Cover Story: The Googleization of the Traditional ISO

Once known for mainly hiring sales people, the most innovative ISOs nowadays are on a hiring binge for techies. What’s behind this shift?

By Kevin Woodward and Jim Daly

\”Disruptor” is one of the favorite nouns in American business nowadays, so much so that it’s almost a cliché. But the word has very real meaning for independent sales organizations, many of which find themselves as the disruptees in danger of being shunted aside by tech-savvy disruptors.

Today, some of the most successful ISOs are racing to differentiate themselves by their technology-based products and services, which offer merchants everything from tablet-based point-of-sale systems to back-office processing to business-management functions to fraud-prevention systems and chargeback resolution.

Just as Google Inc. hires software engineers by the gross and uses that asset to drive innovation in markets from Internet search to the point of sale, ISOs these days are looking to add technologists as much as they are trying to find and keep talented sales folk.

This tech-oriented approach means that the traditional ISO, which heavily emphasized the “S” in the merchant-acquiring industry’s most familiar acronym, may not succeed the way the ISOs did traditionally up until just a few years ago.

Back then, most ISOs sold or leased POS terminals to small and mid-size merchants. Like railroad firemen of old shoveling coal into steam locomotives, those terminals fed transactions into the computer systems of big third-party processors, which took care of just about all the operations—authorization, settlement, production of merchant statements, and dispute resolution.

The transformation of some ISOs into tech-oriented merchant processors in their own right is not new (“Innovative ISOs,” April 2012). Some of the biggest acquirers in the business—Heartland Payment Systems Inc., TransFirst LLC, and a few others—now operate their own soup-to-nuts technology platforms but still are technically ISOs: non-bank companies that sign merchants to accept card payments.

The difference in the past couple of years is the rate of the ISO industry’s technological transformation, especially with the spread of smart phones and tablets, and the increasing capabilities of Internet-based services.

Square Inc., for example, launched only in 2009 but has vaulted to the head of the mobile pack thanks to its original cube-shaped reader for smart phones, later supplemented by a whole host of other mobile-based services for both merchants and consumers.

“The disruptors are where it’s all at,” says acquiring-industry researcher and consultant Paul R. Martaus, president of Mountain Home, Ark.-based Martaus & Associates. “The ISOs are standing there trying to figure out how can we compete in a disruptor marketplace.”

In some cases, companies have proven adept at working with developers to integrate their services with the management software those developers sell merchants and professionals. Mercury Payment Systems, for example, works closely with a network of 500 system developers and resellers to recruit and then serve small merchants. Those relationships came in handy last summer when the Durango, Colo.-based company signed on as the first ISO help PayPal Inc. in its effort to sell its mobile wallet to physical stores.

In other cases, the new tech orientation can be found in both point-of-sale hardware and software ISOs install for merchants. Free-terminal pioneer Harbortouch in 2012 launched POS Elite, a sleek new system combining touch-screen displays and increased processing horsepower with software customized for merchants’ lines of business, offered at no cost to the merchant. The Allentown, Pa.-based company followed that up last year with a collaboration with mobile-payments startup Tabbedout.

Here, Digital Transactions profiles six other companies of varying size that it believes highlight this new tech orientation of the ISO industry—Clearent, EVO Payments International, Heartland, Merchant Warehouse, North American Bancard, and Transaction Services. Our picks are entirely subjective, and we apologize up front to acquiring executives who feel their company deserved a profile.

But we think most industry veterans would agree that our spotlighted companies are taking technology and trying to turn it to their own advantage—and in so doing are giving merchants a reason to do business with them other than just low pricing.

When it comes to tech, though, a lingering question is, build or buy? Some of the more innovative ISOs are concluding they need to build it themselves.

Happauge, N.Y.-based TransFirst is one ISO that concluded early that deploying its technology would help it stand out in the acquiring market. More than 15 years ago it began developing a front-end platform for authorizations and draft capture called Transaction Central, according to chief operating officer Stephen Cadden.

Over time, Transaction Central morphed into a gateway called TXP for physical and e-commerce merchants of varying sizes and industries, and TransFirst completely rebuilt it in 2011 to keep up with changing technology.

In addition, TransFirst, which services 200,000 merchants and handles $40 billion in annual charge volume, last year rolled out TransClear, its back-end processing system for clearing and settlement.

“We recognized over time that merchants were becoming more sophisticated,” says Cadden, adding that TransFirst’s goal was be able to accept any merchant, “from being a small single location mom-and-pop merchant all the way up through an enterprise business.”

In addition to its desire to serve a broad range of merchants, Cadden says a big reason for TransFirst’s emphasis on proprietary technology is that it offers more control over products and operations than the company would have if it outsourced major functions to third-party processors.

He points to the Durbin Amendment in 2010’s Dodd-Frank Act, legislation that imposed new transaction-routing requirements on debit card issuers. For merchant processors, Durbin puts a premium on their ability to offer merchants hassle-free routing choices.

“We didn’t want to be in a position where we did not control our platform from the aspect of development,” says Cadden. “We would have had to ask those third parties, ‘How are you handling Durbin?’”

