ISVs in Payment Industry

Part
01
of three
Part
01

Integrated Software Vendor - Structure of Market and Key Trends within the Payments Industry.

OVERVIEW
The use of Integrated Software Vendors (ISVs) is increasing as many companies, especially small businesses, turn to them to help meet their payment processing needs. Those needs include implementing a solution that works specifically with their business’ unique needs to protect customer data while delivering to the client a smooth, user-friendly experience. To that end, a period of both market consolidation and verticalization is currently occuring within the ISV space in the context of payment processing. ISVs are both acquiring and being acquired by payment processors and are beginning to specialize​ in servicing niche market segments. The biggest trends concerning ISVs are occuring both in the payment space and in the larger payment industry as a whole. These trends include vertical integration between ISVs and payment processors, specialization by industry, alternate payment channels, payments embedded in the Internet of Things (IoT), and more. Detailed information about the nature and structure of the ISV market as well as key trends existing within the payments industry are included below.

findings

Nature and structure of the market

The use of Integrated Software Vendors (ISVs) is increasing as many companies, especially small businesses, turn to them to help meet their payment processing needs. Those needs include implementing a solution that works specifically with their business’ unique needs to protect customer data while delivering to the client a smooth, user-friendly experience. The ISV market as incorporated within the payments industry is rapidly becoming more consolidated and vertical as ISVs both acquire and are acquired by payment processors. The companies involved in these acquisitions know that they companies they acquire or are acquired by must have a strong contractual relationship with their clients in order for the acquisition to be successful.

Payments processing, once overlooked as a service offering and revenue stream by ISVs has risen in prominence as a means of both ascertaining an ISVs existing value proposition to its end users, and as a long term strategic play for enterprise value creation through the high quality, recurring revenue it generates. The increased recognition by ISVs of the value found in payments processing has exacted changes in the relationship that exists between ISVs and payment processors, particularly when it comes to forming strategic partnerships and the resulting vertical integration of the market.

The vertical integration that is occuring as a result of the increased number of acquisitions involving ISVs and payment providers is not occuring as a one-size fits all approach. Merchant Services Providers (MSPs) and Independent Sales Organizations (ISOs) are being impacted by the increased consolidation and vertical integration occurring within the ISV market. ISOs, in particular, will need to develop niche business models specialized for the companies they do business with if they wish to stay competitive.

According to a 2016 study by First Analysis Consulting Group, “Roughly 51% of ISVs have enabled payments to be made directly as a feature within their product-set.” That adoption rate is on the rise, causing many ISVs to “reevaluate the role payments could play in their platform.”
According to Double Diamond Group, the role of “ISVs in key vertical markets will drive most of the growth in GVP.” The key markets Double Diamond Group is referring to include digital commerce, nonprofits, government, utilities, healthcare software firms and more. The market potential for ISVs who also act as payment facilitators is promising with the market potential equaling $10.5K for B2B SaaS Providers and $1.6T GPV.
The integration of services resulting from the consolidating is occurring for a variety of reasons. Vertical integration leads to a process that is simpler but also more effective and more secure. It allows for layers of protection and encryption that aren’t necessarily as available to a stand-alone service or process.

Trends

Trends in the ISV market can be found both in the payment space and in the payment industry as a whole. New technology is fueling trends including open networks and integrated payments, alternative pricing plans, and entirely new business plans that take into account the changes happening within the market.

Other trends are the result of business looking for a vendor that does more than simply accept a credit card. These trends include embedding payments into the Internet of Things (IoT), increased co-opetition resulting in partnership that were once unthinkable (like PayPal and Visa), SMB challenges, and more consolidations.

Still other trends are impacting not just ISVs in the payments space but also the payments industry as a whole. These trends include improving the customer’s experience, payment monetization, and dealing with the regulatory environment and the risks associated with handling financial information. Additional trends include banks aiding in collaboration by becoming platform players, infrastructure rationalization, open APIs that enable stakeholder collaboration, instant payments processing and many more.

Conclusion

ISV use by companies is increasing as demand for payment processing that does more that just accept a credit card grows, The market is in a state of flux caused by an rise in ISVs both acquiring and being acquired by payment processors. The trends in ISVs market are found in both the payment space and in the payments industry as a whole. These trends include alternative pricing plans, embedding payments into the Internet of Things (IoT), infrastructure rationalization, instant payments processing, and more.
Part
02
of three
Part
02

Integrated Software Vendor - Function and Materiality within the Payments Industry.

