Choosing a Win

   The Art of
an ISO 



by Charles Marc Abbey       

   FOR AN ISO, MUCH OF YOUR PROFESSIONAL HAPPINESS OR MISERY will flow from your selection of a sponsor. Too many ISOs focus primarily on the buy-rate in making this decision, a decision which is actually multi-dimensional and which extends beyond the financial arrangements.
   First, buy rate is clearly important to your success due to the biting price competition present in the industry. However, buy rates are relatively homogeneous. In recent First Annapolis research examining nearly 30 ISO sponsors, over 70% of the sponsors had the same storefront retail buy rate - 149 basis points - though there was much greater variation in mail-order/telephone-order (MO/TO) buy rates. However, buy rates are only part of the financial picture and the second element to understand is the rest of the pricing structure and what if anything you share in. Statement fees, chargeback fees, annual fees - it is the sharing arrangements on these elements that differ so significantly between sponsors.
   However, as with so much in business, the difference between a good deal and a bad deal are all the non-financial elements of the relationship. You may have the best financial deal in the world but if the relationships prevents you from selling effectively, your financial deal will profit you little.


   Virtually nothing has more of a dampening impact on a sales organization than an inappropriate credit policy or process. Is the sponsor prepared to take on the types of merchants you will be able to deliver? Have you had a meeting of the minds with the sponsor on the underwriting criteria and do you have confidence the sponsor will apply the underwriting standards consistently?

Turn-Around Time:

   The sales environment in the business today requires a certain immediacy in decision making and operational set up. Many sponsors advertise 24-hour turnaround time, but there are nuances from sponsor to sponsor. What time does the acquirer require your applications in order to get the 24-hour turn? How complicated is the sponsor's paperwork, and how likely will your sales force be able to deliver fully completed applications consistently (the standard usually applies from the point at which the application is fully complete)? On what percentage of the applications does the acquirer not make its 24-hour standard and how long does it take to complete processing these applications?


   Conversions, mergers and acquisitions, and bank mergers - unfortunately, the consolidation of our industry has lead to great disruption to ISOs. What is your sponsor's fundamental competitive position? Also, ISOs have often targeted community banks who are not knowledgeable about the business but who are willing to customize their relationship with the ISO. This strategy has become more unstable as both banking regulators and the card associations have turned up the heat on sponsors who enter into ISO relationships without knowing what they are doing.

Residual Track Record:

   Non-payment of residuals is unfortunately a chronic problem in this business, and sponsors are not all the same regarding their policies and their reliability. Know who you are doing business with.


   Many ISOs have generated a great deal of value by developing portfolios that they could sell subsequently to other players. Your right to do so is a function of the contract you have with your sponsor, and this item is always a contentious issue. It is not only important to strike the right deal, it is important to document the deal clearly in an enforceable contract.
   A sponsorship relationship is a strategic level issue for an ISO; without a sponsor, you are out of business, and therefore, you should probably not have just one sponsor. On the other hand, striking an attractive deal, financial and non-financial, is really a matter of leverage over the sponsor, and generally, you have leverage when you represent a material proportion of the sponsor's monthly application flow. Finally, though most business in the ISO market is conducted informally, we highly recommend a well conceived and formalized contract.

Marc Abbey is a Partner at First Annapolis, a Baltimore-based consulting and mergers and acquisitions firm. Mr. Abbey is responsible for the firm's acquiring and commercial card practice areas.