By Nancy Drexler
Drew Freeman, President of Freeman Consulting Inc., has worked for banks and processors, as well as run an ISO during the last 33 years. He remembers when interchange was simple, terminals were dial up, and mobile meant that "merchants better get mobile and walk to the bank to make their credit card deposits."
For many who have been in the industry since its early years, those were "the good old days."
"It was a smaller world," recalled electronic payments consultant Diane Vogt Faro, a former First Data Corp. executive, Electronic Transactions Association President and a W.net co-founder. "It was easy to get into the market, easy to acquire merchants, and revenue was significantly better."
John Martillo, who co-founded Cynergy Data LLC and today is Chief Executive Officer of ISO SignaPay Ltd., agreed. "It used to be that there was no limit to your success," he said. "Anything a merchant or ISO needed, you could find a way to provide. You could be all things to all people and grow as large as you wanted."
In the early days, electronic payment acceptance was new for many merchants and could easily be marketed as a way for them to grow their customer base and boost sales. The sales pitch was simple; competition was minimal; doors were open; there was money to be made. With no restrictions to entry, many took advantage, and the ISO business was born. "In the beginning ISOs concentrated on the lower and middle end of the market," said industry consultant Gerritt Kerkstra, who joined The Strawhecker Group after years with MasterCard Worldwide and Visa Inc. "They opened up new areas of acceptance, such as grocery stores and schools and government." When these new markets became saturated, ISOs still differentiated and grew by "adding riskier forms of acceptance, like MO/TO and pay at the pump," Kerkstra said.
Martillo remembers it as a "get rich quick industry." And it was precisely this allure that drew countless new players into the ISO space. As competition increased, ISOs looked for new ways to distinguish themselves. Mostly, they cut pricing. Rather than entering new markets, adding value or lowering attrition, they lowered their rates to entice merchants to switch processors. "Our idea of a new idea was a new pricing model," Martillo said.
Terminal-leasing programs became free terminal programs. Attrition soared as merchants shopped around for better rates. Margins were compressed. Yet new players continued to enter the industry. "The space was so lucrative that companies became increasingly focused on building market share," said David Price, co-founder and President of the gateway company Plug and Pay Technologies Inc. (Plug'n Pay). "Some companies built it by giving things away for free or at low cost, and others simply bought their way in."
Gaining market share became more important than raising profits. The result was even lower pricing and greater competition, Price noted. "We were one of only three gateways when we launched Plug'n Pay in 1996," he said. "Today we are one of 50 gateways."
"The smaller ISOs have seen their margins being stolen," Freeman noted. "Eroding margins and huge attrition take value out of the portfolio and are forcing many of these guys to roll up under the bigger companies that can support and sustain them."
Mike King, CEO of Portfolio Specialties LLC, said some of the smaller ISOs "are selling out of fear. They view this as their last best chance to sell at a high multiple," he added. Nevertheless, in the course of buying and selling merchant portfolios, he sees more buyers in the market now than sellers. "Established ISOs are actively pursuing and purchasing portfolios in order to increase their market share and boost their buying power," he said.
Freeman said, "The ISO market is definitely going through a consolidation. It won't go away all together, but it will certainly decrease in size."
In a consolidating market, what happens to ISOs who aren't interested in selling or can't afford to purchase growth and market share? Most pros agree: ISOs must find new ways to add value and differentiate themselves.
"You can no longer grow an ISO business simply by being all things to all people," Martillo noted. "It's too late to be huge, and too expensive." Instead, he recommends that ISOs develop expertise in niche markets "You have to find the right opportunity, become an expert, add value, and package it all right," he said. "You have to stay focused." Targeting niche markets has long had appeal, but these days success takes far more than simply tailoring a few marketing messages to a particular audience. Business owners must develop a meaningful market presence, and they have to add more value than simply payment processing.
To build visibility and establish brand, experts recommend joining industry trade groups and associations, advertising in trade publications, participating in social media and blogs, and attending industry events. The key is to develop a reputation as an industry contributor and thought leader, which is critical to growing meaningful relationships and establishing trust.
