[IMGCAP(1)]
Some ISOs are earning higher margins and reducing merchant attrition by concentrating on a few specific market niches instead of spreading their efforts among numerous segments. The trend is taking hold in an industry facing increased competition and tightening margins, according to industry observers.
"The way the economy is now and the way the industry is morphing, I think more and more people are specializing," says Neal Tichelkamp, president of Ladera Business Solutions, a Jefferson City, Mo.-based provider of merchant sales and services.
ISOs that specialize can become payments advisors to their merchants and thus add value to the relationship, says David Fish, senior analyst at Maynard, Mass.-based Mercator Advisory Group Inc. "Increasingly, the pressure is on merchant-level salespeople and smaller ISOs to communicate the value of services as opposed to signing the deal with the slimmest margin possible," he says.
Margins Can Increase In Niches
Selling to a niche market can increase ISOs' margins because they face less competition, says Ken Musante, president of Eureka, Calif.-based Humboldt Merchant Services. Typically, fewer competitors vie for business in niche markets, such as municipalities, government agencies or medical offices, says Musante. He led a session at the Midwest Acquirers Association conference last month in St. Louis titled "Riches in Niches: Winning Where the Margin is Better."
Having fewer competitors is the "beauty of specialization," agrees Fish. "Automatically, the number of players focusing on a segment, as opposed to the whole market, decreases," he says.
ISOs that specialize also gain advantage over the competition by becoming experts in a market segment, says Musante. "It's impossible to be an expert in everything, but it's easy to be an expert in a niche," he says.
As niche experts, ISOs become vital to merchants for payments information pertinent to their segments, which can decrease merchant attrition and raise margins even more, says Musante.
Agents do not necessarily need a background in a segment to sell in it, says Tichelkamp. Success in a niche can drive segment knowledge and expertise, he says.
Agents tend to latch onto what feels comfortable, Tichelkamp says. After achieving a few sales in a segment, "it drives their momentum, and they learn more about the segment," he says.
However, agents that already have expertise in a segment have an advantage, says Fish, giving the example of a former government-services worker who knows how to approach merchants that sell to government agencies. Those with relevant experience "have a leg up on those who are learning by doing," he says.
Not All ISOs Specializing
Though the specialization trend is taking root in the ISO industry, not every ISO needs to focus on a niche to find success, says James English, president of Card Payment Systems Ohio LLC, a Stowe, Ohio-based ISO. "If you open yourself up to any merchant, I think you're better off than in a niche market," he says, adding that specialization is a reaction to an increasingly challenging market. Some ISOs "are looking to keep their sales force happy, so they move into niche markets," English says. "I don't think it's necessary yet" for all ISOs to make the move to niches.
ISOs can thrive without specializing by providing value and customer service to merchants, says English. "People doing it the right way see benefits.
Those not taking care of their people aren't seeing benefits, he says, adding that Card Payment Systems Ohio does not focus on a single market. "We spread ourselves out among everything," he says.
Serving every payments segment will continue to work for large ISOs, says Fish. "They have the scale and efficiency to continue to have success with this approach," he says. "The success there is dependent on size."
