Cover Story: Innovative ISOs

 

What merchants increasingly want from an independent sales organization  is an all-in-one application developer, provider of business solutions,  and bundler of mobile and e-commerce data.  Forward-thinking ISOs are the ones that can tick off those boxes.

By Peter Lucas

Having difficulty figuring out the definition of an independent sales organization? You’re not alone. Today’s ISOs are anything but the traditional feet-on-the-street sales force that tirelessly knocked on merchants’ doors.

 

Those ISOs sold transaction processing at a deep discount and looked to make their real margins on terminal leasing.

 

No more. Gradually or quickly, depending on the market, the old ISO is being replaced by a new generation of companies. More innovative, this new breed of ISO is armed with software solutions that can solve merchant problems and earn them higher margins in a business built on cutthroat pricing for transaction processing and terminals.

 

“The traditional sales model used by ISOs has lost productivity,” says Marc Abbey, managing partner for Linthicum, Md.-based First Annapolis Consulting Inc. “If ISOs want a defensible position in the market, they need to specialize in serving market niches.”

 

Some of those niches, such as m-commerce and e-commerce, offer explosive potential but represent completely new territory for most ISOs that have spent decades in the brick-and-mortar world.

 

Other niches include souped-up point-of-sale systems that get beyond the standard-issue payment terminal but demand development resources that some, but by no means all, ISOs have. A software program that aids merchants in running their business more effectively, for example, can not only generate potentially high margins but also stake out ground that few competitors can invade.

 

But, since few ISOs have a background in software development, those that are responding to this opportunity are looking to partner with developers that have created applications that solve a business problem for merchants and can be integrated with their POS system.

 

Indeed, it’s hard to overstate the importance of software in the modern ISO market. “More and more, application developers are driving the direction of payments,” says Bill Ready, chief executive for Chicago-based ISO and e-commerce specialist Braintree Payment Solutions LLC.

 

What makes it possible for ISOs to sell the sophisticated business solutions merchants are looking to integrate into their point-of-sale system is that POS terminals today are, often, personal computers. They are outfitted with a card swipe and connected to back-office servers running a merchant’s business, but incorporate far more computing intelligence than was the case a few years ago.

 

This configuration gives merchants more business functionality at the point of sale, a location where they spend a great deal of their time.

 

Restaurants are a prime example of a merchant category where ISOs have thrived selling business solutions that can be integrated through the point-of-sale system.

 

Applications that can help restaurant managers track table turnover so they can provide more accurate wait times, automate reservations, track profitability by table, monitor employee time and attendance, or manage payroll are of great value to restaurants looking to automate such functions.

 

In some cases, the new demands of the acquiring business have attracted ISOs that weren’t even ISOs when they started out. “A lot of developers created the market for their application, then became ISOs,” says Todd Ablowitz, president of Centennial, Colo.-based consulting firm Double Diamond Group LLC.

 

“Look at Intuit,” he says. “It started selling business solutions that could be integrated with POS systems and moved into selling processing. Merchants are looking for business solutions and ISOs that want compete need to be selling them.”

 

‘Viral Marketing’

 

While Intuit Inc. is considered the classic example of a software developer that morphed into an ISO, many smaller software developers follow a different route.

 

These players prefer not to sell processing services, instead focusing on servicing merchants that run their application. They partner with a processor, gateway, or large ISO to gain entrée into the merchant world and leave it to their partner to sell their app along with processing.

 

“We partner with a lot of companies with solutions that add value to the merchant’s business and a lot of them come from outside the payments business,” says Todd Linden, chief operating officer for Merchants’ Choice Payment Solutions, a Woodlands, Texas-based ISO. “As a super-ISO platform, we can take a wholesale approach to processing in order to attract ISOs and partners that bring value-added solutions.”

 

One area Merchants’ Choice is focusing on is creating real-time discount programs for merchants. Merchants’ Choice can analyze POS activity for a client restaurant, for example, to determine slow periods. It can then work with one its promotional partners to create a daily deal for that merchant, such as 50% off Margaritas on Wednesday at these locations between 4 p.m. and 6 p.m.

