What is my Bank’s Merchant Book Worth?

With the recent collateralization questions surrounding the SVB bank failure, many banks are reviewing their liquidity. They are asking questions like “If the FDIC came in today could I validate everything on my balance sheets at its stated value”. The problem many banks are facing is that they posted a book value of when a security matures and not what it’s worth liquidated today. This leaves a gap between the current book value vs resale value. While your merchant services book can not fix this problem it can add a marketable value to help bridge any gap in the balance sheet.

Merchant services are a standard fee income line item on the bank’s books. It is a recurring monthly revenue stream. For most banks it hits the P&L around the same value as security deposit boxes or overdraft fees, it’s enough to make an impact but it’s not a core revenue for the bank.

What most banks don’t realize is that this recurring revenue can be commoditized. On the open market a merchant services book is worth about 36 times the average monthly recurring revenue (MRR) or 3 times the annual recurring revenue (ARR). Depending on the agreement with your processor and your involvement with the accounts this multiple can increase or decrease but this is a safe value. In addition, most third-party vendors are willing to write this multiple into their contracts so in the eyes of the regulators this can become a golden parachute and a liquidatable contract on your balance sheet.

What does this mean for your bank? If you receive $5,000 a month in revenue from your merchant provider you can book the merchant portfolio as a $180,000 liquidatable asset. While the bank is likely to not sell this asset as the revenue over the long term it is a better investment for the bank and it does help ward off some of the other balance sheet risks when being reviewed by a regulator and should be considered when negotiating a merger or acquisition. To solidify this resource be sure to write in a multiplier on your merchant processing contract.

For more information and any consulting on bank merchant contracts please reach out to us. MPI has completed reviews of contracts held by banks with other processors and residuals audits to determine bank merchant residual worth.