Partnerships / Acquisitions

Why Partnerships Matter As ISVs Seek To Provide Merchant Value

Why ISVs Don't Need To Go The PayFac Route

Independent software vendors (ISVs) have to navigate a brave new world where megamergers are reshaping financial services. And the decision to offer payments may lure some to become payments facilitators (PayFacs). But in an interview with Karen Webster, Daniela Mielke, CEO of RS2, says ISVs can bring payments to merchants by leveraging partnerships instead. Here’s how.

In business, a key maxim for success boils down to this:

Stick to what you know. Partner with others whose (differing) core strengths complement and expand your own offerings.

It’s vital advice for independent software vendors (ISVs) navigating a payments landscape shifting in the wake of megamergers that are bringing more services under one roof.

Many of those ISVs may be mulling the advantages of shifting to a payments facilitator (PayFac) model that might, at least in theory, supercharge growth.

The strategy may have more pitfalls than promise. And according to Daniela Mielke, chief executive officer of RS2, a strategic approach to providing payments through partnerships could be better for ISVs than transforming into PayFacs.

On the surface, becoming a PayFac means offering merchant services on a sub-merchant platform. Merchant accounts are set in place with acquiring banks, streamlining an approach where each seller would traditionally have had to establish merchant accounts — a boon for online marketplaces and platforms, in particular.

Mielke said software providers – traditionally and post-mega mergers — are in the business of solving a merchant’s problems, and payments is increasingly becoming part of the software provider’s revenue as merchants seek to embed payments into their interactions with consumers.

The drive to create a great payments experience has been stymied for those ISVs that want to serve merchants, as they have realized they cannot work with just any processor, said Mielke.

That’s because the experience has held too much friction, and historically it has taken too long to board new merchants, while reporting and settlement functions were less than optimal.

This has led a number of ISVs to become PayFacs, Mielke told Webster.

“The idea that ‘oh, we’re not really a software company anymore — we’re a payments company’ is not how ISVs win,” she noted. “They win by creating the best overall experience for their merchants. The firms that say ‘we are an experience company’ are the ones that do better.”

ISVs that embrace the PayFac model may be underestimating the risks and liabilities associated with that decision.

Mielke said software vendors would be better served by partnering with firms that can offer strategic value rather than companies that simply refer new business to those ISVs.

Looking Toward Strategic Value

Along the way, for ISVs the idea of “processing payments” has evolved from helping merchants accept cards to becoming a strategic enabler of value themselves.

The strategic value is seen all the way across the commerce spectrum, said Mielke, who added that consumers can tell the difference between the merchant who simply offers basic payments functionality (cards, perhaps, in addition to cash) versus a merchant who makes the payments experience invisible and seamless (such as Uber or Amazon).

That seamless checkout and payment functionality is critical for larger firms and is an emerging trend for smaller companies. As examples of the latter, Stripe and Square have broadened their portfolio of offerings to effectively become operating systems for smaller companies.

In a separate example of the partnership model, Mielke noted that RS2, with a focus on payments, helps ISVs create vertical-specific software experiences that compete with the modular approach other firms may offer. The partnerships that help to simplify ISV business models have become ever more complex, she said, as they have had to integrate payments into their business models, contracts and pricing structures.

The Data Component

Data, as always, is the lifeblood of commerce. The conventional wisdom for ISVs becoming PayFacs may be that they have greater control of data. But according to Mielke, as ISVs take on a more aggregated role, enlisting the aid of a good processor should give them access to quality data. There’s no pressing need to become a PayFac.

As she told Webster, integration with a strong partner and a single point of access can make all the difference when it comes to data: “If you have five different providers for different payment types and different parts of your payment ecosystem, then it becomes very difficult to get all these data streams and do something effective with that data,” Mielke said. “But [with] a processor that aggregates all the different payment types, across online and offline channels, in mobile and maybe even in different countries … you have access to a great dataset.”

Degrees of Freedom

A well-structured partnership also offers ISVs several degrees of freedom as they strive to serve merchants, said Mielke. ISVs own the experience, which spans everything from merchant onboarding to risk management, reporting and settlement.

For the ISV, partnerships create the same competitive differentiator that would be the goal of becoming a PayFac.

There still may be an opportunity for PayFacs, Mielke said — chiefly among those facilitators who wish to underwrite merchants. But to realize value without the risk, she believes ISVs should look toward partnerships.

“It’s never just about the technology,” Mielke told Webster. “ISVs can have payments as a strategic part of their value proposition without having to become a payments company.”

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