ISO Practices Committee Insight: Integrated/VAR Market Dynamics

Steve Rizzuto
August 8, 2013 –  Electronic payment industry studies have made it clear that the merchant community is evolving from terminal-based Point-of-Sale (POS) devices to more sophisticated PC and/or browser-based technology solutions. Historically high costs for hardware and software integration are no longer the norm – merchants can secure a robust integrated desktop solution for no upfront investment and receive integrated product features and functionality for a relatively small monthly subscription fee. These dynamics have created a new entrant into the payments landscape – the VAR (value added reseller).

Merchant ISOs and acquirers face their own challenges through fierce market competition and continued margin erosion at alarming rates. As acquirers search for ways to curb customer attrition and address margin erosion, it has become increasingly more important for acquirers to identify new sales strategies. These strategies can include direct sales vertical market-focused efforts; new third party distribution strategies, technology focused sales efforts, and last but not least, the entrenchment of a few pioneer companies into the software integration marketplace. Those pioneer companies predominantly dominated the restaurant vertical and still do so today. In the past 5 years new entrants have opened up new vertical markets for low cost integrated solutions. The advent of these companies as “trusted advisors” for payments has evolved rapidly.

Executing a fully developed integrated strategy should impact all areas of an ISO. A strategy should coincide with the organization’s strengths and strategic initiatives. When considering any new initiative, an organization usually begins with “low hanging fruit”, or areas already considered as strengths. When making the initial effort for targeting VARs as distribution, strategic, or vendor partnerships, one should consider:

  • Identify highest populations of MCC Codes in an organization’s portfolio, researching VARs servicing those merchants
  • Identify VAR’s targeting key portfolio SIC/verticals that might be causing attrition to terminal based clients
  • Reverse market the VARs’ products to existing customers in addition to gaining referral business from those partners.

A fully developed and implemented VAR sales strategy encompasses all of these areas. Although significant penetration has already occurred within many vertical markets by competitors, there is still significant opportunity in the integrated provider space. One must perform a thorough market analysis and have identified specific opportunities. The ability to “switch” a currently integrated partner is more difficult as the cost of integration can be a sales barrier for most, but new entrants are plentiful.

Many VARs today that do earn revenue on electronic payments are typically locked into a referral agreement. In these instances, the VARs are doing the bulk of the heavy lifting in the sales process, essentially turning the ISO sales process into a formality sale – nice place to be! Some VARs have taken the “direct selling” path and are ecstatic to learn about the increased revenue opportunity for the extra work of selling themselves, essentially creating a VAR ISO. At this juncture it’s probably best for an ISO to create unique joint ventures with VARs that have “evolved” into wanting to own the sales process.

Objectives?

  • Adding new distribution channels for non-commoditized growth
  • Enhancing merchant retention; controlling attrition to low single digits
  • Expanding new products for direct sales channels that generate significant revenue opportunities
  • Providing a defined differentiator in a crowded payments marketplace.

What is being achieved?

Focusing on key, pre-determined, high growth vertical markets; each with a high propensity to drive merchant accounts/volume, in attractive MCC codes that do not cause undue financial risk exposure – utopia! These partners have integrated via software, gateway, website, plugin or some degree of technical workforce management to a strategic ISO/acquirer, under contract, ultimately linking merchants to use the ISO as a payments partner. ISOs can segregate their partners into separate sub divisions that will be reflective of the “functional” nature of how one does business with each partner, all integrated by various degrees. These sub-divisions are defined as follows:

  • Indirect VAR Partners – software/gateway/website integrated with VAR partner doing the selling internally
  • Direct VAR Partners – software/gateway/website integrated with ISO doing the selling via telesales

What positives are derived by this focus?

  • Generally, ISO garners a higher percentage of the net revenue with each partner (not a race to zero yet)
  • Reduced partner defection, as integration binds them to one acquirer/ISO
  • Lower merchant attrition due to integrated services
  • Integrated portfolios command higher exit multiples from the investment community
  • Predictable and sustained growth modeling advantages

What are some of the challenges?

  • Perceived cost of implementation of partner integration can be a hurdle
  • Some integrated partners may be new to payments causing strain on core competencies; requirement of additional training and education
  • Legacy VAR partners, familiar with the payments space, have become savvy to payment industry fee structures and have higher negotiation demands
  • ISO or ISO’s processor’s inability to write multiple API’s to meet an ever changing landscape in the integrated partner space, can prove challenging due to the hundreds of potential applications and software re-writes required
  • Unproven partner software line may not yield significant merchant processing revenue (risk reward doubts)
  • Micro Merchant and Ecommerce sales models can prove risky, requiring significant risk monitoring tools to protect ROI
  • Generally speaking, integrated partners demand higher relationship management resource skills from ISO
  • Long sales cycle is not customary skill set of traditional MLS organizations
  • This must be a concerted team effort from all functional support departments, as this market segment is an “enterprise” sell.

Measuring Success/Progress:

  • Success will be measured by partner agreements signed and focused implementation
  • Identify key vertical and sub vertical markets for deep pipeline generation
  • Size each vertical opportunity and identified the top 3 VARs in each category 
  • Recruit, hire and train a more technical sales team
  • Verticals assigned to sales executives making each a resident expert in the respective vertical
  • Sales to penetrate the secondary vertical markets within each primary vertical for second tier deals to insure steady pipeline growth
  • Monitor margins closely on deals sold via telesales to ensure profitability given revenue splits to VAR

There is no doubt that the point of sale is rapidly being influenced by those providing bundled integrated solutions with payment capabilities for even the smallest of merchants. The cost for a merchant to transition from a traditional terminal to an integrated solution have come down dramatically – those ISOs that find a niche to play with these entities will survive in the long run. The undeniable presence of Vars in most every vertical give merchant’s reason to pledge allegiance to a new POS expert.

[spacer height=3] [divide] [spacer height=3] Steve Rizzuto is President, Commercial Services of TransFirst, LLC and a member of the ETA ISO Practices Committee.

The views expressed in the posts and comments of this blog do not necessarily reflect those of ETA.