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The Green Sheet Online Edition

April 24, 2017 • Issue 17:04:02

ISOs take note: The value of operational expertise is skyrocketing

By Adam T. Hark
Preston Todd Advisors

The value of operational expertise in the ISO world is skyrocketing, taking on new import as the business paradigm for merchant acquiring has transitioned away from transaction processing and toward delivering robust, all-encompassing, technology-based business management solutions for merchants.

As such, the fundamental nature of the ISO's personnel makeup is changing as well. It's no longer viable for an ISO to exist purely as a sales platform providing Level 1 support. Because the products and services that ISOs sell today are more expansive and sophisticated, the sales channel, support platform and ability to manage both all require a higher degree of business acumen.

A brief look back

It wasn't long ago that the inherent value of an ISO was its merchant processing portfolio and its ability to grow the same. The ability to sell merchant processing was the primary function of an ISO.

I would argue that if you were to survey ISO owners 10 years ago on which skill set was more valuable to the continued success of their operation, sales or operational wherewithal, the percentage of owners who would have ascribed a greater value to sales would have approached 100 percent. True to their name, ISOs were sales organizations, and their proficiency at selling drove their value.

Though it remains true today that the inherent value of an ISO is largely a function of the quality of its underlying merchant portfolio, as well as an ISO's ability to grow and support that portfolio, the calculation for assessing an ISO's worth is changing. Today's merchants want and expect more value from their payment providers, and this has come in the form of new product and service offerings.

These new product and service offerings have driven ISOs to reinvent themselves by hiring, educating, and managing a new wave of sales and customer support talent with the breadth and depth of knowledge capable of selling and supporting a new, robust and expansive product suite.Thus, there exists the need today for ISOs to find highly capable operational personnel to run a successful business. As such, the value of personnel with this skill set has never been higher. This phenomenon is playing out in the sales channel, customer support functions and partner relationships.

Sales channel

Let's assess an ISO sales channel past and present. A 1099 sales channel selling merchant processing 10 years ago didn't require particular expertise in software-based business management solutions, data security or multiple payment schemes (e-commerce gateway or mobile) ‒ at least not beyond a stand-alone terminal or rudimentary POS system. Payment processing was the product. ISOs competed with one another on pricing and customer support. Working knowledge of extraneous technologies that do more than is required wasn't foremost in the minds of agents and owner/operators.

Fast forward to 2017, and the 1099 sales channel of 2007 is a non-starter. The products and services ISOs sell today aren't comparable to those sold 10 years ago. An ongoing ISO enterprise cannot realize success in today's business environment offering payment processing alone. Merchants expect and demand more.

Whether it's a multifunctional POS system, data mining and reporting, marketing tools, data security, omnichannel capabilities, and the like, an ISO and its sales force must be selling business solutions that provide value to merchants beyond payment processing.

To this end, a sales channel (1099, W-2 or hybrid) needs to be properly managed by highly trained personnel to effectively sell these new value-added products and services. Thus, it's more important now, more than ever, for ISOs to employ competent, knowledgeable personnel for the sales channel ‒ often in the form of experienced operations executives.

Customer support apparatus

Following the same logic, if an ISO's core products and services have changed over the years, so too, must the requirements of an ISO's customer support apparatus. The range of merchant issues requiring support has expanded well beyond payment processing related setbacks. End-to-end business management solutions, data security and multiple payments schema have all but ensured this.

As such, today's ISOs require highly trained and properly managed support personnel necessarily comprising management with operational expertise and expansive product knowledge.

Partner relationships

Another sign of the changing times are the extensive partner networks and distribution channels that refer-in or resell payment processing on behalf of ISOs. Admittedly, high-value partner relationships existed 10 years ago, often taking the form of agent bank referral channels or POS dealers, and these types of partner relationships still exist today. The difference, though, is that the nature of the partners has changed, and the partnerships have become more valuable.

Nowhere is this more clearly illustrated than in the current high demand ISOs harbor for independent software vendors (ISVs). ISV partnerships are the most highly sought after relationships in the merchant acquiring space, whether by an ISO operator, agent office, or third-party processor. Why? Integrated payments.

Unlike a decade ago, the software solutions available to merchants today are exceptionally robust, providing business owners with operational efficiencies, reporting, security, rewards and loyalty, and an increasingly frictionless purchasing experience for the consumer.

As such, when a merchant elects to incorporate a software solution along with integrated payments into his or her business, the merchant is making a major business decision, evidenced by an appropriation of valuable resources (time and money) to bring the solution online. The net result is the creation of a very sticky, high-value merchant.

ISOs that have cultivated relationships with these software providers need to ensure that these ISV partners are appreciated for the value they provide and are comfortable with the competency of their payment processing partner. ISV partners need to be happy with the business terms of the partnership (revenue share/compensation) and how responsive the ISO is to the ISV's end-user's needs.

ISVs also need to know that their payment processing partner has the competency to speak intelligently about their software platform and possesses the wherewithal to manage issues at the payments/software interface.

This high-value, high-touch ISO to ISV relationship needs to be carefully curated and, as such, requires the skill set of a capable operator.

The big picture

Winding the clock back 10 years or so, the majority of merchant portfolio and ISO merger and acquisition transactions involved an asset sale of the portfolio and the sales channel ‒ that's if the selling party was willing to part with it. Buyer interest in acquiring the operational assets of an ISO, such that they were, was relatively nonexistent. Why? Because back then the only product was payment processing ‒ and it was a simple product that did not require sophisticated product training or customer support.

Looking at the marketplace today, the experienced buyers acquiring payment properties have assigned real value to an ISO's operational capabilities. I can further attest that for some buyers, the operational component has been put on equal footing, in terms of importance, with the sales component.

This change in how operational expertise is viewed and valued should serve to validate how critical quality operational assets are to an ISO's ability to thrive in today's marketplace. The new products and services that ISOs must embrace today are dictating what ISOs need to properly and effectively conduct their operations. end of article

Adam T. Hark is co-founder of Preston Todd Advisors and a leading M&A advisor in payments and payments technologies. With over a decade of experience, Adam advises clients in M&A, growth strategy, exits, and business and portfolio valuations. He can be reached at adam.hark@prestontoddadvisors.com or 617-340-8779.

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