There is no doubt the financial services industry and the tech world are on a path of convergence, or collision, depending on your viewpoint. By necessity, payment service providers are starting to act and function more like tech companies as the Internet and mobile devices, working in tandem, expand connectivity while also providing a vast, virtual and ever growing playground for businesses and consumers.
One need look no further than the May 2014 news that would have top 10 merchant acquirer Vantiv Inc. landing cloud-based payment provider Mercury Payment Systems LLC for a cool $1.65 billion. The acquirer saw the future of payments rests not in merely providing merchants solely with the ability to accept electronic payments, but in offering a total business management package, largely facilitated by the online deliverance of technically sophisticated applications packaged in sleek, eye-catching and functional Google-like or Apple-like interfaces.
However, this large-scale, industry transforming movement leaves many of the men and women in the middle ISOs and merchant level salespeople (MLSs) in an awkward position. For more than 40 years now, ISOs and MLSs have been the frontline soldiers for the banks, card brands, acquirers and processors, setting up merchants with POS terminals and competing on price and value-added services.
Now, with the rise of software-as-a-service (SaaS) technology, the feet-on-the-street have a new mandate sell software suites and merchant-specific apps, with the payment processing reduced to a reliable, but oh-by-the-way, add-on. Indeed, it's become a "wag the dog" world.
Pick your cliché. The goal posts are being moved; the playing field is being transformed; the middle ground is shifting. Rick Oglesby, Senior Analyst at Double Diamond Payments Research, put it this way: ISOs and MLSs better become independent software vendors (ISVs) – or partner with ISVs – or perish.
Oglesby said the traditional ISO business model of competing on price and distributing barely differentiated POS terminals has been losing relevance for years, as evidenced by increasing attrition and margin compression. "If you go out and talk to ISOs, you will hear a lot about increased attrition, and they are fighting really hard just to acquire enough merchants to not slide backward," he noted.
In its place has arisen the ISV model in which vendors sell integrated, highly individualized payment solutions that have proven popular with forward-looking merchants. "For a long time the ISV market has been a far more efficient growth engine for the few players that were involved: Mercury, Element, PayPros and Accelerated," Oglesby said. "It has been a far more efficient model for acquiring than has been the ISO model for a very long time."
In the last two years, mega acquirer Global Payments Inc. and Vantiv have been positioning themselves to take advantage of the ISV channel. Global purchased ISVs Accelerated Payment Technologies and Payment Processing Inc. (PayPros), while Vantiv acquired Element Payment Services Inc. and, most recently, Mercury.
Oglesby added, "It's really compelling at this point in time because obviously those are two mega acquirers that are [positioning] themselves to take on the other megas with the most productive acquisition channel that the industry has seen over the last 10 years."
The aforementioned ISVs are experiencing double digit annual growth rates. Not so in the traditional ISO realm. "Your average ISO is lucky to crank out a single digit number," Oglesby said.
Payments attorney Adam Atlas is seeing the same double whammy of merchant attrition and margin compression. "The smaller startup registered ISO scenario is fewer and farther between at this point," he said. "And I think it's because of how competitive it is, and how tough the marketplace is."
With increased competition on pricing comes greater effort by ISOs just to keep merchants and less time to board new merchants, Atlas added. "So that ISOs, when they were spending x number of personnel hours to generate new accounts, they see themselves having to shift some of that personnel time working more to save the existing account," he said.
As a consequence of this backward race, the ISOs unwilling or unable to change are being sold or simply going out of business, and the more efficient and technologically minded ISOs are surviving. It's a time when complacency is the enemy of the average ISO.
"They haven't made [technology] a priority," Atlas said. "They're so busy just selling accounts they haven't gone the extra mile to say, 'OK, should we also provide a tablet, an app, some extra software, that actually gets an extra hook into the merchant in terms of the longevity of the account?' It can generate more revenue. It makes the merchant happier potentially."
Oglesby predicted the traditional ISO will be completely phased out in five or six years; ISOs will have to adapt to the ISV model or simply go extinct. A domino effect will gain momentum as more merchants leave their processors for ISV vendors, and the ISOs' top sales agents jump the sinking ship as well. "They're going to have a much harder time attracting quality people," Oglesby said. "The quality people are going to migrate over to the higher value product solutions."
Oglesby does not underestimate the profound change the ISV model forces on traditional ISOs. In many ways, selling SaaS products is more challenging and labor intensive than what ISOs are used to.
"I mean dumping a terminal on the desk and walking away is pretty easy to do," Oglesby said. "But when you sell somebody a whole POS system, and they need to migrate to it, you've got to hold their hand through that process, train their people, all those things.
"Frankly ISOs don't like to go back to anybody they've already sold to. But this is a very different world. You're going back a whole bunch of times. You're selling a heck of a lot more value, and you're selling on the value that you are bringing. You're not selling on the cost savings."
An example of an ISO that made the transition successfully is Harbortouch, formerly United Bank Card Inc., which was known as the home of the free terminal placement. "But they went away from that, and they went down the road of here's a POS system that you can use to run your business," Oglesby said. "And it's low cost. You can do this, that and the other thing. … Their focus is on selling the software at 60, 70 dollars a month on a recurring revenue stream as well as monetizing the payments."
