In the past few years, the payments industry has experienced a flood of new offeringsfrom consumer-facing giants like PayPal and Google to Silicon Valley startups such as Square.
The influx has left ISOs and agents wondering whether the new entrants regard them as competitors or potential allies.
In fact, established payment companies identify the risk of displacement as their main concern about new entrants and emerging payment technology, according to the 2013 survey New Entrants in Payments: The Incumbent Perspective, by the Electronic Transactions Association and Goldman Sachs.
Meanwhile, new entrants may regard ISOs as dinosaurs on the verge of extinction. But others are starting to understand some of the advantages ISOs bring to the business, says Steve Eazell, president of the Western States Acquirers Association and vice president of sales and marketing for Secure Payment Systems Inc., a San Diego-based merchant services provider.
We have the relationships, Ezell says of himself and other ISOs. We have the distribution network. We have the players on the street. Without us, theyre not going to be able to go to the next level.
Thats why ISOs seem to set aside their concerns about displacement, according to another ETA-Goldman Sachs survey.
That study, called the Annual Merchant Acquirer and ISO Survey was released in April and indicates 90% of respondents suggest that new entrants represent only 25% of attrition. Only 10% of respondents believe new entrants will negatively affect ISOs pricing for small and medium-sized merchants.
New entrants often bring new technology that can seem impressive until someone has to distribute it to merchants, industry veterans observe.
Startups are often finding that if they want to keep growing among merchants they cant reach directly, they have to find distribution partners such as ISOs and acquirers, says Linda Perry, an independent consultant and former head of acquirer and processor relations for Visa Inc.
We know how to get in and sign up people for payments, Perry says of ISOs. Thats what we do.
Payments analyst Gil Luria of Wedbush Securities, a Los Angeles-based financial services firm, contends many newcomers consider ISOs potential partners instead of direct competitors
They want to move very fast. And to move fast, they would much rather go through the existing infrastructure as much as they possibly can, Luria says.
However, companies dont want to start from scratch by building merchant relationships will do exactly that if they have no other alternative, Luria says.
If acquirers dont want to cooperate with themwhich some would rather nottheyll find a way to get around them, Luria says of the possibility that tech companies shunned by ISOs will find their own way to market.
Still some newcomers seem like friends and others dont.
With its now ubiquitous white dongle, Square seems firmly planted in the competitor category, while Google and its Google Wallet offering is positioned as a potential ally to ISOs, Luria says. But PayPal has taken more of what Luria calls a co-opetition approach.
Last spring, PayPal made some members of the acquiring community nervous when it launched a deal with Discover Financial Services to accept payments from customers at brick-and-mortar stores that accept Discover.
Still, PayPal then made a move that signaled it wants to work with acquirers on the new venture. To enable the in-store system at more locations, PayPal contracted with 50 merchant acquirers just after the launch.
Among those merchant acquirers was EVO Merchant Services of Melville, N.Y.
PayPal realizes that its best to work with processors rather than try to challenge them, says Jeff Rosenblatt, EVOs president.
Rosenblatt believes EVO and other ISOs should form partnerships with some of the new entrants. EVO has been in talks to create other alliances with mobile payments company LevelUp and Isis, the mobile wallet venture of AT&T, Verizon Wireless and T-Mobile, he says.
Luria also sees opportunities for incumbent companies to work with Isis, which might need ISOs and acquirers to convince retailers to buy NFC terminals. He also expects ISOs could work on the acceptance of Google Wallet, in some capacity.
Square still isnt embracing ISOs as an ally, Eazell says. Instead, it relies on social media and their own network of reaching the masses. I think theyre going to run into a roadblock at some point, Eazell says, adding that Square wont be able to reach the volume players by using their current methods. Theyre dealing with small mom and pops. Theyre not doing any serious volume yet.
Perry suspects Square might need to explore other business models. I dont think theyre going to be their own ISO forever, she says. And with Square making noise about an initial public offering in 2014, the company might move even closer to needing that extra distribution.