By Mike Gardner

Payments used to be one of the industry’s least vulnerable to disruption, but it is now facing transformative reshuffling, with new digital entrants and changes in consumer behaviour. Those in the merchant acquiring business that are counting on organic growth from existing markets are feeling the pinch.

A market experiencing seismic rebalancing

The global payments industry has seen rapid growth in recent years. In 2016 it accounted for 34 per cent of overall banking revenues: that’s up 27 per cent from just five years earlier. Overall, the industry is projected to grow an average of seven per cent in the next five years1.

But only some of the rapid growth in segments of the payments market is organic. A large portion of it is coming from the micro-merchant space as more countries switch from cash and cheques to card payments.

The result is competitive rebalancing, as payment facilitators and ISVs (independent software vendors) are disrupting the structure of the payments market. They are carving sizable market shares that are both organic and inorganic (e.g. from acquisitions) in nature.

Micro-merchants that were previously too expensive to service with traditional methods are now being catered to by companies like PayPal and Etsy that make it easy and inexpensive to sign up with them to process payments.

According to a recent study small to mid-sized businesses (SMBs) with less than $5 million in annual card volume will collectively generate 12.7 per cent more in card volume in 2018 than in 2015. SMBs have experienced a 4.5 per cent average compounded annual growth rate2.

Not only has the micro-merchant segment become highly desirable due to its market size and combined processing volumes, but the early stage disruptors have been wooing and winning mid-sized merchants: the “bread and butter” of traditional ISO (independent sales organization) portfolios. Square3 and Stripe4, as examples, have been moving upstream with new terminal offerings and other solutions for larger sized retailers.

As a result, acquirers and ISOs are now feeling threatened. Traditional organic growth is taking a back seat to the inorganic growth of the digital disruptors in a big way.

Evolve or go bust

The threat to traditional companies is real. This is highlighted by the staggering growth of those investing in technology to deliver faster customer-centric service and a full suite of products while the traditional players are inching along organically.

According to research by Agreement Express, 2017 year-over-year revenue growth for traditional acquirers averaged approximately 10 per cent, with some as low as only four per cent. Yet disruptors such as Shopify grew 73 per cent in 2017 over the previous year and it looks like they are on track to continue this impressive trajectory in 20185.

In the new rebalanced payments economy, those companies that can keep pace with rapidly evolving merchant demands for digital and diverse payment solutions will be the ones that grow their businesses and earn larger pieces of the market share pie.

The writing is on the wall. Traditional payments providers need to evolve or go bust.

The questionable future for ISOs

Does this mean that the traditional ISO market is dead? Contrary to the view of some industry pundits, the answer is no, but with a caveat. Traditional service levels and timelines from merchant application to approval won’t compete with today’s customer-centric service options.

With more technology-led payments companies like payment facilitators and ISVs offering same-day approval for merchants to start processing payments, merchants will no longer onboard with ISOs. That is, unless ISOs offer services and timelines at par or better.

Today, consumers demand a frictionless payment experience and so do merchants, but transactions aren’t the only thing they want in real time. The ISOs that avoid extinction will be those that are able to onboard a greater volume of merchants in less time. The question for them becomes “how do we get there?”

The silver bullet: same-day approvals

The most crucial phase of the merchant lifecycle with any payments company is the first interaction: the application process. The impact of digital payments disruptors is that merchants have come to expect and demand a same-day or sooner application and approval process for payments products.

Digital payment service providers (PSPs) can perform this process that would traditionally take three to five business days in as little as five minutes. Their secret? They make it a point to get to know their customers by leveraging unconventional data and instilling smart risk models to make the underwriting process and approvals lightning fast.

ISOs can avoid extinction by digitizing the development of merchant profiles, applying artificial intelligence (AI) in their risk scoring and assessment and robotic process automation (RPA) to their risk decisioning. The more an ISO knows about its merchants upfront, the more accurate the risk assessment and less conservative it needs to be in the approval process. And of course, the more merchants approved, the greater the increase in new business growth and competitive advantage.

