ISOs must focus on customer experience to compete

At Recombo we keep a close eye on the merchant card industry because many of our customers are in electronic payments and banking. We have noticed over the past couple of years that the industry is getting more competitive, especially for mid-sized ISO’s. High levels of profitability have attracted many new entrants, and margins are getting squeezed because of it. We have also noticed ISOs are having a tough time, caught between the powerful acquiring banks and price sensitive customers. The market is tougher than it was a few years ago, but from our work we have seen that ISOs who focus on customer experience set themselves apart and prosper.

The merchant card services industry is moving towards a binary value chain model. Acquirers and processors provide the network and underwriting needed to process credit card transactions, essentially as utilities; while ISOs distribute and sell the networks, providing customer service to merchants. Because each processor has tens or hundreds of ISOs working with it, and because each processing network has largely the same capability, ISOs are unable to differentiate their product based on features. Instead they must focus on providing a truly great customer experience.

Put yourself in the shoes of a merchant selecting a payment processor, choosing between two different ISOs. Both offer access to the same major payment networks (Visa, MasterCard, American Express, and Discover), and both have largely the same features. The decision will come down to one of two things: price or customer experience.

The customer must make a choice: do they want the less expensive option or the one that offers them the best experience? Both will allow them to securely process payments, receive funds the next day, and store credit card numbers safely, but which is easier to sign up for and which company is easier to work with? Which ISO made a more positive impression? Every merchant has different priorities, and will answer that question differently.

Most ISOs cannot compete directly with acquirers on price because the acquirers are one step higher on the value chain, so they must focus on customer experience. Even if the economics worked out, competing on price is tough. Price-sensitive customers grind ISOs for lower prices and then expect the same service as higher-priced competitors. There will always be smaller ISOs with lower operating costs and larger organizations with more buying power to meet the demand from price sensitive customers. Instead, mid-sized ISOs need to compete on customer service and customer experience, targeting customers that will choose their processor based on ease of doing business, reliability, and fair pricing. That is why, at Recombo, we work every day to provide the tools needed to profitably do so.