Helping ISOs pilot the payment journey

Evolutionary shifts in the payments ecosystem can be daunting to payment professionals. But such changes are a boon to research and advisory firms like First Annapolis Consulting Inc. More than ever, acquirers and other payment businesses are turning to outside consultants to help them navigate a murky and unpredictable landscape, according to Marc Abbey, Managing Partner at First Annapolis.

Technological and regulatory changes are increasingly forcing payment businesses to reposition themselves in the marketplace. More companies are looking for ways to proactively pursue new clients and revenue opportunities by, among other things, mastering the particulars of a certain niche, boarding mobile merchants, expanding to foreign markets and seeking value-added resale opportunities.

"I can't remember a time in the last 20 years when there have been more fundamental questions on the table than right now," Abbey said. "In the ISO segment, there has to be, as we refer to it, some kind of unfair fight. An ISO has to have an advantage over the other guy to get ahead. ISOs in general are going to face certain systemic disadvantages against bigger players, but they also have certain advantages."

Those advantages, entrepreneurship and aggressiveness chief among them, are what First Annapolis seeks to engender and cultivate in its clients, Abbey said.

Mapping the landscape

The Baltimore-based consultancy - which recently opened a second office in Amsterdam, The Netherlands - was formed in 1991 and consults for various financial services firms around the world. It has 80 employees and its clients include acquirers like Elavon Inc., as well as issuers, vendors, investor groups and banks.

Some companies use First Annapolis simply to procure research or information about industry trends, Abbey said. Part of the First Annapolis product suite is a series of white papers that can be obtained on the company's website, including its monthly First Annapolis Navigator publication about the global payments market.

Other businesses that need more intimate levels of service enlist the company for analytics and other assistance pertaining to managerial and operational decision making. That can include undertakings related to mergers and acquisitions, entry into new market segments and international expansion.

"If you're looking for a top-notch merger and acquisition firm, you definitely have to have First Annapolis at the top of your pile," said David McAlhaney, Senior Vice President at Elavon. "If you're looking for a strategic plan related to global markets, products and services, First Annapolis also comes to mind."

McAlhaney is also complimentary of First Annapolis' attention to detail. "They will provide research, step one, on where the market is positioned, broken out by revenue streams," he said. "Then they will continue with, 'Here's a five-year snapshot of what the market could look like.' And then they'll take it to the next level of describing tactical plans a provider might want to engage in."

Focusing the telescope

Abbey, who heads the company's acquiring practice, said First Annapolis approaches consulting jobs with both macro and micro trends in mind. On the one hand, it is important that businesses looking to change operational methods or expand into new markets, understand how such moves line up with larger industry trends and how developments indicate the feasibility of different opportunities, he said.

But the larger information matrix is usually most valuable as a contextual tool, and not as a source of answers in and of itself, according to Abbey. Rather, larger trends are typically analyzed against the particulars of a client's business, which may or may not lend itself to a decision that broader trends suggest is viable.

"With every business, the answer is different depending on its capabilities," Abbey said. "You don't expect there to be one dominant answer that every ISO pursues."

Abby feels an intimate understanding of what's occurring in the market is vital because it informs the analysis of risks and opportunities for individual businesses. "For example, it's perfectly clear that the acquiring business is internationalizing - could not be more clear - but that does not mean every small acquirer should expand internationally," he said. "It's a major undertaking to do, and that small acquirer needs to see their strategy in the context of the limitations of what their response could be."

Directing by compass

To adapt to the changing landscape, ISOs must identify existing and potential areas of overlap between small and large players - business opportunities traditionally associated with smaller firms now being pursued by bigger ones, or vice versa, Abbey said.

He noted that the growth of e-commerce and mobile acceptance is an area where the trend is moving both ways. ISOs have lost business to alternative payment service providers like PayPal Inc., Amazon Inc. and Square Inc., but nonetheless have opportunities to wrangle at least some of that business back, Abbey said.

He added that, while the relative cheapness and convenience of signing up with alternative payment aggregators has lured merchants away from traditional accounts, such providers lack wider product offerings and niche specialization; thus ISOs can gain leverage through specialized services like value-added offerings, as well as by providing intimate, knowledge-based technical and operational assistance.

As examples of that knowledge, Abbey gave underwriting (the typical process will not work with mobile merchants) and specialization (the key way ISOs can differentiate themselves).

"The merchant market is not uniform at all," he said. "There are dozens and dozens of little segments with different needs than the average one. There are differences in technology used, point of sale systems, type of processor, buying behavior. ... The greater the difference, the greater the opportunity for a strong niche. If you pick something that's not that different, any acquirer could serve that."

It is this type of insight that First Annapolis specializes in: "how competitors in this context assist clients in developing their own strategies, what they want to do with this technology, using what channels with what kind of underwriting process," Abbey said.

Charting a million points of data

On its website, First Annapolis lists oil, airline, hotel and auto industries as specialty markets that have high demand for knowledgeable payment service providers.

"Our services are a collection of different things," Abbey said. "We have a program of research we do to stay abreast of what's happening in the industry, and we have recurring research interviews to help collect data. We've developed certain information tools and we do analysis over time using accumulated data - public sources that are not yet assimilated.

"For example, what are all the different actions of payment networks around the world? On any given day we might put out an article about that. It's taking all these little data points about what's going on at all these companies and putting them together to provide strategic guidance."

Abbey cited the key drivers of industry change today: the growth of mobile acceptance, the push toward the Europay/MasterCard/Visa (EMV) security standard, compliance with the regulations that implement the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the expansion overseas of U.S.-based acquiring businesses.

Steering the ship of change

First Annapolis looks at many technological changes in payments not necessarily as technical problems, but as operational ones. In other words, how will new technology change the way POS environments are run?

"I do think that, for acquirers focused on new merchants, the material event is not the technology per se, but changes in the sales processes, boarding processes and [customer care] processes," he said. "The threat is whether these technologies and business processes overlap with traditional accepting merchants.

"In the PayPal and eBay world, people thought it was just individuals selling goods and services; true enough, for a while. But over time, businesses started to use eBay and PayPal as sales channels, and we're going to see the same thing with mobile point of sale."

Visa's plan to replace traditional mag stripe cards with EMV chip and PIN cards in the United States in five years could also profoundly impact the way POS systems are operated. With the integration of EMV, all restaurant tableside service becomes self-service because customers will be required to enter passwords rather than hand cards to servers, Abbey said.

He recommends ISOs investigate EMV as it pertains to the installation of new POS equipment, different structures for risk management and underwriting, and the gray area of card-not-present (CNP) transactions. For instance, EMV chip and PIN plays a role in card-present, not CNP, in Europe; it is unclear whether Visa will do the same with EMV in the United States, he said.

Abbey suggests small-merchant ISOs intellectualize their businesses. He suggested ISOs ask themselves, "Will there be this overlap between formal and informal markets, and how much overlap does there have to be for that to be painful for me? Have I reached my threshold?"

Abbey has found that it doesn't take much to shift volume away from traditional channels. "But will the market niches allow traditional players to stay competitive and not compete with Square on Square's terms?" he said. "I would say yes."

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