By Dale Laszig and Patti Murphy
From the first electronic transactions, merchant level salespeople (MLSs) have helped customers navigate the ever-changing payments sphere. They led millions of merchants from paper to dial-up to broadband, and from countertop to integrated to omnichannel systems. Now, after decades of leading major initiatives, MLSs face a critical juncture. As merchants replace single-use systems with digital service models, and payment facilitators (payfacs) embed payments into specialized service offerings, traditional ISO and acquirer business models are being disrupted.
This two-part series explores how payfacs are changing the acquiring marketplace, creating opportunities and challenges for acquirers and MLSs. Part 1 revealed how early payfac models set a higher bar for acquirers, with streamlined applications, fast approvals and automated boarding. Part 2 explains how payfacs are evolving and how traditional acquirers and MLSs can collaborate and compete in the new payments marketplace.
In a 2016 report titled Merchant Aggregation: Growth Opportunity or Compliance Burden?, First Annapolis Consulting predicted continued growth for the payfac model but not at the expense of traditional acquirers and their sales partners. "Developing support models and offerings specific to aggregators may be a significant opportunity for acquirers over the next several years," Brooke Ybarra, First Annapolis Senior Manager, wrote in the report.
Todd Ablowitz, Chief Executive Officer at payment consultancy Double Diamond Group LLC, suggested this is part of a larger market shift. "Software is the future of payments," stated Ablowitz, who also is co-founder of Infinicept, a payfac service provider. "Selling payments as a stand-alone service no longer makes sense when merchants have moved on to more sophisticated solutions."
Merchants aren't shopping for standalone POS systems; they are looking for systems that help their businesses run more efficiently, Ablowitz pointed out. "Whether it's scheduling, registering customers or using social media to assess risks, they want an operating system for their business, and if they find it, they will use it," he said. "You can't sell rate; we've been saying that forever. You will go broke." It's not just about payments anymore; payments are a feature, he added.
Ken Paull, Chief Revenue Officer at Cayan LLC, agreed, stating that the market has moved to integrated systems and traditional selling methods are changing, too. "Clover, Square and other integrated solutions have enabled small and midsize merchants to use sophisticated, integrated POS," he said. "As more VARs [value-added resellers] sell POS software, we're seeing agents become VARs and VARs become agents."
Peter Fitzpatrick, Enterprise Sales Director at Agreement Express Inc., a Vancouver, B.C. firm specializing in onboarding automation, foresees a future where niche-oriented technology firms dominate payment distribution channels. "You'll see lots and lots of targeted, specialized verticals, each with its own unique way of assessing risk," he said.
When industry veterans Ablowitz and Deana Rich founded payfac platform Infinicept in 2014, RunSignUp LLC was one of their first clients. Based in Moorestown, N.J., the cloud-based software company organizes races to benefit charities and boards about 1,000 races a month. Infinicept helped the company bring payment processing in-house. "When we found them, they were offering PayPal, Braintree or Stripe," Ablowitz said. "Why let the payment revenue go [elsewhere], when they could be sharing that revenue and improving customer experience as a payfac?"
Becoming a payfac enabled RunSignUp to set up each race organizer as a sub-merchant, process payments through its master account and send net remittances to each race organizer. Sub-merchants pay the company a flat rate of 6 percent per transaction to cover hosting, marketing and transaction processing costs. The impact of the change on RunSignUp's bottom line has been significant: it rose from $12 million in 2013 to $100 million in 2015 after the company became a payfac. "RunSignUp provides many more services to races than just payments, and becoming a payment facilitator gave us the ability to monetize our services in a unique way that really works for our customers," said Kevin Harris, RunSignUp's Chief Financial Officer.
Experts have been saying for years that traditional acquiring, with its lengthy approvals and ambiguous pricing, is no longer sustainable in a world of one-click checkouts, same-day deliveries and instant merchant accounts. But that doesn't mean acquirers and their sales partners have been shut out of the market.
Holli Targan, a Partner at Jaffe, Raitt, Heuer & Weiss, P.C. who specializes in financial technology, noted many payfacs lack the knowledge and experience acquirers and their sales partners have amassed. She said she is frequently contacted by payfacs seeking expertise in areas such as underwriting, fraud management and chargebacks, noting "they're going out and hiring industry experts to help build robust payments capabilities."
Paull noted that whether merchants are self-enrolling or being signed by MLSs, they want to be online quickly, accepting payments right away. "Traditional ISOs and merchant aggregators are using auto-enrollment, same-day activations and real-time underwriting to compete with Square, Stripe and PayPal," he said. "They're moving into the VAR space, with advanced APIs and platforms that easily integrate with mobile wallets and stored value systems."
Fitzpatrick has observed "many shades of gray" between ISOs and payfacs. "Small acquirers and ISVs [independent software vendors] that resemble payfacs have similar requirements from an onboarding perspective but very different approaches when it comes to managing risk," he said. "The type of accounts they board will typically determine the amount of risk each merchant represents."
So how can ISOs and MLSs compete without becoming payfacs? Ablowitz said MLSs have numerous options. Seek out verticals you know and understand, then pursue merchants in that space with solutions that go beyond just acquiring transactions, he advised. "You may want to find a software package for a merchant group, or sell software that includes payments, or sell payment facilitation to software companies," he said. "Find a restaurant POS software and sell that."
Paull suggested selling turnkey services, such as enhanced reporting, ISV integration, faster EMV (Europay, Mastercard and Visa) processing and gateway solutions. "For example, Party City had a long-standing relationship with an acquirer but needed enhanced security features," he said. "We took the payment flow off the POS and got them EMV support with minimal disruption."
