Is tiny the next big thing for ISOs? Or is bigger better?

That’s the dilemma ISOs have been facing ever since Square Inc. came on the scene two years ago, promoting card acceptance to babysitters, gardeners and one-man-band merchant outfits.

Square’s success with these so-called micromerchants has left ISOs wondering whether there’s any money to be made on the smallest of businesses.

The answer’s not so simple. Some ISOs believe micromerchants are just too small — often processing less than $5,000 or $10,000 a month — and therefore not worth their time. Others insist it’s a mistake to ignore the micromerchant market, and that smaller merchants can provide an entrée to bigger clients.

Industry consultant Todd Ablowitz says ISOs need to adopt a more nuanced strategy when it comes to dealing with micromerchants. “Most ISOs I talk to have very little interest in micromerchants. The argument is not to go after micromerchants, but to go after new acceptors that can be material to your bottom line,” says Ablowitz, president of Denver-based Double Diamond LLC.

Square changed the rules of the game in terms of micromerchants’ awareness of credit card processing, says Derrick Hess, a national sales director in Hammond, La., for Payment Processing Technologies, or PayProTec. The ISO is based in Warsaw, Ind.

“When you walk into a merchant and ask if they want to accept payments from a smartphone, their immediate response is, ‘Like Square?’” Hess says.

Hess believes Square opened the market for micromerchants better than ISOs ever could, largely because of the national advertising blitz the company did. “You never see an ISO advertising on the radio or TV,” Hess says. “Just imagine what ISOs could do if they’d actually pool enough money together and do a national advertising campaign.”

Square may have created substantial brand awareness, but Hess believes there’s plenty of room for them to capitalize on that awareness. He sees more of his agents inquiring about the services available for them to offer to micromerchants, and they want to know what products they can offer to compete with Square.

“It’s a big opportunity right now. And that’s something that we have to get involved in,” he says.

Rather than try to compete with Square, Jeff Marcous of Dharma Merchant Services is happy to have them around. His ISO’s office in San Francisco is just down the street from the headquarters of Square Inc. Having Square in the neighborhood has actually been a blessing, he says. In fact, Dharma refers customers to Square all the time.

“Our intention is to have the merchant’s best interest in mind, and if that means sending them off to a competitor, then that’s what we’re going to do. And merchants are so grateful for that,” says Marcous, CEO of Dharma.

It’s not unusual for Dharma to get referrals from merchants it passed on to Square because the merchant appreciated Dharma’s honesty, Marcous says.

Dharma isn’t likely to turn away new business, but it takes the same amount of time to qualify, board and service a micromerchant as it does for a larger one, Marcous says. With limited a limited number of salespeople, it’s something the firm has to consider. “We would much rather focus our attention on more profitable merchants,” Marcous says.

That strategy also helps Dharma reduce attrition. Having watched merchants come and go over the years, Marcous says the No. 1 reason merchants leave is because they go out of business. The more micromerchants you have, the more likely you’re going to have merchants who leave, he says.

Referring a merchant to Square isn’t always the end of the story, though. Micromerchants that grow into more profitable operations sometimes find that they need more than Square can offer. That’s when a merchant services company starts to look appealing again, Marcous says.

Courting micromerchants has been an important piece of Host Merchant Services’ strategy, not necessarily in terms of profitability, but for branding and awareness, says Lou Honick, CEO of the Delaware-based ISO.

“I don’t see us ever having micromerchants be the basis of our business, but I think that by taking care of those merchants and delivering a really excellent products, it has benefits to other areas of what we’re doing,” Honick says.

About a year ago, Host decided to compete with Square by introducing its own mobile payments application, HMSPay. Merchants can accept payments by downloading the app and attaching a card swipe device Host provides to their iPhone, iPad or Android.

HMSPay differs from Square. First, Host targets merchants with mostly business-to-business transactions, as opposed to casual payments.

Unlike Square, Host creates a full merchant account for each company that signs up for HMSPay. For that reason, the ISO charges fees for maintaining the account. The advantage of that model is that Host doesn’t place a lot of conditions on how it funds merchants, Honick says. Host evaluates each merchant up front, so it doesn’t need preset limits on processing volume.

“If you process today, you get your money tomorrow, whether it’s $200 in a month or $10,000 in a month,” Honick says.

Courting individual micromerchants might not seem like an attractive prospect, but being able to serve that market is advantageous from a branding and marketing standpoint, Honick says. Host puts a lot of work into its social media marketing, and it’s a boon to the company when small merchants endorse the ISO through their own social media use. “Our goal is to promote our business through excellent service and by acquiring fans of our business,” Honick says.


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