You know your payments knowledge is of little value if your payment solutions aren't being used by merchants. Do you need an ISV strategy to get more volumes? How do you retain margins? Read on...
Can PSPs keep using the same playbook and maintain revenues?
No. The old model of replacing 30% of the portfolio with new standalone sales each year won’t cut it anymore. Almost all of the payments TAM is in SMB, but the SMB distribution model has shifted, and today’s SMBs are signing up for embedded payments more than ever before. Even the single digit net growth you are achieving today is at serious risk.
Today’s SMB strategy is all about ISVs. ISVs are now the top source for SMB payment distribution. According to Flagship, the majority of SMB merchants in the U.S. are signing up for embedded payments solutions. The growth from next-gen POS providers who focus on software + payments is impressive, with some seeing 40-50% CAGR, compared to the single-digit growth typical for traditional PSPs. Companies like Square, Stripe, and Toast, by embedding payments into their software, have captured 26.2% of the payments market share from payments incumbents between 2016 and 2021.
Absolutely. Software + payments is a winning formula for distribution because SaaS products lead the purchasing decision before payment services. ISVs integrate payments into their core offering, making it an irresistible value proposition for SMBs.
You can either build your own software or partner with existing software providers. Some PSPs, like Fiserv with Clover, are creating software ecosystems, while others, like Stripe, are partnering with software channels. PSPs have a strong position in the distribution of low-end software bundles for point-of-sale, web commerce, or e-billing, but ISVs dominate in distributing the highly-verticalized software.
Now. The clock is ticking. According to McKinsey, as ISV adoption in small businesses hits 50%, the window of opportunity for PSPs is narrowing. When adoption plateaus, competition for market share will intensify, and it will be a fight for the remaining late adopters.
While ISVs take a share of the payments margin, they bring in larger, lower-churn merchants and often handle much of the sales and support. This is a stark contrast to agents, who typically bring in smaller merchants with higher churn and provide little post-sales support. Further, ISVs sell to many merchants, and once you’ve won an ISV, you can gain access to their entire customer base. It’s a different economic model but one that can lead to larger, stickier merchants.
Start by identifying where you have the right to win. ISVs have options, so differentiating yourself with something they value is key. You may have an advantage in risk tolerance, speed of payouts, customization, or other factors that are especially desirable to a micro-niche vertical, which results in both SMB adoption and margin retention for you.
Flagship has a framework that helps PSPs decide whether to a) target large, established ISVs; b) go broad on the long tail of small ISVs; or c) pursue a vertical-specific strategy in the diverse middle. Remember, with 80% of payments happening in person, having modern card-present solutions tailored for embedded payments is crucial. If you need help crafting your ISV strategy, Handpoint has supported hundreds of ISV integrations and can help you find where your strengths truly stand out.
As ISVs disrupt payments, can merchant acquirers stay relevant? | McKinsey
Integrated payments and ISV/SaaS distribution in merchant payments | ThePaypers
Next-gen POS Driving Impressive Growth | Flagship
M&A No Longer the Key Driver of Consolidation in U.S. Merchant Payments | Flagship
Merchant VAS Now a Lucrative Reality for PSPs | Flagship
A Framework for Focusing Your ISV Strategy | Flagship
Riding the New Wave of Integrated Payments | Bain & Company