Once again, the payments industry finds itself gripped in the throes of change. It’s happening as independent software vendors (ISVs) add payments to the bundles of business services they create to help retailers, nonprofits, and government agencies manage their enterprises. If an ISV becomes capable of offering all or most aspects of payment on its own and registers with the card brands to do so, it earns the formal title of “payments facilitator.” When an ISV gets third-party help with providing payments, the ISV still looks like a payments facilitator to its merchants.

“‘Payments facilitator’ seems to be the new buzzword in the industry,” says Holli Targan, an attorney and partner at Jaffe Raitt Heuer & Weiss. She defines payments facilitators as aggregators, merchants of record, or master merchants that facilitate card acceptance by sponsoring and aggregating transactions for submerchants. Visa and MasterCard use the term “payments facilitator” in their rules, while American Express and Discover call them “payment service providers,“ she says.

Although the payments-facilitator phenomenon isn’t exactly new, it’s becoming more widespread and appears likely to keep expanding, according to Todd Ablowitz, president of Double Diamond Group LLC, a Colorado-based consulting firm. “We’re in the first or second inning,” he says of the movement. About 200 payments facilitators are operating in North America, and worldwide the figure stands at about 600, he estimates. “All of the major card brands, including Visa, MasterCard, American Express, and Discover, have welcomed the involvement of software vendors in the payments revenue stream by way of the payments facilitator model,” he notes.

About 11,000 U.S.-based ISVs could benefit from the payments facilitator model, Double Diamond research indicates. The firm arrived at that figure by starting with its database of 23,000 ISVs actively selling in the United States and then subtracting any that don’t receive payments and those that sell in the United States but have headquarters abroad. Of those 11,000 ISVs, 4,200 operate in the card-present market and have potential gross payment volume of $787 billion; 6,300 are in the card-not-present market and have potential gross payment volume of $772 billion.

“We expect that the payments-facilitator market, excluding PayPal, Square, and Stripe, will continue to double annually for at least two more years, with growth moderating in subsequent years to yield an average annual growth of more than 80 percent over the next five years,” the Double Diamond research states.

Meanwhile, about 1,200 ISOs are listed with Visa, with most of the sales volume generated by the top 100, says Ablowitz’s colleague, Rick Oglesby, a partner and head of product consulting at Double Diamond. Somewhere between 10,000 and 20,000 salespeople are working in the industry, with about 5,000 of them active, Oglesby says.

Responding to a Need

Recognizing the proliferation of payments facilitators, ETA has created the ETA Payment Facilitator Guidelines to help members negotiate the intricacies of the business. “Payments facilitators present another segment emerging in the payments industry and demonstrate the opportunities for market changes in the ecosystem,” notes Amy Zirkle, ETA director of industry affairs.

The organization also is planning a full day of programming dedicated to payments facilitation on May 11 at TRANSACT in Las Vegas. In addition, its TRANSACT Tech series of events is intended to engage leading-edge payments businesses, including payments facilitators, according to Del Baker Robertson, ETA vice president of strategic partnerships.

The growth of payments facilitators has apparently piqued Ablowitz’s interest: His company recently finished a white paper on the subject; he helped prepare the ETA guidelines; and he publishes to disseminate news and analysis. Ablowitz finds it helpful to view payments facilitators as belonging in either of two camps: wholesale or retail. Wholesale payments facilitators earn revenue from the transactions they enable and take on all or most of the risks and duties (such as underwriting and compliance) generally handled by ISOs and acquiring banks. Retail payments facilitators get third-party companies, such as WePay, Braintree, or Digitzs, to help with the job of providing payments services, may or may not make money from the transaction services, and generally avoid the potential downside. One might think of the latter as looking like payments facilitators without really being payments facilitators.

Oglesby describes payments facilitators this way: “Being a payments facilitator is a way of enabling an ISV to be ISO-like and earn these revenue streams as though they were an ISO, when in reality they are a merchant.” In effect, payments facilitators’ customers become sub-merchants in the payments landscape.

Function and Fulfillment

Slippery definitions aside, payments were usually an afterthought back in the days when ISVs began offering their wares to customers and including payments in the bundles of capabilities they create, says Laura Wagner, CEO of Digitzs. Hardly anyone would skip payments now, she adds.

In fact, some ISVs that become facilitators have switched much of their focus to the payments element of their offerings, notes Oglesby. Some go so far as to make payments their main source of revenue and provide their software to merchants at little or no cost, he says. In such cases, the company might charge a premium on the transaction, boosting the fee to 5 or 6 cents from the usual 2 or 3 cents, for example. But, it’s still a reasonable deal, he says. Those higher fees can make sense, Oglesby maintains, because when an ISV charges a merchant only when a transaction occurs, the ISV is also charging only when its software comes into play.

It’s also reasonable to view the payments facilitator business as already quite large by considering such companies as Adyen, PayPal, Stripe, Shopify, and Square as members of the category, Oglesby explains. PayPal is approaching $300 billion in processing volume, while Stripe and Square are both closing in on $50 billion in volume, he says.

Vantiv is enlarging the market, too. In 2010, the company worked with Visa and MasterCard to write the rules for payment facilitation in the United States and called their finished product the “payment service provider model.” Vantiv even patented the word “PayFac” for the category. That’s all according to Matt Downs, ETA CPP, head of channel and business development for Vantiv Integrated Payments, which was formed this year by bringing together the company’s Mercury and Element subsidiaries.

