In a Digital World, ISOs Face Tough Relationship Choices

Already facing technology-driven threats to their relevancy, independent sales organizations (ISOs) face another dilemma: should ISOs spread their wings with numerous acquirers and processors, or stick with one that provides the best deal for servicing merchant clients?

For example, Chase's recent sale of its ISO business to First American Payment Systems is a case where one company, Chase, was seeing an end to ISO relationships looming, while another felt it had the right model for ISOs to build long-standing relationships.

First American Payment obtained the ISO contracts and their merchant accounts, effectively moving the ISOs who were working with Chase under the First American umbrella, First American spokesperson Sarah Guckes said.

For its part, Chase is continuously looking for "opportunities to simplify the business while strengthening and growing our core business," Chase spokesman Edward Kozmor said. "After a thorough review of our ISO business and our overall strategy, we made the decision to sell the ISO portfolio to First American Payment."

But it may be rare for an ISO to feel comfortable putting a stake in the ground with one processor, acquirer or equipment provider.

"A lot of ISOs have multiple relationships already," said Adil Moussa, payments strategic marketing analyst at Omaha, Neb.-based Adil Consulting. "They had one with Chase, but also maybe one with Global Payments, TSYS or First Data. They do that so as not to have everything all in one basket."

However, in an industry continuing to cast doubt in ISO's minds as to where they will fit in, or how they will have to adapt to changing technology and merchant needs, it might not be a bad idea to find a partner that locks in business.

"With one relationship, you have volume and maybe can get better pricing tiers," Moussa said. "Everyone is trying to attract ISOs and put all of their volume under one relationship and they attract them by giving lower prices."

First American Payment has a strong reputation for operating with ISOs, but the company will have to give those coming in the Chase deal "more reasons and incentives to stay with them and build a relationship," Moussa added.

Though neither Chase nor First American Payment revealed how many ISO contracts were involved in the sale, it is generally felt that it was likely around 100 or fewer.

Chase's cutback in the use of ISOs dates to 2008 with the breakup between Chase and First Data, in which First Data obtained all of the ISOs.In the meantime, Chase built its own small ISO channel, one that became less of a factor as Chase created ChaseNet to support its digital product development.

The sale to Fort Worth, Texas-based First American Payment was "surprising" from that standpoint because of the development of Chase Pay, said Brian Riley, principal executive advisor with CEB TowerGroup. "Chase Pay is looking to emulate Android Pay through your device with host card emulation, so I was a little surprised to see Chase lost some of that connection with small merchants," Riley added.Chase Paymentech remains a large and strong operation, and the ISO sale indicates that Chase may want to put more of its "focus on the high end," Riley said.

The ISOs now in First American Payment's hands represent businesses from small retailers, the quick-service industry and the growing e-commerce landscape. First American will get ISOs involved in selling gateway services, EMV technology, tablet-based payments, and will include integrated POS products and business-management software.

While companies would like to lock ISOs into a single relationship, they generally work with many companies almost on a "merchant-to-merchant" basis, finding the right services provider for the right merchant client, said Richard Oglesby, senior analyst at Double Diamond Payments Research.

"First American essentially bought the merchant deals, and if those ISOs want to service those customers, they would contact First Payment, rather than Chase," Oglesby said.

First American will get to know a few new ISOs out of the deal and look to convert them to its business model, Oglesby said, adding it’s not a new phenomenon. "There are only about 1,200 ISOs out there, so every one of them is being targeted by every super ISO or bank in the market already."

Regardless of where an ISO decides to pitch a tent or pull up stakes, experts generally agree that the role of an ISO isn't suddenly going to fade from the payments ecosystem. The decline will be more gradual.

The independent software vendor space may grow rapidly at the expense of ISOs over a number of years, but not immediately, Oglesby said. "You still need an ISO to close a sale, but you need the expertise behind that."

The industry views an ISO as a payments expert, but payments are becoming increasingly complex in getting bundled with other services.

"By definition, if you are an ISO that has become familiar with bundling POS services, you are no longer an ISO, you are now a value-added reseller," Oglesby added. "The VAR and ISO channels are going to crash and become the same."

The bottom line is that ISOs will not be "payments specialists" any longer simply selling a terminal out of a box, Oglesby said. "Those that continue to just be payments specialists are the ones who are in the most danger," he added. "Maybe not today or tomorrow, but over the next 10 years."