Another reason for developing a core processing platform, he adds, is the ability to add ancillary new products that work off of those platforms. In that way, TransFirst says it can save merchants time and money by not having to shop for specialized services à la carte from third-party vendors.

“If we’re going to develop products and services that are proprietary to TransFirst, we wanted to build them on our own platform so we could deliver them in the ways we thought best, and also we did not have costs that would affect us as we went to market,” says Cadden.

Some of the newer ISOs put heavy emphasis on tech from the get-go—think Square and Braintree Payments, which is now owned by PayPal’s parent company, eBay Inc. Square started out serving young, tech-savvy small merchants open to using iPhones and tablets for payments and loyalty programs. Braintree offered specialized services for e-commerce.

These days, for ISOs rooted in the old ways but looking to take on a more tech-oriented strategy, selling can become a challenge when the topic moves beyond the discount rate.

But that doesn’t mean old-fashioned sales skill is no longer relevant. The trick is to combine that skill with knowledge of how to apply technology to solve merchants’ problems. And, to be sure, in some cases just plain old dash and daring can still win the day. “The guy that has it [a menu of new, tech-based products] is being outsold by the guy who doesn’t have it, but has shinier shoes,” says consultant Martaus.

Cadden says TransFirst’s basic sales pitch is simple for merchants to understand: one-stop shopping at fair prices.

“A merchant doesn’t want to do business with five or six or seven entities,” he says. “That’s kind of an easy conversion.”

Clearent

Web site: Clearent.com

Does your company offer a reseller program? Yes

Technology is part of the Clearent foundation, starting with a proprietary payment-processing platform. St. Louis-based Clearent soon will launch an application programming interface (API), which will enable developers to offer integrated Clearent payment processing in their software, says Mark Sundt, chief technology officer.

“Technology is important for several reasons,” Sundt says. “First, technology helps us provide unique benefits to merchants and agents. For example, we can offer next-day funding with a late 11 p.m. cutoff time because we use our own technology to do it. This benefit is hard for legacy processors to match because their systems are not as flexible.”

Technology also enables Clearent to offer its independent sales organization and agent partners tools to differentiate themselves, he says. “Selling the same capabilities as hundreds of other competitors won’t get it done,” he says. “Our technology provides unique solutions for our agents that they can’t get from other processors, and this helps them present unique solutions to win over merchants and create more loyal customers.”

Sundt sees little reason that Clearent’s reliance on technology will lessen any time soon. “As we’ve seen the past few years, technology enables creative new products and solutions,” Sundt says. “It’s always difficult to predict the exact changes, and the timing of when they will occur, but we believe that technology will be a key driver of change. Clearent will continue to be an active participant in these changes.”

Indeed, the company actively encourages new developers with its participation in LaunchCode, which matches companies that need developers with aspiring programmers who need real-world work experience.

EVO Payments International

Web site: EVOPayments.com, EVOSnap.com

Does your company offer a reseller program? Yes

EVO Payments International launched its EVO Snap division in 2013 to be a resource for developers and provide a common integration point for them to tap into EVO’s payment system. “Technology development is a significant part of our operation,” says Kevin Hodges, chief financial officer at the Melville, N.Y.-based merchant-services company.

That is especially important for a company like EVO, which is investing in international payments. It offers payment services in Poland and has a merchant-acquiring joint venture in Spain, for example. “We have made significant investments focused on solving current and unforeseen business problems for our multinational developer and merchant customers,” Hodges says. More than 400,000 merchants process more than $50 billion annually, EVO says.

EVO’s strategy is about enabling merchants to accept payments without a lot of fuss. “As the payment landscape changes, our goal is to continue to make it as easy as possible for our merchant customers to consume and activate those services,” Hodges says. “In the past, we spent a lot of time making sure our systems were certified to a wide variety of POS terminals. In today’s omni-channel marketplace, we provide a common integration point for traditional hardware and emerging software solutions whether it is mobile, e-commerce, back office, unattended, or point-of-sale systems. Our advantage will be providing one simple-to-use API allowing EVO services and EVO partner services to be quickly activated for card-present and card-not-present acceptance needs globally.”

That omni-channel influence will manifest itself in the continued melding of payments into more devices and applications, he says. “While traditional POS terminals will remain an important part of the industry, we are going to see mobile payments and integrated solutions continuing to grow rapidly.”

Heartland Payment Systems Inc.

Web site: HeartlandPaymentSystems.com  |  Does your company offer a reseller program? No

Princeton, N.J.-based Heartland Payment Systems Inc. has a history of using technology to benefit its merchants, and by extension, its direct sales force.

With a diverse product set, ranging from traditional payment terminals to campus payment programs and point-of-sale systems, Heartland’s investment in ongoing technology programs is constant. One of its highest-profile endeavors was the 2010 launch of its own E3-branded payment terminals that encrypted the transaction. Developed following the 2009 announcement of its massive breach, the terminals were designed to assuage merchant and consumer concerns, while aiding the merchant’s data-security efforts.