In the innovative payments industry, Integrated Software Vendors (ISVs) are considered key contributors in defining this sector. There are five general models utilized by ISVs in the payments industry, primarily based on deviations in control over user experience: the agnostic model, referral model, shared-sales model, white label model, and Independent Sales Organization (ISO) model. It is expected that there will be increased utilization of the shared-sales and white label models, based on advantages conferred by these models. Additionally, the ISO model, which includes major players such as Apply Pay, Samsung Pay, Chase Pay, Square, Adyen, PayPal, Stripe, Shopify, and Vantiv, is expected to grow substantially in popularity over the next five years.

function and materiality in the payments industry

ISVs are now considered "prime candidates" for companies seeking integrated payment solutions, and in this industry, ISVs may offer either a complementary payment solution or a new sales channel entirely. This decision is often based on the amount of control the ISV ultimately seeks to retain over user experience, which is best understood as the role taken in six key processes: sales, boarding, underwriting and risk management, revenue, technology delivery, and service and support. In general, to accommodate these variations in control over user experience, ISVs currently operate based on five models, each of which is discussed below. Models are presented in ascending order of revenue generation.

1. Agnostic Model

ISVs classified as "payment provider agnostic" have certified their software to different payment platforms, which provides maximum flexibility in client payment options. Many ISVs have developed "product interfaces to industry agnostic payment gateways," which allows clients the freedom to partner with payment providers of their choice. There are a number of drawbacks to this model, however. First, costs increase, as it is necessary to manage a number of different integrations. Second, this model may result in increased responsibilities with respect to PCI Compliance. Third, in the absence of customized service, payment processors are less likely to be loyal to payment provider agnostic ISVs. Finally, ISVs utilizing this model do not generate revenue from payment providers.

2. Referral Model

ISVs that prefer to develop relationships with payment providers, rather than offering the virtually unlimited integration provided via the agnostic model, refer new merchant leads to their payment partners. ISVs then generate a limited revenue stream from these referrals. This model allows ISVs some flexibility, as partners are "preferred" but not required, and the model promotes increased input from ISVs regarding sales and support. However, this model offers the most modest revenue opportunities for ISVs of all revenue-generating models.

3. Shared-Sales Model

In the shared-sales model, ISVs enable their software to interface with one payment processor exclusively. This model provides a greater revenue stream for ISVs, and greater control over sales and customer support is allotted to ISVs.

4. White-Label Model

ISVs operating under the white-label model function like proxy payment processors. In this model, ISV's employ a payment provider's solution, but the ISVs branding, processes, and support systems are utilized. This model provides ISVs with control over sales and onboarding, while the payment processor continues to manage functions such as underwriting and risk management.

5. ISO Model

An Independent Sales Organization (ISO) is an organization that provides credit underwriting and client onboarding for a specific processing platform. ISOs are sponsored by a bank or other financial institution that interacts with the Federal Reserve, and they are subject to regulatory and compliance requirements. ISVs acting as ISOs may serve as "micro-merchants" for Payment Facilitation. Software companies acting as ISOs are often termed "PayFacs" for this reason. Their role is to "aggregate transaction volume to manage
costs and simplify implementation of many small users." Essentially, ISVs operating in the ISO model are direct payment providers, and they have maximum control over user experience while generating the highest revenue of all revenue-generating models.

emerging trends in function and materiality

Our findings revealed there are two significant emerging trends for ISVs in the payments industry relating to function and materiality, although this list is by no means exhaustive.

1. Model Selection among ISVs

Although there is some dispute within the industry regarding which factor ISVs consider the most important feature in selecting a payment partner and operating model, the two most commonly identified factors are the ability to receive compensation and customer service. Approximately 66 percent of ISVs in a 2016 consulting survey reported that being able to generate revenue is among the top three criteria considered when selecting a payment partner. However, subsequent research indicates that customer service is also a vital consideration. As a result, industry experts predict that the shared-sales model and white label model will offer the most promising opportunities for ISVs. These models offer the opportunity to improve user experience while most effectively generating revenue.

2. Evolution of the ISO Model

Payment Facilitators (PayFacs) operating in the ISO model have generated significant attention in the industry, as a number of ISVs that initially operated as PayFacs are now focusing almost entirely on the payment feature of their software offerings. Instead of being software companies generating some revenue from payments processing, these ISVs are now focusing on payments as their primary source of revenue. The software itself is often provided to partner merchants at no cost, or only when a transaction occurs. Although ISVs functioning as Payment Facilitators is not a new phenomenon, it has become more widespread in the payments industry. There are currently 200 ISVs serving as PayFacs in North America, with 600 reported globally. Growth in the Payment Facilitator market is expected to double annually from 2016 to 2018, at which time it will slow but is still projected to generate 80 percent growth over the next five years. ISVs who elect to become PayFacs benefit from "frictionless boarding, simplified pricing, and a single point of support to submerchants," while simultaneously generating increased revenue. ISVs in the payments industry that have acquired "marquee status" as PayFacs include Apply Pay, Samsung Pay, Chase Pay, Square, Adyen, PayPal, Stripe, Shopify, and Vantiv.

conclusion

In summary, our findings revealed that ISVs in the payments industry are currently operating via five models, primarily based on deviations in control over user experience. The shared-sales and white label models are expected to gain popularity, while the evolution of the ISO model is also a key trend relating to function and materiality in the payments industry.
Part
03
of three
Part
03

Integrated Software Vendor - Major Vendors within the Payments Industry.