Ybarra's First Annapolis study highlights addressing risk and security as a critical imperative. "Developing support models and offerings specific to aggregators may be a significant opportunity for acquirers over the next several years, but it is important to also consider a plan for the increased risk inherent in such models," she wrote. Indeed, a robust, holistic approach to security (from underwriting and onboarding through transaction processing) should be a paramount consideration for ISOs seeking to create payfac-like experiences for their merchants and prospects. This may require new ways of analyzing risk and security.
A growing number of payfacs, for example, use nontraditional sources, like social media footprints, to evaluate prospective clients. "It's easy to underestimate how homogeneous sub-merchants appear," Fitzpatrick said. He pointed to specialized tools that can help better evaluate merchants. "Imagine using a Yelp score as a risk indicator," he added. "A merchant with 4 and a half stars and 500 check-ins would appear to be a trustworthy business. Specialized tools like this can be added to base underwriting to evaluate specialized markets."
Paull recommended ISOs and MLSs focus on semi-integrated in-store systems to deliver high-level security across all channels. "Semi-integrated systems keep payment card data out of PCI scope, because the technology and POS are not talking to each other in the store," he said. "It's also critical to use validated P2PE [point-to-point encryption] and tokenization." He added that the bottom line is control: the fewer controls there are in place, the greater the risk, and the less clear a migration path there is for growth.
Considering how rapidly regulatory requirements can change by country and region, payfacs and acquirers, alike, must stay abreast of and respond to these changes. As a global service provider, Infinicept constantly evaluates its technology stack according to government regulations and Payment Card Industry security standards. "We don't just design for audit," Ablowitz said. "We design our framework for compliance."
The requirements of real-time updates and reporting are constantly changing, hence the need for ongoing adjustments, Paull said. He added that Cayan does so with routine feature enhancements. "All the heavy lifting is done in the cloud, making more nimble solutions available to everyone using the platform," he said.
Nadav Naaman, Vice President Product at payment technology Zooz Inc., said systems that leverage artificial intelligence and machine learning react faster than humans to opportunities and threats at the transactional level, and smart routing solutions route transactions in real time to least-cost payment networks. "Merchants need the freedom and accessibility to choose the right payment rails," he added. "Smart routing is another example of how merchants work with different platforms and data points on an ongoing basis, adding layers of integration from a centralized place."
Acquirers and ISOs must also demonstrate to merchants that their relationships are not restrictive, Paull stated. "Large merchants that have banking relationships frequently work with multiple acquirers," he noted. "We can route their transactions to different processors and networks."
Henry Helgeson, CEO of Cayan said most merchants are looking for redundant processing systems that enable them to deliver a consistent customer experience, in-store, online and on mobile devices. Cayan, he noted, has designed its Unified Commerce Solution Suite to unite customer touchpoints across all channels in a secure, cloud-based platform. The solution enables merchants to manage the entire customer experience without touching payment card data.
Advanced technology platforms with multitiered architectures are ably provisioned to manage master merchant accounts and dynamic sub-merchant populations, Paull added. "When we add features in the cloud, such as new mobile wallets, we propagate those updates to our customers," he stated. "The solutions are available to everyone using the platform. Unified Commerce is a powerful capability with the turnkey solutions most merchants require."
The need for interoperability likewise extends to POS devices and software. That was a key consideration for Cayan in developing its Genius program, which Paull described as "built to be ubiquitous yet simple enough to be a homegrown system." He pointed to the need for readymade solutions and "plug-and-play" application programming interfaces (APIs) that address unique business ecosystems. Examples of acquirer APIs include reporting, statements, billing, chargeback management and funding instructions.
Maintaining multiple platforms and dynamic sub-merchant populations requires merchants to continually adapt to every account and platform update. "It can be challenging for merchants to work on an ongoing basis with different platforms, each with its own portal, reporting methods and payment flows," Naaman said, adding that Zooz eliminates that burden "by normalizing the data and lining everything up in a coherent manner within our agnostic platform."
Of course, none of these considerations count for much if onboarding is cumbersome: simple automated processes are needed. Payfacs use advanced technologies to streamline onboarding and speed up merchant approvals, but they must not cut corners, especially when it comes to due diligence, Fitzpatrick said. "We work with payfacs and acquirers to help reduce onboarding time and create a seamless customer experience," he said. "Automated tools may streamline the process, but each account must be vetted according to its individual risk profile and merchant category."
The emergence of payfacs is ushering in big changes for merchant acquiring, changes that pivot on technology, not customer service. "The largest payment acquirers were built on distribution networks that won merchants on service," Fitzpatrick said. "ISVs have changed that, because their services with built-in payments provide more value than the services ISOs provide. Square's customer service sucks, but merchants don't care, because the POS is so valuable."
Ablowitz noted that thousands of MLSs are finding it harder to compete. "Some are evolving and some are trying to make it more complicated for the uneducated," he said. "There's an army of door-knockers who want to keep making a living, but not every software company is set up to be sold online or has a dealer network. These companies are looking for a sales channel."
Fitzpatrick agreed MLSs, ISOs and acquirers will remain vital to merchant acquiring. "In this tech-driven world, a payfac's primary consideration in choosing an acquirer will be 'who can maximize my approvals?'," he said. "Acquirers with the best risk models will win, and those that miss the boat will have to steal ISVs from other acquirers, which is harder than winning new business."
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