 

Once the deal is created, Merchants’ Choice can offer it to the merchant, which can then broadcast it to customers that have opted in to its mailing list, post it on its Facebook page, or tweet it via its Twitter account. In some cases, the merchant promotes the deal on the promotional partner’s Web site.

 

“To successfully compete for and retain merchants today, ISOs have to help merchants drive sales and traffic, because there is always someone willing to undercut your price on processing,” says Linden.

 

Merchants’ Choice also works with mobile-application developers. The application can be used to find out about a merchant’s daily sales, events, or nearest location. The strategy is to create a mobile-phone app for a merchant and help distribute it.

 

Merchants in college towns are prime targets for such applications, which can easily be distributed on campus by the merchant or a Merchants’ Choice representative.

 

The app can also be posted on the merchant’s Facebook page, where visitors must “Like” the merchant to download the app. Consumers can access the Facebook page to read reviews or customer comments or organize outings to an event the merchant is sponsoring. They can then pass texts or e-mails directing friends to the merchant’s Facebook page.

 

“Viral marketing is a big part of social media, and the more tools an ISO can give merchants to market themselves, especially through social media, the greater the edge the merchant has against its competitors. The same is true for the ISO,” says Linden.

 

Multichannel Checkout

 

While many software developers are seeking out ISOs, some ISOs are reversing the model and establishing themselves as a platform on which application developers come to them to build new programs.

 

Braintree, a Well Fargo & Co. ISO, is positioning its self as a development platform supporting e-commerce and m-commerce applications developers. In February, Braintree introduced a library of mobile-application tool sets to build mobile-payment applications that accept payment within the application itself, as opposed to through the mobile Web browser.

 

The resulting applications are expected to be more secure than transmitting payment data through a browser, since the card data are not exposed on the Internet. Instead, the information is collected by the application, encrypted, and transmitted directly to the merchant’s server, which forwards the data to Braintree for processing. Braintree is the only party involved in the transaction that holds the key to decrypt the data.

 

“Data security is important, especially in the mobile world, and we don’t want to offer merchants applications that expose card data through the mobile Web browser,” says Braintree’s Ready. “This approach helps developers and merchants avoid PCI compliance issues.” The Payment Card Industry data-security standard (PCI) is a set of rules enforced by the card networks to lock down card data.

 

Braintree’s developer libraries support smart phones and tablet devices running the Android (Google), iOS (Apple), and Windows Phone 7 operating systems.

 

While Braintree is aggressively pursuing mobile merchants, less than $1 billion of its $4 billion in transaction volume comes from these merchants so far. Still, unlike most ISOs, Braintree has a large contingent of application developers on staff. About 30 of its 60 employees as of February were developers, a figure Ready predicts will double in the next 12 months.

 

“We feel there is a lot of innovation yet to happen in e-commerce and m-commerce and we want to build a platform for developers much like the cellular-phone industry did,” says Ready. “Applications are the value in mobile commerce and we feel that, by offering developers tool sets on our platform, they will have more flexibility when it comes to innovation than if we simply created our app and sold it to merchants. Innovation and flexibility is what will get merchants excited about those applications.”

 

One feature Braintree offers through its platform is the ability to help merchants integrate their mobile and online shopping experiences so they can create a one-click checkout for shoppers that move between the two channels.

 

For example, Braintree’s e-commerce applications can securely save a consumer’s payment data on the company’s servers and call that information up again when the same customer makes a purchase from that merchant using their mobile phone. “It’s hard to type of lot of data into a mobile phone,” says Ready. “One-click checkout helps makes the transaction easier to complete for the mobile shopper.”

 

With no pavement-pounding sales force, Braintree relies solely on word of mouth to sell its applications. The company hit upon the strategy after deciding to focus on e-commerce and m-commerce merchants, many of which provide constant feedback to Braintree developers about applications.

 

“Most of our developers are highly engaged in social media, which is extremely viral, so news about new applications can spread fast,” says Ready. “We’re adding about 100 new merchants a month.”