But selling the Harbortouch POS system, or another ISV solution, involves a different skill set and different tactics. "It's about going in there and saying I have a portfolio of 10 products, tell me about your business and I'll see if I can find you the right one," Oglesby said. "And once I figure out what the right one is, having the skill to really talk about the value propositions. Why is it the best one for that particular customer? What is it going to do for them? How is it going to transform their business?"
Swipely Inc. is another example of the ISV model. The Rhode Island-based tech firm operates an SaaS platform that provides businesses, primarily in the restaurant and hospitality markets, with big data analytics, with a helping of payment processing on the side.
"Quite frankly, the merchant processing is a means to an end," said Angus Davis, Chief Executive Officer at Swipely. "It's sort of a side dish, if you will, to the main event, which is the analytics and the marketing tools."
Swipely takes data from three sources payment networks, in-store POS systems and social media and repurposes it for merchants in the form of charts and graphs on a dashboard interface that illuminates trends and details of those businesses that would otherwise remain hidden.
For example, Swipely can crunch sales trends and note the effect weather had on sales, or which menu items were most popular and resulted in return business, or which items were not popular but maybe should be.
Davis said, based on a four quadrant graph, restaurateurs can recognize the "hidden gems" on their menus premium dishes that aren't often ordered: "You go to a new restaurant and say, 'I don't know. What should I have?' Well, that server should recommend the steak enchiladas because they have a very high retention rate. A lot of people who get that will be back. But steak frites are popular but they don't have a very good retention rate."
Additionally, Swipely can analyze wait staff performance and pinpoint areas where servers may need more training. Swipely also scours social media sites like Facebook and Yelp to provide insights on customer impressions and business ratings.
"You might want to know what people are saying about you during Restaurant Week on Facebook, or what reviews came in during that campaign period about you on Yelp or OpenTable," Davis said. "And so, all in one place, you can see that information. We pull it all together in a single place without requiring you to integrate it, and it's really a case of the whole is greater than the sum of its parts."
Davis came from a tech background, with a stint at Internet browser firm Netscape before he co-founded the voice recognition startup, Tellme Networks Inc., which was sold to Microsoft Corp. in 2007. He founded Swipely in 2009 to democratize analytics that big tech companies and merchants had access to, but not your average Main Street business.
One of the main things Davis has learned about most merchants is that they would rather avoid the "rip and replace" approach to new services, whether it's a new-fangled POS system or a mobile wallet scheme. He said the Swipely approach provides the benefits of technology without requiring that consumers make changes to their purchasing behavior, as well as saving merchants from having to trash the considerable investments they have already made in their existing POS systems and in-store operations.
Money Goes Mobile, a May 2014 impact note from Aite Group LLC, compared the tech world to financial services. Aite Analyst and report author Nathalie Reinelt wrote that tech firms are more agile than their payments counterparts in developing solutions and bringing them to market. But even though financial firms may be slower, they have a pretty good reason to be, as one false move could prove disastrous.
"The financial services industry, by design, doesn't have the same freedoms that tech companies have to make mistakes," Reinelt told The Green Sheet. "Google can launch a wallet that is only compatible on a very small percentage of smartphones, and no one thinks twice, chalking it up to the cost of innovation.
"However, the financial services industry is much more restricted because those missteps could have dire consequences to their brand. We hold our financial institutions to a much higher standard than we do tech companies."
The biggest difference between banking and technology organizations is how quickly they adapt to changing market conditions, according to Reinelt. "Tech companies are very agile and pivot quickly when opportunities present themselves, while the financial services industry has a tendency to be more reactive," she said.
But the emergence of the mobile payment ecosystem requires that both industries find common ground, Reinelt said. In the impact note, Reinelt offered the example of the relationship between Google and payment firm PayPal Inc. She wrote: "Arguably, Google Wallet and the PayPal app are going head to head, competing for top-of-wallet (m-wallet) status, yet you can find the PayPal app available for Android users on Google Play." It is somewhere in this "inevitable overlap," as Reinelt put it, that ISOs and MLSs will find their way. The secret lies in selling a quality product, whatever that might be. "The focus should be on consumer and merchant value, not creating technology for the sake of technology," she said. "It's hard to sell anything when you can't justify why it's adding value."
But beyond building a great solution, education is also crucial. "As these financial innovations take shape, providers need to ensure that all parties are thoroughly educated on the features, benefits and risks of the emerging technologies," Reinelt said, namely such hot technologies as near field communication, host card emulation and virtual currencies like bitcoin.
The prospect of becoming experts in technology is surely daunting for many ISOs and MLSs. Not everyone can master technology, just like most people will never cook the perfect French meal or design a runway fashion collection from scratch.
However, it is Atlas' conviction that sales pros must make a commitment to themselves to be "on top of their game technologically."
"And it doesn't mean they have to know how to program," he added. "It means they have to know what services they can resell to their merchants that can add the most value so that they don't get knocked out 18 months later by someone who has another widget or gadget."
With technological know-how and the right mix of products and services, ISOs and MLSs will continue to showcase what they do best sell and by the force of their selling abilities, make things happen.
"Like all shifts in business, things don't always happen because they have to," Atlas said. "They happen because somebody makes a great sale. Why do we get a new telephone this year and not wait 'til next year? Well, this year's phone works just fine, but someone made a great sales pitch, and I went for it. And why not? That's the heart and soul of business, and particularly the ISO business."