There’s a big debate going on among ISOs I have spoken to about the best strategy for going forward in our business: whether it’s better to be a specialist or a generalist. First, some clarity on language. By generalist, I mean an ISO that caters to brick and mortar merchants of various retail industries such as pet shops, cleaners, small food stores or restaurants - basically anything where the consumer presents him/herself at the point-of-sale. The needs of these merchants are pretty uniform when it comes to payment processing. They need a POS terminal that works, a good price point and someone to answer the phone when something goes wrong.
There are two kinds of specialists – market specialists and technology/product specialists. The market specialist has knowledge of and service capabilities for a niche market. Take not-for-profit businesses for example. The technology they need is a little different from classic retail (churches might need software to track donations and pledges for example), so they need special reporting and other support services. The sales cycle for this market is also different than the traditional small retailer, and therefore the ISO’s marketing approach has to be different as well.
The technology/product specialist has deep knowledge of a technology and uses that knowledge to craft approaches to specialized markets for which that technology or product is applicable, often with minor changes. Mobile payments is a good example of a technology that has several market applications such as delivery services, home repair, etc. The key point though is that each of these markets requires a different dedicated sales staff to support them.
Who’s best suited to today’s processing business? Well, I would say both, with some modifications.
Can the generalist make it in today’s world with free terminals and falling processing margins? How does the generalist compete when all he has to work with is price?
The answer is simple: He competes on price. If an ISO wants to be a generalist, there’s room in the market for that approach as long as it’s a big generalist. But there won’t be small generalists in five years. There will be a few large ones. Generalists will have to scale to a large size (at least 50,000 merchants or better 100,000) in order to sustain the costs necessary to serve their merchant population in a cost-effective way. They will have to have a huge customer base to spread the fixed costs over. The other thing they will have to be is the low cost producer in the market. The company with the lowest cost to provide service is the one which can cut prices until the other competitors have to exit the business. Generalists must have a low cost strategy and scale to survive and prosper.
Technical/product specialists on the other hand may find niches with higher margins and they may construct barriers to entry which help protect those margins. Usually, however, a move to niche markets comes at a price. Niche markets, as their name implies, are smaller than the general market and therefore limit growth. Before moving into a niche market, you have to ask yourself if the niche is big enough to sustain your company over time and if it can provide the platform you need to reach your goals.
Niche markets can become quite crowded quickly, especially if they are small. Two or three players in niche can be more than the niche will support profitably. In addition, many niches are defined by geography, which limits their size. If a competitor enters a local niche, it can take months or years for the players to sort out the market.
Of course, these strategies can be combined. I suspect we will see the development of generalists who also have niche oriented teams within the business. The generalist segment of the business will be the biggest by merchant count, but the specialist teams addressing their respective technical products and vertical markets may well provide as much profitability as the generalists. A mix like this can work well, giving the ISO the nimbleness required to address a variety of customers with divergent needs.
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