Value, not price: How ISOs can really compete with PayFacs

As commerce continues its evolution from in-store to online, merchant services are evolving with it.

The meteoric rise of online shopping has forced retailers to reexamine how they service their customers. Consequently, merchants are now demanding ecommerce-centric solutions that improve customer experience, generate revenue and reduce risk.

With online retail sales expected to reach USD 453 billion in the US and a rate of growth in the double digits, according to the US Census Bureau, it’s no wonder merchants are so focused on the ecommerce experience. Even long-established merchant-services partners, Independent Sales Organizations (ISOs), are feeling the impact of merchants’ evolving needs, and are increasingly losing market share to a relative newcomer: the Payment Facilitator (PayFac).

In an effort to retain clients and prevent churn, many ISOs have aggressively lowered their processing fees. Unfortunately, the euphoria of lower pricing only delays the inevitable: merchants will churn as they recognize the added value PayFacs deliver. If ISOs hope to remain relevant in the age of ecommerce, they must stop competing with PayFacs on price and start competing on value. One simple way for ISOs to offer value is to integrate solutions that meet the evolving needs of their merchants.

The role of ISOs in the growth of ecommerce

While the first online transaction was made in 1994, according to the New York Times, the real growth in ecommerce didn’t begin until the early 2000s when high-speed internet and encrypted communications allowed consumers to make purchases quickly and securely. As consumers became more comfortable shopping online, merchants - eager to capitalize on this expanding sales channel - became more comfortable selling online.

To process this new revenue stream, merchants turned to their trusted partner: ISOs. Formed in the early 90s to help banks onboard the scores of small- and mid-sized retailers eager to accept electronic payments in their physical locations, ISOs played the vital role of acting as both advisors to merchants during the account-creation process, and resellers of the acquiring bank’s payment-processing technology. When ecommerce came to the forefront nearly a decade later, ISOs were the obvious choice for businesses wanting to accept online payments too. In fact, their influence was so profound that by 2001, ISOs were responsible for opening nearly 80% of all new merchant accounts. However, ecommerce too began evolving, and with it the expectations of consumers. PayFacs took notice and began creating solutions to meet those needs.

The rise of the PayFacs

As more and more businesses opened digital stores, consumers became more discerning and selective. Influenced by their frictionless ecommerce shopping experiences on premier sites like Amazon, shoppers began expecting a similar experience from all retailers. Small- and mid-sized merchants realized that in order to compete against the ‘big guys’ they needed innovative solutions to enhance each touch point along the customer’s digital journey, including payment. Seeing an opportunity to contribute to the advancement of ecommerce, PayFacs answered the call.

Touting themselves as technology-focused companies, PayFacs have grown in popularity amongst businesses by not only simplifying the merchant account-creation process but also by improving their customers’ digital shopping experiences. They accomplish this by offering a suite of complementary solutions that reduce order review times, increase approval rates, and even prevent fraud. Faced with high merchant turnover, and bottlenecked by the acquirer’s legacy technology, ISOs were left with no other choice but to reduce their processing fees to remain competitive.

A race to the bottom for ISOs

As PayFacs continue to take market share, ISOs are finding themselves in a race to the bottom. In fact, a search of “merchant payment processing services” on Google yields an endless number of ads from ISOs all promising the same thing: the lowest processing fees. And while processing fees are important to merchants, they are no longer the only reason a merchant selects a payment processor.

In reality, modern merchants now consider a myriad of ancillary solutions such as enhanced customer experience and robust fraud prevention when selecting a payment processor, according to the 2017 Global Payments Insight Survey: Merchants and Retailers.

The window for ISOs is closing. If they fail to adapt, then ongoing pricing pressure and decreased market share look inevitable. If, on the other hand, they confront the demands of ecommerce-centric merchants, then they may thrive once more. For ISOs up for the challenge, integrating third-party solutions may be the answer they’re searching for.

Integrating value for merchants

With ecommerce sales projected to reach USD 4.8 trillion by 2021, according to statista, merchants will certainly continue to search for solutions that improve customer experiences, generate revenue, and reduce risk. If ISOs hope to be considered, they must integrate solutions into their payment processing flow. Take, for example, fraud prevention. When done correctly, it has the ability to not only improve customer experience but also increase merchant revenues.

Most businesses use a series of rules and manual processes to review online orders. This creates an experience where customers are forced to endure long review times and merchants reject legitimate orders. In fact, in 2017, approximately USD 118 billion was lost to credit card transactions being incorrectly marked as fraud, according to research by Javelin Strategy. But recent technological advancements in areas such as machine learning have dramatically improved the speed and accuracy of fraud prevention.

Merchants that have integrated ecommerce fraud prevention solutions such as Riskified into their payment processing flow not only review their customers’ orders in real-time but also approve up to 70% of the orders they would have otherwise declined. Integrating such a solution into an ISO’s gateway could be a genuine differentiator in a competitive market and a true added value for their merchants.

The businesses and industries that have thrived in the transition from in-store to online are those that have been able to adapt; businesses that were unwilling or unable are no longer with us. With a bit more innovation and an appetite for new approaches, ISOs could be among the success stories.

About Matt Lifshotz

Matt Lifshotz is the Head of Partnerships at Riskified. He oversees the strategy and team that aligns Riskified’s offerings to our solution, technology and platform industry partners. Prior to joining Riskified in 2016, Matt was the US Director of Business Development at Ideon, a Spanish incubator of fintech companies. He previously helped lead Smartpros eCampus, one of the first online learning technologies for financial services organizations. He began his career at Merrill Lynch, and holds a B.S. in Economics from Penn State University.

About Riskified

Riskified improves global eCommerce for the world’s largest brands. Inaccurate eCommerce fraud prevention costs businesses billions in chargebacks, overhead and unnecessarily declined orders. Riskified uses powerful machine-learning algorithms to instantly recognize good customers and weed out bad with a 100% chargeback guarantee. Merchants can safely approve more orders, expand internationally and eliminate the costs of fraud while providing a frictionless customer experience.