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The Green Sheet Online Edition

May 26, 2008 • Issue 08:05:02

Go vertical, young ISO

By Lane Gordon
MerchantPortfolios.com

The 2008 Electronic Transactions Association's Annual Meeting & Expo was very interesting. Of the many emerging angles we encountered in terms of the most sought-after acquisitions, there appeared to be one common theme: niche specialization.

Being an industry insider and dealing with buyers and sellers every day, I have been accustomed to seeing a merchant portfolio's value enhanced through a broad spectrum of diversified Standard Industrial Classification codes, geographic locations, and a large component of traditional brick-and-mortar businesses.

But times are changing: Welcome to the dawn of enhanced value through nondiversification, specialization and ancillary products. Let's face it. The product that most ISOs are selling is a pure commodity.

When you're selling a commodity for a living, the only way to take yourself out of the realm of competition based solely on pricing is to find a way to differentiate your product and services. Typically, this type of differentiation or enhanced value is sold to a merchant in the form of a higher level of quality customer support and or service.

Essentially, ISOs are decommoditizing what basically is a homogenous product. Much of the value created by better customer support and service manifests itself in minimal losses of merchant accounts. Yes, that's right. Good old attrition maintenance (also known as retention) is the end game which creates value (especially in the eyes of a buyer).

Successful ISOs have effectively managed to brand themselves or at the very least differentiate themselves from the pack. I've learned to have tremendous professional respect for those who have managed to do that against all odds.

The problem is that most of the other ISOs have become aware of this methodology, and what we're seeing now in the marketplace is a commoditization of high quality service and support, which has been the next level of differentiation in the ISO world beyond just superior pricing.

This leaves the ISOs with several questions:

  • How do I differentiate my ISO now?
  • Where do we go from here?
  • How do I, once again, decommoditize my offering to merchants?

ISOs and processors are now looking toward all sorts of verticals and specialties. As an established ISO with a substantial base of merchant accounts, you've already successfully managed to push your way into the lives and day-to-day operations of your merchants.

If you can successfully find ancillary office goods or services to offer your merchants - that also generate recurring revenue - you can successfully leverage your existing merchant base and expand your revenue stream.

For the same reason that accounting software manufacturers have had interest in the processing and ISO world, we are seeing larger ISOs and processors now looking at related back-office products and services as a way to permanently entrench themselves with merchants.

ISOs are researching specific verticals such as niche segments within various industries. ISOs are availing themselves of specific knowledge they may have within a certain sector, a technology piece that allows them to integrate into a niche market, or sometimes even the fact that they have implemented bilingual speakers into their service and tech support, allowing them to cross into what was previously considered to be a demographic they couldn't make inroads into.

Some ISOs focus exclusively on Chinese restaurants, for example. They have built out the appropriate multilingual support necessary to keep their clients happy; they thereby have relatively low attrition, other than natural attrition due to business closings.

There are ISOs focusing exclusively on service stations. Others are focusing on becoming the merchant processor of choice for specific trade associations and industry groups. The underlying portfolios of these ISOs, therefore, are focused on a particular niche - which is different from what we saw a few years ago.

The successful ISOs targeting trade associations are not only using phone, direct mail and e-mail campaigns, they're also going to the tradeshows. They are forging relationships with the association members and leadership who will help them land accounts, as well as with individuals who will help them with merchant retention, for example, cases in which a merchant is approached by a competing ISO via the phone and offering "a better deal."

Some of the more creative approaches also include offering ancillary goods and services that the particular association members routinely have to use or reorder on a regular basis.

Another trend we're seeing is that nontraditional portfolios with e-commerce books of business are coming into their own. We were accustomed to encountering portfolios that may have had a component of Internet or MO/TO business as part of their overall portfolio. And this had a deleterious effect on a valuation because e-businesses were traditionally viewed as higher risk (card-not-present) and not as "sticky" as their brick-and-mortar counterparts.

But now an increasing number of ISOs are focused exclusively on one or both of these card-not-present areas. And considering the huge shift in consumer online purchases that is still under way, why wouldn't an ISO be interested?

Attitudes toward the e-commerce sphere have recently changed from undesirable to acceptable; in some cases they've shot right past acceptable and now reside in the most-wanted category for many ISOs, as well as for firms acquiring ISOs and portfolios.

More and more companies are availing themselves of some type of proprietary technology, whether it is software, hardware, or even a gateway that allows them to integrate with the needs of a niche market.

Regardless of the method selected, market pressures have forced ISOs to come up with fresh ideas in identifying and capitalizing on new areas for revenue growth. The old adage "grow or die" has never loomed more ominously on the horizon. Today's ISO is all about growth and retention. Going vertical seems to be the current pathway toward that end. end of article

Lane Gordon is Managing Partner at MerchantPortfolios.com, a company specializing in marketing ISOs and portfolios for sale. Prior to MerchantPortfolios.com, Gordon spent a number of years working in the payments industry. Gordon holds degrees from the Massachusetts Institute of Technology and Carnegie Mellon University. He can be reached at 866-448-1885, ext. 301; lane@merchantportfolios.com; or by fax at 508-638-6444.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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