IMGCAP(1)]
A competitive ISO market and a merchant base largely established with card acceptance has led many ISOs to wonder what new market opportunities-if any-remain. The search for untapped markets (and untapped revenue streams) is at the forefront of many agents' minds. However, existing merchant categories that mostly lack card acceptance and that other ISOs overlook may be the industry's elusive target. "If I knew [how to find the next profitable merchant category], I would have opened up an ISO a long time ago. I would be really rich," says Adil Moussa, an analyst with Boston-based Aite Group LLC. "Everybody is trying to come up with new merchants. It's just very difficult to put your finger on that new category that's going to hit it big."
Instead of chasing an elusive target, ISOs should focus on the migration from paper to plastic payments in traditional merchant categories, observers say. Though a merchant may already accept card payments, other areas exist within the merchant's business that are strongholds for paper payments, such as business-to-business transactions. Focusing on the migration trend instead of hunting for the next up-and-coming retail niche ultimately can net ISOs a greater return on their efforts, observers say.
Where ISOs and industry observers agree less is on the debate over which merchants are more profitable: existing ones or start-ups. In searching for new markets, many ISOs turn to start-up merchants, while others believe existing merchants is the more-profitable category.
Converting Paper Payments
The card brands lately have not introduced any new merchant category codes, and few new niche markets exist, notes Gino Kauzlarich, president and CEO of MerchantService.com, a Sarasota, Fla.-based ISO. A merchant category code is a number a card brand assigns to a retailer that categorizes the merchant by the type of services or products it sells.
"At the end of the day, the major nationals are pretty well tied up. [The market] has been penetrated," says Kauzlarich. For ISOs "the opportunity in America right now seems to be on the side of converting cash to credit," he says.
Merchant types that are strongholds for invoicing and paper payments, such as companies that specialize in business-to-business transactions, utilities and property-management firms, are the least saturated with card payments and present the greatest opportunities for ISOs, according to observers. "Even in the most mature categories where card acceptance has been in place for years, there is an opportunity to expand card volume because many of those industries still deal with heavy cash and check volume," says Steve Carnevale, vice president of new markets, consumer bill pay and U.S. commerce development at MasterCard Worldwide.
Card brand American Express Co. also is "putting a lot of focus" on business-to-business transactions, says AmEx spokesperson Christine Elliott. "It's the next area of plasticization," Elliott says.
Business-to-business transactions account for "trillions of dollars in the U.S.," and "the best estimate we've seen is that half to a little more than half of that money is still spent in cash or checks," she says. In describing types of business-to-business transactions, Elliott uses the example of a lumber or construction company that invoices its clients and business partners and receives payment back in checks.
Some merchants transact partly with cards and partly with cash and check payments, says Elliott. While most hotels, for example, transact with guests using credit or debit cards for guestroom rentals, they tend to invoice clients and receive check payments in their events business, she says.
"If you booked a wedding or corporate event, chances are you would book the hotel room with the card, and [the hotel] would invoice you for the big event," Elliott says. She recommends ISOs look at businesses holistically and find which business areas typically transact in cards and which areas focus on paper transactions.
Another area of opportunity in converting paper to plastic payments is with merchants that accept bill payments, says MasterCard's Carnevale. Such entities as utility companies and property-management businesses "represent good opportunities for ISOs to expand their business, as consumers increasingly demonstrate a preference to pay these bills with cards," he says.
Bill payments have opened up for card acceptance in the last five years, agrees a spokesperson from Visa Inc. In recent years, there has been a "strong consumer preference for shifting to plastic from paper in a number of categories," such as education, health care and public transit, says the spokesperson.
Overall, the number of merchants available for ISOs to call on remains roughly the same each year: Among all small businesses in the U.S. annually, roughly 10% are new-business locations, and 10% of overall locations close, according to a U.S. Small Business Administration spokesperson.
Between March 2004 and March 2005, 76,725 retail trade locations opened, and 74,903 locations closed, according to the most recent figures available from the Office of Advocacy U.S. Small Business Administration.
Start-Ups Vs. Existing Merchants
As ISOs search for new market opportunities, many look to start-up merchants as potential moneymakers, yet the competition among ISOs for their business is fierce. "I see more competition with brand new start-up businesses than anything," says Erik Verryden, president of National Processing Solutions Inc., a Phoenix-based ISO.
Start-up merchants are "bombarded" with offers for free equipment and low rates. Many ISOs also use the same new-business leads to find start-up merchants, which increases the likelihood of competition, Verryden says.
"The problem with new businesses and new-business lists is everyone is tapping those," agrees Tom Stone, chief operating officer of Vision Payment Solutions, a Portland, Maine-based ISO. "It is not uncommon for a new merchant to have 100 inquiries before they open their doors."