One-stop shopping

If the expectations for immediate application and approval timelines aren’t exerting enough pressure to the payments industry, merchants also expect a broader spectrum of product offerings to serve diverse consumer needs. What’s more, they want the convenience of doing business with a single entity.

Payment facilitators and other disruptors are offering merchants a vast range of products under a single white-labelled experience. These PSPs essentially act as the front-end interfaces to a wide variety of products from different channel partners, all accessed by merchants under single umbrellas. And they are doing it all digitally and practically in real time.

Merchant onboarding is key

Payment facilitators have mastered the art of onboarding merchants by making the process fully digital, simple, convenient and often uneventful. Just like consumer purchasing behaviour has become an anytime, anywhere function of our society, merchants are holding their payments providers to the same standard.

For ISOs to remain relevant, they need to evolve to this new world order towards the streamlined merchant experience. The key is in merchant onboarding, which includes more than just digital forms and e-signatures. In reality, end-to-end onboarding also includes the aforementioned AI-driven risk scoring and RPA for underwriting and analytics.

In the 15-plus years that we have been servicing payments companies, Agreement Express has helped acquirers, ISOs and other PSPs master this process with cutting-edge methods and technology. We leverage traditional and non-traditional data that speeds the approval process and lowers the cost of onboarding merchants.

The critical enabler, however, will be in extending this onboarding and underwriting capability within an integrated ecosystem of payments providers. Together, members of the ecosystem will benefit from straight-through processing and deliver a unified merchant experience similar to that of a disruptive payment facilitator. The power lies in the efficiency, but also in the data secured and protected in the cloud for use across the platform.

In the Agreement Express platform, when an ISO is in the sales cycle with the merchant, fields in the application are auto-verified and pre-populated from existing data sources. This eliminates the back-and-forth between the mid-office and the merchant, helping automate the application process. Merchant data is shared from the application through the mid-office, back-office and underwriting teams seamlessly with no manual re-entry for fast approval turnaround. The information gleaned from the enriched merchant data allows these companies to grow the velocity of their business, approving and onboarding more net new merchants.

Agreement Express will be able to, through application programming interfaces (APIs) and seamless integrations across ecosystems, help ISOs and acquirers securely and automatically share the merchant data to one or more key channel partners for underwriting due diligence or oversight. They can’t do this without end-to-end digital merchant onboarding.

The next frontier

Agreement Express knows that product distribution ecosystems such as this are the future for payments. We have a growth equity partnership with Frontier Capital that will accelerate our ability to enable and automate end-to-end onboarding, with innovation that transcends across payments ecosystems.

Our goal is to help our customers leverage the power of the payments product distribution network that will allow them to be customer-centric and agile to maintain current merchant portfolios as well as onboard new business in a simple, connected and intelligent way. In an era of connectivity, customer behaviour will continue to evolve as technology expands the breadth of what we think is possible.

Companies managing merchant applications on paper, re-entering data into multiple systems or manually underwriting merchants are at risk of not only being disrupted but seeking to exist. It is our role to ensure that we deliver the innovation that the payments industry requires to stay ahead of the curve.

Mike Gardner is chief strategy officer, Agreement Express (

1 “Global payments 2017: Amid rapid change, an upward trajectory”, McKinsey & Company, report, October 2017.

2 Jim Daly, “Small Merchants Are Generating Bigger Payment Volumes, Analysis Finds”, Digital Transactions, October 8, 2018.

3 Raymond Pucci, “Square Continues To Move Upstream”, PaymentsJournal, November 8, 2018.

4 Anthony Ha, “Stripe Moves into Brick-and-Mortar Payments with Terminal”, TechCrunch, September 17, 2018.

5 Jessica Galang, “Shopify’s 2017 Financial Results Report $843 Million CAD Total Revenue”, BetaKit, February 15, 2018.

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