 

‘The Rate Game’

 

While serving as a one-stop shop for payment solutions is nothing new for ISOs, many have yet to pull together a portfolio of applications across multiple sales channels. Instead, many ISOs prefer to focus on developing merchant solutions for a single sales channel.

 

Dallas-based TransFirst Holdings Inc. is an ISO looking to break that mold by positioning itself as an application aggregator.

 

Enabling merchants to connect consumer payment data across their online, mobile, and storefront sales channels and detail that information in a single report is of value to merchants looking to simplify their overall operations.

 

“A lot of merchant solutions are sold on an a la carte basis, which means a different vendor supports each application,” says Steve Cadden, chief operating officer for TransFirst.

 

Supporting multiple applications from multiple vendors also means applications are most likely not connected, which can create data silos for multichannel merchants. “Our strategy is to support multichannel commerce,” Cadden adds. “Merchants have a lot of customer touch points today and they want bundled solutions that make sense for their business and have information delivered in a single report.”

 

Another drawback for merchants with the a la carte approach is that they end up paying a lot of fees. There can be duplicate fees when using multiple vendors, such as for service and support. Duplicate fees unnecessarily raise the cost of doing business for the merchant.

 

With many merchants still looking to keep a tight lid on operating expenses in the wake of the tepid economic recovery, paying one vendor to service and support all the applications tied into their POS system can be a lot cheaper.

 

“Consolidating solutions through one provider gives merchants better pricing,” says Cadden. “The bit-by-bit approach does not necessarily sit well with merchants from a cost perspective.”

 

Bundling business solutions along with service and support and transaction processing also gives ISOs a competitive advantage over ISOs selling processing separately on price, as the latter makes it tougher for those ISOs to gain a toehold with merchants.

 

“With the bundled approach, the merchant’s focus is on the POS system, not the cost of the processing, and price competition dissipates,” says Brian Jones, executive vice president of sales and marketing for Allentown, Pa.-based ISO Harbortouch (formerly United Bank Card). “Cold calling these days is tough for ISOs strictly playing the rate game.”

 

One merchant segment Harbortouch is focusing on is restaurants. The company is preparing to launch an iPad application that enables servers to electronically submit customer orders to the kitchen as they are being taken at the table. The application speeds the ordering process and reduces the risk of human error in filling the order from a handwritten document.

 

In addition, Harbortouch’s core POS system allows managers to update pricing at the POS terminal or from the back office, automate the splitting of customer bills, track bar tabs started by customers waiting for a table that need to be carried over to the restaurant bill, and track all current promotions to automate calculation of discounts.

 

“Selling a POS system shifts a sales representative’s focus away from trying to save accounts to acquiring new accounts,” says Jones. “Many of the ISOs we do business with say they spend up to 50% of their time trying to save accounts because they are playing the rate game.”

 

Better Managers

 

One reason many ISOs focus on selling business solutions for restaurants is that restaurateurs have unique needs. The same is true, for example, for health-care providers, which need to manage patient schedule and insurance claims.

 

Merchants with unique needs tend to place a high premium on automating manual tasks and on detailed reporting. “Reporting is becoming a real hot button with merchants because it allows them to view their business in greater detail,” says Jones. “They can break down labor costs, trends, inventory management, etc. with a few keystrokes.”

 

The evolution of ISOs from sales forces to solutions providers can be traced in part to the level of talent coming in at the senior executive level. “There has been a steady influx of better managerial talent at ISOs over the years,” says First Annapolis’s Abbey. “That level of talent has changed the way they think about and view their business.”

 

In other words, ISOs are more aware of how their business is evolving and what they need to do to remain competitive.

 

“The technology boom is bringing about a lot of innovation when it comes to business solutions, because that’s what businesses want,” says Braintree’s Ready. “Many ISOs realize they have to keep pace with innovation and that it is the software developer that brings the innovation merchants want. If [ISOs] don’t work with them, they’ll eat their lunch.”