More recently, in October, Heartland invested $20 million in mobile POS startup Leaf Holdings Inc. Last August, Heartland unveiled its mySchoolBucks app for parents of school-age children to manage fees for meals, tuition, labs, athletics, clubs, and events. And earlier in 2013, it launched the SmartLink Food Safety Monitoring service, which does not have a direct payments component but is used by restaurants, which represent a large segment of Heartland’s customers. The service remotely monitors food temperatures.

Heartland chief executive Robert O. Carr says technology investment is essential to the payment company. “It’s important also to invest in the mobile technologies and all the new alternative-payment systems to stay ahead of the industry in that area, and also to continue to consolidate our platforms and take on those expenses as they come,” he told analysts during the company’s fourth-quarter earnings call. “It’s the wrong time to stop investing in technology, and we’re doing plenty of that right now.”

As Carr explained during a prior conference call, this focus on technology gives Heartland advantages. “We believe our technology and industry-leading sales organization provides us with competitive advantages, and we are capitalizing on these strengths, both through internally developed new products, as well as by entering into exciting agreements with or partnering with companies we believe will be industry winners,” he said.

Merchant Warehouse Inc.

Web site: MerchantWarehouse.com

Does your company offer a reseller program? Yes

Known for its Genius platform, Merchant Warehouse has developers in Boston and Ireland who regularly hold their own hackathons, events where they try to find issues in the payment-technology company’s current software and develop new programs.

“Over the past four years, technology has served as a catalyst for the evolution of our company from an independent sales organization, providing payment processing and merchant-account services to small and mid-size businesses, to a leading provider of payment-technology solutions,” says Henry Helgeson, chief executive. “Technology has always played an important role at Merchant Warehouse, but in late 2011, technology became the core of our organization. From Genius, to integrating with leading independent software developers (ISVs), to connecting with commerce service providers—like Isis and LevelUp—technology sits at the core of our day-to-day activities.”

Technology rose in importance because Merchant Warehouse saw an opportunity to distinguish itself, he says. “By investing in technology and launching the Genius platform, we made it easier for [small businesses] to accept any and all types of payments, deploy new customer-acquisition and -retention programs, and improve their overall customer engagement,” he says.

The point of sale no longer is where a transaction occurs, but interaction, Helgeson says. “Consumers are becoming more open to the idea of mobile-payment options, and merchants of all sizes are recognizing the opportunity to leverage mobile-payment tech to deliver a more seamless—and targeted—experience for their customers,” he says. “In the next few years, we’re going to see significant investments in making this customer experience even better, primarily around loyalty and rewards capabilities. We’re also going to see additional activity in security and compliance as we approach the EMV deadline in October 2015 and merchants work toward becoming EMV ready.”

North American Bancard

Web site: GoNAB.com, NABancard.com, NorthAmericanBancard.com, PayAnywhere.com

Does your company offer a reseller program? Yes

Troy, Mich.-based North American Bancard LLC views its investment in technology as a way to remain competitive. “There are so many companies out there, big and small, that it’s important to always be looking ahead and help shape the future of payments as opposed to just following along,” a North American Bancard spokesman says.

“Over the years technology has become such a big part of everything we do in life,” the spokesman says. “Whether it’s driving your car or using a smart phone, technology has evolved in such a way that it touches every part of what we do. The payments industry is no different. The challenge in the payments industry is to make the latest and greatest technology easily accessible to users. That’s where the investment pays off.”

North American Bancard cites its PayAnywhere mobile POS service as technology to make mobile payments attractive to merchants.

“The mobile-payment space, especially, is always in such a state of change with new technology being released every few weeks that it’s important for companies to make sure their products, both mobile and traditional, are secure and adhere to the guidance provided by the PCI Council and card-issuing brands. You will see a big push for more regulation and better security technology in products over the next few years, especially in the wake of the Target data breach.”

Transaction Services (TRX)

Web site: TrxServices.com

Does your company offer a reseller program? Yes

Designed from the start as a technology-focused payments company, Transactions Services built, and maintains, its own payments gateway. Its products include tokenization, recurring transactions, detailed purchasing card data, virtual terminal, and a custom point-of-sale application. “We are actively completing a cutting-edge mobile app, a QuickBooks Plugin, and hosted pay pages with the ability to calculate and perform surcharging,” says David Leppek, president.

Unencumbered with a legacy payment infrastructure, and because the development staff is in-house, Transaction Services says it has a flexibility that others may lack. “Because it is in-house, we own the infrastructure and can change it as needed when required,” Leppek says. “A technology solution has the benefit that it can scale exponentially beyond what one can do with staff. By adding a server or two, I can instantly handle another 100 applications a month; a task that would cripple most organizations. Our technology is the only way to accomplish such a feat.”

With technology as an elemental component of Transaction Services, it is able to take advantage of rapid shifts in payments, he says. “Our competitors, by building on top of this legacy infrastructure, have limited their capabilities to that currently supported, requiring complex third-party applications to be bolted on in a superfluous fashion.”

In an example, when the Internal Revenue Service issued the tax-reporting requirement on credit and debit card sales, Transaction Services staff revised its software and avoided paying a vendor to supply that service to its merchants, Leppek says.