Merchant services is an industry built by individuals - entrepreneurs, each with his or her own novel approach to tapping into the vast opportunities for success that the market offers. Yet, as any business grows and matures, going it alone can become increasingly difficult. So ISOs and merchant level salespeople (MLSs) searching for new revenue opportunities turn to value-added services provided with the help of third parties.
Industry attorney Adam Atlas likens these to insurance policies. As an ISO or MLSs adds points of connection to merchants, it becomes more difficult for those merchants to leave for a better deal, Atlas said. However, an ISO or MLS with a dozen different solutions running at a merchant location doesn't want that merchant interacting with a dozen different providers. The ISO or MLS wants to be the sole focal point for customers. "There are so many more choices for merchants to make, so many things for them to worry about," said Mark Lorimer, Chief Marketing Officer at Capital Access Network Inc. "As their partnerships deepen, they bring increasing value to customers." And that's where ISOs and MLSs prove their worth as sources of expertise and good counsel.
"Establishing good partnerships is one of the most important things you can do in this business," said Dee Karawadra, founder and Chief Executive Officer of Cordova, Tenn.-based Impact PaySystem LLC. "If you don't have the right partnerships, there's no way you can make it in this business." ISOs and MLSs who do not have "two or three services available" are setting themselves up for increased attrition, said Marc Brown, President of Blue Star Loyalty of Tampa, Fla. Yet in most cases, in-house development just isn't practical.
ISOs and MLSs are not the only players in the merchant services space who need partners. Industry consultant Paul Martaus said an argument can be made that no one can operate in the merchant services arena without partners. MLSs partner with ISOs; most ISOs have partnerships with acquirers or processors, which also partner with network services providers. "Just about everyone buys some outside expertise," Martaus said. "Even a big organization like TSYS doesn't do everything itself. It uses debit [card payment] gateways."
Total System Services Inc. (TSYS), which has a long history of providing transaction processing services, partnered with First National Bank of Omaha in 2010. Then, in 2011, the company took over that bank-owned acquirer and purchased several small ISOs. Renamed TSYS Acquiring Solutions, the acquiring arm of the company has been growing at a healthy clip: 2011 revenues exceeded market expectations, with gross revenues up 6.8 percent over 2010, according to investor reports.
First Data Corp. is perhaps the most obvious example of the power of partnerships, especially bank partnerships, which account for almost half the card payments the company acquires. Typically, these partnerships place First Data in charge of day-to-day operations, risk management, and merchant sales and support. Banks usually contribute sales leads and new business through branches and relationship officers.
Like TSYS and First Data, ISOs and MLSs are searching for ways to grow markets. But there is some trepidation. "A lot of people have very closed minds about partnering with other organizations and allowing access [by those firms] to their customers," Brown said. But he noted this shouldn't be a concern if the partnership is equal. "Both parties have to be helping each other for a partnership to be successful," he said. Karawadra is not concerned about the notion of partners poaching customers. "If I lose an agent or a merchant, then I'm not doing something right," he said.
Merchant Data Systems, a South Florida ISO, partnered with Internet marketing firm Karma Shack in November 2011 to support an array of products and services. Sophisticated online marketing, card processing, gift and loyalty programs, working capital, payroll services, and "merchant friendly" Payment Card Industry (PCI) Data Security Standard (DSS) compliance are just some of the value adds the partnership brings to the ISO's clients. "This is another example of our partnership mentality as we continue to develop new products and marketing strategies," Drew Freeman, President of MDS, said.
A partnership checklist
Business partnerships are a bit like marriages: you should want them to be for the long haul. "Picking the right partner is key because it is a reflection on your personal brand," said Capital Access Network's Mark Lorimer. "Choose one that is best for all parties long term, not just [for] you short term. Short-term compensation potential should not be a deciding factor."
Dee Karawadra of Impact PaySystem added that if you have "the right back-end partners, you shouldn't have any problems selling on the front-end." So what should ISOs and MLSs consider when evaluating potential business partners? Here's a starter checklist.
What's the company's reputation among other ISOs and MLS? (In addition to your colleagues, check industry chat rooms and forums, like GS Online's MLS Forum)
How long has the company been in business?
Who are the principal executives and project team members? How much professional experience do they bring to the industry generally and to your needs in particular?
What's the underlying technology? Has it been proven to be effective?
Is the product or service compliant with all applicable standards?
Does the product or service adequately fit your needs, or does it require work-arounds?
Would you use the product or service yourself?
Can the offering integrate with your existing infrastructure?
What kind of customer support is provided?
How well does the product or service accommodate growth through product enhancements?
Does the business provide client references, and have they been checked out?
