BURLINGAME, Calif. -- If ISOs arent willing to transform their business models in the coming years, theyll become extinct in a payments industry bustling with aggressive, agile startups that skip the middleman and go directly to the merchant.
The problem is whether we as an industry can handle change, says Paul Martaus, owner of Martaus & Associates Inc., a financial services consulting firm in Mountain Home, Ark. Martaus voiced his thoughts here during the 10th Annual Western States Acquirers Association 2013 Conference.
Rapidly changing technology is roiling the payments industry, and new companies, including Groupon and Square, are targeting merchants directly without the help of ISOs. Groupon boasts that it keeps its processing fees low by relying on its internal sales force.
Moreover, recent research supports the notion that ISOs arent moving quickly enough to respond to new threats.
In a race to differentiate, acquirers are hurriedly adopting easily copied white-label, third-party products, according to research by Rick Oglesby, a senior analyst at the Aite Group.
As a result, despite each acquirers best efforts at differentiation, merchants still believe that acquirers are interchangeable, and the commoditization cycle continues, he said.
Many merchant acquirers provide the same services as their competition, including 95% that offer reporting and analytics services, 95% that offer gift and prepaid products and 91% that offer loyalty programs, Oglesby said. Even relatively new mobile point-of-sale products are offered by 68% of acquirers.
Because acquirers arent differentiating themselves, 25% of the 491 merchants surveyed answered I dont know when asked the name of their acquirer.
When a customer cannot name his or her service provider, you can be sure that the customer does not believe that the service provider stands out in any way, Oglesby said in the report.
But the report also notes that only 8% of merchants are seeking new acquirer relationships.
Still, acquirers should concentrate on innovating, bundling and segmenting, WSAA conference speakers said.
Even though some startups compete directly with ISOs and acquirers, other alternative and mobile payments providers have sought to form partnerships with merchant acquirers.
SCVNGRs LevelUp has collaborated with Merchant Warehouse and Heartland Payment Systems for their merchant relationships. PayPal has also decided to work with ISOs.
These guys dont want to be banks, Martaus said at WSAA. Because of complicated regulatory requirements for banks, most payments technology startups are merely looking for a new way to access consumers existing checking accounts, he says.
Then theres the upside of change.
Even though the acquiring business is long-established, many in the market are excited about the influx of new technological tools to sell to merchants. Sales agents are becoming merchant relationship managers, keeping merchants happy by providing big-data tools and other offerings, Martaus says.
Retailers pay ten times more for customer information than for payment authentication, he says. ISOs should find a way to earn revenue from big data, he says.
Meanwhile, ISOs are being urged to prepare merchants for the EMV liability shift in October 2015. But the industry is feeling pushback from merchants that protest the price of EMV-ready hardware despite the anticipated security benefits, Martaus says. n