When Visa opened its network to third-party software developers for the first time in its history earlier this year, CEO Charlie Scharf said his company was going after a "staggeringly large" opportunity.
Now, independent sales organizations and independent software vendors are equally threatened by disruption, making an alliance a logical — if uneasy — step for both groups.
It's a quickly changing environment up and down the payments food chain, especially for the ISO and ISV operations. They may find the current fast pace of payments technology to represent the proverbial best of times and worst of times. Good because there are far more opportunities for partnerships and deals; bad because having many choices isn't the same as making the right choices.
"The days of an ISO just dialing for dollars and standing on their own as an independent solution are about over," said Rick Robshaw, CEO of Club Prophet Systems, a software vendor providing point of sale, management and food/beverage software to the golf industry.
ISOs understand that their traditional role in merchant acquiring has changed because of technology, and it is becoming common practice for them to seek partners they might not have considered to be allies in the past.
But they also face an ongoing threat. "As the networks and ISVs become more sophisticated, the gateway companies and ISOs become less valuable," Robshaw said. "While we use a couple gateway companies, we primarily tie directly into one of the leading processing networks."
In an example of the types of ISO-vendor partnerships possible, Club Prophet works with Linked2pay, Integrity Payment Systems and TSYS for the majority of its clients, but also with gateways Phoenix and Shift-4 for niche markets. In Canada, the company works with Moneris to serve its install base.
Ultimately, for software vendors, it becomes critical to choose the correct partners and find ISOs and processors that will help benefit the customers they already have.
In that regard, software vendors are becoming keenly aware of old — but apparently not forgotten — ISO tactics that are considered ineffective in today's landscape.
"We probably get calls from four ISOs per week asking us to integrate with them," Robshaw said. "They use all kinds of tactics to try to get through the filters to talk to the right people, and most of these tactics are quite sleazy."
On occasion, an ISO will tell a software vendor that one of its customers is switching to the ISO network, creating a need to integrate with them, Robshaw added. "Then we call our customer to find out they have no intention of moving their processing."
After understanding where the land mines exist, the first choice a software developer must make is whether to remain more agnostic and provide choice for their merchant customers, or to embed a preferred or exclusive partnership for payment processing in their solution, said Chris McNulty, president of payments industry consulting firm Wimsett & Company.
"They are lured into the latter by financial upside on a part of the solution ecosystem that they may not have participated in previously," McNulty said. "That path may not be in the best interest of their customers, as they lose control over pricing and margin levels in the future as well as flexibility to ensure the best service."
But it is a good time to be a software developer because most acquirers, processors and ISOs have developed a strategy to partner with more of them, McNulty added. Most have taken notice of the recent acquisitions of companies like PayPros, Accelerated Payment Technologies, Element Payment Services and Mercury Payment Systems, and realize it is a buyer's market for integrated payments, McNulty said.
Indeed, after acquiring Mercury, payment processor Vantiv increased its level of collaboration with payments software developers, creating the Vantiv ONE hub to better organize technology development and collaboration.
But even with expanded opportunities and channels to advance services and develop new products, the software developers and vendors don't always have clear choices.
"It can be confusing on what is the best model to benefit and protect their customers they have worked so hard to earn," McNulty said.
ISVs also want to land non-exclusive contracts with ISOs and acquirers, McNulty added. "Locking into exclusive contracts with the wrong partner can damage the reputation and long-term success of their solution," he said. "Even the best choices at one point in time can later become a bad choice."
A merchant's satisfaction has to remain an ISV's most important asset. "The software developer owns the customer relationship and should protect that at all costs," McNulty said.
By its nature, an open network generally means more traffic. As such, it can translate to a logjam for software vendors seeking integration with a payment provider.
"That logjam has much more to do with the PA-DSS [payment application data security standards], than it does integrating to a payment provider," Club Prophet's Robshaw said.
"Any change to the credit card logic in the card data environment causes the ISV to re-validate to the PA-DSS, and this is an effort of hundreds of man hours and upwards of $100,000."
In those cases, the software vendor has to be a bit wary of ISOs that promise a simple integration and suggest that customers will be "completely out of PCI scope" without that integration, Robshaw said. Or they might say, "If you handle card data in your ISV software, your are in scope." Neither is likely to be entirely true, he added.
However, if an ISV is actually taken out of scope through an integration, they still have to understand the need to inform the merchant about who is responsible for each facet of PCI validation and compliance, Robshaw said.
Ultimately, most ISOs do not develop the technology they assemble, but now more options are available to them to consolidate with the right platform partners, said Richard McShirley, chief marketing officer for linked2pay, which provides card and core bank services in a consolidated package for its ISOs.
"The approach taken by ISOs as a hub results in too many semi-integrated apps, which is a maintenance issue for the ISV, and potentially a major one affecting compliance, service quality, user cost and other factors," McShirley said.
Linked2pay looks at the current payments trends as a consolidation opportunity for those that do not pay for technology development, but have the tools to sell those new technologies, McShirley added.
In that way, an ISO touting a secure payments application and PCI compliant system can approach a merchant or financial institution and offer mobile, online or e-mail payment acceptance options, McShirley said. It also means the ISO can concentrate on what it does best — sell stuff.
"The ISO may need to embrace the role of being the sales team for a financial institution and stop trying to be the solution provider hub for the software vendors," he added. "That approach is getting harder by the day."