A New Alphabet Soup, VARs and ISVs, Spells An Effective, But Expensive, Channel for Acquiring

Merchant acquirers once relied on independent agents, direct sales, and agent bank relationships to sign up merchants. Now, a new group has entered the picture and is accounting for a rapidly increasing share of new merchant accounts. Value-added resellers and independent software vendors will enroll 15% of all new merchants this year, on par with agent banks and up from 11% in 2009. That’s according to new research from Aite Group LLC, a Boston-based research firm that follows the electronic-payments market. Aite based some of its conclusions on a survey of 18 acquirers conducted between December and May.

That market share is growing fast, Aite says. By 2013, nearly one-quarter of all new merchants will sign up with acquirers through the vendors they deal with for the equipment and software they need to run their businesses. These are merchants entering the card-acceptance market, not those switching acquirers. Such fast growth means that VARs and ISVs are poised to grab a commanding position relative to acquirers and independent sales organizations, including the ability to name their price. “Power is going to shift into the hands of the ISVs,” Adil Moussa, an Aite analyst, tells Digital Transactions News. “Once ISVs realize this is a significant moneymaker, they will dictate what they want.”

Indeed, while resellers and software marketers now earn residuals averaging 16% of transaction revenues, that share is likely to climb to 25% to 30%, Aite projects. That means acquirers and ISOs will have to share with these companies larger and larger portions of the revenue stream they get from merchants. VARs and ISVs will earn $2.3 billion in residuals on client merchants’ transactions this year, up 35% from $1.7 billion in 2009. Aite projects that number will grow to almost $4 billion by 2015. Residuals are revenues resellers earn over the lifetime of an account with a particular acquirer.

In part, this newfound power stems from acquirers’ competition to sign deals with resellers and ISVs. These companies are valuable conduits of new merchant business because they typically specialize in systems for particular industries, such as hospitality or the medical market. Merchants in these industries depend on these systems to support their operations and look to the resellers to recommend acquirers for card acceptance.

Resellers and software vendors also have the upper hand because their products, services, and advice are more important to the merchant than payment processing. “Payment is such a small part of what the ISV does,” says Moussa. “The merchant doesn’t care who they process with at the end of the day. They will process with somebody who’s giving them good software that frees up their [time].”

But, while the VAR and ISV channel will become increasingly expensive for acquirers in one sense, it has the potential to bring costs down in other ways. If resellers are fully integrated with acquirers’ systems, the costly processes of underwriting and boarding merchants can be automated, Moussa says, reducing staffing and other expenses for acquirers. This could at least in part offset the increased cost of using resellers. “It will reduce the cost for acquirers so they can spend more on the ISV relationship,” he notes.

Another advantage is that acquirer deals with resellers are seldom exclusive, with VARs and ISVs typically working with as many as three or four acquirers at once, Moussa says. Over time, though, it will become harder for smaller acquirers and ISOs to forge bonds with VARs and ISVs, he says, because the resellers are focusing on larger acquirers to corner as much volume as possible. “Their dream is to work with the top five acquirers because that’s where the volume is,” he says.