Integrated Software Vendors (ISVs) develop customized payment solutions that seamlessly work within a client's existing software framework. With a 23% annual growth and $148 billion in gross processing volume in 2016, ISVs are one of the fastest growing sectors of the payment processing industry. This sector is extremely fragmented, with over 11,000 competitors, but is experiencing consolidation as a handful of larger payments companies acquire smaller ISVs.
Below you will find a deep dive of our findings.

OVERVIEW OF ISVS

ISVs offer customized payments solutions which seamlessly and invisibly work within the merchant's existing software framework. ISVs may allow businesses to link their accounting software directly to the ISV's software to save time, reduce their overall expenses, increase cash flow, reduce human error, improve workflow, and strengthen security.
In a recent white paper, Paysafe explains, "The ISV ... and VAR (value added reseller) business model is evolving to reflect the growing needs of merchants, who are increasingly looking to adopt turnkey solutions to grow their businesses, and allow for better end user engagement." They also note that "ISVs and VARs must ensure their technology infrastructure is supported by an integrated payment solution that’s resilient, scalable, and delivered by a PSP that has experience in their sector."

MARKET SIZE

In 2016, ISVs had gross processing volume (GPV) of $148 billion and were growing at a rate of 23%. For comparison, the total market GPV was $5.2 trillion, but is growing at a rate of only 6%. It is estimated that ISVs have the potential to corner up to $1.6 trillion of the total market GPV.
The sector is extremely fragmented. In 2016, nearly half of the 23,000 business-to-business (B2B) payments solutions companies were ISVs. (We will discuss this fragmentation in more detail below.) Many of these myriad ISVs differentiate themselves by focusing on "untapped and/or rapidly growing vertical markets" like healthcare, education, charities, etc. rather than the retail sector. So, for example, ISV payment solutions which can integrate with an overall practice management system are particularly gaining popularity in the healthcare industry "due to the trend of centralization ... and the rising complexities associated with patient care and payments."

PAYMENT FACILITATOR SECTOR

One of the most lucrative spaces for ISVs in coming years will be the payment facilitator (PF or PayFacs) space. A PayFac is a platform which allows anyone who wants to offer merchant services to use the PayFac's MID as a "sub-merchant" rather than having to get an MID of their own. The most well-known examples are Paypal, Square, and Stripe. Even excluding the volume generated by these giants, PayFacs' transaction volume is expected to grow 88% annually to reach $513 billion in GPV by 2021, generating $4.4 billion in revenue. Consequently, "ISVs that transition to PFs and extend frictionless boarding, simplified pricing, and one point of support for sub-merchants will experience significant growth."

FRAGMENTATION AND CONSOLIDATION

Determining the top competitors in this sector is difficult due to the incredible fragmentation of the market (over 11,000 competitors). In addition, the top competitors offer ISV services without it being the dominant sector of their business. However, there are signs that there will be an enormous amount of consolidation in the coming years. Todd Ablowitz, "president of Double Diamond Group and co-publisher of PaymentFacilitator.com," states, "We continue to see a massive secular trend of vertical ISVs becoming payments companies... We see this trend accelerating substantially in the coming years."

TOP COMPETITORS

First Data is the top competitor in the ISV space in terms of revenue ($11.8 billion). In October 2017, the payments solution company announced its intent to acquire BluePay to further its ISV strategy, "particularly in Card-Not-Present and eCommerce." BluePay had already been a long-standing distribution partner to First Data. It regards BluePay's integrated solutions to be highly complementary to its earlier acquisition, CardConnect, which provides "best-in-class merchant and partner management tools" and "cutting-edge ISV product suite."
The next largest competitor, at $3.9 billion in revenue, is Global Payments, which entered the ISV space in 2012 with the acquisition of Accelerated Payment Technology (APT) for its "fully-integrated software solution." Global Payments has continued to develop its ISV products with the August 2017 acquisition of ISV Active Network. "The agreement also includes a partnership in which Global Payments will provide payments technology solutions to companies in Vista Equity Partners’ portfolio."
With about $1 billion in annual revenue, Paysafe is in third place in the ISV sector. As with the top two competitors, Paysafe operates in ISV but offers other services as well, including "payment processing, digital wallets, prepaid solutions and card issuing, and acquiring products and services."

CONCLUSION

ISVs are becoming the go-to vendors for payment solutions, particularly by under-served and specialized verticals like healthcare. Their impressive 23% growth to $148 billion in GPV could be accelerated to as much as 88% growth by expansion into the payment facilitator (PayFacs) sector. Though the sector is incredibly fragmented, a handful of companies like First Data, Global Payments, and Paysafe are beginning to dominate as they acquire smaller ISVs.
Sources
Sources