These days, Vantiv is working with “north of a 1,000” ISVs and claims that more than 80 percent of the payments facilitators registered in North America are its clients. Downs notes that the company offers programs for ISVs at any stage in their progress toward becoming payments facilitators. He says that with “turnkey” offerings, “all they have to do is code onto our platform, and we do the rest.” Other programs would accommodate ISVs more sophisticated in the payments business. “The degree they want to build it up and support it is really on a company-to-company basis,” he says of ISVs and payments facilitation. Some begin with a turnkey program and grow. Others elect to start as a full-blown PayFac and subsequently decide to back off to a more moderate degree of independence.

Vantiv claims to help ISVs improve the customer experience, and Downs provides the example of “staged underwriting.” Vantiv provides access to the infrastructure for the process. For example, suppose that a new merchant wants immediate access to an accounting package that includes payments. The ISV can collect 10 or so data points and make a quick decision to enable the merchant to begin a small number of transactions almost immediately. As the ISV gets to know the merchant, it can grant higher volume.

To speed up that process of getting acquainted, Vantiv offers dynamic funding that updates a merchant’s underwriting file with every transaction—instead of the old way of waiting for an evaluation that may have occurred only quarterly, Downs says.

Those advantages have contributed to the prodigious growth of ISVs in payments, but that success does not come solely at the expense of ISOs that have traditionally promoted transaction services to merchants, says the ETA’s Zirkle. That’s due to a lack of overlap—some verticals fit more naturally into the world of ISOs, while others more closely match the ISV scene. “ISOs will continue to exist—and continue to serve larger merchants,” she says. “Payment facilitators tend to serve smaller merchants and merchants in merging channels.”

The Right Fit

ISOs hold their own with the types of customers they have courted for decades, such as retailers, restaurants, and salons, observers agree. Proprietors of many of those businesses have become comfortable viewing payments and business-oriented software as separate, says Downs. What’s more, many merchants in those segments just don’t need the services ISVs provide because those merchants seldom or never receive electronic payments, he maintains.

Conversely, entities that seem to mesh with ISVs, according to Wagner, include utility companies, units of government, and nonprofits. ISOs simply haven’t been contacting many of those entities. Ablowitz suggests that other types of businesses that represent opportunities for ISVs are hospitality, digital commerce, bill payment services, and fitness. ISVs do well in market segments where cash is still dominant and in segments that aren’t always thought of as merchants, such as apartment rentals or Airbnb, according to Downs. And Oglesby says that, unlike ISOs, ISVs can often profit from one-time events, health-care providers, and new types of businesses.

One example of a new type of business where ISVs can hold sway is Uber, explains Oglesby. Like so many new businesses, Uber cannibalizes more-established competitors to some degree—in this case the taxi business—but accrues much of its growth by expanding the market. Uber, for example, will pick up your groceries, while a taxi cab driver probably won’t. A Google search for the word “uber” combined with other words or phrases, such as “karate” or “medical marijuana,” yields a host of new businesses, he notes. Some of those new businesses offer lots of advantages, like the “uber pizza” restaurants that keep customers’ favorite toppings on file.

New businesses are proliferating because of the apps consumers download onto their mobile devices, says Downs. People are becoming accustomed to using their phones to order dinner, pay in advance for a movie, or remotely monitor the security systems in their homes, he explains.

But even though ISVs don’t threaten ISOs with extinction, analysts still urge the latter to take precautions. “Differentiate or die,” Ablowitz advises ISOs.

Agreeing, Downs contends that “the days of selling stand-alone solutions are going to be challenged.” Merchants are simply coming to expect lots of features, Downs concludes.

Attempting to offer value-added products and services can lead ISOs to promote business-oriented software or other options in addition to payments, both Ablowitz and Downs maintain. What’s more, Oglesby points out that ISOs can actually become ISVs by creating programming. For years, industry observers have been encouraging ISOs to include value-added products like software to the list of offerings they promote to merchants. Thus, ISOs can differentiate themselves from competing ISOs while also rivaling ISVs in the breadth of their wares. ISOs that shy away from becoming programmers can seek opportunities to distribute software for ISVs that lack merchant contacts, Oglesby suggests. “Not everybody was born to [write] code,” Downs humorously suggests, and observers agree that some ISVs lack sales expertise and would benefit from working with ISOs that have extensive merchant contacts.

But even as more ISOs come to resemble ISVs, Downs suggests that not all ISVs will become payments facilitators. In some verticals, the advantages of controlling payments just aren’t great enough to justify the effort and expense, he says. That would include verticals that need software to run operations, not to sell products. That’s why he typically advises anyone in payments to find hardware and software and sell it to increase margins. “Everyone’s got to pick up a piece of software and say, ‘How can I translate this into value of merchants in a particular vertical?’”

Downs’ own company is heeding that advice. The payments scene is becoming more complicated as Vantiv becomes somewhat of an ISV itself. The company recently announced a partnership with Verifone to introduce the Verifone Carbon Commerce Platform as part of Vantiv SmartFit Solutions. The product operates as a POS device that includes order and inventory management software, tools for online analytics and reporting, and a gift card program that the companies say many small business owners could not otherwise afford.

Perhaps the onslaught of payments facilitation—like so many disruptions—is blurring the lines among entities in the payments business. If that’s the case, however, it seems certain that companies will find ways to differentiate and thus create another wave of disruption. In payments, everything changes. TT