Here Come the Developers

While they may account for a sliver of acquiring,  ISVs and VARs are poised for fast growth. But will ISVs still be distinguishable from ISOs in a few years?

Software developers and their dealers are big news in the payments business these days. They’re the ones that make point-of-sale systems sing, and increasingly they’re wiring in payments to join the chorus.

That’s because new factors like mobile payments and the nationwide EMV rollout are making this POS expertise crucial for retailers. Merchants nowadays don’t see payments as an isolated function but rather something integrated with other functions like sales management and loyalty.

Small wonder, then, that major merchant processors like Vantiv Inc. and Global Payments Inc. have ponied up considerable sums to buy developer groups.

But just how much business are independent software vendors (ISVs) and value-added resellers (VARs) generating, in terms of actual merchant accounts and volume? For all their newfound importance, ISVs and VARs account for a surprisingly small share in both categories, according to research released last month by Annapolis, Md.-based First Annapolis Consulting.

The research does indicate, however, that software developers and dealers will claim a larger share in months to come as more merchants resume buying so-called integrated point-of-sale equipment.

‘ISOfication’

ISVs and VARs are signing between 150,000 and 200,000 merchant accounts yearly, or about 9% of all merchant accounts, First Annapolis estimates. That leaves 91% being signed by banks and independent sales organizations. With respect to overall merchant dollar volume, developers and dealers account for between $100 billion and $150 billion, or just 4% of the total market, the firm figures.

The ISV-VAR marketplace remains highly fragmented, with more than 10,000 active developers. More than 60% of these players have annual revenue of $500,000 or less, First Annapolis says.

But the channel has grown more potent in recent years, with several processors acquiring developer talent to reach new merchants. Relatively recent examples include Vantiv’s acquisitions of Mercury Payment Systems LLC and Element Payment Services, which led to the formation of Vantiv Integrated Payments. Similarly, Global Payments created its Open Edge unit after acquiring Accelerated and PayPros.

And, while banks and ISOs still account for the bulk of merchant business, ISVs and VARs are likely to enjoy fast growth, experts say. “It’s growth that makes the big story on the VAR/ISV channel,” says Rick Oglesby, president of AZ Payments Group LLC and a senior analyst for Centennial, Colo.-based Double Diamond Payments Research.

“The channel is growing at a rate that is approximately three times the growth rate of acquiring as a whole,” Oglesby adds. “The fact that the market isn’t fully penetrated is what makes the opportunity so big.”

Also, ISVs and ISOs are increasingly working together in such a way that it’s becoming hard to speak of distinct shares, Oglesby points out. In many cases, they work in tandem in what he calls a “two-tiered” sale, with ISOs selling the merchant account and ISVs or VARs selling the payments software.

In time, he predicts, the two worlds will become one. “We used to look at these channels as completely distinct entities, but over time they will be one and the same,” he says.

Brooke Ybarra, a senior manager at First Annapolis who supervised the firm’s research on relative market shares for ISOs and ISV/VARs, agrees that, with ISVs increasingly taking on the sales role, they’re becoming less and less distinguishable from ISOs. “We term it the ISOfication of ISVs,” she jokes.

Controlling Distribution

At least one merchant processor has seized on this trend as a business opportunity. New York City-based iPayment Inc. last summer introduced its TiSO (pronounced “tyso”) program, which assists developers in registering as ISOs and offers training as well as technology support.

While Greg Cohen, president at iPayment, won’t disclose how many ISVs or VARs have signed up so far, he says the response has been robust. “We’re happy with the way it’s evolved,” he says.

As time passes, he predicts more ISVs will see the benefit in controlling the distribution end of payments, not just the technology. “The ISVs are going to figure it out,” he says. “The bigger ones already have.”

In some respects, there’s nothing new in this trend. Companies like Intuit Inc. long ago saw the opportunity in controlling merchant-account sales on top of POS software development. But with the payment function having grown more app-based in recent years, the opportunity has widened for ISVs and VARs to be their own ISO.

“One way to grow is to sell more software, but many of these folks want to control the entire commerce experience,” says Cohen.

Ybarra sees the same trend. “Software developers are very proprietary about their customer base, so becoming an ISO or payment aggregator is a way to increase control over their merchant portfolio,” she says.

That control can translate into dollars and cents if the ISV is more willing than an ISO to take on risk. “If they’re going through someone else, they’re at the mercy of that someone else’s risk policy,” notes Adil Moussa, principal at Omaha, Neb.-based Adil Consulting. “The ISV is saying, ‘Let me hold the bag.’”

Post-EMV Growth

Of course, this trend can run both ways. Some ISOs, such as Harbortouch and Heartland Payment Systems (acquired this year by Global Payments) have created or acquired extensive software-development capabilities, while remaining ISOs.

And, while this is going on, others are jumping into the market to act as so-called payment facilitators, ISOs that sign small merchants to operate on the ISO’s merchant account. Often, these players are also formidable technology shops, such as Square Inc. and PayPal Holdings Inc. “There are less [traditional] ISOs, but more people selling payments than ever,” jokes Cohen.

For now, Ybarra predicts dealers and developers will benefit from increased share as merchants increasingly turn to integrated POS systems, which build payments functionality into the larger store POS flow.

This trend, she says, slowed last year as merchants turned to standalone payment terminals to speed certifications for EMV, but will accelerate as merchants emerge from the EMV transition.

“We expect [integrated POS] growth to resume,” says Ybarra in her report. “With it, ISV and VAR distribution will make up a bigger share of new merchant flow as acquirers currently pursuing the strategy expand its use amid their broader sales tactics and more acquirers follow the leaders into this channel.”

Sounds like a market-share reading a few years from now will show a much bigger slice of the pie for ISVs and VARs—or else the division of the pie will no longer make much sense.