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Though developing proprietary systems can help a merchant-service provider increase revenue and retain clients, it also can create sales and marketing challenges, observers say.
"When developing something new, it takes awhile for people in our industry to feel comfortable enough with the product to sell it to their merchants," says Ben Goretsky, CEO of USA ePay, a Los Angeles-based online-payment gateway. "Selling it is always the hard part," Goretsky says.
Product training is necessary to increase the likelihood that agents will sell a proprietary product to merchants, says Henry Helgeson, president and co-CEO of Merchant Warehouse Inc., a Boston-based ISO. "Industry reps are so conditioned to talking about price. It takes sales training to get the reps comfortable enough to talk about the product," Helgeson says.
Some salespeople may have difficulty grasping new hardware or software products, agrees Goretsky. "We do our best to train them," but sometimes increasing a salesperson's comfort level with a proprietary product is a slow process, he notes.
New salespeople entering the industry also are helpful in selling new systems because they are not focused on existing systems or selling methods, says Goretsky.
Another challenge for creators of proprietary systems is completing projects quickly, notes Jared Isaacman, CEO of United Bank Card Inc., a Hampton, N.J.-based ISO. United Bank Card began working on Harbortouch, an integrated point-of-sale system, in 2006, and the system entered the market in late 2007, he says.
"Developers have a backlog of ideas," and often they have too many projects to work on at one time, says Isaacman.
In-House Options
A merchant-service provider may choose to outsource development of a proprietary product to a third party or build it with an internal team, says Helgeson, noting Merchant Warehouse builds most of its products in-house.
Although developing products internally requires a significant staff, an ISO is "able to tweak the pieces" and continue to update them, Helgeson says. "It is cheaper to buy it for the first time with someone else, but the problem is when you have to update it," he says.
An ISO also will need to pay the third-party vendor each time it returns to revise the product, Helgeson says.
ISOs must be fully dedicated to their proprietary products throughout their lifespan, says Goretsky. "You can't go out there and think, 'I am going to buy or create a solution and, once it's done, it's done,'" he says. "It's got to be constantly maintained."
Outsourcing product development is beneficial if a company wants to complete a project faster, says Goretsky, noting that 90% of USA ePay's development projects occur in-house. A third-party team also is useful if a project requires technology or systems with which an in-house team is unfamiliar, he says.
Overall, not every merchant-service provider is in a good position to successfully create and sell a proprietary system. "When you are signing 100 merchants a month, it doesn't make much sense to invest thousands in a product," says Helgeson. "But once you start signing thousands, it's a better cost justification, and you have the resources internally to support it."
The cost of product development often includes the initial development of the product and providing a support team for it, says Helgeson. "We have 25 to 30 people on staff that really have to deal with our proprietary products," he says. "It takes quite a bit to do this, more than I initially expected."
When anticipating the cost of developing a proprietary product, "whatever you think it will be, add a zero to the end of it, and that is what the cost will be," says Goretsky.
The first proprietary project requires the most due diligence, says Helgeson. "You probably need to put twice as much due diligence in it as you think you do, and then when you think you are done, look again," he says. The process becomes easier after the first project launch, notes Helgeson.
Creating a proprietary hardware or software project can be beneficial for many merchant-service providers and lead to increased revenue and client-retention rates. However, success is not guaranteed.
