As promised in my last article, the Merchant Cash Advance Year In Review, here are some predicitions for 2008.
1) Underwriting will tighten up / approval rates will go down - Many merchant cash advance providers have seen their share of bad debt this year. For a merchant funding company, it's no secret that no matter how much money you fund each month it's irrelevant if your bad debt eliminates all your profits (or even worse puts a merchant funding company into a loss). Too many companies tried to capture marketshare / attract new agents by funding deals whose industry doesn't work for this product, gave a merchant too much money then they should qualify for and were naive to identify merchant fraud. In 2008 you will see for the first time industries that NO merchant cash advance funding company will touch rather than the select few who were willing to take the risk in 2007 on high risk industries and they suffered the consequences.
2) Sales Agent Commissions will stabilize and/or decrease - 2007 was a bidding war between merchant cash advance companies to attract new sales agents / ISOs to resell their product. Many cash advance companies were new to the industry and haven't had the experience yet to understand the full profitability of the business. After factoring in the bad debt associated with the product and the quality of deals submitted by certain agents / ISOs, many merchant cash advance companies have come to the conclusion they can't make money by paying the ISO commissions they were paying. Many have already started to lower commissions or changed the pricing to the merchant to offset the higher commission. Some merchant cash advance providers have even terminated relationships with various agents / ISOs because they couldn't make money on the relationship. All the above factors I believe will lead to stablizied / lower commissions in 2008.
3) Self Regulation - The industry has grown to large and has too many providers to not have best practices / industry standards in place. In 2008, I believe you will see a group of the key merchant cash industry players come together to announce a set of best practices for not only the merchant, but practices to protect the merchant cash advance providers as well. In my opinion, the amount of fraud committed against the merchant cash advance providers by unscrupulous merchants and sales agents far exceeds the amount of unethicial practices that may have taken place by certain sales agents to merchants (no different then the problem that has existed for years of sales agents taking advantage of merchants when selling credit card processing services).
4) Mergers & Acquisitions - In 2008 I believe we will see the first major merger and/or aquisiton in the merchant cash advance industry. It will most likely come in the following form: 1) Merchant cash advance providers who run out of money will most likely be swallowed up by another merchant funding company. 2) You will see larger financial institutions looking to enter the merchant cash advance space. I believe you will see an outright acquisition of a merchant cash advance provider or a strategic investment in one by a larger player. 3) Two mid-size merchant cash advance providers merging together to become a larger player in the space.
All in all, I think 2008 will be a very positive year for the merchant cash advance industry. Demand for the product will continue to grow, especially with the recent credit crunch. Everything I mentioned above in some cases may be short term hiccups (e.g., harder for agents to get deals approved), but in the long term it will be more beneficial for the sales agent / ISO and the merchant cash advance industry to ensure this is a viable, long term career for all.
I wish everyone a happy, healthy and prosperous 2008.
-David
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10 comments:
This is a good means of communication for everyone in the Industry! Great job David
You are absolutely right. I work at a mega-ISO and we have already seen the beginnings of all your predictions. One funder who we did 3mill a month with dropped us becauseof commission disputes with management. Another funder who funds another 3mill a month reworked pricing to continue paying us outrageous commissions and a third large funder basically lost funding from their lending source and had to seriously curtail their lending.
David,
Your first and second prediction are right on! But they are no longer predictions it's already happening! It was obvious that some of this had to happen last year, it was becoming too "crazy". This is one of these things we just had to sit back and watch! If you can wait it out you will be better off in the end!
Your third point about self regulation is something that I support 100%. But it will only work if everybody can be mature enough, put their differences aside for the better of the industry and work together on the same goals. And everybody would be all the large players, in order for an association to be taken seriously it needs volume, you only get that from having the large players on-board. It also adds to your M&A prediction, the large financial industries will not be interested in acquiring some small company, they will acquire the better one. Once that happens the "association" would also benefit from the acquisition. Identifying the list is simple enough, establishing the goals is simple enough...best practices, certification programs etc... the hard part is the implementation, it will take time resources and money. There are some white papers out there already on best practices. I think we need to go for it and get this done!
Prediction #4 mergers and acquisitions.
Yes, it will happen for sure. . . This is scary at many different levels:
If in fact a large financial institution comes in they will not be interested in the small company. . . The cost of funds is going up everyday, a large institution will get better rate, small companies in the space will be out of business in no time.
2 small companies getting together to make a bigger one is not an issue! it will make the rest of the us having to deal with one less competitor! The deals are getting "shopped" around anyway. most likely the 2 companies will have overlapping sales channel. So you can't take a $100M company and another $100M company and think you now have a $200M company! it doesn't work that way!
But I agree it will happen in 2008.
MerchantCashAdvance@live.com
How do you know these moves towards consolidation haven't already started?
I never said they didn't start already... Actually I know of one that will be a surprise! I don't think that there is a lot of people capable of making a successful consolidation. When merging or consolidating you need to evaluate: the management staff, the assets, the infrastructure, the value proposition. All I am saying is yes, it's happening, I doubt consolidation will matter to the industry. Large financial institution coming into the industry is a whole different story!
too much paranoia. keep selling it and keep looking for infrastucture of companies you decide to work for. its not about who pays the highest commission anymore- much more to it than that
the problem with the industry is who the resellers are. any high school drop out can sell it and all the snakes in the grass are lining up to take advantage of merchants and mcas. going to a model of w-2 vs 1099 may not be a bad course for several mca's. if brokers remain a concentration of resellers, a certification training should be implemented prior to being allowed to selling the product.
I think we should push forward with a certification program. If anybody would like to share some thoughts on what would make sense to include in the guidelines for a certification program I would be happy to give it a shot and write something and maybe share it over this blog with David's help. Anybody interested email me: merchantcashadvance@live.com
Once again...how do you know this hasn't already started within some ISO's? If not for anything else than to declrease liability insurance
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