How Smaller ISOs Can Thrive

The big may get bigger, but there’s plenty of room for smaller ISOs and payments companies to thrive and capitalize.

With megaprocessors, fintechs, payfacs, and integrated payments providers abundant in the payments world, smaller independent sales organizations and software sellers may feel some pressure. But the competition does not automatically mean dire straits for them. A nimbleness in customer service, products, and sales can contribute to survival strategies for smaller ISOs.

And more than a few smaller ISOs are doing more than just surviving. They’re competing and growing, just as their larger counterparts are. How they do that, however, has some unique characteristics and opportunities.

“Flexibility is the key,” says Jeff Fortney, senior associate at The Strawhecker Group, an Omaha, Neb.-based advisory firm. Fortney was an executive at ISOs TouchSuite and Clearent prior to joining TSG. “Flexibility in target merchants, flexibility where marketing funds are invested (if at all), and the ability to pivot when an opportunity presents itself.”

Others echo Fortney. “You have to be willing to change with the times,” says Juan Ortiz, partner at Juan Ortiz Inspires and consulting partner at Field Guide Enterprises LLC, an acquiring consultancy.

In 2019, the upper end of the payment-services continuum stretched to an unprecedented size when six already large payments companies merged in three separate deals. The three surviving companies—Fiserv Inv., FIS Inc., and Global Payments Inc.—had combined total revenue, which included more than solely payments revenue, of $41.24 billion in 2022, up 18.4% from $34.82 billion for 2020. (In February, FIS announced its intention to spin off the big processor Worldpay, effectively undoing its 2019 merger).

To get a better idea of the scale just among acquiring companies, the total processing volume among the top 10 acquirers in the 2023 Directory of U.S. Merchant Acquirers from The Strawhecker Group was $8.8 trillion. The combined volume for the remaining 202 acquirers in the directory was less than half that figure, for a total of $3.3 trillion.

‘Doors Have Opened’

One byproduct of that heft is that it tends to produce a lot of merchant churn, especially following a merger or acquisition. One smaller ISO survival strategy is being able to quickly pursue merchants that might be unsatisfied with their new, larger provider.

As Digital Transactions reported in February (“A Mixed Payoff for the Megamergers”), these mergers “also created opportunities for emerging players to capture market share by offering solutions on newer platforms or with different capabilities or functionalities,” as Thad Peterson, strategic advisor at Aite-Novarica Group in Boston, said then.

That’s a notion echoed by Tim Russo, senior director of liquid fintech partnerships and business development at Palo Alto, Calif.-based TripActions, a card, travel, and expense-management services company. “In the wake of these mergers and the support gaps, doors have opened for existing companies to expand their footprints and for fintech[s] to move into the marketplace,” Russo said.

Mark Dunn, founder and president of Field Guide Enterprises, shares a clear example of that nimbleness. One particular ISO, a startup in the late 1990s, capitalized on a local bank merger when a Wisconsin bank was acquired by a Minnesota-based bank. The new owner had sent letters to the merchants notifying them of the combination.

The ISO, sensing many of the merchants wanted to retain a local connection, got hold of one of the letters and approached the merchant, holding up the letter during the sales pitch and asking if the merchants had received the letter and if officials were happy about the change. When the merchants said no, they weren’t happy, the ISO’s sales took off, Dunn recalls. Their pitch? “We’re in Wisconsin and we’re going to take care of you,” he says.

“That’s the kind of thing that happens where there are these mergers,” Dunn says. “Many ISOs are doing the basic blocking and tackling they always have—good customer service, good follow-through, and taking care of people. Taking care of people just works.”

Fortney says customer service is critical, especially for small and medium-size businesses. “SMB[s] with a large ISO are one of many,” Fortney says. “As a result, they are not known by anyone in the company until there is a serious issue. It can be difficult to get an issue addressed. There are limited to no retention efforts for the SMB.”

As Ortiz says, smaller ISOs can offer a personal touch that might be more difficult for a sprawling organization to do. “Even the big ISOs know they need that,” he says. “They need people in the streets…There are millions of small merchants that don’t trust the big companies.” That’s why being smaller continues to have advantages, Ortiz says.

‘Niche Verticals’

One disadvantage, however, is that the smaller ISO may not be able to provide every element of the service merchants expect, such as technical support. “When you run a larger account, you have to have a partner to support you,” Ortiz says.

That means ensuring the partner can deliver the service level merchants have come to expect from the primary company. The merchant, when faced with a problem with payment services, is very likely to call the salesperson for help.

That expectation confers responsibility for knowing the partner’s structure and staff, Ortiz says. “If I’m registered with a big office, I need to know the staff there because when I need help, I need to pick up the phone, shoot a text, or send an email to get help,” he says.

Assistance from a partner can be invaluable, especially because a smaller ISO’s focus is intrinsically on sales, says Fortney. “Hiring support staff is not an issue, as many will leverage their processing partners’ after-hours support, underwriting, risk management, and their approved solutions,” he says.

That’s part of the role for Worldline’s North America operations, says Justin Passalaqua, country director. Worldline is a large international processor. “We have more than a thousand ISO partners in North America,” Passalaqua says. “There are still plenty of opportunities for smaller organizations,” he adds.

These opportunities might be in niche markets or underserved ones, for example. “It’s important for Worldline and some of the larger companies to not forget about these specific needs,” he says. “It’s important for us to consider these niche verticals and how do we empower them.”

Partners like Worldline should ask about tools they can provide smaller ISOs and independent software vendors to serve these specialized markets, Passalaqua says. These tools can help the ISO make an entry, such as with an easy pricing model or education.

‘Greater Margins’

It’s sales, however, that is the primary engine of the smaller ISO or independent software vendor. These sales will drive revenue growth and scale. Scale eventually becomes more important for many. But they’ll have to grow first to reap the benefits.

“Scale may be important to payments companies,” Fortney says, “but the smaller ISOs must first grow to get to the point that scaling is a benefit. The small ISO is primarily a sales engine. Their sole goal should be to sell.”

That means their primary effort should be in adding merchants to their portfolios. “Concentrating on the SMB marketplace commonly allows for greater margins and short sales cycles,” Fortney says.

And once a merchant agreement is secured, the ISO should have a retention plan in pace. It could be as simple as a newsletter, Fortney says. “The key is that their name is at the forefront when a merchant thinks of merchant services,” he says. “And not solely when there is a problem.”

Passalaqua has known plenty of ISVs that were content with their growth. An example he cites is an ISV that provides summer-camp management software that dominates that segment.

Eventually, though, an ISO or ISV will need some sort of exit plan. “Since they are primarily sales offices in action, it’s not possible to stay a small ISO,” Fortney says. “You can grow into a medium-sized ISO.”

These payments experts continue to see opportunities for smaller payments companies.

“There’s plenty of opportunity for smaller ISOs and ISVs,” Passalaqua says. “There’s always going to be problems that need to be solved in the commerce of our world.”