ISOs Are Failing To Differentiate, An Analyst Says

ISOs are scrambling to set themselves apart in a price-oriented business, but most are failing to dazzle merchants.

In fact, about a fourth of merchants don’t know their ISO’s name, according to a survey of 500 small and mid-size businesses by Boston-based consulting firm Aite Group.

“When a customer cannot name his or her service provider, you can be sure that customer does not believe that the service provider stands out in any way,” Rick Oglesby, an Aite senior analyst, wrote in the report.

One problem is that most ISOs are offering the same value-added services that are supposed to set them apart from competitors, the report indicates.

Ninety-five percent provide reporting and analytics services, 95% offer gift and prepaid cards, 91% offer loyalty programs, 91% offer check processing, and 86% offer encryption and tokenization services.

About 77% offer e-commerce gateways, and 68% offer mobile point of sale, but even those two services are quickly becoming more commonplace, Oglesby notes in an interview with ISO&Agent Weekly.

The acquiring industry is failing to differentiate for several reasons, in Oglesby’s view. For starters, many ISOs are good at selling but don’t have product-development capabilities. Other ISOs don’t have enough scale to compete effectively. Still others have grown so big they can’t help but operate as generalists, he notes.

Moreover, the necessity to differentiate has caught some ISOs by surprise, leaving them like “deer caught in headlights,” says Todd Ablowitz, president of Double Diamond Group, a Centennial, Colo.-based consulting company. They don’t know what to do or how to get started, he says.

But it doesn’t have to be that way, according to Ablowitz.

“Coming up with a plan to differentiate doesn’t have to be hard,” Ablowitz says. “It can be very basic blocking and tackling.”

Some ISOs are trying to distinguish themselves by focusing on software  that boosts merchants’ profits and makes their lives easier.

Others ISOs are taking a consultative approach to selling—helping merchants build their business and manage expenses as opposed to merely processing their transactions.

Others are concentrating on one or a few verticals or niche markets, such as doctors, dentists, hotels or micromerchants.

Still others are focusing on growth areas such as mobile technology as a way to separate themselves from the pack.

One overarching theme is that competing on price alone is a thing of the past

 “The old way of marching into Mr. Merchant and asking for last month’s statement and bidding on price, is certainly a dying mode of sales,” says Kurt Strawhecker, managing partner of The Strawhecker Group, a payments industry consulting firm in Omaha, Neb. “The more you specialize, the less commoditized your offering is,” he says.

Boston-based Merchant Warehouse tries to stand out by staying ahead of the market, says Michael Gavin, senior vice president of sales. “We try to look at what is going to happen, as opposed to what it is happening,” he says.

Merchant Warehouse developed its own technology to support mobile commerce in addition to cash, credit, and debit payments from a single device. The ISO calls the technology “future-proofing” because it’s designed to accommodate payments methods that have yet to become widespread.  

Jeff Broudy, vice president of sales and marketing at Total Merchant Services of Woodland Hills, Calif., says his ISO is pushing services that aren’t just payments-oriented but also help merchants expand their business.

The ISO is combining two recent acquisitions to further those efforts. In December 2012 it bought Fanminder, a company that focuses on mobile and social loyalty marketing. Total also recently purchased Registroid—a POS application for Android devices for restaurants and retailers.

ISOs are introducing data services that help clients grow their businesses.

“A lot of merchants need access to easily understood analytics about their business,” says OB Rawls, the senior vice president who oversees Atlanta-based First Data’s ISO Sales Channel. “Programs that allow them to understand that Wednesdays are their slow day and every day their peak business hours are between 4 p.m. and 6 p.m.”

Still, many ISOs continue to operate on the premise that if it’s not broken, don’t fix it, Rawls notes. “A lot of smaller ISOs haven’t seen the change coming as rapidly as some of the more technologically advanced ISOs have. The [old] model still works for them,” Rawls says.

But ISOs that aren’t striving to differentiate may find they’ve been living on borrowed time, Rawls and other industry leaders agree.