Existing merchants that accept card payments also get calls and marketing materials from ISOs, but the competition is not as intense, says Verryden. "A lot of times [existing merchants] will ignore [ISOs] because they already take cards," he says.
The high level of competition for start-ups has led some ISOs to focus on existing merchants entirely.
Elite Merchant Solutions focuses "almost solely" on converting existing merchants because it is "the most-profitable" method, says Justin Milmeister, president of the North Hollywood, Calif.-based ISO. "With new merchants, you are just guessing" about what the processing volume and what the revenue for the ISO will be, he says.
Existing merchants also are less likely than start-up merchants to go out of business, and existing merchants typically have "more capital to purchase extra services like gift cards or to upgrade equipment," says Milmeister.
The important difference between a start-up merchant and an existing one is that the existing merchant has its business established, agrees National Processing Solutions' Verryden. Existing merchants have a processing-volume history that ISOs can use to estimate their potential revenue from the merchant. ISOs can gauge the revenue they will earn from existing merchants "because you know how much they will make you up front," says Verryden.
However, not all existing-merchant business is worth pursuing, says Milmeister. Signing existing merchants without prior card acceptance is time consuming, he says. "We do not find it worth it to target these types of merchants as you add an additional step in the sales process, which is teaching the merchants why they should accept cards," says Milmeister.
Despite heavy competition to win start-up merchants' business among ISOs and trepidation that the new businesses may fail, ISOs and their agents should not dismiss fledgling retailers, says Jamie Savant, a partner with The Strawhecker Group, a Omaha, Neb.-based management-consulting firm. "I encourage agents and ISOs to continue to look at the new-merchant model," says Savant. "You don't know who the next diamond in the rough will be."
Milmeister, however, does not believe Elite Merchant Solutions is missing opportunities to sign contracts with start-up merchants whose processing volumes may take off. "It's the same reason I don't bet on the long shot at the horse track," he says. "You will consistently lose to get the one long shot."
Finding Market Opportunities
For ISOs that are searching for specific markets to enter-whether the merchants are existing, start-ups or new to card acceptance-referrals are the most effective way to attract and sign new opportunities, agree observers. The effectiveness of referrals for ISOs is "true and not surprising," says Vision Payment Solutions' Stone. An ISO's likelihood of success is greater when dealing with a referred business, he says.
Referrals are the best source of merchants for ISOs and acquirers, agrees Aite's Moussa, who wrote a report recently on ISO and acquirer merchant tactics. Forty percent of new accounts that merchants sign up for with ISOs and acquirers are business referrals from trade associations, vendors, accountants and friends, according to the report "And Besides Pricing? What Drives Merchants To Sign Up With Merchant Processors"
released in October. Aite surveyed 160 merchants for the report.
Other sales tactics are less effective than referrals at gaining merchants, according to the report. Cold calling is "pretty effective," with 15% of surveyed merchants signing with an ISO or acquirer after receiving a cold call, says Moussa. The least successful method of acquiring merchants is through direct-mail campaigns, with only 2% of merchants choosing companies based on mail solicitations, according to the report.
National Processing Solutions gained a profitable merchant contract because of a referral from a satisfied client, says National Processing Solutions' Verryden. "We set this merchant up, and she sent us down to an office building. We never would have walked in there" without the referral, he says.
ISOs can gain referrals by providing good service to merchants and by working with community networks, agree industry observers. "If you can be part of an association, and they put you up as the preferred vendor, when you call on association members they will be more likely to talk to you," Stone says.
ISOs also should approach merchants "by vertical," Moussa recommends. If ISOs and acquirers "are able to separate [merchants] into categories, [they] can target them more accurately," he says. "I was surprised to see the differences among the verticals," Moussa says. The first step an ISO should take after acquiring a list of merchants is to look at each merchant's merchant category code and separate the merchants into groups based on the codes, he says.
When agents separate merchants into verticals, they divide them into categories based on similar attributes. For instance, e-commerce, health care and restaurant merchants each represent a specific vertical.
Merchants do not respond the same way to independent sales agent and acquirer sales tactics, with different categories responding favorably to different methods, according to the Aite report. For instance, brick-and-mortar merchant respondents are most responsive to sales calls, with 24% indicating they found their processors that way, according to the report. Restaurant merchants, however,
respond best to referrals by professional trade associations, with 31% of respondents stating they found their processor through association referrals.
For many ISOs, the hunt for the industry's elusive target is ongoing. While ISOs may continue to search for untapped markets, there remains plenty of revenue to find along the way among the existing opportunities. ISOs can target all types of merchants, including existing ones, start-ups and those new to card acceptance, while keeping watch for the elusive untapped and overlooked merchant categories.
