. Do you hold funds on suspicious activity? Y N
54. Do you net settle? Y N
55. Do you have the right of offset? Y N

Scoring
Sales Productivity (line 11):
If sales reps are generating over 15 new merchants per month or greater, then give your business 15 points.
11 to 14 active merchants per month 10 pts.
8 to 10 active merchants per month 8 pts.
5 to 7 active merchants per month 5 pts.
Less than 5 active merchants per month 0 pts.
Revenue Generation: Net Spread Margin (line 27)
Greater than 1.00% (100 basis points) 20 pts.
Between 0.80% and 1.00% (80-100 bps) 17 pts.
Between 0.60% and 0.80% (60-80 bps) 14 pts.
Between 0.40% and 0.60% (40-60 bps) 12 pts.
Between 0.30% and 0.40% (30-40 bps) 10 pts.
Less than 0.30% (30 bps) 5 pts.
Expenses: Loss Rate (line 34)
Less than 0.01% 5 pts.
Between 0.01% and 0.02% 4 pts.
Between 0.02% and 0.03% 2 pts.
Greater than 0.03% 0 pts.
Expenses: Total Expense per Transaction (line 36)
Less than $0.20 per transaction 20 pts.
Between $0.20 and $0.30 15 pts.
Between $0.30 and $0.40 10 pts.
Between $0.40 and $0.50 5 pts.
Greater than $0.50 0 pts.

Profitability Return on Net Revenue (line 38)
Greater than 40% 20 pts.
Between 30% and 40% 15 pts.
Between 20% and 30% 12 pts.
Between 15% and 20% 10 pts.
Between 10% and 15% 5 pts.
Less than 10% (30 bps) 0 pts.
Merchant Attrition (line 43)
Less than 5% 5 pts.
Between 5% and 10% 10 pts.
Between 10% and 15% 15 pts.
Between 15% and 20% 10 pts.
Between 20% and 25% 5 pts.
Greater than 25% 0 pts.
Merchant Mix
Your top 5 merchants make up over 10%
of your total volume. 0 pts.
Your top 10 merchants make up over 10%
of your total volume. 2 pts.
Your top 15 merchants make up over 10%
of your total volume. 3 pts.
Your top 25 merchants make up over 10%
of your total volume. 5 pts.
Risk Management: Reserve ratio (line 51)
Greater than 100% 5 pts.
80% to 100% 4 pts.
60% to 80% 3 pts.
40% to 60% 2 pts
20% to 40% 1 pt.
Less than 20% 0 pts.

If "no" to liability (line 48) 2 pts.
If "yes" to fraud monitoring (line 52) 2 pts.
If "yes" to holding funds (line 53) 2 pts.
If "yes" to net settlement (line 54) 1 pt.
If "yes" to right of offset (line 55) 1 pt.

Sum of Total Points _______

Grading Your Merchant Business
90 points or greater: You can feel confident that you are doing an excellent job managing your portfolio and its associated risk. 80 to 89 points: There is probably one primary area that you can improve upon and be an "A" player. 70 to 79 points: There are probably two primary areas that need attention, but overall, the business is performing well. 60 to 69 points: You probably have a few problem areas. Prioritize and focus on one area at a time. There is no such thing as a quick fix. Less than 60 points: You probably need to evaluate how competitive you are in the merchant business and whether you can sustain your business for the long term.


Barry Davis is a Senior Consultant with First Annapolis Consulting and has focused on the merchant acquiring industry for over four years. First Annapolis provides business and management consulting along with portfolio/business sale advisory services. Barry can be reached at 410.855.8500 or via e-mail at [email protected].