Not Your Father’s ISO: How Tech Is Forcing Acquirers To Make a Crucial Choice

By John Stewart

When the Internet, and then mobile and cloud-based technology, began to radically change the acquiring business, some independent sales organizations thought they could adapt by becoming software companies without changing the way they do business.

They were wrong, and that mistake is costing them dearly, argues Rick Oglesby, senior research analyst at Double Diamond Payments Research, Centennial, Colo. “Your average ISO is a distribution specialist selling a universal solution.” he tells Digital Transactions News. “The software industry isn’t like that. It’s very different from traditional payment-industry approaches to selling.”

The result of this mismatch is inevitable. “These guys haven’t figured out how to make money” on mobile solutions, Oglesby says.

So should ISOs become ISVs? Independent software vendors have shot to prominence as mobile and cloud point-of-sale technology has brought sophisticated business-management and marketing functions, once affordable only at big chains, within reach of small merchants, the ISOs’ bread-and-butter clients. Oglesby’s answer, laid out in 35 pages of closely reasoned text in a report released Thursday, is a carefully qualified “maybe.”

Carefully qualified because most ISOs that try it out are ill-suited to the ISV role. Whereas software demands tailoring and targeting products for specific merchant types and needs, ISOs are set up to sell a uniform service to all comers, with much of the business arriving via referrals that ISOs can’t control. “Most acquirers are going [with] a square-peg/round-hole strategy and most of them don’t even realize it,” says Oglesby.

Also carefully qualified because there is an alternative path, according to Oglesby’s report, entitled “To Be Or Not To Be an ISV.” That’s to become a so-called integrated payments provider (IPP). In this role, ISOs continue to sell payments, but the customer is no longer a merchant. Instead, the customer is now a value-added reseller that in turn offers the payments function as a component of an overarching business-management service.

Examples of ISOs and merchant processors that have assumed the IPP role, according to the report, include BluePay, Cayan (formerly Merchant Warehouse), Global Payments, Vantiv, and Yapstone.

What is clear, though, is that ISOs can’t afford to stand pat as the acquiring industry undergoes perhaps the most disruptive technology revolution it has ever seen. “There is the do-nothing strategy,” Oglesby says. “Just keep selling payment terminals. You just need to realize that is a dying business.” ISOs that might consider this path are the ones run by owners who are close to retirement, he notes. “Some might say, ‘I’ll just milk that [business].”

But it’s not enough to decide whether to assume the role of an IPP or ISV. Sorting out this alphabet soup requires also deciding whether to concentrate on the mass market or specialize in a segment. “If you’re selling POS systems to dry cleaners, you need to know the dry-cleaning business really well,” Oglesby says by way of example.

That’s not how ISOs have historically approached their market. “ISOs have traditionally had a mass-market approach with a universal product,” Oglesby says. As a result, becoming an ISV is likely to be a wrenching, if necessary, change for many firms.

Nonetheless, Double Diamond’s research indicates many have started laying the foundation for this move. Among merchant processors interviewed for the report, 85% said they have some sort of in-house platform and development capability. Some 54% are considering acquiring a software company. Double Diamond interviewed executives at 26 representative companies for the report.

Much is at stake just in payments alone. This year, acquirers will process $5 trillion in payments volume for some 10 million U.S. merchant locations, according to the report. On that activity, the industry will generate $5.2 billion in earnings before interest, taxes, depreciation, and amortization, a common measure of comparable profitability. That number, the report forecasts, will grow to $7.2 billion by 2020.