Cynergy Is an Example of Economic Stresses on ISOs, Experts Say

Tuesday's news that Cynergy Data was filing for bankruptcy and planning to sell its assets serves as perhaps an extreme example of the fierce toll the recession is taking on independent sales organizations, observers say. Indeed, some say the ravages of reduced payment volumes, failed merchants, and squeezed margins could well shutter more ISOs, or send more into bankruptcy protection, before the year is out. “I think we're going to see more going down,” says Richard W. Noble, chief executive of BCC Merchant Solutions, a North Kansas City, Mo.-based ISO. Fourteen-year-old Cynergy Data blamed a weak economy and an “unsustainable debt load ” for its decision to seek Chapter 11 protection and sell its assets to The ComVest Group, a private-equity firm with controlling interests in other ISOs, including Pipeline Data Inc., Cardaccept Inc., AirCharge.com, SecurePay.com, and Northern Merchant Services Inc. (Digital Transactions News, Sept. 1). ComVest's managing partner is Pete Kight, the founder and long-time chief executive of CheckFree Corp., now part of Fiserv Inc. But while these may have been the specific causes of Cynergy's decision, Noble and other observers say other factors are bedeviling ISOs as the economy struggles to regain its footing in what has turned out to be the deepest recession since the early 1970s. Many ISOs that dished out generous bonuses to sales agents in return for booking new merchants are now finding it hard to sustain those payouts, says David Fish, senior analyst in the credit advisory service of Mercator Advisory Group, Maynard, Mass., and a former executive with North American Bancard and Global Payments Inc. The practice spread while times were flush and the upfront payments could be more quickly recovered from ever-rising payment volumes. “We're seeing ISOs that are essentially underwriting factories,” says Fish. But the downdraft in consumer card usage that has followed increasing layoffs and home foreclosures has made it the return on investment timeline stretch out months beyond what ISO managers originally planned, Fish says, crimping cash flow. While debit cards are faring relatively well, credit card usage shows no signs of recovery yet. Merchants are seeing first-ever declines in same-store sales on Visa and MasterCard (Digital Transactions News, July 30). And combined second-quarter U.S. credit card volume dropped 12.2% for Visa Inc. and MasterCard Inc., from $355 billion to $312 billion. A related problem is that a number ISOs have tended to increase the residuals they pay sales agents on merchant payment flows, a move often used to retain high-performing agents or to lure them away from competitors. Some observers cite residual streams ranging from 70% to as high as 80%. Again, experts say, this practice while defensible in a booming economy has come back to haunt many ISO balance sheets as volumes plummet. “There's not enough left in the house to support it,” says Noble, after such payouts. “The only way you can sustain that is to add volume. When you get the reduction in volume we've had the last few years, your bottom line erodes very quickly.” Noble himself has had to take major steps to shore up his business, including cutting his staff and moving into less expensive office space. “We took a 20% reduction in square footage and got a 50% reduction in [rent] cost,” he notes. But cost-cutting only goes so far. Noble and other ISO executives are under steady pressure to maintain levels of service to clients and to invest in regulatory requirements like compliance with the Payment Card Industry data-security standard. Many ISOs have started levying extra fees for PCI. But with merchants becoming more demanding as the economic stress builds, ISOs find themselves in a bind, since they typically can't sustain fees for extra service. “Its commodity pricing at one end and concierge service at the other,” says Noble. The result will be more hard times ahead, observers say. “It's a struggle for all of us,” says Noble. “There are a lot of ISOs hurting. Meanwhile, it may be hard to predict the next one to follow Cynergy Data's path, but many ISOs could be close. “There are a lot of ISOs in a similar situation, if not as immediately dire,” says Fish.