February 26, 2020TSG Press

Payment Service Providers: How Do You Define Success in the ISV Channel?

Simply partnering with any ISV does not equal a successful ISV strategy. As a payment service provider, you know that not all independent software vendor (ISV) partnerships are worth the effort. Focusing on select, high-performing industries is key to a successful ISV strategy. As part of a focused ISV strategy, these questions remain:

  • What constitutes an attractive ISV industry?
  • Which ISV industries meet that definition?
  • Which ISVs serving those industries should I pursue?

Looking at the numbers from TSG’s AIM analytics platform of approximately 4 million card-accepting merchants, ISVs are the fastest growing sales channel among U.S. merchant acquirers, with 115% growth from 2012 to 2019. With an ever-competitive market, how do you address the questions above and where do you start?

First and foremost, be methodical and use data to define your strategy. This article identifies five pillars of a data-driven ISV strategy and how you can begin to answer the questions above.

Looking for something more visual? Download the infographic.

#1 Define High Performance

This may seem obvious at first, but the definition of an attractive card-processing merchant will vary between payments providers and it isn’t always clear cut. You should set aside time with your team to clearly determine what performance criteria is most important to your merchant portfolio. Make a list of potential metrics and choose a few that are deemed critical. This is criteria like volume, attrition rate, total volume growth, average merchant tenure, geographic location, or simply average annual net revenue per merchant.

Some acquirers may be focused on building longevity in their merchant portfolio vs. having merchants with the highest amount of net revenue. Others may focus purely on net revenue and are less concerned with attrition. Portfolio managers should regularly reevaluate their key criteria and adjust efforts accordingly.

Defining specific performance criteria is a solid first step in building a successful ISV strategy.

#2 Find Industries that Meet the Definition

Once the definition of high performance is established, find out which industries match the definition. Each industry performs differently. For example, restaurants have significantly higher average attrition than education merchants and provide substantially less net revenue to their processing provider. TSG’s proprietary AIM analytics platform offers the ability for payments companies to find attractive industries based on the criteria that matters to them.

For example, when giving equal weighting to merchant account tenure, volume gross attrition, and total volume growth, TSG’s AIM platform reveals that the utilities industry (MCC 4900) is the fourth most attractive vertical in the U.S. market and the average utilities merchant will generate $3,407 in annual net revenue for acquirers.

#3 Learn How to Succeed in the Chosen Industry

At this point you’ve made great strides in building a successful ISV strategy. Now, what about meeting the needs of ISVs in these verticals, and maybe more importantly, the merchants these ISVs serve? Every industry has specific payment product and service needs and wants.

After identifying the right industry, you should evaluate and update your product set to ensure you can serve the industry effectively. Identify table stakes products as well as things you can do to differentiate. Simple examples: if you want to serve fitness centers, you need a strong recurring billing and account updater feature, if you want to serve salons and spas, you should have a gift card solution. Talk with merchants in your chosen industry, work with payments experts; identify product gaps and fill them.

A classic example of an ISV having success in payments is wellness software, Mindbody. Mindbody upped its payments game to offer a seamless payment experience in its business management software. It has multichannel payments, including an eCommerce solution that works in the MINDBODY app as well as partner apps. The solution supports recurring payments for card and ACH and has a strong gift card offering. The company’s payment processing revenue doubled in under three years, and now represents about 40% of total revenue.

#4 Find the Right ISVs in the Chosen Industry

Finding ISVs that serve an industry is a large endeavor, as some industries have hundreds of software players. This is aside from determining which ISVs in the market are best to focus on from a sales perspective. Perhaps just as important as choosing the right vertical is choosing the right ISV. Providers need to determine another set of criteria: What kind of data do I need to have on prospect ISVs before jumping into a sales conversation? How many merchant accounts do I need to gain from an ISV relationship to meet my ISV channel goals?

Again, criteria can vary across providers, but TSG recommends knowing the following items on ISVs identified in the selected industry:

  • Number of merchants served (what account lift can I expect if a deal is made? Does it align with sales goals?)
  • Geographic presence (can I serve the locations this ISV serves?)
  • Status of payment acceptance/current payment processing relationship(s) (who am I up against?)
  • Other industries served by the ISV (can I serve those industries as well?)
  • How concentrated is the ISV market in this industry (how many partnerships do I need to gain material market share?)

#5 Take it a Step Further

Providers should tailor their sales message to each ISV and sell against any weaknesses the ISV’s current payments partner may have. When it comes to presenting pricing, remember that average merchant fees will vary by area of the country, even within the same MCC and merchant size tier. Also, be sure to ask key questions during your sales conversations, here are three examples:

  • Does the ISV currently participate in merchant onboarding? Providers that can augment or automate this effort for the ISV may differentiate themselves; ISVs dealing with manual and paper-based processes will be more likely to entertain a new provider.
  • Does the ISV have a licensed software model, a SaaS software model, or both? Those offering both models may want an acquirer that can provide a payments integration for both.
  • Does the ISV understand PCI? Many ISVs believe they can avoid PCI when they can only minimize the scope of their responsibilities

The recurring theme of this article is to make data-driven decisions with your ISV channel strategy. Start with defining performance criteria, follow that definition to corresponding industries and software players, ask the right questions when prospecting ISVs, and tailor your sales messaging. Market intelligence makes a difference, make sure you have it.

TSG Can Help

Are you a payments player looking to thrive in the ISV Space? TSG has the tools to help your company plan and execute an effective strategy. Learn more.

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