Stop Letting Payments Own You

By: Jon Decker, CEO of BlockChyp

In the early 2000s, partners like Mercury and Sterling introduced RSPA to a new revenue stream made possible by gateway technology provided by companies like Datacap Systems. It seemed like perfect harmony: Payments were simple, the heavy burdens of PCI and EMV weren’t on the POS, and you could refer a merchant to a processor without blowback. Don’t you wish it was still that simple?

Since then, the mad dash of acquisitions in the payment space has left the market shellshocked. The landscape is littered with unfulfilled promises from previous relationships, increasingly demanding technical requirements, and PCI standards that require ISVs to address constantly.

The key to VARs and ISVs surviving in this changing landscape boils down to three approaches: Continue to be agnostic, rely on an ISO to sell your product or “own” your payments.

The Agnostic
The agnostic approach reflects an understandable distrust of payments.

When I was in POS, credit card issues consumed my time. The burdens of managing processing made it impossible to sell support or install a new system without jumping through complex and costly hoops. Furthermore, when we started tracking reasons for support calls, we found over 40% were credit card-related. Take a close look at what it actually costs:

=Assume a support person is $15 an hour. It takes 2 hours to set up an account and another 2 hours in support calls per month. You spend $60 the first month and then $30 each month after, totaling$390 per year. Multiply that times 100 merchants, and you spend $39k per year.

Agnostic ISVs often align with an ISO or two to build a residual stream to cover the costs. But since these ISVs don’t own the processing, they are now relying on someone else’s culture and are at their mercy. Additionally, when ISO sales reps are compensated by how many merchants they board, not at what price they board them, there’s a race to the bottom that all but eliminates residuals.  

ISO selling POS
On paper, this sounds like an amazing concept: create a POS that makes it easy for ISOs to sell. Why not tap into a huge sales market that is desperate for a solution? According to Visa, there are 1,300 registered ISOs in the US alone. However, consider why would they sell your product and not someone else’s? Does your product vary enough to be attractive to the ISO?

There are some ISV’s that have found success in this relationship. Vend was a leader in this space, selling an estimated 500+ solutions per month through the ISO channel. According to Jake West, formerly of Vend and now GOTab, “We found our model very successful in training partners to get a customer interested and bought into joining a demo.”

He said the payments partner would join the demo led by a Vend AE to see the sales team in action. “We had a two-sided approach. We relied on our payments partners to do what they do well – leverage local relationships, execute a merchant application, and deploy payment devices. Vend would manage software demo, install, and go-live, along with non-payment hardware,” said West.

The model worked because it’s acknowledged that an ISO won’t understand the intricate nature of a merchant’s environment and how to sell the right POS system.

The lesson is: if you partner with an ISO, make sure you fully control the POS experience.

Owning Payments
Toast and Square have started a movement that is hard to ignore. Both companies have combined a payment solution with a POS offering, making the experience for the merchant seamless. When a merchant has an issue, they have one number to call, resolving problems more quickly. 

VARs and ISVs need to deliver this experience with their solutions, creating a one-stop-shop for all of a merchant’s needs – including payments.  There are a few ways to accomplish this.

  1. Become a Registered ISO

ISO registration costs start at $10k for card brands alone, and depending on what level of ISO you want to be, costs can total up to $50k. Whether you are a Retail or Wholesale ISO, you don’t talk to card brands directly – you must use a bigger player like TSYS or Global. Retail ISOs use the bigger players’ contracts, underwriting and rules, and Wholesale takes on underwriting and management and, in exchange, gets a say in the merchant application and contract. The advantage of becoming an ISO at any level is that you price the account and get a larger residual.

  1. Become a Payfac

Payfac is supposed to mean the provider has one account or MID, and all merchants process under that one account. However, the landscape of Payfac has shifted so many times since Square influenced Chase and Visa into the idea that it is hard to get this in its original form.  

Payfac is a great solution for large providers with large reserves – money sitting in a bank account and cannot be touched – because you are holding all the risk.  I had one ISV tell me that they were quoted $3 million as a reserve amount. You also have to apply for a money transmitter license.

You can also enlist companies like Infinicept to help you transition to a Payfac model, services that typically cost about $10k a month. You will also have to hire underwriting and risk management teams and analyze and consider risks, such as a merchant that cannot cover chargebacks or pay their bill at the end of the month. It adds up quickly.

The benefit of a true Payfac model is 100% control of the merchant experience. You get to decide which information goes into the application, what the merchants are billed, the user experience, and how merchants are funded.

  1. Own Processing through Partnership

The last way to own processing is to partner with someone that gives you the tools to enable payments within your organization. After talking to several ISVs and VARs, they said the number one reason for becoming a Payfac is residuals. They wanted more of a share, and they did not trust they were being paid correctly.

The Partner model is more of a hybrid of the ISO and Payfac approaches. You can have control of the pricing like an ISO and also the transparency of the residual stream like a Payfac.

A good partner relationship is completely transparent. This provider should teach people in your organization how to read statements and how to price accounts. This partner should support the ability to quickly board merchants and monitor what they are doing. You should get full transparency to merchant statements so you can audit and be sure what you priced is what is getting billed.

The Partner approach is a great stepping stone for those that are not ready to become an ISO or Payfac but are ready to own their payments business.