Payments Innovation

Why The Death Of The ISO Is Greatly Exaggerated

Why The Best Is Yet To Come For ISOs

For at least the last 15 years, it seems there has always been someone ready to write a eulogy for independent sales organizations (ISOs).

The exact cause of ISOs’ predicted death changes every few years depending on what is going on in the payments ecosystem at the moment, First American’s Vice President of Strategic Partnerships John Newton told PYMNTS in a recent conversation.

At various industry events over the years, Newton has heard PayPal will be the end of ISOs, Square will be the end of ISOs, Stripe will be the end of ISOs — and, most recently, the ISO apocalypse has been attributed to the mergers and acquisitions (M&A) extravaganza that has marked the processor space in the last 12 to 18 months.

That’s not to say the great reshaping of the merchant services chessboard that is currently underway has not been important or impactful. Fiserv merged with First Data, TSYS merged with Global Payments, and FIS bought Worldpay — three moves that, in effect, made the processor world a much smaller place, populated by some extraordinarily massive players. ISOs have to be prepared to adapt to the landscape that is unfolding around them.

“For a lot of ISOs that are selling traditional and somewhat canned products and services, there has been some hesitation, because this is their livelihood,” Newton noted. “ISOs whose processors have recently merged or been acquired must ask: ‘Will we be as valued? Will we have the same cadence of new products to offer? Will there be a new focus that will shift away from ISOs as a distribution channel?’”

Those are big — and important — questions, he noted, given the risks ISOs perceive to their future in a merchant service environment that has changed tremendously and is likely to change even more. But, said Newton, ISOs are at their core entrepreneurial entities that are wired to adapt and are evolving to meet the changing times — primarily by reimagining their business model and reshaping their relationships with technology providers.

The Dangers of the Smaller Field

From the processor’s point of view, said Newton, the name of the game is consolidation in an effort to build scale. And the more it happens, the more pressure builds in the market for big incumbents to either start gobbling each other up or to combine forces. In chess terms, the queen takes the rook and controls more of the overall board.

“But as we start looking at those fewer options at the top of the market for processors, I think there tends to be gaps in innovation,” Newton pointed out.

And those gaps are an almost inevitable consequence of the size and scale the mega-processors are gunning for, he said. The only way to really go big is to go broad, and to have a product set that is usable out of the box for many different types of merchants. In practical terms, Newton explained, that translates into a payments product that is just that: a payments product. It allows for the seamless transaction of funds that will work as well for someone selling shoes as for someone selling salads.

“But as merchants are evolving in digital channels, they are looking for ways to better manage inventory, improve mobile order-ahead, manage data on consumers and products, and build rewards and loyalty programs,” Newton pointed out. “Things for which merchants need a third party in today’s environment, because they aren’t going to come directly from their processors.”

And those value-added needs that attach to payments — but also go beyond them, Newton noted — present an opportunity for ISOs at the dawn of the 2020s, as they face their evolving future.

Tapping Into Tech Partnerships

The old paradigm for ISOs, Newton said, was centered around two relationships: the one between the ISO and the merchant, and the one between the ISO and the processor. The ISO’s relationship to the latter provided them with the products and services to sell to the former.

But as they evolve, ISOs are seeing the innovation gaps created by an environment in which there are fewer, but larger, processors — and they are embracing new technologies and partnerships with independent software vendors (ISVs) to bring more robust payment solutions to market.

Where ISOs are seeing the biggest success today, Newton noted, are the places where they can step in and bridge the gap between an off-the-shelf payments solution and a vertical-specific, customized payment solution in partnership with the ISV that serves that particular vertical.

“What ISOs are bringing to the table is the payments expertise and the ability to seamlessly integrate it into that vertical expertise the ISV brings,” he said. “With those partnerships and acquisitions with software firms, value-added and enriched solutions can be introduced to the market in a way that gives merchants the value they want from their order-ahead programs or inventory management solutions, while that payment piece is pushed into the background inside that software solution.”

It is a different set of relationships for ISOs to develop and will change how they evaluate the processor relationships they need to support these more value-added payments products. There could very well be a round of mergers and acquisitions coming in the ISO space, in something of a parallel to what has gone on in the processor space, as both ISOs and ISVs reposition themselves in the new market for merchant services.

Plus, Newton said, the action is probably not quite over in the processor space, which is still unfolding cyclically. As innovation gaps appear and smaller processing players find the funding to enter the system and compete to fill them, the bigger processors will continue to be pushed to consolidate, acquire and scale to protect their market share.

“I don’t think we’re completely done with consolidation,” said Newton. “I think there are more moves still to be made and a lot of players out there that look like attractive targets — which means there are some opportunities for different organizations to come together and solidify their place as the top 25 continue to evolve.”

But while what’s next in the market is still a work in progress — with many more new pairings and entrants to come — Newton is certain about one thing: ISOs, contrary to the longstanding myth, aren’t dying; they’re not even sick.

They’re just observing a different landscape and reevaluating what they need to offer to sell into it.



The How We Shop Report, a PYMNTS collaboration with PayPal, aims to understand how consumers of all ages and incomes are shifting to shopping and paying online in the midst of the COVID-19 pandemic. Our research builds on a series of studies conducted since March, surveying more than 16,000 consumers on how their shopping habits and payments preferences are changing as the crisis continues. This report focuses on our latest survey of 2,163 respondents and examines how their increased appetite for online commerce and digital touchless methods, such as QR codes, contactless cards and digital wallets, is poised to shape the post-pandemic economy.