ISOs Use Data and Service to Reframe Business Model and Merchant Value

Charles Zhu, vice president of product at Enigma, told PYMNTS that the pressure is on independent sales organizations (ISO) to reinvent themselves.

And in doing so, they won’t just survive amid the great digital shift and growing competition from platforms and Big Tech.

They can thrive.

A bit of background is in order: ISOs sell card processing and merchant services on behalf of an acquiring bank, and as Zhu noted, typically provide those services through partnerships with processors.

The model has been changing through the years, Zhu said.

“ISOs were the dominant way that a merchant would have an entry point toward being able to process credit card transactions. And ISOs would use the relationship to the bank to give merchants the best card processing rates possible, and used their ‘boots on the ground’ to develop really tight relationships with customers.”

Challenges and Opportunities

But more recently we’ve seen the emergence larger tech firms — Zhu termed them disruptors — such as PayPal, Square and Stripe, and processors and acquirers, too, that have focused on providing those services. As a result, the ISOs have faced significant competition and challenges.

Among the most significant seismic shift — a combination of tech and competitive pressures — confronting the ISO, Zhu said, has been the fact that the very ways in which merchants have gone about choosing credit card processors has changed.

That’s due to the ease and multiple online entry points the merchants had in signing up for processing services.

“The default is to no longer talk to a sales rep,” Zhu noted. “The default is for a merchant to conduct a lot of online searches themselves, and they sign themselves up for these services, with as little friction as possible — and that makes it quite easy to sign up with the first processor that they encounter or even have heard of.” Square, for one example, has made it easy for merchants to onboard, and with the Square dongle, do so without any hardware.

“Now, with merchant cash advances, loyalty programs, websites and appointment scheduling, companies like Square have become one-stop shops for merchants,” Zhu said, “and these providers can earn high margins on those ‘add-on’ services.”

Specializing and Finding the Right Niche

Against that backdrop, ISOs are being forced to differentiate themselves, to find avenues of specialization.

“Among the advantages that ISOs have had,” Zhu said, “is the face-to-face relationship that’s always distinguished ISOs from the bigger players. You can call someone; you can get someone on the phone. But the ISOs need to, at the same time, identify their customer niches and build the best experiences for those niches.”

A niche, he said, could be industry focused. Some ISOs have specialized in providing services to HVAC companies and contractors, or lawn care and landscaping firms (he mentioned one ISO that does card processing for the golf card industry).

“In addition to industry focus,” he said, “ISOs can focus on risk levels.” He mentioned that ISOs may opt to provide services for companies with a high international presence, or firms that do all of their business online. In other cases, an ISO can find a niche in offering its services to native language speakers (Thai business owners, in an example).

“Once you’ve identified these initial affinities, and you are using data to do so,” he said, “you can start to capitalize on building out the customer experience that makes sure you’re the ISO with the standout solution.”

Building out those experiences means that ISOs must harness data — including alternative data — to tool their solutions to the right merchants and the right risk profiles, and who might switch over from the tech platforms if given the right mix of value-added offerings.

“You need fresh data that’s specific to card processing volumes. You don’t want some rough estimate of total revenue. The cash part of the business probably doesn’t even have much more relevance to you. You want to know whether a merchant is growing and shrinking their card processing volumes, the average transaction size, chargeback levels,” he said. That granular level of detail will help ISOs winnow down their prospects, and show them how to personalize offers — and who should be onboarded automatically.

“If you already have that data, you can get them through the early parts of underwriting and onboarding and show them how much money they’d be saving before even requesting any kind of statement,” Zhu said.

That data flow becomes richer through APIs and integrations available through firms including Enigma, he said, and can even help track when new businesses are registered in a given state (and thus will need payment services).

The increasing adoption of advanced technologies such as machine learning, he said, can streamline and improve the prospecting process, and to help ISO determine where the path toward optimal success lies.

“These data points,” he added, “can help ISOs see certain things that are really important and finding good leads that might otherwise be missed — helping ISOs find new customers evolve during dynamic time in the payments ecosystem.”