Payment Service Providers: Adapt or Die
Payment service providers (PSPs) need to wake up to the fact that end-to-end, vertically optimized solutions make life easier for merchants, particularly for small businesses without large in-house IT teams. When merchants have the core technology necessary to run their businesses from one provider, they operate more efficiently – especially when integrated with payments systems that work seamlessly. Furthermore, if an issue arises, they can resolve it more quickly because there’s no finger-pointing between vendors. While it’s true that, as a PSP, you offer essential services in a world where cash use is declining. However, if you only offer payment services rather than upselling and cross-selling and other essential components, you’ll lose business.
Keep Your Head on a Swivel for New Competition
Your customers need more to operate than just the ability to process payments. They need solutions that help them manage their businesses, give them access to data for informed decision-making, and tools that allow them to enhance customer experiences. Independent software vendors (ISVs) and Fintechs recognize the opportunity, and they’re seizing it. They’re developing solutions to optimize point of sale processes and store operations, and embedding integrated payments to meet all merchant needs.
The strategy is working. McKinsey & Company research in 2022 found that more than 50% of small businesses were using ISVs as payment providers, and another 15% were transitioning to ISVs for payments. McKinsey also noted another change in the payment industry: ISV strategies included moving upmarket. In 2024, PYMNTS reported that 75% of ISVs planned to expand their payment capabilities.
What’s Driving ISVs to Sell Merchant Services?
Although market demand for total solutions is driving this payment industry trend, ISVs and Fintechs see the opportunity as more than capturing marketing share. Embedding payments within their solutions means more revenue. ISVs directly capture more revenue through the share of payment processing fees they receive from merchants transacting through their software. Some ISVs and Fintechs are becoming PayFacs, which carries more risk but allows them to capture even more payment processing revenues. Evolving into a PayFac requires establishing a bank sponsorship, paying fees to card brands, and setting up an MID and processing payments for their customers through it. Developers who evolve into PayFacs take on more risk, handling underwriting and compliance requirements like Know Your Customer (KYC) and Anti-money laundering (AML), on their own. However, they also take more control, tailoring the onboarding experience and funding schedules to their market.
With solutions comprising software and payment solutions purpose-built for their markets, ISVs are capturing and retaining more business. And, ISVs aren’t only targeting markets and niches upgrading their processes, like field services that want solutions for accepting payments on-site. They’re targeting all merchants, including the retailers, salons, and restaurateurs in your merchant portfolio.
How Payment Service Providers Can Fight Back
As ISVs expand into payments, payment service providers can, in turn, expand into software to offer total solutions. You can partner to offer software and value-added services, like point of sale (POS), fraud prevention, and payroll solutions, to meet all merchant needs. Payment service providers are working more closely with partners to build total solutions, rather than through in-house development or acquisition, like Fiserv’s acquisition of Clover to offer an all-in-one POS system.
Another effective strategy is to optimize solutions for specific vertical markets. Many ISVs focus on markets or niches, for example, developing solutions for quick service restaurants, grocery stores, or specialty retail shops. Then, they add payments. Payment service providers, on the other hand, have the experience and knowledge to tailor merchant services to these businesses, understanding their needs, enhancing the total solutions they can offer. Verticalized solutions don’t only have to be ISVs’ strength. Payment service providers have the power to challenge them in the market.
Sell Value-Added Services and New Products Effectively
Even though pivoting from just selling payment processing services to becoming a total solution provider is essential to staying relevant in your market, changing course is challenging. Redirecting your sales team to sell value-added services and software rather than focusing on lucrative payment services sales is often difficult, if not impossible.
Fortunately, you can now leverage the smart payment devices on your merchants’ counters to sell these new products and services. With a merchant engagement platform, you can reach business owners and key-holding associates with promotional campaigns when they power up their payment terminals to start the day. Instead of trying to retrain your sales team and adapt your compensation framework, you can automate selling new products, consistently letting merchants know you can provide solutions for more of their needs. Eye-catching graphics help to inform merchants of the products you offer, with a near 100%+ view rate and as much as a 25% response rate to promotions. You can also segment your portfolio to target offers for tailored solutions to merchants in specific verticals.
What’s Your Next Move?
With the growing threat from competition, only selling payment services is not an option to remain viable. Payment service providers who don’t adapt will lose business to ISVs and Fintechs positioned to meet all merchants’ needs at the point of sale to operate efficiently and competitively.
The pivot from a payment service provider to a solutions provider is easier when you add automation to your sales processes. Our Direct-to-Merchant™ (D2M) engagement platform allows you to upsell value-added services through graphical workflows, informing your entire portfolio of the products you offer to help them run their businesses — without turning to an ISV.
Let us show you the easy way to raise awareness about your products and services, keep up with payment industry trends by introducing new products to your market, and increase customer retention. To request a demo, contact us.