Is the business willing to agree not to market directly to your customers?
According to industry attorney Adam Atlas, an answer of no to any of these questions need not be a deal breaker, but a negative response certainly does require closer examination of a potential partner.
Jerry Cibley, who does business as The POSMan, is an industry veteran with 25 years of POS system sales experience under his belt. He saw a big change taking shape in merchant services in the 1990s. That's when POS systems companies started partnering with acquirers and ISOs so that they could integrate card services with the systems they were selling merchants.
"We were just on the periphery then; we didn't even know about residuals," Cibley said, adding it was a big deal that sales teams were sharing leads, which helped POS systems companies sell to more merchants. "Then it changed again, and the ISOs started getting more involved," he noted. Most ISOs find it difficult to meet customers' changing demands. Few have the time, money or staff expertise to take care of every customer's every need. "I no longer have the time to take care of all of my merchants' needs," Karawadra said when explaining his decision to take on partners. "I needed to be out selling."
ISOs that think they can do everything in house are "missing out on the opportunity to establish deeper more profitable relationships," Lorimer said. Selecting partners isn't something that should be taken lightly, because choosing the wrong partner "could result in complaints to or about you and dry up referrals," he added.
Karawadra spent a great deal of time shopping for upstream partners when he was setting up Impact. "I went from ISO to ISO to ISO trying to find the right partner," he said. "I wanted someone who was honest, upfront and ethical." Karawadra hasn't stopped shopping for partners either; these days he's focused on partnering with specialty companies and professional associations to expand offerings and drive more business to Impact's agents.
Partnerships aren't just about driving sales. "If you choose the right partner, they can shield you from [messy] operations stuff," Bryan Daughtry, Vice President, Sales and Marketing at Up Solutions Inc., told ISOs and MLSs attending the Northeast Acquirers Association's winter tradeshow and outing in January.
Up Solutions has a partnership with ISO iPayment Inc. under which iPayment agents sell PC-based POS systems, and Up Soutions takes care of back-end services: software configuration, installation, training and ongoing support. "This deal provides our sales partners a solution that strategically differentiates them from the competition," Mike Ackerman, Senior Vice President at iPayment, said when the partnership was formed in the spring of 2011.
According to Lorimer, merchants are huge drivers of change. "They want ISOs to partner with them to tackle increasingly complex decisions," he said. For ISOs, this means putting together their own "payments ecosystems," he added. That payments ecosystem might include, in addition to bankcard processing, new payment types and form factors, PCI compliance services, payroll, marketing, prepaid and loyalty cards, and even access to capital.
With bank lending to small businesses at historic lows, access to capital has become a critical success factor. That's why ISOs, MLSs and acquirers are forging partnerships with companies like CAN, Lorimer said, adding that ISOs and MLSs have a critical role to play in the funding process. "They're intimately familiar with what their customers need," he said.
Economic factors also are driving interest in prepaid debit cards, especially closed-loop (gift) cards, and loyalty programs. "It's really difficult to lead with bankcard services these days," Brown said. "This is something else to help get you in the door." Brown, whose company has partnered with numerous MLSs in support of loyalty programs, suggested any business that expects to see a customer at least once in 30 days is a good prospect for a loyalty program. "Once you get a merchant on a successful loyalty program, they will find it almost impossible to leave you," he said. And that, in a nutshell, is the power of partnerships.
Partners are not for everyone
There's an exception to every rule, as the saying goes. Among ISOs, Transaction Services (TrxServices) is an exception to the trend toward forging partnerships. "I've been real hesitant to partner with vendors, processors and others," said David Leppek, President of TrxServices, a Delaware-based ISO. "Even when I have to, I try to offer it as a value-add."
That's the strategy TrxServices has taken with PCI compliance. With a client roster stacked with Level 4 merchants, Leppek opted to build PCI compliance into its client interface - a homegrown system he described as ultra-secure and designed to handle anything MLSs and their clients need. "We don't need anything fancy until we come upon a customer involved in e-commerce, and I'd eat the cost on it because it's to my advantage for them to be in full compliance," Leppek said. An industry veteran, Leppek's career most recently included a stint at First National Merchant Services (now TSYS Merchant Services).
TrxServices put significant time into designing its interface system, which handles everything from lead generation, to marketing materials and contracts, to terminal implementation and trouble shooting. And most critical to Leppek, the system provides real-time insights into client activities. Leppek said he is often approached by firms looking to partner on new offerings, but "there really isn't any client demand." However, one request he has heard from clients is for mobile payment functionality. Leppek hired a team of software engineers to build a mobile payment interface for the company's system. "Once they've built it, I'll probably just give it away," Leppek added.
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