Over the past few years, many POS VARs and ISVs have at least considered adding payment processing to their roster of services. While actually doing so requires considerable strategizing, it is in most instances well worth the effort—and for more than one reason.
For some resellers, moving into payment processing comprises a key means of replacing income lost through shrinking hardware margins, differentiating themselves from other players in the channel, and generating recurring revenues. The latter can be impressive. Although variations may occur, integrated processing provider Elavon (www.elavon.com) purportedly pays participants in its Member Service Provider program an average of $750 per month for every merchant client that handles $250,000 in monthly credit card payments and $4,500 for every merchant client that handles $1.5 million in monthly credit card remittances. VeriFone (www.verifone.com) has channel partners whose monthly recurring revenues have increased by “10, 15 and even 20 percent, at not a lot of cost,” as a direct result of incorporating payment processing into their model, states Harry Hargens, the company’s director of PAYware channel programs and business development.
But this is only a small piece of the puzzle. The trend toward integrating payment acceptance applications with POS solutions has taken tight hold and is growing ever stronger; VARs may in turn find that merchants expect a full-service offering that includes payment processing as well as ancillary value-added programs, such as gift cards and loyalty.
“The more important question may be not whether (moving into) payment processing is a good move, but what you will be missing if you don’t have these capabilities,” says Suzanne Van Laar, Elavon’s channel manager and vice president, ISV/VAR channel. Van Laar adds that having a payment processing component yields VARs better control over relationships with their merchants, as they become the sole resource for all transaction-related requirements.
Mike Hackney, vice president of marketing for processor Sage Payment Solutions (na.sage.com), corroborates Van Laar’s comments. He adds that an increasing number of merchants, among them SMB merchants, are embracing mobile payments and will only be inclined to look to VARs for any necessary hardware and software if payment processing, too, is on their service menu.
“Mobile payments—and the SaaS model, for that matter—have been real game-changers here,” echoes Brian Nierby, vice president, North American channel sales for processor Mercury Payment Systems (www.mercurypay.com). “VARs stand to lose out if they don’t play, but those that do” may also find that some of the compensation they receive can be used to diversify their POS lines, adding yet another layer of merchant “stickiness.”
Moreover, there is a rapidly increasing need to fight encroaching competition from independent sales organizations (ISOs) and agents that market merchant accounts to retailers and other entities that accept electronic payments. A seemingly growing number of ISOs and agents have invaded what was once exclusively VAR territory. These contenders now sell a wide range of options, from POS terminals to ancillary programs (loyalty, gift cards, etc.) and, in some cases, software (accounting, inventory management and the like). Many are vying for a larger share of merchants’ business by touting “free” terminals whose cost they subsidize through other means.
“If VARs don’t offer integrated payment services and products, they open the door for ISOs to provide subsidized, fully-integrated systems,” asserts Justin Zeigler, marketing director, Datacap Systems (www.datacapsystems.com). “They should instead be turning” such competitors “into their variable-cost salesforce, especially given the fact that “virtually all POS packages and
embedded POS systems have an integrated payments option coupled with available programs for cooperative relationships between VARs and merchant services providers.”
Just as multiple rationales support VARs’ move into payment processing, resellers have a choice of several models for doing so. Each has its own set of benefits and drawbacks. Referral partnerships with agents. In this scenario, VARs do not actually sell payment processing services or technology. Rather, they refer merchants in need of processing agents; some of whom are employed by ISOs and others who handle sales to merchants on a contract basis. Resellers receive a fee for each referral proffered, but do not otherwise “share” the account with the ISO served by the agent.
On the positive side, “it’s a good way to gradually get into payment processing—to learn the lingo and, as such, build a foundation” for delving more deeply into payment processing, observes Jeanne Aiken, director of merchandising, ScanSource (www.scansource.com). The disadvantage is, of course, smaller fees than would otherwise be collected Partnerships with ISOs/acquirers. VAR/ISO partnerships usually entail an arrangement wherein ISOs sell the actual merchant accounts and, in most instances, handle the necessary account setup paperwork while the former sells the technology, executes integration and upgrades and services accounts going forward. Resellers pocket a share of recurring revenues without the burden of boarding merchants for processing services and setting up accounts (responsibility here falls on ISOs’ shoulders). They also generate profits from the sale of payment processing hardware and software, and/or from the rental of such products, which they have bought outright, to merchants in association with ISO/acquirer partners.