In addition, vertical market ownership cannot be won simply by establishing good relationships; sales and retention depend on an ISO's ability to provide a unique set of solutions tailored to the specific needs of the niche. And here is where new, nontraditional businesses are adding value.
"You can't sell something to someone if they don't think there is value in it," Faro said. "You never could, and you never will. Small business owners still want services that make their businesses easier, more convenient, and more profitable. Payment services providers must offer solutions that help them do this."
Through National Benefits Program, Faro provides small-business owners access to affordable benefits. "We offer a value-added that is different and unique from what the competition may be offering," she said. Martillo established Se¤orPay, which caters to Spanish-speaking merchants.
These are among dozens of services and technologies making inroads into the payments arena because they give ISOs ways to differentiate, capture markets and boost retention.
"To win the battle for value creation, you have to have a better solutions set," Freeman said. "And since you can't do everything yourself these days, that means partnering with companies that can help you diversify your product line."
And finding the right partners is critical to success. Some products will be right for some merchants, but not everything will be right all the time, Freeman said. Additionally, ISOs should look for committed partners who will form productive relationships by being attentive to detail and highly flexible.
"ISOs today need a technology partner that helps them actually do the things their merchants need them to do," Price said. "In the gateway arena, they need partners who can give them the innovation and flexibility to target niche markets."
To most payment experts, technology integration has become the key differentiator for businesses offering diversified product lines. "Merchants are no longer shopping around looking for a better deal," Kerkstra said. "They are looking for integrated, vertical opportunities where payments are embedded into overall merchant solutions. ISOs who focus on delivering that will be the ones that survive."
Kerkstra suggested ISOs turn to new products, services and technology offered by players outside of the industry. Loyalty programs, benefits programs, video purchasing, text messaging and technology innovations are a few of the offerings that can supplement the more traditional terminal, gift card and cash advance programs.
Kerkstra said the key is to use these services not as individual profit opportunities, but as components that can be combined with rates, terminals, POS software and mobile options to create all-in-one, niche-specific, value-added solutions. Kerkstra calls them "embedded solutions," which are unique sets of products and services packaged into single, industry-specific offerings that add measurable value to merchants. Not only does the selling of single, embedded solution sets boost sales, it can also reduce attrition. It helps merchants build relationships with their service providers, so they are less susceptible to basis-point savings ploys. However, in building these relationships, true service and support are critical.
"You can talk to your merchants all the time now," Freeman said. He encourages using social media and email to boost the frequency of merchant touch points. "It is still just as important to keep in touch with your merchants and add depth to your relationships. This will always be the key to retention and growth," he added
Kerkstra agreed, stating, "If the merchant sees you as a source of information, you will develop the trust that leads to a meaningful relationship and stickiness."
If our goal is to package business solutions, build relationships and boost retention, isn't that what merchant services has always been about? Freeman said it is all about perception. "Maybe you no longer want to be perceived as a payments company, but rather as a business services solution offering a unique value proposition," Freeman added. "Payments is part of the deal, but only a part. It is positioned differently."
Faro believes the model hasn't changed much. "New ISOs will continue to join [the industry], depart and evolve as they always have. There is still a significant amount of cash that can move to electronic form, still plenty of opportunity for growth. The ones who adapt will succeed."
Faro also feels that proximity will continue to be a factor in sales and retention. "The small business model is not going away," she said. "There will always be people who like doing business with providers in their community."
Kerkstra pointed to commercial cards, micro merchants and mobile solutions for direct sellers as some of the many new frontiers still available. "There are folks who think that the payments industry is broken," he said. "We hear that a lot from Silicon Valley - that we have too many products, and it's too complex for merchants. But for all that, MasterCard and Visa are still everywhere, and I don't see that changing."
Freeman added, "Whenever it gets tougher, the smarter people will prevail. Smart people now will diversify their product offerings, leverage social media, create other business services and touch their merchants."
Kerkstra noted that innovation always brings threats and opportunities. "You either respond, adapt or perish," he said. And this is a reality wise payment pros do not dispute.
Nancy Drexler is the President of Acquired Marketing, a boutique marketing firm for businesses in the payments industry. To learn more about what Acquired Marketing can do for you, visit www.acquiredmarketing.com, call 917.743.5258 or email firstname.lastname@example.org.
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