By contrast, the major pitfall of allying with ISOs/acquirers is that VARs’ solutions and systems must integrate with the payment processing gateways supported by the processors with which these ISOs/acquirers work.
Not surprisingly, sources recommend exercising due diligence in choosing ISO/acquirer partners. VARs going this route should solicit feedback from software developer and integrated payment systems providers for guidance on how to get started and which partners to choose.
Narrowing down the field of ISO partner candidates to those that are familiar with or, more ideally, already serve the vertical markets in which a given reseller specializes is imperative. As several sources point out, merchants are paying VARs for their expertise as trusted advisors in selecting and implementing a retail system that best meets the needs of their individual business. Should the ISOs not possess complementary expertise, they will look askance at the deal.
Partnerships with processors. Once the exception rather than the rule, this approach is rapidly taking hold. According to research firm Aite Group (www.aitegroup.com), VARs and ISVs generated approximately 15 percent of all new merchant accounts, up from 11 percent in 2009, while processors’ direct salesforces boarded 32 percent of accounts and ISOs, 21 percent. Aite projects that VARs’ heightened influence on transaction processing will enable them to sign 24 percent of new merchant accounts next year, supplanting ISOs for second place in the game, and that VARs may eventually be responsible for signing the majority of these. Lending credence to this theory, at least one processor—Mercury Payment Systems—employs only VARs and ISVs as its salesforce.
VARs and ISVs that adopt the processor partnership collect a percentage of the fee for each transaction processed. Most sources peg the latter at 10 percent to 20 percent, but Aite Group puts it at 16 percent, or a collective total of $2.3 billion in merchant transaction fees in 2011, up from $1.7 billion in 2009. Eventually, Aite predicts, VARs’ share of transaction fees will hit a mark of 25 percent to 30 percent. Variables that affect the percentage of transaction fees collected by individual VARs encompass the size of their merchant base, the ease with which payments can be integrated into their applications and the scope of its sales staff.
Resellers’ ability to offer to merchants almost or entirely turnkey business solutions that incorporate processing, rather than more basic POS solutions with no ancillary capabilities (e.g., reporting) and a payment processing piece, allows them to bring in the largest possible cut of transaction fees.
In addition to such potentially hefty transaction fees, resellers benefit from partnerships with processors because the latter do not insist on exclusive arrangements with them; VARs have the freedom to sign and service merchants that use a competing processor. Reputable processors themselves serve up a range of “perks” to their VAR partners, including the latest R&D for gateway solutions and help ensure merchant compliance with PCI and PA-DSS
requirements—the complexities of which would otherwise pose a challenge to resellers attempting to incorporate payment processing into their roster of offerings.
“It’s incumbent on processors to help with PCI and PA-DSS, and to work with the card brands on the compliance front,” notes Jana Franks, vice president, integrated payment solutions for processor First Data (www.firstdata.com).
VARs need to ask a myriad of questions to determine whether they should partner with a particular processor. The first question centers on processors’ organizational and payment infrastructure. “The technology and staff needed by processors to support VARs is different than what is needed if they are only supporting agents or working directly with merchants,” asserts Henry Helgeson, CEO of Merchant Warehouse (www.merchantwarehouse.com), a provider of credit card processing and merchant services. “There needs to be support for gateways, credentialing, and sales and marketing. A reputable processor will also explain how payment is structured and what factors into it. Not all are created equal in that regard.”
The availability of technology that will assist VAR partners in setting themselves apart from the competition and enhancing merchant “stickiness” merits evaluation as well. Examples include support for mobile payments and encrypted card readers, sources say. Processors should offer direct certification options (to certify VARs solutions for use with their programming gateways) as well as application programming interfaces, some experts assert.